What’s the deal with Groupon?

November 9, 2011

Watch Groupon Stock Soars, but Does It Have Lasting Value? on PBS. See more from PBS NewsHour.

Groupon’s non-stratospheric IPO last Friday is really good news for all concerned:

  • The underwriters don’t have to explain their pricing Voo-Doo, because only an acceptable amount of money was left on the table.
  • Andrew Mason & Co. get to gloat, at least for a while, about spurning Google and earning a valuation some twice the reported terms — even though Google went into the daily deal business in a way which looks and feels incredibly like Groupon.
  • Merchants who might have had reservations about the appeal of Groupon saw just how much attention was lavished on the company. Members will continue to get random offerings and spend money on things they didn’t know they wanted.

Such a deal!

But it may also have lulled some eager high-tech investors into a false sense of security. It’s hard to criticize the valuation of Groupon, and even the long-term viability of the daily deal phenomenon. But it’s not impossible.

In the interest of full disclosure, I signed up for Groupon a long time ago and even installed the iPhone app. I used the service exactly once, and let the deal expire (for which I was out a cool $5) for a couple of reasons, neither particularly Groupon’s or the vendor’s fault.

I should also say, as I have been told many times in many ways by many people, that I am not the demographic they care about. I almost never buy anything I haven’t thought about a lot. Heck, I don’t even sample free stuff at Whole Foods unless I’ve already decided I am interested in buying — and then I don’t because I’ve already decided. I still think QVC and HSN operate under an unsustainable business model — and I think they print money.

What is true is that Groupon et al arrived in the midst of a recession and are thriving even though US unemployment is 9%. Getting something at a deep discount may be just the ticket for trying times. Anything which involves prying disposable income for what amounts to suggested demand is darned impressive.

Still, the naysayers were out in some force, despite my own mild doubts (here, and here in a piece I edited, and above in an appearance on PBS’s News Hour) that Groupon was over-valued. The fact that insiders were dumping Groupon shares is a sign they lack confidence.

We won’t know the true institutional interest yet, but there is already some evidence that deal-making loyalty is ephemeral. Forester did some polling and concludes that people are somewhat turned off by the volume of e-mail involved. As for me, the demographic that doesn’t matter, I almost immediately stopped the daily delivery, and also turned off the app’s alerts.

But according to two new Forrester surveys 47% of flash sale subscribers and 36% of daily deal voucher subscribers have never actually purchased a daily deal offering. Some 51% of prepaid voucher buyers and about a quarter of flash sale buyers told Forrester they would have purchased anyway without a discount offer. And 29% of daily deal users said that they unsubscribed because of the volume of e-mails received, presumably the majority of which were unappealing offers. (Also, 43% say they haven’t redeemed an offer at least once.)

The question isn’t whether discounts and deals will ever go out of style. They won’t. The question is: How big a business will it be for any one company? For the individual investor, eager not to be left out of what may turn out to be another high-tech gold rush, and comfortable with the lessons of the dot-com bust a decade ago, getting a piece of this deal may seem very tempting.

Zynga is said to be planning to go public this month, and the decision for the little guy about whether to get in early is similar: is even the fabulously successful creator of FarmVille and Mafia Wars 2 a good enough risk, when tastes are fleeting and the crowd so capricious? And what about The Big One: Should the small investor friend Facebook, whose private market valuation of some $82 billion makes it worth about as much as Kohlberg Kravis Roberts and more than such non-publicly-traded companies as Qatar Petroleum, Koch Industries and the US Postal Service?

The oldest investment truism is still the most wise, and obvious: Revenues dictate value. Not popularity.

Here’s another one: When a deal seems to good to be true, it probably is.

2 comments

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“too good to be true”

Posted by Shukla | Report as abusive

Well the bank is to make money from nothing by taxing the hopes. Looking at it from the individual ‘Investor’ or Shaftee point of view it’s certainly not going to seem like a good deal.

Posted by Collipops | Report as abusive