News broke at the end of this week that social offers site Living Social was signing with Deutsche, Bank of America and JPMorgan to underwrite an initial public offering. This follows Groupon‘s filing which included a risk disclosure section that read like late-career Edgar Allen Poe.
While there is no question that these deals will be red hot, at least initially, there is a huge gap in understanding how these companies differ from each other. The differences are important, they will ultimately determine valuation and market share.
The numbers and time-frames I use below are approximate but the points I make here are vital:
1. The first thing you gotta know is that Groupon is the biggest and most creative, they essentially invented this game, taking the Daily Candy email blast model and turning it into an interactive coupon business from just an advertising business.
2. Groupon’s massive pre-public valuation is based on this first mover advantage (first, biggest, best, most mindshare, most revenues, widest geographic presence, etc).
3.. Living Social, while second in the game, is no also-ran. It is backed by serious venture money, a large chunk of which comes from Jeff Bezos and Amazon. No one understands e-commerce like Bezos and his guys.
4. Groupon is fortunate in that merchants now use its name as a verb (I’m going to Groupon a new foot massage offer this weekend”. Google understood the advantage that kind of thing gave them during the Search Wars and they encouraged it.
5. Where things begin to get tricky, however, is that Groupon has only been able to market and expand the way it has because of the approximately 60 day wait time between when a merchant’s offer is run and when they pay cash to the merchant. They have two months to use that money to hire, build, advertise, bring on new merchant customers etc. But merchants tend to be moms and pops, Main Street customers who would love to get paid sooner.
6. This delay is what has led many in the media to cal the company a ponzi scheme.
7. Living Social knows that the most frustrating part for the merchants who use Groupon is the wait to get paid. They are cutting Groupon’s legs out from under it.
8. Merchants who run Groupon offers can now expect a call from a newly-hired Living Social rep soon after who will say “what if we re-ran that same offer you ran with Groupon except instead of waiting 60 days to get paid, we can pay you in a week? Would that sound good?” As a merchant, you have no reason to say no unless of course the original Groupon offer was unprofitable (another issue for the offers business).
9. With tactics like these, Living Social and a host of me-too companies will ultimately crunch margins at Groupon and force the company cut down on how much money and time it has for the marketing it has been so good at. Living Social will undoubtedly take share.
10. And then, when Google Offers launches, everyone is screwed. Google will outsmart both companies and their Adsense/Adwords rolodex is so massive that to even try competing will be laughable. And guys, Google can probably pay a merchant within 28 hours, good luck selling against that.
Google offered Groupon a big number, supposedly 6 or 8 billion dollars to join the fold. Groupon spurned them. The maverick CEO of Groupon, Andrew Mason, will have to face Google as well as an Amazon-backed Living Social. As his model adapts to industry-standard quicker payout times, it is hard to imagine the company’s revenue recognition and accounts payable components looking the same as they do today.
While Groupon is big and was first, the “offers space” is going to witness the ugliest brawl in all of social media. Despite Groupon’s lead, it is far from over and will never be as profitable as it was this past year. Consider yourselves warned.
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