Groupon's (GRPN) long-awaited IPO has now come and gone while speculation continues to spread at a feverish pace. My opinion of Groupon's situation has led me to be bearish on the trade. My sentiment is due to one simple aspect of any business; the competition. Google (GOOG), Amazon (AMZN) and Facebook are all looking to capitalize on the "Social Commerce" wave which will present Groupon with a number of significant challenges to the core of their business and leadership. The objective of this article is to analyze Groupon's real value and where it ranks among the competition.
Is Groupon Really Significant?
The first time I heard the words "Social Commerce" was in 2007 at a software leadership summit hosted by IBM. The focus of the summit was social commerce and how online retailers could leverage various social activities to strengthen cross channel support. Groupon's contribution from a strictly "social" perspective is minimal but the social connotation sticks with them because it became relevant at just the right time; the quintessential "right place at the right time" paradigm.
Groupon's user community may interact with one another in a limited capacity by posting reviews of deals. Groupon's unique feature was a defined sales channel waiting for vendors twenty-four hours a day, 7 days a week, consisting of consumers eager for the next daily deal. Of course, geo location adds to the overall appeal by allowing a vendor to offer consumers local deals it would not have the opportunity to offer on a national level. Geo location played a primary role in Groupon's initial success but by no means offered any significant competitive advantage.
The bullish argument that Groupon is the rightful "market leader" doesn't ring with me. I'm not overwhelmed by Groupon's accomplishments as far as being an innovator within the realm of social commerce. Remember Lycos, AOL and MySpace? These were market leaders at one point in the internet's brief commercial history. In my opinion, Groupon made the mistake no tech company can afford to make: It became comfortable and complacent, and then overlooked the responsibilities required by any successful online business. Consistent innovation and adding value for the consumer and vendor are imperative to Groupon's business model.
Sizing The Competition
Estimates regarding the number of competitors now in the "Deal-Of-The-Day" social commerce arena are north of 350 with the top 10 being the only real threats. Even so, small competitors will continue to dilute Groupon's market share. It's one thing to have market share dissipate slowly over a longer period, but when your competition goes from micro-competitors to Google, Amazon and Facebook the losses can rack up in a single day. Groupon has just begun feeling the pinch of Google methodically moving in for the takeover. Google, Amazon and Facebook are responsible for the innovation driving the evolution of the web for the last decade. There are fundamental differences between a company like Groupon in comparison to a Google, Amazon or Facebook. To illustrate, the sections below consist of a shortlist of "milestone" achievements Google, Amazon and Facebook have made over the past decade.
Facebook hasn't innovated as much on the technology forefront as Google and Amazon, but it is responsible for the social web billions of users utilize each day. Facebook had its work cut out for it initially because MySpace ended up being sort of an infection on the surface of the web. Everything was completely disorganized and there was no semblance of order. MySpace maintained the appearance of misguided creativity as opposed to the social icon Facebook has become. Facebook has created a level of communication that just a decade ago would've been considered a burden. Politically, it has become a vehicle for revolution, promoter of democracy and a fear to tyrannical dictators. To put it mildly Facebook is a historical figure and an American Icon.
When a company's mission is to "organize the world's information", you realize you're dealing with a company willing to take on great challenges. I also feel it stepped in at just the right time. There was a time when the web looked like it was headed in the wrong direction and I credit Google with steering users, politicians and organizations in the right direction. Google has also pioneered certain aspects of mobile computing, cloud computing solutions used by hundreds of thousands globally, distributed computing and grid computing platforms that are some of the most complex and powerful software ever developed, Google Maps, Gmail, Google+ and more specific to this article, Google Offers.
Last but not least, the financial backers of LivingSocial.com, Amazon. Amazon is typically known as being the number one online retailing giant, but it also achieved a huge amount of success by building one of the most efficient fulfillment services in the world. An ever bigger surprise to some is finding out Amazon pioneered what most people know as "Cloud Computing". Amazon is the architect of the first true enterprise cloud computing platform, which I believe, will spearhead the next evolution of the web. Amazon's EC2 (Elastic Compute Cloud) platform is the blueprint all other cloud platforms us as a model. Oracle (ORCL) and IBM (IBM) are considered the runners up in the cloud computing platform space, but would likely take them years to catch up to Amazon. I'm not going to go into great detail regarding Amazon's EC2 platform because there is so much to cover, but I will say this: Amazon has spent over 5 years perfecting its platform which will likely run a majority of America's big business when the transition to a managed infrastructure becomes the standard. The transition has begun and will continue for at least a decade.
Groupon's Worst Nightmare - Google Offers
Knowing what Google, Amazon and Facebook are capable of, does it seem realistic that Groupon can compete? My answer to the question is a definitive "no".
Google, like it or not, has been known to make decent ideas, great ideas. So what will Google do to make the Google Offers service so much better than Groupon's "Deal Of The Day"? The common complaint regarding Groupon's service is from vendors. Groupon takes too much of the profit and if a vendor's deal isn't a featured vendor it won't get much exposure. Google's primary advantage is the number of channels it can use to promote vendor deals. Google Search, Gmail, YouTube and Google Shopping are just a few of many channels it will utilize to display vendor deals as well as register new customers. In respect to registering new customers, if you already have an account with any of Google's existing services, you simply configure your Google Offers profile and you're ready to start buying deals. In addition to increased vendor exposure, Google provides vendors with the following advantages:
- Massive Customer Base: I can't speculate/estimate the number of unique visitors Google's vast online empire receives, but YouTube alone receives over 2 billion unique hits per day. Now multiply that by the number of primary service Google has in their portfolio. The potential vendor exposure is staggering. Currently Groupon maintains around 150 million subscribers. Of those 150 million subscribers, there is no accurate way to estimate the number of "active" subscribers.
- Customer Segmentation / Target Marketing: To me, this is one of the primary advantages Google has over any competitor in this space. Google collects user demographics in order to deliver more accurate and applicable content to its users. For instance, when I log into my Gmail account, ads on the right navigation are specific to investing, computing and golfing. Ironically my favorite things in life happen to be investing, computing and golfing. It's either an uncanny coincidence, or Google is target marketing. Anonymous users are delivered targeted search results based on their current session activity. This applies to all Google's channels that allow anonymous user activity.
- Cross Selling / Up Selling: Google is notorious for their mastery when it comes to classifying, categorizing and relating data. An example of cross selling would be if I went to Google and searched for "Mizuno Forged Blades" and Google returned an offer from a local golf equipment store for 50% off a brand new set of Mizuno blades. During the checkout process another local vendor happens to be running a special for 50% off golf bags. My new blades now have a home.
- Analytics: Google Analytics is another flagship service it hit the nail on the head with. To make a long story short Google has developed a set of tools sellers used to develop marketing campaigns and strategies to help sell their products and services more effectively. Google Analytics has become very popular and is quickly becoming the preferred solution as opposed to industry leaders such as Coremetrics.
- Community Support: When I say community I'm not talking about the traditional form of a community. For years Google has been building a vast and loyal community which is composed of software developers from all around the world. Whenever Google releases a new product or service like Google Offers it creates an API (Application Programming Interface) that enables developers to interact with the service and develop applications that market and sell vendor products and services.
The intention of this article isn't to slam Groupon. I think it's important investors who are trading the hype realize what Groupon is up against. I think the delay of the IPO and the repeated redrafting of the S-1 are a direct result of Groupon and its underwriters realizing the challenges that lay ahead. I think it will take a miracle of divine proportion for them to reclaim the coveted title of "market leader"; then again anything is possible in these current market conditions. At the end of the day, the moral of the story is that it does pay to be first, but it will always pay more to be the best.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.