Vertrue Inc.

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Vertrue Inc.

680 Washington Boulevard
Stamford, Connecticut 06901
U.S.A.
Telephone: (203) 324-7635
Fax: (203) 674-7080
Web site: http://www.vertrue.com

Public Company
Incorporated: 1989 as Card Member Publishing
Employees: 1,600
Sales: $579.8 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: VTRU
NAIC: 514199 All Other Information Services

Vertrue Inc., known as MemberWorks for much of its history, is a leading consumer services marketing company. Vertrue enrolls consumers in a variety of cost-saving membership programs, offering discounted shopping and travel, for example, as well as health insurance, healthcare products and services, financial privacy enhancement, and other programs for which consumers pay monthly or annual fees. Vertrue claims some 18 million members combined in its more than 20 membership programs. Fees are typically between $60 and $120 annually. Vertrue solicits consumers through a variety of channels including over the Internet, through telephone sales calls, and through television. The company typically targets customers by partnering with banks, credit card issuers, and other third parties, paying royalties for access to lists of millions of people. Vertrue also operates a subsidiary called The Bargain Network, a membership-based Internet search tool that allows consumers access to listings of discounted used cars and bargain houses, including foreclosed properties. Vertrue also owns the Canadian Internet dating service Lavalife, Inc. Lavalife is a leading lister of online personal ads, available in major metropolitan areas across the United States, Canada, and Australia. Lavalife counts more than 1.2 million subscribers.

IDENTIFYING A NEW MARKET OPPORTUNITY

Gary Johnson founded the company that became Vertrue Incorporated in Omaha, Nebraska, in 1989. Johnson had been a vice-president of product development for what was then the largest membership services marketing company, CUC International, in the 1980s. Membership marketing began in the late 1960s and grew hand-in-hand with the credit card industry. The first such company was SafeCard Services Inc., which began soliciting credit cardholders in 1967. Several companies, including CUC International and Signature Group, evolved around the same time, working with credit card issuers to offer their credit cardholders additional services such as insurance. By the late 1980s, the market potential for such companies seemed huge and relatively untapped. There were some 300 million credit cardholders at the time, all potential customers for membership services, who could be solicited once a month as their bill arrived. Membership fees were typically $25 annually, with a high rate of renewal, which added up, according to an interview with Gary Johnson in American Banker (April 10, 1997), to a potential market worth from $4 billion to $5 billion. Existing membership services firms tapped only a small percentage of that market in the late 1980s, and Johnson was convinced that the industry could easily hold another player. Consequently, in 1989 he quit CUC International and founded his own company, which was at first called Card Member Publishing.

Card Member Publishing debuted at a time when the credit card industry was both growing and changing. The number of credit cardholders surged in the 1990s, from approximately 300 million in the late 1980s to about 900 million a decade later. Whereas many credit cards had carried an annual fee from the 1960s to the 1980s, competition forced issuers to both lower interest rates and drop annual fees in the 1990s. Credit card issuers thus became more fond of membership service firms such as Johnson's Card Member Publishing, because these companies were a stable source of revenue. Card Member Publishing paid royalties to card issuers in exchange for access to lists of millions of potential customers. As credit card issuers dropped their own fees, they made up for it by selling information to these third-party marketing firms. Since credit card customers were reaping savings by not paying an annual fee to their card issuer, they were perhaps more likely to consider paying other fees for the services Card Member Publishing offered. Services were first closely tied to credit cards, offering insurance against theft and loss, or other financial services. But over the 1990s, the industry began offering other services, such as travel discounts, dental insurance, or legal services.

Card Member Publishing was at first a small player in the industry, though it grew at a rate of 40 percent a year. Finally in 1996, the company linked up with one of the nation's leading credit card issuers, Citicorp. Citicorp issued more Visa and MasterCard credit cards than any other bank, so taking it on as a client was a coup for Card Member Publishing. Card Member Publishing offered a financial services membership package called Maximum Dividends to Citicorp cardholders. The company also had other major card issuers as clients, including BancOne, Capital One, Mellon Bank, and Bank of New York. By 1997, Card Member Publishing worked with 13 of the top 20 credit card issuers in the United States.

PUBLIC COMPANY IN THE MID-1990S

By 1996, Card Member Publishing had grown to a company employing 500 people and enrolling as many as 1.7 million customers in its eight membership programs. It was still small compared to its more established rivals. Signature Group had 15.6 million members and CUC had 66 million, but revenue had grown to $57 million, and founder Gary Johnson estimated that the market was still largely untapped. With a lot of potential growth ahead of it, Card Member Publishing went public in October 1996, selling shares on the NASDAQ. The company changed its name to MemberWorks, Inc., and moved its headquarters to Stamford, Connecticut. MemberWorks enrolled customers in varied programs. Some, like Maximum Dividends (which also went by the name MoneyMaster) were financial services packages, long a staple of membership programs allied to credit card issuers. But MemberWorks also had two dental insurance membership programs, a travel discount plan, sports and entertainment packages, and other programs related to health and computers. It brought out several new programs shortly after going public. The company's customers were principally young families with children, who might need additional insurance or were avid bargain hunters, and recent retirees. This second group was often keen for discounted services that might make up for benefits they had had while still employed. MemberWorks customers were promised that they could save an amount worth ten times the membership fee they paid if they enrolled in Member-Works programs.

COMPANY PERSPECTIVES

Vertrue is an integrated marketing services company that gives consumers unrivaled opportunities to improve their lives through exclusive access to significant discounts and unique services. Our consumer-based membership and loyalty programs, as well as proprietary Internet and telephone-based technologies, create multi-channel venues for our clients and marketing partners to generate incremental revenue and enjoy enhanced loyalty.

In the mid-1990s, the company seemed poised for tremendous growth, as it hoped to ink deals with the remaining seven banks in the top 20 with whom it did not already have a relationship. But the late 1990s saw the start of a string of lawsuits brought against MemberWorks and affiliated banks. While revenue continued to climb, the company attracted negative publicity, and some banks altered the type of business relationship they had with MemberWorks and other membership marketing companies.

In June 1999, the state of Minnesota sued a division of U.S. Bancorp, alleging that the bank violated its citizens' privacy by turning over their personal and financial data to MemberWorks for $4 million plus commissions. The bank quickly settled the suit, but Minnesota then targeted MemberWorks directly. The new suit claimed that MemberWorks had solicited business, using the customer list it bought from U.S. Bancorp, and asked consumers to sign up for a 30-day free trial of a membership plan. Sales calls were made by telephone, and MemberWorks did inform customers that they would be billed after the 30 days was up. But Minnesota claimed MemberWorks misled consumers by not revealing that the firm already had the customer's credit card data on file. MemberWorks could automatically begin withdrawing the membership fee from the consumer's credit card account unless the consumer actively contacted the company at the end of the free trial period and resigned from the program.

The Minnesota lawsuit set off a ripple through the credit card industry, prompting some issuers such as Bank of America to promulgate new rules about how and whether to give out customer information. U.S. Bancorp ended its relationship with MemberWorks and with three other companies in the member services industry as a result of the legal action. A proliferation of consumer complaints about member services companies even led to talk of financial privacy reform in Congress.

The spotlight on the company's marketing practices was doubtless unpleasant for MemberWorks. The effect on the company's growth and financial picture was mixed. Bad news about MemberWorks continued to come out over the next few years. For example, the company had to reimburse the State of New York Attorney General's office the $75,000 the office spent investigating MemberWorks, in addition to agreeing to double refunds to New York customers who complained about unauthorized billing to their credit cards. MemberWorks also agreed to change the way it asked for and recorded customer consent to pay for its services. While this kind of public wrist-slapping might have seemed dire to a company that depended on good customer service to keep going, nevertheless MemberWorks' revenue climbed by more than 50 percent in 2000, to just over $330 million, and its profits were four times what they had been in 1999. MemberWorks lost money in the fourth quarter of 2000, related to its purchase of an online financial services company that year, eNeighborhoods Inc. Even as it recorded another loss in the fourth quarter of 2001, again related to online business, MemberWorks' share price went up. Its membership rose to eight million by 2001, and the company was offering as many as 20 different programs.

CHANGES IN THE 2000S

The company addressed its ongoing legal and public relations problems proactively, engaging a consumer advisory board in 2001 made up of respected figures such as a former Michigan attorney general and the former heads of three state consumer protection divisions. The advisory board was meant to add weight to MemberWorks pledges to offer the best customer service and to reign in practices that had irked consumers and sparked the lawsuits. A number of consumer complaints against the company had led the Better Business Bureau in Omaha, the city where the company had been founded, to suspend MemberWorks from the Bureau in 1999. But in 2001, the Omaha Better Business Bureau reinstated MemberWorks, declaring itself convinced that the company was now upholding high standards of customer service and fair business practices. The company continued to attract complaints in some communities, including a class-action lawsuit brought by several Florida consumers in 2001. Yet the company's revenue and membership continued to grow. Revenue for 2002 was more than $427 million. MemberWorks also sold an Internet business in 2002 that had been a drag on earnings previously. Revenue grew to almost $457 million the next year.

KEY DATES

1989:: Company is founded as Card Member Publishing.
1996:: Company goes public, changes name to MemberWorks.
1999:: First of a series of lawsuits is brought against the company.
2004:: Company acquires Lavalife, changes name to Vertrue Inc.

One of the most significant changes the company underwent in the 2000s was its acquisition of a leading online dating company, Lavalife. MemberWorks paid $313 million for the company, adding a new dimension to the kind of business MemberWorks was involved in. Lavalife was founded by a small crew of entrepreneurs and technology buffs in Toronto in the early 1980s. The company at that time was called Phoneworks, and it was basically an interactive voice-mail system at a time when such a service was rare. Phoneworks began offering several information line services, so that customers could call in, pick an option using their phone's keypad, and access restaurant reviews, entertainment calendars, and other information.

Eventually Phoneworks' principals noticed that many of its customers were using an option that allowed people to leave messages for each other, essentially a telephone dating service. They reorganized the company in 1990 under the name Telepersonals, focusing on the dating service. Telepersonals was very successful, and expanded quickly to other Canadian cities. By the late 1990s, Telepersonals was operating in 40 cities in North America and Australia. Revenue rose to $80 million, and the company expanded its staff and infrastructure.

Just as Telepersonals was taking off, the Internet threatened to overtake the telephone as a quick and satisfying way to post and answer personal ads. Telepersonals decided to acquire one Internet dating service in 1996, called Webpersonals. Over the next four years, the telephone side of Telepersonals held steady or contracted, while the Internet side became much more active. In 2000, the Canadian company changed its name and its focus again. It became an Internet dating service called Lavalife, a name picked for its young, hip flavor. The company marketed itself to urban singles with trendy ads in print and on billboards. The company grew quickly, adding an unbelievable 10,000 new users a day in the early 2000s. By late 2003, its service was available in 65 cities in Canada, the United States, and Australia, and revenue reached $125 million. The following year MemberWorks bought Lavalife. The dating service continued to run out of Toronto.

With the addition of this new division, MemberWorks was a more diversified company. In 2004, the company decided on a major rebranding, and it changed its name to Vertrue Inc. The new name was supposed to represent "our focus on consumer value," according to founder Gary Johnson (Fairfield Business Journal, October 18, 2004). The company also adopted a tag line, used on its web site and in its promotional materials, "Get more out of life every day." By 2004, the company counted approximately 18 million people as members of its various programs.

Vertrue did not leave its problems behind with the change of name. It saw lawsuits in Pennsylvania and Florida in 2003 and 2004, related to consumer complaints of unauthorized withdrawals from credit card accounts for membership in Vertrue's clubs and programs. The company maintained that it had tougher consumer protection policies than any other company in its industry. Vertrue paid a $5.5 million penalty in 2005 relating to a suit in Connecticut. Meanwhile, the Lavalife division seemed to be growing in new directions. It began cross-marketing programs with the movie theater conglomerate Loews Cineplex Entertainment Corp. in 2004, hosting singles parties at Loews theaters. Lavalife also updated its technology with a new phone service, making use of the growing popularity of cell phonecameras. Revenue for Vertrue rose to $579.8 million in 2005, up from $488.7 million a year earlier.