
On Grouponzi - mariorz
http://parislemon.com/post/6187955938/on-grouponzi
======
stevenj
This may not apply to this market, but I think it's still insightful:

"Here's a model that we've had trouble with. Maybe you'll be able to figure it
out better. Many markets get down to two or three big competitors—or five or
six. And in some of those markets, nobody makes any money to speak of. But in
others, everybody does very well.

Over the years, we've tried to figure out why the competition in some markets
gets sort of rational from the investor's point of view so that the
shareholders do well, and in other markets, there's destructive competition
that destroys shareholder wealth.

If it's a pure commodity like airline seats, you can understand why no one
makes any money. As we sit here, just think of what airlines have given to the
world—safe travel, greater experience, time with your loved ones, you name it.
Yet, the net amount of money that's been made by the shareholders of airlines
since Kitty Hawk, is now a negative figure—a substantial negative figure.
Competition was so intense that, once it was unleashed by deregulation, it
ravaged shareholder wealth in the airline business.

Yet, in other fields—like cereals, for example—almost all the big boys make
out. If you're some kind of a medium grade cereal maker, you might make 15% on
your capital. And if you're really good, you might make 40%. But why are
cereals so profitable—despite the fact that it looks to me like they're
competing like crazy with promotions, coupons and everything else? I don't
fully understand it.

Obviously, there's a brand identity factor in cereals that doesn't exist in
airlines. That must be the main factor that accounts for it.

And maybe the cereal makers by and large have learned to be less crazy about
fighting for market share—because if you get even one person who's hell-bent
on gaining market share.... For example, if I were Kellogg and I decided that
I had to have 60% of the market, I think I could take most of the profit out
of cereals. I'd ruin Kellogg in the process. But I think I could do it.

In some businesses, the participants behave like a demented Kellogg. In other
businesses, they don't. Unfortunately, I do not have a perfect model for
predicting how that's going to happen.

For example, if you look around at bottler markets, you'll find many markets
where bottlers of Pepsi and Coke both make a lot of money and many others
where they destroy most of the profitability of the two franchises. That must
get down to the peculiarities of individual adjustment to market capitalism. I
think you'd have to know the people involved to fully understand what was
happening."

-Charlie Munger

<http://ycombinator.com/munger.html>

~~~
Super_Jambo
I think it all comes down to how effectively branding and marketing have
destroyed the EMH. Airplane tickets are fungible they're easy to compare on
price. They're also expensive enough that people take the time to shop around.
However because of the regulators no brand of airline is unsafe.

Buying an expensive branded cereal is probably not a completely rational
action IF you could identify equally good no-brand cereals you'd save money.
But certainly in the west the cost is such a small part of most peoples
spending that they don't bother.

------
po
_Yes, the amount of money they’re spending on customer acquisition and
retention is absolutely insane. (And the amount owed to merchants is
especially troubling.) But look at what they’re up against. Pretty much single
major player is now coming directly at them — including the company that tried
to buy them for several billion and was turned down, Google.

Facebook is charging fast too. LivingSocial. Etc.

They need to get out in front of this. And that’s what they’re trying to do._

If your explanation for why they are losing money is that they're _doing what
needs to be done_ then that's fine, but you're forfeiting the 'defensible
moat' argument. They're losing money because a bunch of established businesses
could come in and take over if they don't. That part doesn't make them a ponzi
scheme but it does make it a bad business to be in.

The part that makes it a ponzi scheme is that they are now seeking more
investors even though the vast majority of the money from the last few rounds
went to earlier investors. That's pretty much the dictionary definition of a
ponzi scheme:

 _A Ponzi scheme is a fraudulent investment operation that pays returns to
separate investors, not from any actual profit earned by the organization, but
from their own money or money paid by subsequent investors_
<http://en.wikipedia.org/wiki/Ponzi_scheme>

There is nothing wrong with taking _some_ money off the table so the early
investors/employees aren't operating under undue risk, but the scale of cash-
out at Groupon is more than a bit fishy.

 _edit:_ As a side-note the actual original Ponzi scheme was supposed to be
profitable through arbitrage of buying and selling Postal coupons:
<http://en.wikipedia.org/wiki/International_reply_coupon>

~~~
edanm
"If your explanation for why they are losing money is that they're doing what
needs to be done then that's fine, but you're forfeiting the 'defensible moat'
argument. They're losing money because a bunch of established businesses could
come in and take over if they don't."

It's not one argument or the other - that's a false dichotomy. It could be
that, _right now_ they're still vulnerable, but are doing what needs to be
done to build their "defensible moat".

And in fact, this makes perfect sense. They're a _very_ young business,
they're spending a lot of money building their economic fortress. The fact
that they aren't profitable is surprising, but for such a young company not
_too_ surprising.

"There is nothing wrong with taking some money off the table so the early
investors/employees aren't operating under undue risk, but the scale of cash-
out at Groupon is more than a bit fishy."

I agree, but I'm not sure I get this argument. Isn't this something that the
investors decide? I mean, it's not like the founders were duping anyone. They
went up to some VCs, asked them to buy a big portion of their shares, and the
VCs agreed (after thoroughly looking at the numbers, I might add). The
investors seemed fine with it and considered it a good investment nonetheless,
so what does it prove? Nobody was duped here.

I think the only difference between what's happening now with Groupon and what
usually happens with small startups is the scale of money involved. Groupon is
similar to other young companies, but a lot more money happens to be involved.

~~~
po
_They're a very young business, they're spending a lot of money building their
economic fortress. The fact that they aren't profitable is surprising, but for
such a young company not too surprising._

Ok, I'll give you that. _Maybe_ this is money well spent. I think you will see
arguments both way on this one. I personally don't think it is.

 _Isn't this something that the investors decide? I mean, it's not like the
founders were duping anyone._

Even if you tell the public, "Full disclosure: I'm running a ponzi scheme, you
want in?" it's still illegal.

The scale of money is disconcerting but the actual behavior that is being
rewarded is what concerns me. If fully appreciate that I might be wrong here,
but I need to hear a better explanation of why I'm wrong.

~~~
edanm
I'll be honest, I'm probably much less qualified than you to say whether their
money is being well spent. I'm just betting that the investors, who _are_
pretty savvy, _do_ know whether their financials are good. Of course, you're
suggesting that the investors are in this because they believe future
investors will pay them back, and so on, but I think the people investing in
Groupon are doing so for solid reasons.

'Even if you tell the public, "Full disclosure: I'm running a ponzi scheme,
you want in?" it's still illegal.'

Someone mentioned in another comment that a Ponzi scheme, by definition, means
that people don't know it's a ponzi scheme. The commenter contrasted this to a
pyramid scheme, where everyone can know. Is that true?

In any case, I thought it worthwhile to copy this form Wikipedia:

"A bubble: A bubble is similar to a Ponzi scheme in that one participant gets
paid by contributions from a subsequent participant (until inevitable
collapse), but it is not the same as a Ponzi scheme. A bubble involves ever-
rising prices in an open market (for example stock, housing, or tulip bulbs)
where prices rise because buyers bid more because prices are rising. Bubbles
are often said to be based on the "greater fool" theory. As with the Ponzi
scheme, the price exceeds the intrinsic value of the item, but unlike the
Ponzi scheme, there is no person misrepresenting the intrinsic value. With the
greater fool theory in mind, some may invest even though they believe the
securities are overpriced due to a bubble."

In other words, the only thing that really changes between a Ponzi/Pyramid
scheme and a bubble, is that investors think there is actually something of
value underlying the investments. Obviously, many people disagree, but I'm not
sure that we shouldn't give savvy investors the benefit of the doubt.
Especially investors who have a lot more access to proprietary information,
and who have had a lot more time to look over Groupon's terms.

* Note: I wrote a lot of things about the definition of a Ponzi scheme which are probably obvious to you. But I'm just now, with all this talk, starting to dig into what these mean exactly, so all of this is new to me.

~~~
po
_I'm just betting that the investors, who are pretty savvy, do know whether
their financials are good._

You should probably stay far away from Wall St for your own good. The
savviness of the investors should be a warning sign, not one that instills
trust. Remember, in an IPO, they are the ones on the other side of the
handshake. They have every incentive to fool you.

As for your other points. A ponzi scheme is like Bernie Madoff where you pay
off early investors with the money from later investors. I don't believe being
open with how the money works would change that. Pyramids are usually where
members are pressured to get even more members because a percentage of the new
hires' sales goes to the person who brought them in. The bottom of the pyramid
cannot get their investment back because they run out of "greater fools". It's
all a bit confused because if you buy into Groupon you also get ownership of a
business which may or may not be worth something.

We really can argue about the semantics of these labels but really what it
comes down to for me are these two questions: Is this a healthy business, and
have the founders acted in the best interest of the business? To me the
answers are I don't think so and absolutely not. I don't trust an executive
team that would allow 90% of a non-profitable company's runway to go into
their own pocket with my money.

They've acted in their own self interest to which many would say "whatever, it
was a fair trade". I want people the people who think that way to realize that
sometimes we restrict trades that are "fair" regardless of how stupid you are
for getting into them. Roulette is a losing game but it is a fair game. We
also restrict and regulate it heavily.

Anyway, I think we're in agreement on this: it's really interesting to talk
about. :-)

------
sunchild
Some thoughts on this:

A. Spending on customer acquisition is building real barriers to entry.

I tend to agree with DHH that the barriers to entry will never be high enough
in the daily deal area. Also, as Groupon seeks to stay ahead of daily deal
competitors, it cannibalizes its own business model – namely, the artificial
scarcity and urgency of daily bargains reverts to more and more on-demand
variety. We see this already.

B. Spending on direct sales is building a valuable collection of local
merchants.

Others have built directories of local businesses before. The Yellow Pages,
Yahoo are examples. Yelp, etc. are more modern examples. Can Groupon unlock a
profitable business model from their collection?

C. Spending on marketing is building enough public goodwill to transcend value
propositions altogether.

Groupon is a great brand name, so far. Public goodwill is damn fickle, though.
I'd like to think that consumers require a real value proposition from their
favorite brands, but I'm not sure that they always do.

When it comes to daily deals, I doubt consumers will chose Groupon over a
better deal, just because of the Groupon name.

~~~
SwellJoe
_When it comes to daily deals, I doubt consumers will chose Groupon over a
better deal, just because of the Groupon name._

On this count, it's worth remembering that extreme bargain hunters have very
low loyalty to vendors. It's what allows them to take advantage of the best
deals. Which is why I think a lot of businesses have been disappointed in the
results from Groupon deals, and why the moat around Groupon is pretty shallow,
given how much they've spent.

~~~
tptacek
Eh. How much Groupon disappointment do you think comes instead from brick &
mortar small businesses being utterly unacquainted with the high-volume low-
conversion sales model of the web? Because that seems like the thesis behind
Groupon: give local biz a taste of how customer acquisition is tuned and
scaled on the web.

I'm a loyal customer of several well-known, well-regarded small businesses in
Chicago, and _none_ of them have the marketing savvy of the least-successful
successful web startup we can think of.

So in that regard, I think the people who worry about the disloyal deal
hunters miss the point a bit. That's the flip side of the 5-10% conversion
rate: the 90% who bounce. Web people don't flip out about this. Local biz
does.

Remember, the most popular current alternative to Groupon is advertising. The
only reason local biz people don't flip out over advertising effectiveness is
that nobody knows how to figure it out.

------
laurenkuhlman
I don't see Groupon, or any of the clones as a good investment, for a very
simple reason: there's no network effect. In the social realm, thats really
the key. Social networks like LinkedIn, FaceBook and Twitter increase their
value with each additional user. Telephones are also a classic example of the
network effect. Groupon does not become more useful to me the more users it
has. Possibly, it becomes more useful to merchants but from the merchant's
I've discussed this with, other sites simply offer them better terms and,
therefore, more profit.

Personally, I think sunchild had a great point by addressing that the
artificial scarcity is gone. Myself, and my peers, have now reverted to buying
these deals on-demand. If I want a massage deal, I head over to YipIt (an
aggregator) and do a quick search. I don't waste my time reading their emails.

SwellJoe and GentleBen also addressed the same issue: lack of loyalty. My
biggest complaint as a person on constant data overload is that Groupon (I use
the Android app) now sends me over a dozen deals per day, half of them for
suburban restaurants which I would never patronize. Its no better than coupon
books or every other "deal" marketing ploy now.

------
christopherslee
I'm pretty sure there are "Groupon for X" companies in YC. So clearly people
see that there is money to be made.

I'm not exactly sure why everyone is hating on Groupon. Why not hate on Zynga
for coping other games? Why not hate on Linked In's 500 P/E IPO that has
already lost 25% off it's high?

The daily deal marketplace may not end up being a winner-take all market. But
will having the biggest subscriber list give Groupon an advantage? Once they
flip the switch from growth mode to profit mode, who knows what might happen?

I assume the hate is mostly just misdirected jealousy because it seems "so
obvious anyone could do it." But like Andrew Chen's recent post, it's not easy
to build both your consumer side and your merchant side. Anecdotally, I've
heard many of the top 10 deal sites have trouble lining up their next day's
deal.

While the daily deal industry is far from perfect yet, Groupon certainly
unlocked a space that a lot of people are jumping into. And I assume that
someone will figure out how to do it right for both merchants and consumers in
a profitable, sustainable way.

~~~
afterburner
"Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's
high?"

I assume the hate is partly financial advice of sorts, and there's no great
need to harp on Linkedin after its stock goes down. Besides, there was hate on
Linkedin just before and after the IPO.

------
pbreit
I worry about Groupon but not for the reasons here. Regarding the financials,
it could easily ratchet down acquisition and marketing spend and be very
profitable. The barriers to entry arguments are very superficial. Sure, just
programming a competing service and closing a few merchants is not that hard.
But building an 8 figure mailing list is not easy. Finally, some suspected and
I'm inclined to agree that the otherwise ridiculous payoff of early investors
and employees might be explainable as necessary to turn down the Google offer.

My main concern about Groupon is the core proposition may not actually work in
the long term. There are all sorts of problems with fatigue, inherently
cheapskate customers, high rates of existing customers, worsening economics,
etc.

------
ditojim
what justifies taking ~300 million off the table (and that's just 1 person)
and then going back to ask for more a short time after? sounds like the
investors were keen to exit and make their buck ASAP. i don't think that is a
good sign in general. andrew mason took a much more reasonable payday.

------
bentlegen
Does anyone here have any loyalty to one group-based buying service over
another? I certainly don't.

------
ssharp
In reference to this part:

"Yes, the amount of money they’re spending on customer acquisition and
retention is absolutely insane. (And the amount owed to merchants is
especially troubling.) But look at what they’re up against. Pretty much single
major player is now coming directly at them — including the company that tried
to buy them for several billion and was turned down, Google."

Wouldn't a proper business model dictate just about the opposite? When trying
to build a profitable customer base, you should focus on keeping customer
acquisition costs DOWN, not spending 3x revenue on it. For example, Super Bowl
ads just don't seem like an appropriate way to spend money for them right now.

This is nearly identical to what happened in the last dot com crash. Sure,
Groupon does have significant revenues, but they haven't proved (to me anyway)
that these revenues are sustainable without their massive expenditures.

We've heard numerous times that Groupon considers its sales force to be a
major asset, partially justifying its valuation and forthcoming IPO. Maybe.
However, unless that sales force proves to be a strategic asset to a customer-
facing feature, whether it be cheaper or more interesting deals than the
competition, I don't see a multi-billion dollar value there.

------
sgdesign
"You cannot overlook the fact that they’re also making hundreds of millions of
dollars each quarter now"

I don't understand this "oh but they're making $4 billion so they must be a
great company!" argument. If my business plan is to pay people $2 and have
them give me $1 back, I could also make $4 billion (and I'd be loosing $4
billion in the process, but that's just "marketing expenses"…).

~~~
_delirium
It's not the usual use of the term "making money" in business, either. If you
run a restaurant that has $5m in expenses, and $5.5m in revenues, you're
making $500k, not $5.5m.

------
Daniel14
I just feel as if the only justification for this new round of founding MG
brings to the table, is that a) they will be able to cut back spending
(=profit) and b) Google and Facebook are producing similar products, so it
must be something good. Personally, I'm convinced by neither arguments and
would argue that it isn't just risky, but pretty much doomed to fail (or
rather, be a really bad investment for the public).

------
neilbaylor
Google doesn't offer to buy Ponzi schemes for six billion dollars.

~~~
billswift
I suspect Google was looking at the possibility of modifying it to fit in with
their advertising business. I can envision several ways that could have worked
out.

~~~
tptacek
That's a little weasely, because the people calling Groupon a Ponzi scheme
tend to talk about how minimal their competitive advantage and technological
"moat" is. Google can build stuff. Why'd they try to buy this?

~~~
antiscam
It wouldn't be right to assume that because Google has many smart people,
everything they do as a result is smart. Google is hardly an innovative
company anymore. In fact, they seem mostly to be coasting on existing models
and paying lots of people mostly just so that they don't work for existing and
potential competitors.

~~~
tptacek
I think this is a fallacy stemming from the fact that Google's initial
products were _so unbelievably successful and important_ that they are likely
to be permanently hard to top. I do not agree with you that Google is no
longer innovative, and I particularly disagree with the notion that they are
so uninnovative that they'd believe they lack the technological prowess to
compete with Groupon.

~~~
antiscam
Oh, I don't mean to suggest that at all. I'm just trying to suggest that an
offer from Google doesn't, to me, at present imply that the offeree has any
special merit. Google is cash-rich and can use cash strategically.

------
rkon
The fact that there are so many clones isn't proof that Groupon's business
model works, it's just proof that there are no barriers to entry. Compared to
Google and Facebook, their mailing list isn't much to brag about either. If
they had impressive churn rates, you can bet we'd be hearing all about it by
now. The fact that they keep those numbers secret is highly suspect, in my
opinion.

Also, paying hundreds of millions out to early investors is exactly what they
should NOT be doing if they're trying to "get ahead" of their competition. If
they had any faith in their own business model, they'd put it into the
business and expect even higher returns.

~~~
ericd
I agree with most of what you said, but it's not highly suspect to want to
keep something as vital as churn rate secret from your competitors.

