Groupon Buys LivingSocial, a Rival Once Valued at $6B | Hacker News Reader

Groupon Buys LivingSocial, a Rival Once Valued at $6B

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194 pointskpeel71 comments

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?

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).

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.)

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

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.

Pretty much this.

A little background... the company was in the television industry. The original product was "clickable TV," in which they'd managed to deploy a small Java app to set top boxes over the cable lines, which could display a small icon appear at the bottom of the screen. When a user pressed 'select' on their TV remote, they would get an email sent to them with more information. It launched in a small US city and they approached local news channels ("click now to get the full story") and local businesses ("click to get a coupon code") to sell it.

The product did work (even if you DVR'd the program, which was my favorite feature), but most of the local business that were contacted said "cool idea, but we don't have any TV commercials, so come back to us if you can do something else."

When it proved too hard to sell the clickable TV product (perhaps obviously -- even in 2010 it was 10 years too late), they decided to reach back out to the local businesses with a new idea... a Groupon clone. We ran it for a while and it did "okay," but not well enough to keep the lights on, and the company closed its doors soon after.

Yeah but demand isn't the problem when you're offering crazy discounts on things.

Dealing with small businesses is a total pain. Dealing with thousands of them is a major challenge for any business.

Many small businesses don't adhere to professional norms of communication, negotiation, payment, etc -- that's not a big surprise, considering that many of them are owned by people without a lot of background in big business. The amount of time put into each deal is very high compared to the money you can get out of it.

This is why enterprise sales are so much easier than small business sales. You can make millions dealing with a small handful of enterprise companies, or you can try to make the same amount of money by dealing with hundreds or thousands of small businesses.

>You can make millions dealing with a small handful of enterprise companies, or you can try to make the same amount of money by dealing with hundreds or thousands of small businesses.

This is burying the lede, IMO. Your sales structure should either be set up to catch shrimp or whales. You can have a product that sells itself and provide it cheaply - say, a smartphone app that summons a car to get you where you want to be. Or you can have a product that takes a full-time professional sales force, and get a lot of money out of the few sales you make there.

The problem is that small businesses are salmon.

If only there existed a way to catch those... /s

>Or you can have a product that takes a full-time professional sales force

This is Just-Eat's model - they have an army of sales people in every country they operate, pitching to the local food places in their area.

Joel Spolsky expanded on some of it on his famous blog post:

http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...

"There's no software priced between $1000 and $75,000. I'll tell you why. The minute you charge more than $1000 you need to get serious corporate signoffs... So you need to send a salesperson out to the customer to do PowerPoint"

Dunno. I am finding a ton of it in the CAD/CAM world.

I work for a company that primarily has small businesses as customers, and I agree that they're a handful.

We average something like 2 hours per customer onboarding. However, the value of each customer is pretty high. Good customer relations is also fairly important as there's a lot of staff transfer within the industry. Satisfied customers basically do your marketing for you.

The customers you get via things like GroupOn are not the customers you want. And the GroupOn customers crowd out your good customers.

The name is spelled Groupon, as a combination of group + coupon.

>I'm curious how you could possibly lose money in a business like this

This implies that an unlimited number of people could have started profitable Groupon-like businesses.

Somewhere a VC is nodding enthusiastically.

> I'm curious how you could possibly lose money in a business like this.

Given all the stories that were going around for a long time about how offering through businesses like this was a losing proposition for most customers (really independent of the truth of those stories), I'm not surprised that there could be trouble making a profit in it.

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.

In regards to the first point, who won? Groupon the company got a ton of cash but man they're in rough shape these days. They're not even really in the same business space either.

I don't even know what they do these days. I had an ex who was into buying daily deals, and literally every single small business where we redeemed one did not like the deal they got from groupon one bit.

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.

Yeah, I've run high margin deals before and even those aren't really worthwhile. For it to be successful you have to be fairly sophisticated with your methodology, and most small business owners (the people who tend to use Groupon the most) just aren't that sophisticated in their setup.

"(the people who tend to use Groupon the most)"

Maybe it's more accurate to say 'the people who easily fell for Groupon's sales people'. In my area the various daily deal sites have very aggressive sales fleets, who literally go door to door in shopping streets convincing owners to put up a deal. Many of them lose money or barely break even; but then again some of them owe it to themselves (I bought a deal once and went back afterwards; she then said 'I'll give you the same price you paid for the groupon, because other customers have complained that they didn't think it was fair they had to pay more when they came back' Wtf?)

Anyway, I don't have exact data of course, but I've been interested in the business model for years, so I tried to get as much information from business owners as I could every time I bought a deal. The overall picture I got even after a few years (so since 2010-2011 maybe?) was that the typical groupon customer had distilled to the cheapskate vendor-hopping type (before that, when groupon was the hot new thing, it was mostly early adopters who weren't really price sensitive, but for whom getting a 'deal' was more about the social validation aspect of looking like a savvy consumer).

I think it's also important to keep in mind when Groupon was founded and started getting big: 2008.

Everybody was suffering and cutting costs. I don't think it was so much as wanting to be price savvy, but rather, wanting to go out and not being able to afford it.

Groupon actually stemmed from a different startup that was supposed to be about something like community building. (The name alludes me, but I used to work for the "parent" company of Groupon and in the same offices as it was getting big. That startup never materialized, but the one they did was got a campaign that if they got x number of people, Motel Bar (which is bar in the same building) would give a deep discount. Andrew Mason, Eric Lefkowsky, Etsy al, quickly realized that that was a real business model, pivoted, and exploded.

Had it been in a different when people were not so price conscious and businesses were not on the edge of going bankrupt, I'm not so sure it would have done as well.

The businesses in that space that seem to still be going strong (see Gilt for example) tend to focus on more luxury items/markets, where they're either selling factory seconds (in the case of retail) or experiences that will likely target a higher class of consumer and will bring them back.

Gilt sold for less than 1/4 of its highest valuation to the parent company of Saks earlier this year (http://money.cnn.com/2016/01/07/technology/gilt-groupe-hudso...)

I think you're thinking of The Point: https://web.archive.org/web/20110204114416/http://www.thepoi...

Their concept of the "campaign" became the cornerstone modeling concept for the Groupon platform.

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.

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.

Good point, thanks for the clarification.

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...

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.

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...

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?

Seems to maybe work well for things like yoga classes also. If the class isn't full then that's unused space that you can give to an interested consumer for basically free with a daily deal (and hope they become future subscribers). But that's about it.

But group yoga is zero marginal cost for unused slots in a class. There's not many other businesses like that.

It can still make sense if you have low marginal vs fixed costs. I know restaurants that are happy to use them to fill up time slots when they're usually empty¹. Since most of their costs are fixed (rent, salaries, etc), they still make a profit at the margin.

¹ I don't know about Groupon, but other deal sites allow them to put certain conditions on the use of the voucher

This is particularly true for businesses that offer things like yoga classes, for whom the marginal cost is ~0. This is obvious to everyone now, but early on most small businesses didn't think of Groupon as what it is: a form of marketing that requires a fairly particular cost structure to be cost-effective.

I did an analysis of the best deals in the early days of Groupon, and they were all classes that were better when attended with friends. (I think the best selling one in the early days was a cupcake baking class.)

One problem early on was Groupon wouldn't allow the limitation of numbers of "deals" sold. That put some people out of business. The people running Groupon were acting well beyond the bounds of morality. IIRC they did correct that after some bad press.

The money lag also killed some small businesses who had assumed they'd get money at the pos to cover their costs and hadn't accounted for increased custom needing greater spending on inputs when money was locked up for 3 months. Cashflow interrupts easily kill a small (micro) business.

Did any restaurants try offering pre-payment for 5 meals (for example) within a timeframe, and banking on many people not using all 5?

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

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.

>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?

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.

>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...

Depends on how good the hygienist is. They're not all the same.

> 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?

No. I would guess that it means it could be in 10s of million $ range. (Maybe that much but given Groupon losses probably an upper bound.)

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))

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.

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.

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.

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.

If any ratio below is above 10%, you may consider it material

1) acquired assets / groupon total assets

2) acquiree pre tax income / groupon pre tax income

3) purchase price / total assets

Groupon has 1.7B in total assets. By looking at criteria 3, this means the purchase would have been at maximum 20% (340M - Wont get into reasons why we use 20%, but this is the ceiling) or less.

The price was likely in the 20-75M range, if living social contributed to less than 10% of the net loss of groupon (100M), and their assets were under 50M (likely).

Groupon still exists? I am surprised.

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.

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.

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...

Is that 60 million in Linden or US currency?

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

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.

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.

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.

I agree with everything you say. However, my point was really about the HUD and keyboard and mouse controls. Just moving around used to be so hard and unintuitive. Not sure if it still is because I haven't logged in in years.

Pretty sure I read a while ago that Zynga's corporate HQ which they bought was now worth more than their business. Or maybe it was some other company with no long-term competitive advantage.

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.

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.

Whoah Groupon is still around?

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...

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