Groupon’s idea of going quiet

By Felix Salmon
June 20, 2011
Rocky Agrawal's TechCrunch essay entitled "Why Groupon Is Poised For Collapse".

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If you want a great example of the kind of mean things that people are saying about Groupon in the run-up to its IPO, you could do a lot worse than Rocky Agrawal’s TechCrunch essay entitled “Why Groupon Is Poised For Collapse”. It’s a great example of overstretch and dubious logic, with a couple of moments of brilliance and genuine insight thrown in at the same time. Groupon, of course, being in its quiet period, can’t react. Except, it just can’t help itself, and has put up a whiny post, supposedly authored by the company cat, about how unfair the whole situation is.

The fact is that when Groupon made the decision to go public, it invited exactly this kind of attention — both before the IPO and forever more. When Groupon was private, no one really knew anything about its financials, and CEO Andrew Mason could happily declare that he’d much rather talk about building miniature dollhouses. Once it’s public, however, he’ll have a fiduciary responsibility to his shareholders, and will have to answer such questions at length. Will that make him happier than answering such questions with a death-ray stare? I doubt it, to be honest. Revenues and business models and profits and forecasts are serious things, and you can’t kid around with shareholders in the same way you can with journalists.

In other words, Mason will have to go from saying nothing, which can be fun, to saying something, which almost certainly won’t be. Rather than moan about his inability to say anything in the quiet period, he should enjoy it while it lasts. From now on in, the boring financial questions are going to be unavoidable — from analysts, from journalists, from shareholders, even probably from merchants and customers who wonder whether Groupon’s profitability is a sign that they’re being ripped off.

Which brings me to one of Agrawal’s smartest points:

Underlying Groupon’s success is an auction. It’s not explicit, like Google’s AdWords bidding platform, but the economic effects are similar. The fact that Groupon runs daily deals creates artificial scarcity and drives up pricing to absurd levels. Even with four deals a day in a given market, you’re talking about fewer than 1,500 deals a year.

The reason that Groupon can get away with retaining 50% of the proceeds of its offers is precisely because the supply of those offers is so constrained that demand will always exceed it. Groupon can then pick and choose among the various different merchants clamoring to do business with it, aiming to maximize its own revenues by selecting the offers which are most lucrative for Groupon.

In this, Groupon’s interests are not aligned with either merchants or consumers. With merchants, indeed, the interests are almost diametrically opposed: the greater the proportion of total revenues that Groupon takes, the less well the merchant does. And consumers will always prefer an offer with a low up-front cost, while Groupon wants to maximize the up-front spend, since that’s all that Groupon ever sees.

Up until now, there’s been one overriding narrative when it comes to Groupon: its astonishing, breakneck rate of growth. The secondary story was the quirkiness of the place, and its sense of humor. And I’m sure that from the company’s point of view there’s something frustrating about running into its first real barrage of negative press just when it can’t respond at all. But my guess is that it won’t take long before executives look back wistfully on these quiet days. Because the aggressive questions aren’t going away — and the questioners are never going to be satisfied with Groupon’s answers, either.

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Comments
6 comments so far

I think people will get bored of groupon and move on.

Posted by Piesmith | Report as abusive

Even Agrawal’s smartest points are horribly phrased.

It’s not a freaking auction. Just because they’re partnering with the most desperate merchants doesn’t make it so. If supply is constrained and your competitors are still catching up, it’s obvious that you’re going to extract high rents. It’s not an auction unless you’re, you know, running an auction.

If you really stretched, you could argue there’s some underlying Walrasian tatonnement auction or something. But then there wouldn’t be anything special about Groupon’s success.

Posted by absinthe | Report as abusive

“In this, Groupon’s interests are not aligned with either merchants or consumers. With merchants, indeed, the interests are almost diametrically opposed: the greater the proportion of total revenues that Groupon takes, the less well the merchant does.”

Not sure that this quite right – both Groupon and merchants care about the absolute level of revenues rather than shares.

“And consumers will always prefer an offer with a low up-front cost, while Groupon wants to maximize the up-front spend, since that’s all that Groupon ever sees.”

Not sure that this is right either, if consumers don’t take up the offers that’s not great for Groupon or consumers. Both have an interest (as do merchants) in offers that are taken up.

This is illustrative of one of the beautiful ideas of internet advertising – merchants want to get hold of interested buyers. Buyers want to get offers that they care about. Intermediaries (Groupon, google etc) want to provide services that attract participation. Outcome – a massively valuable industry!

Posted by econp | Report as abusive

I now get daily deals from nearly 10 email sources. Just scanning my mailbox from today I see Groupon, BuyWithMe, Bloomspot, LevelUp, LivingSocial, RueLaLa, NewEngland Perks and Yipit (aggregator). There are a few more.

Since they are distributed by email, they can develop a large list quickly. A 50% fee seems a lot to expect over time.

Posted by jomiku | Report as abusive

@econp: That’s the problem; after the Internet has done a really good job of eliminating middlemen in just about every industry it has touched, Groupon, et al want to re-introduce it. I just don’t see it as anything more than an experiment waiting to fail.

Look at it this way. You can argue that the only significant value Groupon brings to commerce is its mailing list. Look how well that’s worked for the traditional publishing companies. There may be a role for Groupon here, but the email list will have to be valued at aquite a bit less than it seems to be today.

Posted by Curmudgeon | Report as abusive

Groupon has been hiring a lot lately (http://bit.ly/k0qi6j) and going after Silicon Valley’s top talent… and launching great new products. The Rocky dude can complain as much as he wants, but the business won’t stop. It’s a great value proposition for both consumers and merchants.

Posted by CarlaOlson | Report as abusive
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