The Groupon Bubble is Going Burst Tech | Hacker News Reader

The Groupon Bubble is Going Burst Tech

markevanstech.com

61 pointsbuckpost69 comments

I'm really sick of this Chicken-Little-the-sky-is-falling-I-want-to-have-published-the-"it-was-a-Bubble"-5-years-before-the-next-bubble type articles.

Mashable reported that Groupon had $800M in revenue last year when Google offered $6B for them. [1] Taking $1B in funding makes a bit more sense when you consider it's only 1 year's worth of revenue for them.

LinkedIn is profitable before their IPO [2]

Yelp made an estimated $50M last year, and if they play their daily deals program right, they have a chance to make a crap load more money. I'm wagering they are going to be quite profitable before they IPO. [3]

Facebook make $1.8B in advertising revenue alone this year. I'd be hard pressed to believe they aren't profitable. And, since they have heaps of personal data on 1/12th of the world's population, does anyone doubt that Facebook's first 1,000 employees are going to be able to take up sewing blankets made of $100 dollar bills after their IPO? [4]

Now, when growth oriented technology companies have significant revenue streams and/or are profitable, how exactly is it that we're in a bubble?

Nothing to see here, folks. Go back to building companies that print money.

ref:

[1] http://mashable.com/2010/12/07/groupon-800-million/

[2] http://www.sfgate.com/cgi-bin/article.cgi?f=%2Fc%2Fa%2F2011%...

[3] http://www.businessinsider.com/yelps-first-daily-deal-beats-...

[4] http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/01/18/...

Mashable's own article says the $800M is a "run rate" number. It's really Enron-style accounting:

"Run rate is a tricky number, though. It’s a projection of what the company would make if you extrapolate from its most recent revenue numbers. Depending on the time frame used, the calculated annual run rate can vary significantly."

If my income keeps growing at this rate, I'll be a trillionaire in no time!

Run rate is about quantities, not rates. If you made $10 in Jan, $40 in July, and $160 in the next Jan, then your run rate would be $1920, (12 x $160), not projecting 4x growth per 6 months forward.

Using that math, I've already 'earned' many millions in my lifetime, even though I've only been out of college for a couple years.

And that number gets even more exaggerated if I choose to base the calculation off a month where I got a bonus.

My point stands; it's fabricated revenue.

It's a well understood and useful concept. Let's say you work at a job making $120K. Then in November, you start a new job paying $180K. Would you think that you make $130K (the amount you actually earned that year) or $180K (the amount you expect to make going forward)? Is the extra $50K fabricated salary?

How else would you communicate fast growth in revenue? Also, since run rate is well understood, people don't use it for exceptional or one-time events like a bonus. For example, Groupon didn't claim to be raising money at $12B/yr since the big raise was a one-time event.

It doesn't communicate growth -- there is nothing to compare against. If you were going to do that, you'd simply provide a something like YOY% change in revenue.

A run rate is just inflating/fabricating PAST revenue by speculating on the FUTURE. Refer to my helpful chart:

  |  / <- SHOW THIS NUMBER TO INVESTORS, PRETEND IT WILL GO ON FOREVER
  | /
  |/   <- HIDE THIS NUMBER, TOO LOW
  +---

Wow, a handy ASCII chart that disproves the entire concept of investment. Congrats!

Mark-to-market accounting (Enron-style) is analogous to Groupon booking $3.5b in revenue in Q12011 because their valuation jumped from $2.5B to $6B this year--something they could never realize unless they sold, thus is null. Run rate is speculative, but far more rooted in reality.

I didn't take Marks comments to be so much screaming 'BUBBLE' as they questioned the staying power of group buying.

There wasn't a 'rollerskating' bubble, it had it's time and then people moved to other interests. I think that is what Mark was saying

I'm surprised no one commented on the fact that a Groupon is not a tech company.

Sure, they USE technology, but not nearly as much as they use people. They have massive sales and customer facing teams that make all of the deals for the coupons. Its not like a social network of business owners who create and swap coupons or something.

Groupon is in the deal business, the coupon business. Their name and brand isn't riding off any one large technology push. Calling Groupon a tech company is a stretch (even if thats how they began), and saying its going to "burst Tech" is even more knee-jerk.

and saying its going to "burst Tech" is even more knee-jerk.

I think that was a copy paste error. The original title reads "The Groupon Bubble is Going Burst | Mark Evans Tech".

Well that changes things. I thought the article would be about how a failed Groupon would trigger a tech bubble implosion.

Copy and paste error or link-bait tactic?

> I’m not convinced Groupon has staying power. Sure, it’s uber-popular but how much longer will consumers be captivated by the flurry of deep-discount offers hitting their inboxes?

Ah yes, because everyone knows consumers hate saving money, this is why coupons have never taken off in the past. Wait a minute. In 2009 hundreds of billions of actual coupons were used.

Of all the companies people cite for a bubble, you choose the one making money hand over fist? Seriously?

I think the most ridiculous statement people say is that Groupon isn't defensible, guys, Groupon has thousands of people calling companies every day - guys in a garage eating pizza can't exactly do this. (also, if you're saving people money, people have a tendency to remember your brand)

no one can deny what groupon has accomplished to date. you have to give them props.

as is, they have first-mover advantage (at least in terms of the group discount space taking off). i know i completely abandoned groupon in favor of scoutmob, which requires no money down.

i wrote a post similar to mark's why i believe groupon can't keep this up: http://adamwexler.wordpress.com/2011/02/09/groupon-is-about-...

interesting thing to note....although the general consensus is groupon passed on google, i've heard from a reputable source that it was the other way around, and google backed out of the deal.

The problem is that Groupon's customers aren't actually the people buying coupons, it's the businesses selling coupons, and we've heard plenty of horror stories from that side of the coin. Whether that aspect is enough to dig Groupon's grave is an open question, but let's at least make sure we're approaching the question from the appropriate angle.

If that is right - and it's totally possible - isn't this a fundamental flaw with the business model for all competitors too?

Have there been that many stories? I've heard a couple from small time coffee shops that may not be the best financial planners, but those few sad stories seem to reverberate without a lot of new voices joining the chorus.

I'm going out on a limb here, but has anyone else noticed that HN has a tendency to hate on Groupon?

We see dozens of articles like this reach the front page predicting Groupon's doom, always citing the same dissatisfied coffee shop, always attacking imaginary business models. I'd like to see someone refute Groupon's value as an advertising tool, or even compare it to existing alternatives.

On top of that, a class of hacker news user exists who spells "Groupon" groupOn. It seemed liken impossibly childish insult, to mangle something's name, so I assumed it was an accident or maybe that's how Groupon used to be spelled when it was a startup. Well I looked it up, and no.

Personally, I tend to hate it because I am convinced that coupons are evil. It is just a way to control people's behaviours and turn them into consumer sheep, which I resent from the bottom of my heart.

I root for startups that empower people and open up new opportunities, not for ones that have found a loophole in the human psyche and exploit it to the maximum.

Outside the US coupons are not a big business, at least in the countries I know. So I wonder if it will translate as profitably in the rest of the world.

Here in brazil (at least in são paulo) there are around four companies (groupon included) fighting tooth and nail for this market, even using black-hat-ish techniques (unsolicited email, misguiding website, impossible-to-unsubscribe mailing lists, deceitful ads, etc).

I think most urban-ish places with a capitalized youth are a ripe market for coupon-type businesses.

I wouldn't say they're exploiting a loophole in the human psyche, rather a very well known aspect of it.

It's also a brilliant business model for a recession and financial crisis. In most instances it's win-win-win:

- Groupon makes money

- people get huge discounts, and save money if it was something they were planing to buy anyway.

- businesses both make money (assuming they worked out the math of the deal correctly before accepting it) and gain huge exposure.

I suppose the only losers are wherever people would have spent that money had they not bought the groupon, but that's hard to quantify (bought the same thing at a higher price? bought something else? saved it?).

I can't think of many more innovative business models for a distressed economy.

The losers are the waiters and employees of the featured businesses. I know plenty of people in the service industry who dread the days their restaurants or shops offer discounts on Groupon. Sure it makes money for the company, but in many cases a Groupon deal kills morale within the business.

That on top of the exploitative nature of many (most?) Groupon users, where they buy a Groupon and never revisit the business after they use their discount.

Groupon is a great business, but some concerns about the quality of the leads arise. We need the Glengarry leads.

I dread the day I cannot get into my favourite restaurant because there is a line of Grouponies around the block . . .

Groupon is creating new value and opportunities. Small business now have an easy, trackable, pay-per-action source for customer acquisition. It's hardly exploitative of customers either because you can get a refund if you're dissatisfied (see the Groupon Promise).

HN has a tendency to hate on a lot of things that are wildly successful.

I think the accusation is that it is somehow a "low brow" startup.

See NY Mag's approval matrix: http://nymag.com/arts/all/approvalmatrix/71237/

All I can say is wow, they scaled super fast (scaled real people), and thats not easy

My personal theory? There's a lot of jealousy in HN users WRT groupon because they didn't start it. It's not an unbelievably complex idea -- I'd wager that many Groupon-hating HN users probably think that their current startup is much more complex/important/awesome. They're bothered by something so simple making so much money.

At least that's how I initially felt about Groupon.

At the same time, my attitude seriously limited my business. I'm trying to build a b2b marketplace, and wanted to build my "marketplace of dreams" (if I built it, they will come). I didn't address SEO or getting initial traffic because that was low brow, and would take care of itself if I built a cool enough product.

Boy was I wrong. That was a long (2+ year) lesson to learn.

In last fall's First Look Forum in Seattle, two of the five finalists (including the eventual winner Grocery Cart Savings) had good data on the problems merchants have with Groupon. Of course Groupon's aware of those too and may well have improved things since then, but the discontent is very real.

The only horror stories I can remember are that Mimi's coffee in Portland (?) and the Japanese new year. I've heard other second- and third-hand reports with no names or specifics. The "merchant horror stories" don't pass the sniff test for me - it seems like the same one or two brought up over and over again. It just seems like a fake news trend.

Andrew Mason said at startup school that the merchant satisfaction numbers are something like 95%. I

For what it's worth, I talked to a yoga studio owner who had a horrible experience (with Living Social, not Groupon). It turns out that people looking for a cheap deal on yoga classes aren't good long-term customers so the loss never paid off. I agree that we've only heard horror stories, but I'd be curious if there are small business success stories or is the service only good for big companies who can take the loss?

Despite being super-hot right now, deal sites are still just a customer acquisition tool. Best Buy could flood their stores tomorrow by advertising 90% off plasma TVs. Small businesses don't have the same level of experience and sophistication around customer lifetime value, so they're more likely to make mistakes like that. One of the services that Groupon provides (no idea about LS or other deal sites) is deal shaping/sizing, to help merchants offer deals that will not be super-costly or overwhelming to the merchant while still be appealing to customers. The Japanese new year incident (http://news.ycombinator.com/item?id=2111609) describes this in more detail. I think even the anecdotes will become more and more infrequent as merchants and deal sites get better at this.

I don't think in general coupons are a good deal for people. It is mostly clueless people who fall for it. As JoelOnSoftware wrote somewhere, collecting coupons is like working for 7$/hour. With Groupon, even if you save 50% on your Sushi, maybe you spend 2 hours getting to that Sushi place, rather than 5 minutes to the one around the corner.

However, there seems to be an infinite supply of clueless people, so the whole thing might still sail on forever.

If your goal is saving money, that's true.

However, much of Groupon's appeal is the incentive to try new restaurants or do new things. The sushi place around the corner may be good, but you're probably not going to remember your nth visit.

You've got a point. In fact with the right context aware notifications, maybe Coupons are OK - like if you wanted to buy X anyway and you automatically save money.

Then again if it worked that way, there would be no incentive for businesses to offer coupons...

the only one "coupon" I ever bought was for a $20 Amazon Gift card for $10 on Living Social.

All those other coupons are almost always junk. The only reason it works, is that out of millions of people out there, there are a few for whom that one coupon was actually relevant.

So essentially you sign up for 364 days of worthless spam, to save $10 once a year

I think that a lot of people are very happy to be spammed in return for saving money.

I wonder how much the average Groupon user actually saves in a month/year. I just glanced through the last three month of groupon spam in my inbox and the only deal that I would be remotely interested in was $6 off at some pizza place I don't normally order from.

It almost certainly works out that if you are a Groupon customer you spend more money than you typically would - in your lifespan of Groupon. Whilst you save money on the first purchase, would you have bought it at all if not for Groupon? What about future purchases? You probably wouldn't have ever considered Balloon lessons if not for Groupon...

Agreed, I only bought the $20 Amazon deal at Living Social since it's a guaranteed $10 savings at a company I frequent. Even then, I was hesitant to pull the trigger because I had to go through the registration process and opt-in to spam.

While it's not my concern, I don't see how some of these deals by large, nationally recognized companies (ex: Gap, Amazon, B&N) would be sustainable. I'm sure they can charge it to marketing, but they're increasing sales by offering a substantial discount that makes them lose money on short term, small transactions. I assume they hope 1.) new customers are attracted, 2.) customers spend much more than $20, or 3.) customers who don't normally visit are attracted.

Today's Groupon deal for my area is a $40 oil change for $20.

Whoop-de-freaking do. Every third day or so, I get a flyer with that coupon and about a hundred other offers, which pile up in my recycling pile.

When Groupon was younger, they ran more 90% deals, if I recall correctly. One way or another now Groupon is a company that offers me a small number of utterly pedestrian coupons a day, while I'm barraged with them in my snail mail. Presumably the 90% off approach where the offers were actually special doesn't scale. If the offers scaled, the businesses would already have been offering them through the existing coupon channels.

Oh, and I'm about 50 miles from the closest Groupon hub; my physical mailbox offers me coupons for things way closer than that, some of which I can walk to.

How does offering me an inferior selection of time-bound coupons that is beaten by my physical mailbox most every day make 6 billion dollars worth of sense‽ Groupon didn't create the idea of coupons themselves!

I agree with your statements, but I have a question.

If I am getting a groupon that gives me 50% off $100, and I actually spent the $50 of which groupon takes ~50%... at what point don't retailers start offering "groupon like rates" directly to me, cutting out groupon?

Sure, many retailers will be too lazy due to the distribution groupon has - but won't there surely be this group of retailers?

Groupon was silly not to accept Google's $6bn offer. The profit margin that justified that valuation is sure to drop over time, as their business model is easily replicable. Does that mean Groupon or that business model is going to go away? Of course not. It does mean, however, that $6bn was probably the high-water mark for the valuation a company like this can achieve.

The biggest threat is not from the consumer side - who wouldn't love 50-75% off deals? - but from the business side. Rumor has it that business are losing anywhere from 75-90% on these coupons. Businesses will accept a loss leader now and again, but there are two threats here:

1) Competitors will offer businesses better deals by taking less as a middleman fee, hurting Groupon's profit margin

2) There will be few repeat customers on the business side, as Groupon purchasers don't actually return to the businesses based on the initial discounted deal

Both threats are serious.

However, this is the basic rationale between "loss leaders" and "sale prices" that have been common in consumer-targeted sales for decades (or longer). I see no reason to expect this will change.

Rather, I see Groupon's primary risk is the simple fact that there will be more and more competition, and this will allow both consumers and retailers more choice, cutting into Groupon's phenomenal margins.

Whilst I don't think a profitable business like Groupon will 'burst', I think it will slowly deflate. Why? Does anyone remember the company from over a decade ago, backed by Paul Allen, who were going to revolutionise ecommerce by offering group discounts? It was Mercata and they went under in 2001.

The article at http://www.seattlepi.com/business/vc122.shtml sums up why long-term, Groupon will face challenges (and it's also the exact reason why I decline to use Groupons' services):

"Those who wanted a baby jogger or DVD player, for example, sometimes had to wait seven days for Mercata's so-called PowerBuy to kick in. By that time, shoppers had moved on to another store or online shopping site. Instead of creating a faster, cheaper way to buy products, Mercata actually slowed the buying process."

Que Groupon offering group-buying service with no time-limits, only a quantity-limit?

Groupon does enable merchants to set quantity limits on deals.

Mercata wasn't a daily deal site, it was a demand aggregation site which has inherent problems as mentioned above and in the article.

Groupon may be the strongest brand, best venture backing, and most revenue compared to all the clones, but it certainly could become worthless practically overnight. Easily replicable as seen by many others, staying power is questionable as mentioned.

I'd have trouble sleeping at night if I were Andrew Mason. Especially hearing the company that I turned down 6 bil from was joining the market. Post ipo his wealth will pretty much always be tied to groupons success.

I agree I wouldn't have turned down the buyout, but from what I understand they're certainly not easily replicable.

Sure, you or I could set up a site that offers all the tech of Groupon pretty quickly. Then what? The strength is in their large and proven sales force and network of contacts. That can and will experience churn and cross-pollination with competitors, but they've got a heck of a head start, huge brand recognition and the resources to try new parallel ventures to hedge against problems with their current offering.

Any of a number of companies could and did duplicate eBay's tech. Outside a few national markets where eBay dropped the ball (Japan, New Zealand), how many succeeded?

Ebay is a deceptive example; auctions inherently have powerful network effects. I think Amazon might be a slightly better example: tons of competition but still a lot of money to be made. There can be many winners in this market, and Groupon will probably be the biggest winner.

If there's one thing Groupon shouldn't be worried about, it's Google's ability to do sales and customer support. Groupon's business is ridiculously human-intensive, and Google is notorious for doing everything (customer support included) with as little human contact as possible.

weak analysis.

Here's why Groupon works: data compression. A groupon is a signal compressing all of the economic data in an entire city into a single very best offer, at a rate of one per day. Consumers are overloaded with information and seek simplification, the value derived is a function of the ratio of compression.

Here's how Groupon can fail: they start offering more than one coupon per day. Anything that increases the perceived noise/signal ratio in crowded inboxes.

Actually, that is how Groupon succeeds. Well, more deals in an area without an individual subscriber receiving too many deals.

Targeted deals based on real-time inputs (weather, slow day in the business, new story about a competitor, etc).

Add in hyper-local targeting and enough automation and you have the holy grail of local commerce.

>without an individual subscriber receiving too many deals.

Correct. 1 refers to the rate per individual inbox that was entirely essential for their initial growth and traction. Total volume and market segmentation > 1 ... is a no brainer for any business. While they can now afford to alienate and loose businessmen and others with low inbox noise tolerance, limiting the bandwidth they consume in each individual's inbox is still their weakest link and one of the only ways for them to actually loose subscribers.

Urban sprawl has connected the city where I spend my day with the place where I spend the evening. I"m not the only one either as many make the short commute. It would be nice to get an email from Groupon with both daily deals in a single email, if I choose.

What they can do though is further segment areas if they are easily filling deals, so instead of offering you more than 1 deal a day in your city they could break you city up into multiple areas and offer one deal to each.

yipit is a good example of company working off this idea, by compressing all of the daily deals relevant to you in your area into a single email.

I just thought I'd give groupon a spin to see what the buzz was about. It has a pretty slick landing page that enticed an email address out of me. V-day is coming up and there was an FTD $40 coupon or "Groupon" available for $20 so I thought what the hell, my wife needs some flowers, why not? I click to purchase, it asks me for my basic info, including an email address and CC info. I complete the form and..

Sorry, this email is already in use by another account (or something like that)

Frickin' form: completely blank. Was I supposed to check my email first and create an account? If so, why did it let me get to the order page. So I check my gmail, even the spam folder, and nothing. Even if I signed up a long time ago, an email would be in my archive.

Should I fill it out again with a different email address? Sure... I got time to write this comment, right?

I guess if I end up using this thing more than once, then that will prove the hole bubble charge false. But so far it's not looking good.

Sorry, had to rant.

Update: blank page with window.location.href = "/mygroupons"; after completing the purchase. I sh*t you not. Chrome on Windows, people!

"Groupon and other group-buying services let consumers eat their cake and have it too." To me, that doesn't sound like something consumers are going to abandon very quickly. The notion that collective buying will somehow fade in the eyes of users strikes me as pretty odd - it's a flat out better way to buy, and groupon does a great job of getting worthwhile products to consumers at deep discounts.

Of the points you mention, I think Groupon's greatest worry is probably that retailers may not make the margins they'd like when using it. But even that's a difficult complaint to make work - fundamentally retailers compete with one another and Groupon is a great tool to leapfrog your competition, even if just for a temporary period.

To me, that doesn't sound like something consumers are going to abandon very quickly.

No, but it requires retailers to participate. When the prevailing trend seems to be that retailers lose their ass on the deal, and then don't win over enough new long-term customers to justify the cost, the model is going to need some refinement over time.

Maybe so. In my comment I noted that retailer issues are a far better criticism of Groupon... The OPs analysis is focused far more on consumer issues, which I think is an inaccurate view of what's going on.

The most interesting part is the daily deal (prepaid couponing) as a progression of the CPM>CPC>CPA advertising model.

The opportunity to eliminate marketing/advertising risk as an upfront cost for small businesses is incredibly attractive. Despite the hype, countless copy cats, and bubble comments already, this market is still incredibly young and underdeveloped.

I think the real question is whether this new advertising model is best served by a consumer brand, where Groupon has significant first mover advantage, or an underlying technology solution for every publisher with an audience.

My favorite line from the post: "My sense is Groupon’s popularity and star power has peaked even though sales may continue to grow for awhile."

If it has peaked, why would it continue to grow? I think that other side of the peak is decline, not growth. The line sounds like someone who wants to make a statement, but wants a soft landing if they're wrong.

I think Groupon will continue not because people don't mind a daily email, but because the businesses that issue the coupons receive value from them. Which would be more customers to make up for the deep discount they gave.

I think no one can predict that but the market. No company is going to give you 50% discount if they were selling with good numbers.

I have few domains that I'm planning to transfer to namecheap. Surprisingly, yesterday I found out that they have an around 50% coupon for domain transfer. I quickly went and transfered the domains, I was planning to transfer them two months later.

So it's a deal. The company needs money now. The buyer wants to benefit. Whenever you have these two parties the transaction happen be it groupon or not.

"if I were Groupon’s founders, I would have taken the $6-billion offer from Google in a heartbeat"

that's probably why you AREN'T a Groupon founder

ps.: more from the same blogger: "why Foursquare is dead because it's not canadian" - http://www.markevanstech.com/2011/02/14/is-foursquare-intere...

This article seems light on facts but heavy with opinion. "My sense is Groupon’s popularity and star power has peaked even though sales may continue to grow for awhile..." That's an interesting theory, is there any evidence to support this?

Further, the headline is misleading, as they're talking only about groupon and nothing about how this might impact the tech economy as a whole.

TL;DR The OP is of the opinion that Groupon's (and the group buying sector's) bubble will burst. No facts I think.

Groupon must be super-confident in themselves to turn down $6billion.

I suspect they have some very good metrics that indicate they will continue to grow to a considerable extent to justify that decision. I doubt it was made on gut feeling or whim. Or without facts.

Here is a good blog about three different marketing strategies and customer types the groupon model attracts

http://blogs.hbr.org/cs/2010/12/groupon_is_google_making_a_6...

I clicked on this wondering what 'Burst Tech' was.

Title should say '... bubble is going [to] burst.'

That Groupon is probably a fad? Granted.

That this automatically means there is some kind of "tech bubble"? That any startup related to the consumer space is going to implode and possibly take the whole tech sector with it? Blogga please.

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