
The Groupon Bubble is Going Burst Tech - buckpost
http://www.markevanstech.com/2011/02/09/the-groupon-bubble-is-going-to-burst/
======
iamelgringo
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%...](http://www.sfgate.com/cgi-
bin/article.cgi?f=%2Fc%2Fa%2F2011%2F01%2F29%2FBU581HDJ4N.DTL)

[3] [http://www.businessinsider.com/yelps-first-daily-deal-
beats-...](http://www.businessinsider.com/yelps-first-daily-deal-beats-
groupon-2010-9)

[4] [http://www.sfgate.com/cgi-
bin/article.cgi?f=/g/a/2011/01/18/...](http://www.sfgate.com/cgi-
bin/article.cgi?f=/g/a/2011/01/18/businessinsider-facebook-isnt-growing-as-
fast-as-google-did-in-its-early-days-2011-1.DTL)

~~~
beoba
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!

~~~
pchristensen
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.

~~~
beoba
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.

~~~
pchristensen
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.

~~~
beoba
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
      +---

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

------
alttab
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.

~~~
jauco
_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".

~~~
GBond
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?

------
pclark
> 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)

~~~
Qz
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.

~~~
replicatorblog
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.

~~~
awakeasleep
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.

~~~
Tichy
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.

~~~
SkyMarshal
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.

~~~
symptic
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.

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

------
abrenzel
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.

------
kbutler
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.

------
jwh
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?

~~~
klous
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.

------
xcjamie
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.

~~~
eftpotrm
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?

~~~
apollo
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.

------
davidhollander
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.

~~~
jaxn
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.

~~~
davidhollander
> _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.

------
webXL
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!

------
alexwestholm
"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.

~~~
brk
_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.

~~~
alexwestholm
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.

------
cbar
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.

------
Macsenour
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.

------
csomar
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.

------
herval
"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...](http://www.markevanstech.com/2011/02/14/is-foursquare-interesting-
or-doa/)

------
haseman
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.

------
dansingerman
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.

------
theprodigy
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...](http://blogs.hbr.org/cs/2010/12/groupon_is_google_making_a_6_b.html)

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

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

------
sabat
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.

