
Groupon Buys LivingSocial, a Rival Once Valued at $6B - kpeel
https://www.bloomberg.com/news/articles/2016-10-26/groupon-buys-livingsocial-deal-site-once-valued-at-6-billion
======
dmerrick
Back in 2010 I worked at a startup that ended up pivoting to a regional
Groupon clone. It seemed like a good idea at the time, but the company ended
up going under a year later.

What I remember most vividly was trying to come up with a good name.
LivingSocial was starting to get traction and we wanted to differentiate
ourselves from them. The conversation went like:

    
    
        Boss: What's the opposite of LivingSocial?
        Me: I dunno, DyingAlone?

~~~
downandout
I'm curious how you could possibly lose money in a business like this. Sure
there is a sales cost, but there are alternatives to having a full-time sales
force. I'd have tracked every company that has used Groupon/LivingSocial and
figured out a way to electronically contact or advertise to as many of them as
possible for very little cost (LinkedIn/Facebook enable advertising to
employees at specific companies, for example).

~~~
TuringNYC
Problem is these companies have two sided acquisition costs -- the vendors and
the customers themselves. Even if the vendor acquisition cost was zero using
your technique, you still need to acquire users (along with the 50 other
Groupon clones.)

~~~
jonathankoren
It's not just the two-sided acquisition costs, it's also that on the vendor
side of the equation, daily deal sites have absolutely horrible retention.[0]
No small to medium sized business would repeat, because the massive discounted
price of the Groupon deal was never recouped by repeat customers. Instead they
just attracted deal seekers.

[0] [http://www.businessinsider.com/groupon-survey-
results-2011-7](http://www.businessinsider.com/groupon-survey-results-2011-7)

~~~
sharemywin
it's a great product for a bowling ally. Fixed space/costs So, each extra
person you bring in has value. Horrible for food service where marginal costs
are ~65%, so you lose 40% every time someone comes in.

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pchristensen
I worked at Groupon from 2010-2012. I realized that a lot of the problem with
the daily deal industry was that a) there was only going to be one winner,
because of network effects, and b) no one knew how big the prize would be for
being the winner, so it was not clear how much $$ to raise or spend to make it
worth it. It doesn't matter how much you spend on a war if you lose.

~~~
fullshark
I think the big problem is that it was a bad deal for most vendors except for
very high margin ones. When places like restaurants realized that it wasn't
getting them repeat business and the deals were dominated by stuff like Day
spas it kind of collapsed.

~~~
jamestnz
I agree, it's probably a terrible deal for almost every retailer, especially
small businesses.

As I recall, the standard deal with Groupon etc is 50% off retail price, then
Groupon (or whoever) takes 50% of what's left.

So consider a product or service you usually sell for $100, which costs you
$40 to deliver. When doing one of these deals, you're now selling it for $50.
You get $25 of that, and the platform operator keeps the other $25. So your
cost of sales was $40 and your revenues were $25.

Fine if you're happy to operate a loss-leader to attract quality clients who
will return to you at full price later.

Unfortunately it seems that these daily-deal services often attract low-
quality leads to your business. The kind of customer who exhibits no loyalty,
and simply surfs from company to company taking advantage of these loss-leader
deals, then never returning.

~~~
CPLX
You've just described the main dynamics involved, with one key part left out.

The vendor would realize the revenue up front, when all the "coupons" would be
sold. Then they would fulfill the orders over a period of weeks or months,
with some sort of breakage rate involved. Needless to say that put the
incentives of the buyers and sellers in tension.

But overall the main model was not really just a simple loss-leader approach,
it had a lot in common with loan sharking.

~~~
davemel37
I'm not sure this is true.

"Groupon keeps itself in cash by collecting money immediately when it sells
its daily coupons to consumers while extending payments to the merchants over
60 days."

-[http://www.wsj.com/articles/SB100014240529702043580045770279...](http://www.wsj.com/articles/SB10001424052970204358004577027992169046500)

~~~
pbhjpbhj
That article is paywalled.

Certainly in the past we were "offered" the opportunity to do a 75% off deal.
Then IIRC it was 60-40 in their favour. They got all the breakage (payees that
didn't turn up) and we had ty wait until the end of the deal period to apply
for the money.

It was as close to a con as you could get. Like selling pensioners ludicrously
expensive fascia boards and guttering when what they needed was their gutters
cleaning.

Groupon knew the business it was good for but seemingly marketed to those with
little financial nous. They promised winning repeat custom on the one side and
cheap one-off deals to the end-customer on the other.

IMO some version of this could have been good for businesses in my sector but
it would require the company not to be greedy. Investors don't go for those
companies.

~~~
CPLX
Interesting. My memory of the subject is pretty out of date by now, as I don't
follow Groupon much, but I'm certain that's how it worked during its
hypergrowth period.

Indeed, it appears that we're both correct, assuming you're not in the US.
Interesting article from 2012 sheds some light:

 _Some context about how the company operates: Groupon has had two very
different payment structures. In what I call the American model, merchants
receive cash upfront for a deal. Once the deal is closed, Groupon tallies up
how much it owes the merchant and sends them the money in installments, with
the vast majority of the money delivered within 60 days. If a Groupon isn’t
redeemed, the merchant gets to keep the money. (Known in the industry as
“breakage.”)

Outside the U.S. and Canada, Groupon has used a different scheme. For
simplicity, I will call that the European model. In this scheme, Groupon only
pays merchants when a Groupon is redeemed; merchants do not get cash up front.
If a Groupon isn’t redeemed, Groupon gets to keep the money. Breakage is
considered to be 20-25% of Groupon purchases, so this amount is significant.

There are exceptions to the above. I know of one popular merchant in Europe
that negotiated to get the American model. But this is largely how it works._

[http://venturebeat.com/2012/08/15/the-giant-red-flag-that-
an...](http://venturebeat.com/2012/08/15/the-giant-red-flag-that-analysts-and-
media-missed-in-groupons-earnings/)

~~~
pbhjpbhj
Yes, UK here and I didn't follow the later progress as after being
propositioned (early in the Groupon era) as a mark by them I pretty soon
decided it was far from being good for the business I was in at the time.

Good follow up, thanks.

I wonder why they took those differing approaches - regulatory pressure?

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jseip
As a former LS employee, I don't know what stings more: the immaterial amount
of the transaction, or the 11% after hours plummet.

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dannylandau
Daily Deals are great for one type of business -- Dental offices! I used them
a few times for to get discounts on cleaning. The incentive to bring new
customers by offering steep discounts is definitely worth it for those type of
vendors.

~~~
unclebucknasty
> _I used them a few times_

> _The incentive to bring new customers by offering steep discounts is
> definitely worth it for those type of vendors._

But, it sounds like you either a.) Kept getting steep discounts with multiple
Groupons for the same dentist or b.) Kept hopping to whichever dentist was
offering a steeply discounted Groupon.

Neither of these is good for the dentists.

Or did I miss the sarcasm?

~~~
fspeech
Dentists can compensate for the loss by getting customers who need higher
valued services like cavity filling or crowns. If your dentist tells you that
you need fillings during the exam you are unlikely to refuse and shop around
for other dentists.

~~~
unclebucknasty
> _you are unlikely to refuse and shop around for other dentists._

Sure I am, if money is an issue. From [0]:

> _...many uninsured individuals rely on health-related deals from
> Groupon...to lower their healthcare costs. This may mean they’ll visit a
> different doctor or dentist each time as they find new coupons. This doesn’t
> provide much of an ROI on the initial discount offered, and it also lowers
> the quality of care..._

Sounds more like the OP's described use.

> _Groupon seems to work best for large, one-time procedures on new patients
> and not counting on them returning to your practice in order to make up the
> initial loss._

Sounds unlike the OP's described use.

[0] [https://www.patientpop.com/blog/marketing/groupons-really-
at...](https://www.patientpop.com/blog/marketing/groupons-really-attract-new-
patients/)

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danso
> _The amount of the purchase isn’t material, and the transaction should close
> next month, Groupon said Wednesday in a statement. Amazon.com Inc.-backed
> LivingSocial had cut more than half its workforce in March, part of a
> downward spiral from the headier days of 2011, when it was valued at $6
> billion in a funding round._

For a company of Groupon's size ($3B annual revenue), that doesn't necessarily
mean that it was free, right?

~~~
ChuckMcM
No, it explicitly means that it won't change the guidance the company has
given regarding future performance (it won't get materially more revenue, it
won't incur materially more costs). There is a much better explanation of what
it means on Wikipedia
([https://en.wikipedia.org/wiki/Materiality_(auditing)](https://en.wikipedia.org/wiki/Materiality_\(auditing\)))

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downandout
Does anyone know what the threshold for an "immaterial" transaction is in the
case of Groupon? I'm trying to at least get a sense of the price.

~~~
jacquesm
There is no absolute threshold it is more a matter of whether or not you could
argue that your decisions would have been different had you known about it.

That leaves a lot of legal wiggle room.

~~~
downandout
Well but I think the rule that most companies generally use is if it's under
5% of assets. That's why I was asking.

~~~
jacquesm
That really depends on the situation. For instance, even a small amount might
make the difference between 'profitable' or 'not profitable' and that could
easily trigger sell orders and send the stock down, which would make that
small amount material.

So what is material depends on the eye of the beholder.

Also, if it's good news then there will be a higher threshold for what is
material than when it is bad news.

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trollied
Groupon still exists? I am surprised.

~~~
JonFish85
The money they raised in their IPO gave them a very long runway. As of a year
ago or so they had just over a $1B cash on hand.

~~~
princetontiger
People forget that companies like Groupon and Zynga are still real businesses.
Both are still $1B+ market caps.

As someone who went to both IPO lunches, it was a wild time. Throw Renren, and
several other companies from that time period into the mix. 2012 was almost 5
years ago. Unbelievable. Well, at least tech companies actually did go public.

~~~
ghaff
To add another one, Linden Lab (Second Life) is still around too. Though it's
not in that range--brings in about $60M/year [1] Certainly not the
revolutionary thing it was going to be once but the shocking part is that it
exists at all.

[1] [http://www.zdnet.com/article/second-life-lessons-what-
linden...](http://www.zdnet.com/article/second-life-lessons-what-linden-lab-
is-doing-differently-with-its-new-vr-platform/)

~~~
mountaineer22
Is that 60 million in Linden or US currency?

Seriously, though, they could have a renaissance with the next AR/VR round.

~~~
ajmurmann
Everything about their engine and viewer was still do bad last time I checked
that I would be shocked if they could possibly pull proper VR off. I never
understood why the controls completely reinvented the wheel instead of being
more like what we are used to from video games.

~~~
DrStalker
The nature of Second Life makes optimization a challenge. The geometry is
fully dynamic so you can't pre-compute line of sight or use a lot of other
performance saving tricks. The people making things are not skilled with
efficient 3D design, so even if there was a way to do things like remove
hidden triangles from models most people would not use it. Textures get
uploaded in ridiculous sizes for things that should be using low res sheeted
textures.

And even if you manage to build yourself a nice efficient well designed island
other people will show up with avatars wearing massively over-detailed jeweler
with 4k textures on every surface and with a few buggy CPU-killing addons that
fight each other to try and fix a few of Second Life's design problems, and
suddenly your server is on it's knees begging for more CPU cycles while your
grapics card is busy choking every time their avatar is near.

The short version is when people can build anything you'll get some amazing
works but you'll also get a lot of poor quality, performance killing crap. I
don't see VR changing that, but there is a place for a Second-Life life
competitor that limits what people can do to hit a nice balance of performance
vs. freedom.

~~~
mountaineer22
So, Second Life is MySpace, and we are waiting on the Facebook version of SL?

Interesting.

I kind of see how Snapchat is positioning itself against Facebook in this
arena.

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danvoell
Very interesting. The fact that Groupon buys a rival for pennies on the dollar
sends the value of Groupon down 14%. Assuming people see this low purchase
price as some sort of validation that the model doesn't work? Typically you
would see this type of transaction as Groupon gaining more pricing power in
the industry. Groupon might have been better off just letting Living Social
ride off into the sunset.

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cheriot
I was really hopeful for what a LivingSocial IPO would do for the DC tech
scene. That many dev, design, and product people looking to start their own
thing with the DC talent pool to draw from... Maybe next time.

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juhq
Whoah Groupon is still around?

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qwrusz
While Groupon is not exactly known for their financial filings accuracy. This
acquisition is weirder than usual. There seems to be no official press
announcement instead Groupon added basically just this one line in their
20-page long 3rd quarter earnings press release:

"On October 24, 2016, Groupon entered into an agreement to acquire all of the
outstanding shares of LivingSocial, Inc. The acquisition is expected to close
by early November 2016, subject to satisfaction of customary closing
conditions. The acquisition consideration is not material."

For those comments questioning the _" not material"_ part. I agree this looks
like a potential legit issue: The price paid is probably somewhere in the 8
figures. But regardless of price, Groupon is a small company that doesn't make
any money (they just announced they lost $36 million last quarter alone), so
even a small purchase price, not to mention LivingSocial's future expenses,
can be very material.

But more important than a debate over acquisition details and what is
"material": Groupon management have been accused in multiple different
lawsuits in recent years for _making untrue statements or omissions of
material facts_. And they lose/settle for millions of dollars.

Innocent until proven guilty but if one reads further down to management's
"Outlook" section of the press release it is very odd to see LivingSocial
mentioned here:

"Outlook: Groupon's outlook for 2016 reflects current foreign exchange rates,
as well as expected marketing investments, stabilizing trends in Shopping,
_the acquisition of LivingSocial_ , potential disruption related to country
exits...Groupon is raising its revenue guidance range...and narrowing its
expected 2016 Adjusted EBITDA range to between $150mm and $165mm"

If something is not material then how or why is it one of 6 things listed as
reflected in the company's outlook??? Why even bring it up again?

Things that have an effect or get reflected in a company's outlook and
guidance is material. Even in the most generous definition of material this is
material.

I am not saying Groupon needed to disclose price paid or give a full biz
synergy plan. But what is LivingSocial? Is it a going concern? Is this
accretive or dilutive? Asset or liability?

This acquisition deserves more information than was provided and should not
have been labeled as "not material". The stock's AH 10% drop feels very
material to investors.

Groupon's 3Q2016 Press Release:
[http://investor.groupon.com/releasedetail.cfm?releaseid=9956...](http://investor.groupon.com/releasedetail.cfm?releaseid=995675)

