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Groupon IPO: Can Andrew Mason Skate To Where The Puck Is Headed? June 5, 2011

Posted by Bernard Lunn in IPO, Online Advertising, Uncategorized.
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Most commentary is negative. The current financials look pretty awful. Even worse, the current value proposition to merchants does not look sustainable. They are basically pitching a loss leader. Every merchant understands a loss leader. But if the loss leader does not lead to profitable clients it is just a loss. As the old saying goes ‘it is easy to sell a dollar for 99 cents”.

The positive spin is “the numbers looked awful for Amazon as well, look at Amazon now”. Its a bit like saying Google had no idea of how to make money when they launched but look at Google now.

So is Andrew Mason as smart as Jeff Bezos?

Amazon’s ability to invent the future is extraordinary. They did it first for e-commerce. Even more remarkably they did it again with Amazon Web Services (AWS) when the reinvented the hosting business and created the Infrastructure As A Service category.

The answer of course is, we don’t know. Investing in Groupon is investing in a massive market that is in the process of fundamental change AND investing in a great entrepreneur. I have no idea if Andrew Mason is a great entrepreneur, only time will tell. But I can see the massive market that is in the process of fundamental change. So can Google, Amazon, Facebook, Twitter, eBay, Craigslist, Apple, Microsoft as well as legions of Groupon clone startups.

The market opportunity is so massive that Groupon is totally right to choose a “go big or go home” strategy. This is a network effects game and the winner will be a huge winner.

At stake is the $150 billion local advertising market.

Actually, at stake is the whole evolution of the online advertising business. That is why Google was willing to pay $6 billion. That is why the Google acquisition fell apart on fears that the deal would fall prey to Anti Trust action. (Don’t fall for the “brave entrepreneur walks from $6 billion offer” fairy tale).

Here is why:

At stake is the whole evolution of the online advertising business.

Advertising has evolved to address the famous line “half of my advertising is wasted, I just don’t know which half” through 4 different versions:

* Version 1, pre Web, “we cannot tell you who is looking at the ad”

* Version 2, CPM, we can tell you who is looking, but we have no idea if they are interested

* Versions 3, CPC, we can tell you how many showed interest by clicking, but we have no idea if they will buy anything”

* Version 4, Groupon aka CPA aka Cost Per Action or Cost Per Revenue. In Groupon’s current iteration, the loss leader 75% off list price deal (50% off to the consumer), the vendor is telling the advertiser/merchant “we can tell you how many people will buy the loss leader, we cannot tell you how many will return as full paying customers later”.

Of course, a loss leader proposition is unsustainable. If that is all Groupon can offer, run, don’t walk from this IPO opportunity. But if you think that their loss leader proposition is their foot in the door to the next iteration of commerce/advertising, they could be an Amazon scale company. And you never got a chance to buy Amazon stock on the cheap and you probably never will.

The losers in this next iteration of commerce/advertising are obviously the yellow pages print advertising books that land on my porch and get taken straight to the recycling bin. But they are already dead, the funeral notice just did not get posted. And like the AOL dial-up subscribers, inertia is a wonderful thing!

But the other losers are all those invested in CPM and CPC. They won’t go away but they will be impacted by a proposition that is fundamentally more attractive.

So where is the puck headed? Actually I indulged in some science fiction speculation about what Twitter could do with Twitter Annotations (they dropped that ball). This is about a future of ecommerce that is real time, mobile and social. Foursquare and Loopt are also in this game from another direction.

In the future we are likely to see consumer agents negotiating with multiple vendors via exchanges that get a cut of the action. No, that will not be a 50% cut of the action. Think more like the less than 5% vigorish that payment vendors take. Merchants are incredibly margin aware, they will fight tooth and nail with Amex over 1%. But at the scale we are talking about, 1% is a really, really good business – that Google, Amazon, Facebook, Twitter, eBay, Craigslist, Apple, Microsoft all lust after. All the Groupon clones are simply acquisition bait for those behemoths. The question is does Groupon have a shot at getting into the behemoth class. That comes down to “is Andrew Mason like Jeff Bezos in 1996?”. He looks the part but only time will tell.

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