
Amazon: Ponzi Scheme or Wal-Mart of the Web? (2000) - kyleslattery
http://www.slate.com/id/1004565/
======
marciovm123
"...when you consider that better than 60 percent of Amazon's sales come from
repeat customers--which implies that they're loyal..."

That seems to be the key figure missing from the Groupon discussion. If they
are buying loyal users and customers, their mad-dash growth strategy would
seem rational. If their retention is poor, it would seem more like a Ponzi
scheme.

~~~
melvinram
I think the piece of the puzzle that most people have trouble with is not that
they'll have repeat customers. It's that those customers are loyal to
Groupon... or more specifically, loyal to the concept of deep discounts. The
part most people, including myself, have a hard time grok'ing is that
merchants will continue to punish themselves by doing business with Groupon.

~~~
jamiequint
Exactly this. I'd be very interested in a stat of how many of Groupon's
merchants are operating these deals at a profit. I know one SF merchant
personally that does, but I suspect its very few. Even more importantly, I'd
be interested in how many of these Groupon customers are returning to the
merchant. If that number is high than Groupon has hope, if its low then they
aren't actually adding much value and they can only continue fleecing small
businesses for so long.

~~~
twakefield
"I'd be very interested in a stat of how many of Groupon's merchants are
operating these deals at a profit."

Isn't the point that it brings customers in the door albeit at a loss?
Hopefully, the future value of the customer is more than the loss on the
initial deal. I think that's what your getting at with your subsequent
sentences. I am not in the retail business so this is just conjecture but it
seems to me that it's almost impossible to operate one of these deals at a
profit. Basically, you are renting Groupon's sales machine and hopefully you
convert a big percentage of the customers the deal brings in. I would also
guess few retailers have the ability to present value the customers future
revenue correctly and I'm sure Groupon will (if they haven't already) offer
tools to measure that and justify the ROI of their deals.

~~~
shantanubala
Yeah -- it's a really bad setup in the end though because Groupon attracts the
type of customer that isn't likely to spend a lot of money in the first place
unless there is a deal. In other words, Groupon can attract a lot of
customers, but the quality of those customers isn't very good (at least from
my personal experience, all of the people I know who heavily use Groupon don't
really use it at places they haven't already heard of before). The ROI must be
terrible, but it also can be difficult to measure.

~~~
DaveMebs
I think it depends on the kind of business. I think it is useful to break
Groupon deals into a few categories, as well as the number of customers
involved in any given deal:

FAST-FOOD DINING Depending on the number of customers. most, if not all, fast-
food restaurants will probably be able to make a profit of a 50% deal. These
businesses thrive on large numbers of customers, and their profits scale
extremely well. It is also relatively easy to win over new customers if you
are more convenient, providing a reasonable opportunity to gain repeat
customers (ex: Dominos does a deal and people find it delicious and cheap).

SIT-DOWN DINING This is a much harder category to map a profit on a Groupon
deal. These restaurants have a much more rigid number of customers they can
serve on any given night. For a popular restaurant there is to use Groupon as
they can already fill the seats and it is not a good value for them. For
unpopular restaurants, people will attend but it seems unlikely these will be
repeat customers. They are already bargain hunters, and it will be hard to wow
these customers enough to return to your restaurant repeatedly.

ONE TIME USE ACTIVITIES These deals have a similar problem to the sit-down
restaurant. These are fun the first time, but repeat visits are much less
compelling and it will be challenging to permanently pique the interest of
bargain hunters. (ex: Deal on a boat tour)

REPEAT USE ACTIVITIES Repeat activities seem like a reasonable set market for
Groupon. These activities suffer from the same fixed-sized problem, however
they stand a reasonable chance of retaining customers. Deals such as training
and introductory courses are explicitly designed to attract new customers, and
a Groupon top get them in the door seems fairly reasonable.

No matter what activity the Groupon is for, the number of customers who take
advantage of the deal is a key component. Economy of scale is true for every
business, and the more customers who take advantage of any given deal will
directly affect the profit in involved with any given transaction

------
alexandros
The thing with Groupon is that it can't afford to keep it's implicit promise
to merchants. It's a conflict over customer loyalty. If the customers become
loyal to a couple of local restaurants, Groupon loses them and must 'purchase'
new ones. If they remain loyal to Groupon's offers, then they will not be
worth the merchants' expense to put out the offer. Based on this, Groupon must
either keep spending to acquire new customers, or new merchants. Either way,
the large marketing costs are here to stay (until they saturate the one market
or the other and burn out). I don't think Amazon had any such fundamental
conflicts to deal with.

------
nhebb
Timely, since Groupon competitor LivingSocial is heavily backed by Amazon.
Amazon invested in their infrastructure, whereas Groupon lined their pockets.
Theres is no real comparison between the two, other than the article's title.

A few weeks ago LivingSocial publicly predicted that they'd surpass Groupon by
January 2012. They're currently in ~40% of the markets that Groupon reaches
and have ~40% of the revenue, so that's an aggressive goal. But (non-Ponzi)
Amazon's backing lends it a lot of gravitas.

~~~
syllogism
That interview with the LivingSocial CEO[1] was excellent. I think their idea
of the local restaurant marketplace will do very well. That idea really makes
sense to me, in a way that groupon doesn't.

[1] [http://www.businessinsider.com/livingsocial-tim-
oshaughnessy...](http://www.businessinsider.com/livingsocial-tim-oshaughnessy-
interview-2011-4)

------
dreamdu5t
The big difference is Amazon has always sold tangible goods to actual
consumers.

Even though they operated at a loss while taking investment, they weren't
using the investment to pay out older investors. They had a solid plan for
generating profit, which Groupon doesn't seem to have.

~~~
mortenjorck
Well... Groupon has always sold tangible goods and services to actual
customers, too. Customers that are every bit as fickle as the ones Amazon had
to win over a decade ago. They may succeed or fail at this, but it's not like
they're still looking for a business model.

~~~
dreamdu5t
Not a business model, a strategy to generate profit from their current model.
Groupon's current strategy is to take a customer base that doesn't generate
profit, and make it larger. Yet they haven't shown any way that scaling will
reduce costs much.

How does capturing more merchants drive their costs down, when they have to
pay significantly more for each one?

Amazon had the answer of vertically integrating as much of the supply,
warehousing, and shipment to drive costs down. Groupon doesn't have any way of
driving costs down. That's the problem in my mind.

~~~
Steko
Scale allows them to offer better deals -- if Groupon can generate 1,000
takers for a Dreamdu5t Cafe coupon and Google Offers can only come up with 200
then Groupon can drastically undercut whatever margin Google is taking and win
your sale.

Scale is THE moat in this arena.

"Yet they haven't shown any way that scaling will reduce costs much."

This is simply Parkinson's Second Law: expenditures rise to match income.
Hence the IPO. They need as much cash now as possible in order to scale as
fast as possible to build that moat as big as possible to fend off the
barbarians.

As the cost of getting more quality customers goes up you'd expect their costs
in that area to proportionally decrease. And at that point, if they've
defended their dominance in the deal-of-the-day market then they'll become
massively profitable else if they're in a decent 2nd place then maybe
Microsoft will buy them out for $5 bln more then they're worth, else they'll
end up going the circuit city route.

~~~
sorbus
> Scale allows them to offer better deals -- if Groupon can generate 1,000
> takers for a Dreamdu5t Cafe coupon and Google Offers can only come up with
> 200 then Groupon can drastically undercut whatever margin Google is taking
> and win your sale.

If customers who arrive at a store through Google Offers are more likely to
return to the store in the future without a coupon than customers who arrive
at a store through Groupon, then stores will prefer Google Offers as a way to
obtain loyal customers. And if stores prefer Google Offers to Groupon, then
Groupon collapses. From the point of view of the merchants, this is all about
getting repeat customers who will make up for the loss that they are taking on
the coupons (or, in some cases, betting on customers spending enough in
addition to the coupon to make a profit on the one sale).

The moat that Groupon needs isn't scale, it's loyal merchants who will offer
coupons on Groupon repeatedly - which will get users to use it. If it can't
get that, then it will burn out once it runs out of new merchants.

~~~
Steko
Groupon and Living Social and Google and Facebook are all trying to convert
Jane Doe to their subscriber. I find it extremely questionable that Jane Doe
is going to be much more likely to come back to Sorbus Spa whether she bought
her coupon at one service or the other. Ultimately the client is responsible
for delivering goods and services that merit repeat business.

Who does the client go with? Much like with any other advertising the one that
delivers the best value. Value here is defined as # of new customers divided
by the lost revenue. This will ultimately be driven by scale -- if Groupon can
sell more tickets they can offer a proportionally lower margin and will be
more attractive then competing services.

~~~
sorbus
I was suggesting the possibility of different coupon services marketing
themselves to different segments of the populace; the most common
characterization (as far as I can tell) of people who use Groupon is as cheap
or stingy, so a service which was able to promote a view of its subscribers as
more affluent or using the coupons as a low-risk way of trying something (as
opposed to just shopping for deals) would be better placed to market to
businesses.

However, you're completely right that clients would go with whichever service
offers the best value and best range of coupons, and that scale offers an
advantage there. I would add that it is highly unlikely that subscribers would
only subscribe to a single service. With the marginal cost of subscribing
being so low (just signing up with an email and then looking at the deals when
they show up, as I understand it), the increased variety of coupons would
almost certainly sway the majority of subscribers. At that point, it would
become a fight over which service can find businesses offering the cheapest or
most desirable deal, in which scale gives the advantage.

~~~
Steko
That's a great point, these competing services can try to go after say a
higher end part of the market or underserved demographic.

------
sushrutbidwai
In Amazon's case, it was amazon which was taking up the losses and not the
producers of goods.

In group on's case it is group on as well as merchants are taking up losses
and both believe repeat customers will eventually get them significant ROI.
Now you may question whether offering of group on is good enough to make that
happen or not. But growth like this needs investment.

Another question is - Can group on defend itself against competitor, given
that entry barrier is not big. I mean does group on sign any exclusive
agreement with merchants? I dont think so. So there only entry barrier seems
to be the large sales force which may not be enough to sustain this kind of
growth.

And last think - Group on's acquisitions in emerging markets like India. How
much growth can group on expect from it? eg group on has acquired a very small
player, sosasta and now trying to turn that around and into the biggest deal
site. If groupon can pull this off, they will be bigger much bigger than their
current valuations.

------
nzoschke
Hilarious comparison. I love it.

Isn't the whole point of an IPO to allow everyone participate, therefore
letting the market decide?

If you don't like Groupon's numbers, don't buy the stock. Simple enough.

I'm seeing a lot of: "Think of the poor regular investors when it pops!"
sentiment. Are not these investors rational people acting on the same
information we all have?

~~~
46Bit
No. Of all the things you can describe the stock market as, rational is not
one of them - and that's before you consider the amount of computer trading.

~~~
jrockway
The computers are the most rational of all.

~~~
46Bit
Not when they're programmed by people.

------
dlevine
I actually though about Amazon when I saw people starting to rag on Groupon
and its bottom line.

Another important thing to remember is that Amazon actually figured out its
business model later. For a while, it was pretty much just a dot-com that was
hemorrhaging cash. I remember reading articles for years predicting that
Amazon would go belly up any day. It wasn't until they cut costs and really
dialed in their operations that they became a "real" business, and this didn't
happen until years after they went public. Although I guess that they did
always focus on making customers happy - they just eventually figured out how
to do that without going bust.

~~~
podperson
Even today, Amazon's position is surprisingly precarious. It relies on
loopholes in tax laws for competitive advantage which, if they are closed, are
predicted halve its income.

And there are some analysts who argue that Amazon's "profits" are fictional,
with all kinds of losses disguised as investments and hidden in other
financial vehicles.

Recall that even today, Barnes & Noble is simply unable to sell you a book as
cheaply as Amazon does, either in store or online, even before sales tax.

~~~
lurker19
Amazon hasn't taken on notable investment or debt in a long time, and vendors
and employees still get paid every month. Amazon maybe be making some small
fraction of what they claim, but it is certainly a positive fraction, which is
the most important consideration for solvency.

------
acslater00
Lesson: as early as 2000, people were throwing around the phrase "Ponzi
Scheme" to mean "a business whose long-term prospects I'm slightly suspicious
of".

------
dreamux
Back in 2000 online purchasing and e-commerce were still in their infancy. It
was difficult to predict back then whether traditional models of commerce
applied to these businesses, and to what degree consumers would adopt online
buying.

We know much more now about online business, growth (long and short-term),
scaling, value of users (and their cost of acquisition), logistics, all sorts
of relevant business benchmarks/analytics, etc. Enough at least that many are
concerned about Groupon in a more justifiable context than Amazon circa 2000.

------
stevenj
Does Groupon have a durable competitive advantage? Does it have a moat?

I'm not sure.

~~~
mryall
This earlier article has some discussion of Groupon's moat, or lack thereof.

<http://news.ycombinator.com/item?id=2616412>

------
rockarage
Back in 2000, Amazon did not face the same type of competition Groupon faces
today. There was no Facebook or Living Social, Google did not have 30 billion
in the bank. Groupon is now competing against Facebook, Google and
Amazon(Living Social). If you're merchant, you have more options to choose
from and less reasons to go with Groupon.

1.)Merchants can be certain that Amazon and Google will have the money to pay
them. Groupon on the other hand does not have any profits and is burning
through all their revenue to grow.

2.)Google, Facebook and Amazon has a larger user base.

3.)Merchants can get a better deal from Groupon's competitors as they try to
lure/woo them from Groupon.

Groupon is on very shaky ground the other players are not. The fact is, in
2000 Amazon did not have a number of very profitable businesses copying them.
Amazon could grow, figuratively build a moat without being attacked, Groupon
has no such luxury.

------
bobds
Why are we comparing everything to a ponzi-scheme lately?

"The essence of that critique is that Amazon is just buying customers, and
that once it runs out of the money to do so the Ponzi scheme will collapse."

That makes no sense if you ask me.

------
dr_
The biggest issue with Groupon is the fact that while it may offer a great
deal for consumers, and may make tremendous revenue on each deal, it doesn't
appear to be a great deal for the merchants involved. Oftentimes it seems like
a losing proposition in order to have customers come thru the door - people
who may never return until there's another Groupon.

That may work while the economy is bad, but don't expect merchants to give in
so easily once the economy improves. Groupon will have to either take less of
a cut from the deal or offer a worse "deal" to the consumer.

------
michaelpinto
Yes Amazon turned out to be real, but Pets.com, Kozmo.com, Webvan, Flooz,
eToys, Boo.com and the theGlobe.com weren't real. My guess is that there will
be some winners from the graduating class of Web 2.0 — but there will be
bodies. By the way if you ant to see a great film on that era check out
Startup.com: <http://www.imdb.com/title/tt0256408/>

------
mikecane
Maybe I'm just out of the loop these days or I need to get into Manhattan
more, but I can recall seeing actual Amazon ads in places like bus shelters
and subway platforms and also hearing radio ads back in 2000. All I've heard
of Groupon is from the Internet. Have I missed any big ad campaigns they've
done or has their growth all been Net-based word-of-mouth?

~~~
kevinbluer
They did a Super Bowl ad (at obviously significant expense):
<http://www.groupon.com/blog/cities/groupon-super-bowl-ads/>

Wasn't regarded as a big success though:
[http://allthingsd.com/20110207/groupon-back-peddles-after-
vi...](http://allthingsd.com/20110207/groupon-back-peddles-after-viewers-fail-
to-see-the-humor-and-the-compassion-in-their-super-bowl-ads/)

~~~
mikecane
OMG. I'd forgotten all about those offensive and tasteless Super Bowl ads.
Thanks (I think) for the reminder.

------
scottkduncan
Amazon had to deal with customer acquisition and customer retention, while
Groupon has the added challenges of merchant retention and margins being
squeezed by competitors in a sector with relatively low barriers to entry. To
me, it's a steeper uphill climb for Groupon.

~~~
9999
The way that Groupon has defined the sector actually does present fairly high
barriers to entry in that you need a dedicated sales force to 1) discover
potential merchants and 2) arrange a deal that will work for the Groupon
purchaser and the merchant. If someone redefines the sector by successfully
removing the need for that sales force while maintaining the satisfaction of
merchants and consumers, they will crush Groupon.

BTW, I think that's exactly what Groupon's competitors will do and are doing.
Heck, all they have to do is steal Groupon's previous merchants now that the
trail has been blazed.

------
nmueller
To be fair, Amazon's stock tanked over 90% in the next 18 months:
[http://www.wolframalpha.com/input/?i=amazon+market+cap+from+...](http://www.wolframalpha.com/input/?i=amazon+market+cap+from+2000+to+2002)

Amazon is a great company now but anyone who invested when that article was
written wasn't made whole until 2007.

------
krishna2
For every one amazon.com, there is a list of webvan.com, pets.com...etc.

------
creativeone
Comparing groupon to amazon is like comparing a candy shop to an entire
shopping center.

------
swaits
OMFG HN fail at understanding what a Ponzi scheme is. Enough.

------
gcb
<quote> The essence of that critique is that Amazon is just buying customers,
and that once it runs out of the money to do so the Ponzi scheme will
collapse. Of course, Amazon is buying customers, just as all companies do.
Some companies do it by dumping money into advertising, some by offering
discounts. Amazon does both. The only important question is whether Amazon is
spending too much on those customers, and the answer seems pretty clearly to
be no. In its latest quarter, Amazon added 3.8 million new customers, and
spent an average of $19 to acquire them. When you consider that better than 60
percent of Amazon's sales come from repeat customers--which implies that
they're loyal--and that the average customer spent $116 in 1999 (10 percent
more than in 1998), $19 seems like something of a bargain.

------
lotusleaf1987
The difference is... Groupon can never scale well and have great
profitability-- they need 8000 employees to do what? They have a list of
merchants and a database of emails and what else? As pointed out on another HN
thread, Amazon built a moat what has Groupon done?

