Chicago-based Groupon is certainly one heck of a startup. Like Zynga it sort of came out of nowhere in 2009. Even last December I was sort of only vaguely aware of how fast it was growing.
But it was clear by early 2010 to the whole world that Groupon was on a tear. First a round valuing it at $250 million. Then just a couple of months later it raised new money at a $1.35 billion valuation.
And then in the last few weeks Yahoo offered something even higher for the company – between $1.7 billion on the low side and probably $4 billion on the high side. And Groupon passed.
Revenues are in the $50 million per month range, and the company has roughly 50% gross margins. By some measures, Groupon is the fastest growing company, ever.
Groupon is often said to be the next eBay at Silicon Valley insider dinners and events. But Groupon isn’t going to have the same success eBay has had.
At first blush it seems like a valid comparison. Groupon’s revenues and profits blow the early Ebay results out of the water. When eBay was three years old and going public in 1998 it had revenues of just $4.7 million. Groupon does that much in revenue every three days or so right now.
Today eBay has revenues of a little over $2 billion every three months and is worth around $30 billion. It’s not at all unreasonable to think that Groupon could eventually grow its revenues way beyond $2 billion/quarter – the local products and services category would easily bear that kind of fruit.
But there’s a couple of problems with Groupon. The first is how it scales – it needs a lot of sales people for each market it handles and already probably has more than 2,000 of them on payroll. But the real problem is the complete lack of a network effect to protect its business.
Ebay is expensive. And it has a horrible user interface. Buying stuff is a pain compared with sites like Amazon that have put real effort into making buying painless. It’s also expensive. Everyone would love a better eBay, but after ten years of people trying to kill it, it just keeps going.
Why? Because everyone’s already on eBay. And every new buyer or seller makes eBay more valuable than it was before. Anyone competing with them has to find a way to counter that, and it’s nearly impossible. Even free listings from big companies like Amazon and Yahoo flailed dramatically.
In other words, eBay would have to really work at it to destroy its core business. And since it dominates the market it can continue to charge exorbitant fees and not worry about the user experience.
Groupon has none of that. When Groupon gets a new user that’s great. But that user will quickly leave to Living Social or One Kings Lane or any of thousands of other competing sites for better deals. And when Groupon gets a new “seller,” there’s no reason why that seller won’t also go try out the competitors, too.
There’s just no network effect in Groupon’s business model. Which means competitors can flourish and margins will get crushed.
At TechCrunch Disrupt, Benchmark Capital’s Matt Cohler said he wasn’t sure if Groupon would succeed over the long term. I asked him if he wished he was an investor in Groupon:
That question keeps me up at night. the question for me is…if you look at it from a purely academic point of view, there are neither barriers to entry nor are there switching costs in that product. Typically when a product has those characteristics margins tend to collapse over time. In theory the only thing stopping that from happening is Groupon’s brand…It may turn out that daily deals are ad units, and lots of different products can apply that ad unit.
What can Groupon do to avoid having their margins crushed by competitors? Establish generous revenue sharing relationships with distribution partners, fast. And that appears to be exactly what they’re doing. In the next several weeks the company will likely announce partnerships with Yahoo and CitySearch, we’ve learned.
Oh, and one more partner, too. And that partner will be…eBay.
Update: Great email comment from Alex Rampell:
I actually think Groupon is a “winner take most” market and not winner take all. Amazon has a plurality yet a distinct minority of ecommerce share ($25B in 2009 revenue out of WW ecommerce rev of $600B) yet has a market cap of $74B, 2.5X that of eBay. No barriers to entry.
There are no barriers to entry for online commerce companies — yet Amazon keeps decimating the competition. There are, however, economies of scale. I think Groupon can be the Amazon of Online2Offline commerce, and there’s no reason they can’t get to $25B in annualized revenue like Amazon, but at a much higher margin.
Whether they’ll command the same kind of earnings multiple as Amazon is another story.
and willowy blondes only take you so far, it turns out. Malefactors are punished. The universe is restored to balance.
This time, Gekko is a repentant father longing to make amends to win his daughter’s approval who also essentially steals a fortune from her to get back in the game.
Gekko is a humble reformed crook who has paid his debt to society and also a sleek alpha male puffing on a phallic cigar who can’t wait to gloat about his prowess at making money.
Gekko is a teacher who shares his knowledge. At times, one could swear that one had wandered into a parallel universe version of An Inconvenient Truth, as Gekko lectures us on the hazards of leverage and financial meltdown. Particularly priceless is when he calls a group of young students “ninjas”—no income, no job, no assets—adding, “You have a lot to look forward to.” But the same guy who observes that the mother of all evil is speculation turns up later in the film dressed in a power suit and giddy over his ability to turn $100 million into $1 billion. I don’t think he earned it at $25 an hour; leverage must have figured in there somewhere.
If we fast-forward 23 years to Wall Street: Money Never Sleeps, we are treated to a curiously different kind of moral equation, the morality of “and also” rather than “either or.”
In the new film, Gordon Gekko is a humble reformed crook who has paid his debt to society and also a sleek alpha male who can’t wait to gloat about his prowess at making money. (20th Century Fox)
This “and also” value system also comes across in Gekko’s attitude to innovation. He is clearly cynical about clean tech and derides the “fusion delusion” as the next bubble. In his words, “the only green is money.” Yet at the end of the film, he gives $100 million away to support alternative energy and do something “good” with his money.
• Randall Lane: Wall Street on Wall Street
• Randall Lane: Gordon Gekko’s Secret Revealed
The film’s title may hold its final moral clue. If money never sleeps, then can greed not be far behind, even in these pinched times? No one in the film seems to be hurting for nice apartments and clothes, for example, even with a financial meltdown that has come from “the mother of all bubbles.” As Gekko himself puts it, “Greed got greedier with a little envy thrown in.”
So we’d all like to find a little absolution in these troubled times, and in fact in the end Gekko’s daughter does melt and forgive him, while we on the other hand—adding up all the “and alsos”—don’t know whether to follow suit.
This “and also” value system comes across in Gekko’s attitude to innovation. He is cynical about clean tech, yet in the end, he gives $100 million to support alternative energy.
Gordon, make up your mind. Maybe a little therapy would help.
Dubbed "Mr. Creativity" by The Economist, John Kao is a contributing editor at The Daily Beast and an adviser to both public and private sector leaders. He is chairman of the Institute for Large Scale Innovation, whose i20 group is an association of national innovation "czars." He wrote Jamming: The Art and Discipline of Business Creativity, a BusinessWeek bestseller, and Innovation Nation. He is also a Tony-nominated producer of film and stage.
Get a head start with the Morning Scoop email. It's your Cheat Sheet with must reads from across the Web. Get it.
For inquiries, please contact The Daily Beast at editorial@thedailybeast.com.
Exclusive: Yahoo Courts Former <b>News</b> Corp. Digital Exec Ross <b>...</b>
He's baaaaaack. Former Fox Interactive Media President Ross Levinsohn, that is, who is the top candidate to replace Hilary Schneider as Yahoo's US head, according to several sources close to the situation.
<b>News</b> - Rep: Blake Lively, Penn Badgley Split! - Celebrity <b>News</b> <b>...</b>
"They're still good friends," an insider tells the new Us Weekly.
Telefuture | Old <b>News</b> Report | TVs Merging with Computers | Mediaite
Well, print media, you were warned. A 30 year old news report from NBC news, archived by Vortex Technology, discusses the future of television in a segment creatively entitled Telefuture. In it, they spend a lof of time examining the ...
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Exclusive: Yahoo Courts Former <b>News</b> Corp. Digital Exec Ross <b>...</b>
He's baaaaaack. Former Fox Interactive Media President Ross Levinsohn, that is, who is the top candidate to replace Hilary Schneider as Yahoo's US head, according to several sources close to the situation.
<b>News</b> - Rep: Blake Lively, Penn Badgley Split! - Celebrity <b>News</b> <b>...</b>
"They're still good friends," an insider tells the new Us Weekly.
Telefuture | Old <b>News</b> Report | TVs Merging with Computers | Mediaite
Well, print media, you were warned. A 30 year old news report from NBC news, archived by Vortex Technology, discusses the future of television in a segment creatively entitled Telefuture. In it, they spend a lof of time examining the ...
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Chicago-based Groupon is certainly one heck of a startup. Like Zynga it sort of came out of nowhere in 2009. Even last December I was sort of only vaguely aware of how fast it was growing.
But it was clear by early 2010 to the whole world that Groupon was on a tear. First a round valuing it at $250 million. Then just a couple of months later it raised new money at a $1.35 billion valuation.
And then in the last few weeks Yahoo offered something even higher for the company – between $1.7 billion on the low side and probably $4 billion on the high side. And Groupon passed.
Revenues are in the $50 million per month range, and the company has roughly 50% gross margins. By some measures, Groupon is the fastest growing company, ever.
Groupon is often said to be the next eBay at Silicon Valley insider dinners and events. But Groupon isn’t going to have the same success eBay has had.
At first blush it seems like a valid comparison. Groupon’s revenues and profits blow the early Ebay results out of the water. When eBay was three years old and going public in 1998 it had revenues of just $4.7 million. Groupon does that much in revenue every three days or so right now.
Today eBay has revenues of a little over $2 billion every three months and is worth around $30 billion. It’s not at all unreasonable to think that Groupon could eventually grow its revenues way beyond $2 billion/quarter – the local products and services category would easily bear that kind of fruit.
But there’s a couple of problems with Groupon. The first is how it scales – it needs a lot of sales people for each market it handles and already probably has more than 2,000 of them on payroll. But the real problem is the complete lack of a network effect to protect its business.
Ebay is expensive. And it has a horrible user interface. Buying stuff is a pain compared with sites like Amazon that have put real effort into making buying painless. It’s also expensive. Everyone would love a better eBay, but after ten years of people trying to kill it, it just keeps going.
Why? Because everyone’s already on eBay. And every new buyer or seller makes eBay more valuable than it was before. Anyone competing with them has to find a way to counter that, and it’s nearly impossible. Even free listings from big companies like Amazon and Yahoo flailed dramatically.
In other words, eBay would have to really work at it to destroy its core business. And since it dominates the market it can continue to charge exorbitant fees and not worry about the user experience.
Groupon has none of that. When Groupon gets a new user that’s great. But that user will quickly leave to Living Social or One Kings Lane or any of thousands of other competing sites for better deals. And when Groupon gets a new “seller,” there’s no reason why that seller won’t also go try out the competitors, too.
There’s just no network effect in Groupon’s business model. Which means competitors can flourish and margins will get crushed.
At TechCrunch Disrupt, Benchmark Capital’s Matt Cohler said he wasn’t sure if Groupon would succeed over the long term. I asked him if he wished he was an investor in Groupon:
That question keeps me up at night. the question for me is…if you look at it from a purely academic point of view, there are neither barriers to entry nor are there switching costs in that product. Typically when a product has those characteristics margins tend to collapse over time. In theory the only thing stopping that from happening is Groupon’s brand…It may turn out that daily deals are ad units, and lots of different products can apply that ad unit.
What can Groupon do to avoid having their margins crushed by competitors? Establish generous revenue sharing relationships with distribution partners, fast. And that appears to be exactly what they’re doing. In the next several weeks the company will likely announce partnerships with Yahoo and CitySearch, we’ve learned.
Oh, and one more partner, too. And that partner will be…eBay.
Update: Great email comment from Alex Rampell:
I actually think Groupon is a “winner take most” market and not winner take all. Amazon has a plurality yet a distinct minority of ecommerce share ($25B in 2009 revenue out of WW ecommerce rev of $600B) yet has a market cap of $74B, 2.5X that of eBay. No barriers to entry.
There are no barriers to entry for online commerce companies — yet Amazon keeps decimating the competition. There are, however, economies of scale. I think Groupon can be the Amazon of Online2Offline commerce, and there’s no reason they can’t get to $25B in annualized revenue like Amazon, but at a much higher margin.
Whether they’ll command the same kind of earnings multiple as Amazon is another story.
and willowy blondes only take you so far, it turns out. Malefactors are punished. The universe is restored to balance.
This time, Gekko is a repentant father longing to make amends to win his daughter’s approval who also essentially steals a fortune from her to get back in the game.
Gekko is a humble reformed crook who has paid his debt to society and also a sleek alpha male puffing on a phallic cigar who can’t wait to gloat about his prowess at making money.
Gekko is a teacher who shares his knowledge. At times, one could swear that one had wandered into a parallel universe version of An Inconvenient Truth, as Gekko lectures us on the hazards of leverage and financial meltdown. Particularly priceless is when he calls a group of young students “ninjas”—no income, no job, no assets—adding, “You have a lot to look forward to.” But the same guy who observes that the mother of all evil is speculation turns up later in the film dressed in a power suit and giddy over his ability to turn $100 million into $1 billion. I don’t think he earned it at $25 an hour; leverage must have figured in there somewhere.
If we fast-forward 23 years to Wall Street: Money Never Sleeps, we are treated to a curiously different kind of moral equation, the morality of “and also” rather than “either or.”
In the new film, Gordon Gekko is a humble reformed crook who has paid his debt to society and also a sleek alpha male who can’t wait to gloat about his prowess at making money. (20th Century Fox)
This “and also” value system also comes across in Gekko’s attitude to innovation. He is clearly cynical about clean tech and derides the “fusion delusion” as the next bubble. In his words, “the only green is money.” Yet at the end of the film, he gives $100 million away to support alternative energy and do something “good” with his money.
• Randall Lane: Wall Street on Wall Street
• Randall Lane: Gordon Gekko’s Secret Revealed
The film’s title may hold its final moral clue. If money never sleeps, then can greed not be far behind, even in these pinched times? No one in the film seems to be hurting for nice apartments and clothes, for example, even with a financial meltdown that has come from “the mother of all bubbles.” As Gekko himself puts it, “Greed got greedier with a little envy thrown in.”
So we’d all like to find a little absolution in these troubled times, and in fact in the end Gekko’s daughter does melt and forgive him, while we on the other hand—adding up all the “and alsos”—don’t know whether to follow suit.
This “and also” value system comes across in Gekko’s attitude to innovation. He is cynical about clean tech, yet in the end, he gives $100 million to support alternative energy.
Gordon, make up your mind. Maybe a little therapy would help.
Dubbed "Mr. Creativity" by The Economist, John Kao is a contributing editor at The Daily Beast and an adviser to both public and private sector leaders. He is chairman of the Institute for Large Scale Innovation, whose i20 group is an association of national innovation "czars." He wrote Jamming: The Art and Discipline of Business Creativity, a BusinessWeek bestseller, and Innovation Nation. He is also a Tony-nominated producer of film and stage.
Get a head start with the Morning Scoop email. It's your Cheat Sheet with must reads from across the Web. Get it.
For inquiries, please contact The Daily Beast at editorial@thedailybeast.com.
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Exclusive: Yahoo Courts Former <b>News</b> Corp. Digital Exec Ross <b>...</b>
He's baaaaaack. Former Fox Interactive Media President Ross Levinsohn, that is, who is the top candidate to replace Hilary Schneider as Yahoo's US head, according to several sources close to the situation.
<b>News</b> - Rep: Blake Lively, Penn Badgley Split! - Celebrity <b>News</b> <b>...</b>
"They're still good friends," an insider tells the new Us Weekly.
Telefuture | Old <b>News</b> Report | TVs Merging with Computers | Mediaite
Well, print media, you were warned. A 30 year old news report from NBC news, archived by Vortex Technology, discusses the future of television in a segment creatively entitled Telefuture. In it, they spend a lof of time examining the ...
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Exclusive: Yahoo Courts Former <b>News</b> Corp. Digital Exec Ross <b>...</b>
He's baaaaaack. Former Fox Interactive Media President Ross Levinsohn, that is, who is the top candidate to replace Hilary Schneider as Yahoo's US head, according to several sources close to the situation.
<b>News</b> - Rep: Blake Lively, Penn Badgley Split! - Celebrity <b>News</b> <b>...</b>
"They're still good friends," an insider tells the new Us Weekly.
Telefuture | Old <b>News</b> Report | TVs Merging with Computers | Mediaite
Well, print media, you were warned. A 30 year old news report from NBC news, archived by Vortex Technology, discusses the future of television in a segment creatively entitled Telefuture. In it, they spend a lof of time examining the ...
bench craft company complaints bench craft company complaints
Exclusive: Yahoo Courts Former <b>News</b> Corp. Digital Exec Ross <b>...</b>
He's baaaaaack. Former Fox Interactive Media President Ross Levinsohn, that is, who is the top candidate to replace Hilary Schneider as Yahoo's US head, according to several sources close to the situation.
<b>News</b> - Rep: Blake Lively, Penn Badgley Split! - Celebrity <b>News</b> <b>...</b>
"They're still good friends," an insider tells the new Us Weekly.
Telefuture | Old <b>News</b> Report | TVs Merging with Computers | Mediaite
Well, print media, you were warned. A 30 year old news report from NBC news, archived by Vortex Technology, discusses the future of television in a segment creatively entitled Telefuture. In it, they spend a lof of time examining the ...
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