Since I originally wrote about Groupon (see here), I read yet another interesting article courtesy of Wired. Between the interesting legal risks mentioned in this article, competition from additional big name competitors like Google and Facebook, and a questionable business strategy, I fear this could be a big blemish on the recent tech IPO boom
In the past few weeks I've read several articles about the recent tech boom and startup craze (thanks to Wired and The Economist, my two favorite magazines). For example, LinkedIn just exploded during it's recent IPO, Skype was just acquired by Microsoft for $8 billion, and Groupon turned down a $6 billion offer from Google. Online deal sites are exploding in popularity, I've personally used Living Social, Groupon, and BuyWithMe in the past 6 months (learn more with a great NPR Planet Money Podcast found here). It amazed me to learn that these sites make 50% of the purchase price. No, that isn't a typo, FIFTY percent is a typical cut. Just to be clear, that means if you pay $50 for your hour long massage on Groupon, the company giving the massage gets $25 and Groupon gets $25. With margins like that, you can see why Groupon turned down the Google offer.
What had not been answered to me previously is what Groupon feels separates itself from the competition. If they get a 50% cut, what's preventing the next guy from only taking 45%? Eventually, basic supply and demand should level the playing field and take away the huge subscriber advantage that Groupon currently has. So what is Groupon's answer? Words. According to this NY Times article, they seem to feel their main competitive advantage is how they craft their latest deals in each city.
My opinion? Groupon should take the money and run, as I don't think time will be too kind to their wallets. I'd say the same for LinkedIn, a company valued at 200 times its earnings.