Today Facebook adds over a million users a week, as the poster child of social networking, and companies like Groupon (which claims to be a social product but isn’t really) aim to go public while others like LinkedIn recently have gone public.

The reality is, most of the big successful consumer-oriented “Web” companies out there today are built on foundations of email, and sometimes of encouraging what some might think of as spam. There’s a fine line but let’s look at a few examples:

Facebook, LinkedIn: Both of these companies rely heavily on user-initiated email to other users for customer adoption, perhaps less so than earlier in their lives, but nonetheless, there was no tremendous organic attraction to visit the site based on advertising or great media stories about the companies, it was all about encouraging users to invite their friends. When I was at LinkedIn, I learned that one of our major growth drivers was encouraging a user to upload their address book and making it super-easy to invite new users. The strongest brand we had at LinkedIn, was that of our users — “John Brown is someone I know and if he thinks this service is great, why don’t I try it out?” — and address book uploads and the resultant email sent out turned many one-connection people into multi-friend propagators. It worked great.

Today the existing networks like Facebook, LinkedIn and Twitter with their APIs can perform the same function as the email address transfers, that of pulling user info into an application, but without the email address the system messages in these various services are really not as powerful.

This is obvious in the case of Facebook, which made a major change a few years ago to how aggressively applications could message users. Email went out the window in favor of less aggressive “inbox-style” messages, and app messages were treated as on average far less important than normal friend messages. During the time with its more permissive policies, several companies were able to take advantage and it helped them create big user bases which in turn, had their own gravity to drive other products in their stable – here I speak of course primarily of Zynga. Zynga’s ability to get viral “invite adoption” from users on Facebook was a powerful growth driver.

Groupon too, largely relies on acquiring email addresses to share its daily email updates of deals. According to their S-1, they have over 85 million email addresses today and yet only 15 million people have purchased a deal — so think about an email a day for all of those people and you’ll get an idea of how email drives this and also how they must be sending out a LOT of unanswered, unacted-upon email.

Not that that is bad per se, but anyone who discounts the power of email or argues that email is not still a major driver of user adoption should look at these examples and take heed. With email spam restrictions increasing, email will be more challenged as an adoption vehicle – but it is still the sine qua non of consumer “viral” adoption.

The years of 2005-2007 saw a lot of activity in the mortgage refinance market, as we know, and a big part of that was the explosion of internet advertising in the US about it including the lead generation market. Here’s a clip from a NetRatings press release in January 2006 showing the top online display advertisers in the US:

Top 10 Advertisers by Estimated Spending

     Advertiser*          Total Estimated Spending     Impressions (000)
     _______________________________________________________________________
     Vonage Holdings Corp       $36,574,400              14,954,696
     _______________________________________________________________________
     Netflix, Inc.              $16,770,200               5,042,750
     _______________________________________________________________________
     United Online, Inc.        $13,588,500               3,383,704
     _______________________________________________________________________
     NexTag.com                 $12,557,100               3,517,763
     _______________________________________________________________________
     LowerMyBills.com, Inc.     $12,470,400               2,580,703
     _______________________________________________________________________
     BellSouth Corporation      $11,593,400               3,139,830
     _______________________________________________________________________
     Verizon Communications,
      Inc.                      $10,346,400               2,979,028
     _______________________________________________________________________
     InterActiveCorp             $9,261,900               2,307,974
     _______________________________________________________________________
     General Motors Corporation  $9,260,900               1,749,433
     _______________________________________________________________________
     Scottrade, Inc.             $8,655,200               1,866,586
     _______________________________________________________________________

Estimated spending reflects CPM-based advertising only, and excludes search-based advertising, paid fee services, performance-based campaigns, sponsorships, barters, partnership advertising, advertorials, promotions, email and direct response. Impressions reported exclude house ads, which are ads that run on an advertiser’s own or related Web property and co-branding relationships.

Numbers 4, 5 and 8 above were mortgage advertisers. NexTag (my former employer), LowerMybills and LendingTree (InterActiveCorp in the list above) were not spending as much as the amounts above, perhaps 40-70% of these numbers would be about right depending on the month – but even if we assume 50% of the $35 million here between these three providers, we’re looking at about $17 million or more in a single month (January 2006). That’s pretty amazing. What has changed since then? Well, some the big spenders in display today are Groupon and LivingSocial, and a raft of me-too competitors. Unfortunately, Nielsen’s AdRelevance is a severely broken product and they don’t put out these kinds of press releases as much any more because the data is just way too unreliable.

Mortgage refinance aggregators like LendingTree, LowerMyBills (“LMB”) and NexTag used to advertise the idea of “four offers from competing lenders” which was a nuance in that the lenders were competing with each other not on how good of an offer they could give the consumer, but really based on how much they would pay the intermediary for sending them the lead. As you can imagine, the vendors able to pay more money were the ones that were making more money and often this was via lower monthly cost sub-prime mortgage deals.

In a nutshell though, here are some interesting similarities between these two sets of online advertising programs as they have existed 4-5 years ago (mortgage) and today (and I would argue these were the first advertisers to use banner/display advertising at real scale include the biggest placements on the Web like MSN/Yahoo! front pages for direct response campaigns profitably):

1. Innovation mostly in marketing, not in product. LMB became known for its very innovative attention-grabbing ads like the “dancing cowboys” and others. LendingTree’s marketing innovation of selling a lead to four different buyers (later many moved this to five) and turning that into a positive marketing spin was powerful as well, and set the stage for lots of others to replicate their success.
2. Lead aggregation of less-sophisticated, often local-based entities. Obvious similarities here: the volume in mortgage came from from the big lenders but many of the customers of mortgage lead generation companies were local or superlocal brokers or small lenders that helped drive lead prices up; in almost all cases the lenders did not have the level of sophistication to do their own online search-, display- or affiliate marketing effectively. That is the extent to an even greater degree for the kinds of merchants using Livingsocial, Groupon and others.
3. Branded and unbranded players with differing distribution strategies. Groupon seems similar to LendingTree in having a brand and focusing on large-scale portal placement deals, having deeper pockets and being able to make bigger commitments, leaving LivingSocial and clones to fight over media placement dollars and having to innovate.
4. A less-intent driven “let me see if there’s something interesting” type of offer. While all the mortgage lead aggregators spent a lot of money on expressed-intent search marketing, they found real scale on the display advertising side because they were capitalizing on curious consumers exercising a low-cost option to “check and see if they could get a deal” by sharing their information online. It is a general offer almost anyone can respond to- with a low commitment level. Sharing your email address to get daily emails sent to you seems harmless enough.
5. Focus on short-term economics. The short-term economics of the market for the lenders were great – and because of the moral hazard and disconnect because they were not exposed to the downstream effects of less-qualified borrowers refinancing mortgages (the mortgages were packaged and sold off to investors) they didn’t care that these were unprofitable sales. The chickens eventually did come home to roost, though, and many of these mortgage lenders got put out of business. Similarly, many merchants in the recession of 2008-2011 have been enamored of the upfront checks they’re getting from the likes of Groupon et al, without having the luxury of thinking how these consumers’ future (un)profitability might negatively impact their businesses. Part of the reason for that is the difficulty in assessing the incrementality of new customers, and the impact of these deals on the existing business and customers, which is the next point.
6. Difficulty of analyzing the true customer servicing costs. This issue applies to both the very complex mortgage products, which typically came with all kinds of hard-to-value embedded derivatives for the end user and then by extension for the sellers and servicers who had to deal with thousands of such complex pieces, and also the deal-driven customers who are filling merchants at 50-90% off and in many cases generating cash but losses for the merchants. It is quite challenging to value unprofitable traffic – and participating merchants have expressed mixed feelings about whether they would do another deal (55% said they would not in a February MerchantCircle survey).

The mortgage refinance business is very different today, as we know, driven largely by a lot of macro factors. I don’t believe the local deal/merchant game will see the same degree of fall-out, because it’s more diverse and there is more depth and variety compared to the banks and brokers, but certainly there will be fall-out and consumer burn-out. The valuation and prospects of companies like Groupon are almost certainly overhyped, as these businesses are more about being marketing engines today than having truly innovative products… but they are still creating some meaningful new consumer value — which I believe is a lot different (for the most part) compared with the lead aggregators who were mostly just masterful at marketing.