reDesign

August 30, 2011

There are only two deal companies that matter: Facebook and Google

Filed under: facebook, google, groupon — Rakesh Agrawal @ 7:32 am

Much has been made of Facebook’s decision last week to exit the daily deals space. Yesterday, Yelp told Bloomberg’s Doug MacMillan that it is also exiting the daily deals space.

A lot of the analysis has used these examples to illustrate what a great position this puts Groupon and LivingSocial in. That analysis is wrong.

I reached out to Facebook PR for some more detail on their decision. Here is what spokeswoman Annie Ta told me (emphasis added):

After testing Deals for four months, we’ve decided to end our Deals product in the coming weeks. We think there is a lot of power in a social approach to driving people into local businesses.  We remain committed to building products to help local businesses connect with people, like Ads, Pages, Sponsored Stories, and Check-in Deals. We’ve learned a lot from our test and we’ll continue to evaluate how to best serve local businesses.

That reads to me like Facebook is still very committed to local, it’s just that they don’t see the daily deals model as the right path to it. Like Google, I’ve always thought of Facebook as too good a company to be in the space in its current exploitative state and I’m happy that it got out.

Over the last couple of months, I’ve had several conversations with Eric Rosenblum, the head of Google Offers.

Part of the reason I haven’t aggressively beaten up on Google Offers, aside from the initial piece titled Why I Want Google Offers And The Entire Daily Deals Business To Die, is that I really believe that they want to do the right thing. People have pointed to the slow rollout of Google Offers as a sign of weakness and the relative strength of Groupon; I view it as a sign of discipline and wanting to truly learn about what works and what doesn’t for merchants. They view it as a market-entry strategy and a way to educate local merchants about online advertising. (To be fair, I may just be buying their spin. But I don’t think that’s the case. Groupon largely has refused to talk to me, despite numerous requests.)

At the rate that Groupon is growing, it’s hard to learn anything. It’s also impossible to maintain quality talent when you grow headcount 35% in one quarter. In just one quarter, Groupon has added about as many employees as Facebook has in total.

Google and Facebook can afford to take their time. Rosenblum told me that because he’s not on a march to an IPO, he can afford to treat merchants right and build for the long term. That shows in the structure of the deals that Google Offers runs. There are more restrictions that make it a better deal for merchants.

Offers will be just one tool in Google’s toolbox for merchants. It is essentially a cost-per-acquisition model. Small businesses don’t know what an impression or a click is worth, but they have a better sense of what a customer is worth. But many categories haven’t been exposed to online advertising and that’s what Google is trying to change with Offers. Eventually, Rosenblum believes that merchants will use Google’s self-serve tools. The several-thousand strong sales army of Groupon will feel more like an anchor than a moat.

I believe Facebook has a different play. Its entire business is about connecting people and having them share information with each other. If Facebook sells someone an offer and they then connect directly with the business on Facebook, that’s additive to Facebook’s core business.

By contrast, Groupon and LivingSocial have every incentive to keep you from building a relationship with the merchant. They would much rather sell you another deal themselves than have you go back to the merchant directly. Groupon is even running ads telling consumers to stop paying full price — undercutting the value that merchants provide. At every step of the way, their business interests are directly opposed to those of merchants.

They could change that — I wrote a post with more than a dozen ways how the merchant experience could be improved — but they won’t. They’ve sold investors on the story of massive revenue growth and the fastest way to do that is to con merchants into selling big deals that they don’t fully understand. Even if they fully agreed with my analysis of the business, the best path for insiders right now is to continue the march to IPO and cash out as fast as possible.

Both Google and Facebook have enormous amounts of leverage in their business. The number of people each employee at Facebook impacts is unprecedented. Groupon is not a scalable business. In fact, it’s showing declines per employee as it gets larger. Its average sales per sales rep dropped from $172,000 in Q1 to $138,000 in Q2.

In a few years, we’ll look back and see the daily deals business as a fad that delivered untargeted, unsustainable discounts to unprofitable customers. The Groupon and LivingSocial brands may be around, having been sold to some company in a liquidation sale or bankruptcy proceeding. (Though even that may be difficult, as many merchants hate them.) Even if they survive as companies, the product they sell will be very different.

And we’ll see Google and Facebook ruling the much larger, sustainable local advertising market.

About these ads

August 26, 2011

An open letter to Andrew Mason: You’re wrong

Filed under: groupon — Rakesh Agrawal @ 3:01 pm

Dear Andrew,

I must admit I was surprised to read your email to employees yesterday. I say this because I’ve reached out to your PR team in the course of covering Groupon and they’ve often used the excuse that you’re in a quiet period to refuse to comment to me. So, clearly, Groupon knows what a quiet period is.

Which is why I found your email surprising. I would have thought the big op-ed in the Journal by Groupon investor Marc Andreessen would have made regulators squeamish given that you’re in your quiet period. But your email seems like a blatant violation of quiet period rules to tout your company to investors. Releasing (likely unaudited) partial quarter results is also something the SEC should look into. I know it was framed as a letter to employees, but it was clearly written with the investor community in mind. You know as well as I do that in a company as large as Groupon, any such letter will make it to the press and will get widespread attention.

Let’s move on from the basic legality of your email, which is for the SEC to investigate, to the substance of your letter. Many of your points are dead wrong. Andrew, if you truly believe everything you’ve written, that’s reason enough in my mind to short Groupon. Most of the serious investors I talk to are already planning to do that. I even had one short ask me to stop writing about Groupon because he wants to maximize his return when he shorts you.

Adjusted CSOI

It’s amazing to me that after getting beaten up by just about everybody who covers Groupon for making up a fictional metric to show what a great company Groupon is that you continue to tout this metric. After all, you removed this from your S-1 because it was giving the SEC a lot of concern. So why bring it up again? Do you think that just because it’s not in an official filing that that’s OK?

You make the argument that once you acquire a customer you never have to spend marketing dollars on that customer again. That is utterly ridiculous. Your business is essentially a subscription business. Ask other subscription businesses if they retain customers for life. Ask magazines and newspapers. They would love it if that were true. Too old school? Ask Netflix. They’re among the best acquisition marketing and retention companies in the business. They still spend a lot of money on marketing.

All of these companies report another metric in addition to subscribers: churn. These are the people who stop subscribing. In your case, most of them don’t unsubscribe, they just stop opening emails. The trend on email open rates is a critical number that is conspicuously absent from your S-1. I bet I can guess what that trend line looks like.

If I weren’t covering Groupon, I would have stopped opening the emails a long time ago. The deal quality continues to decline as merchants become wiser and realize that in most cases running a Groupon is a terrible business decision that doesn’t result in high quality, repeat customers. You have another problem: in many cases, the merchants you do get don’t generate high frequency purchases. I’ve had readers send me actual Groupon deals for cars, enemas and boob jobs. I can eat at a restaurant 3 times a day 365 times a year. But how many boob jobs can a person get?

Your own numbers — pulled straight from the S-1 — belie the claim that you’ll never again have to spend marketing dollars on Groupon subscribers. The median number of Groupons purchased by a list subscriber is: zero! The median number of Groupons purchased by a Groupon customer is: 1! More than half of people who have purchased a Groupon have never purchased another one.

I’ve seen you run winback campaigns to get people who have stopped buying Groupons to start buying again. You give away Groupon dollars for that. Isn’t that a marketing expense?

Ponzi scheme

This is an area where you and I have some common ground.

As people colloquially refer to Ponzi schemes, Groupon is absolutely a Ponzi scheme. However, the SEC lays out on its Web site a very clear definition of a Ponzi scheme. (I looked.) By that definition, I don’t consider Groupon to technically be a Ponzi scheme.

It has many of the characteristics and will likely collapse for the same reasons Ponzi schemes collapses, but I don’t think you or your co-founder Eric will join Bernie Madoff in jail. It’s more like the subprime mortgage crisis. A lot of bad things were done, executives got rich, but no one went to jail. In Groupon’s case, consumers, merchants and credit card companies will feel the biggest impact if Groupon collapses.

I think the house of cards analogy I used in my post “Why Groupon Is Poised For Collapse” is most apt. I can think of numerous — and likely — scenarios in which the Groupon house of cards will come tumbling down.

I spent a lot of time studying economics when I was (like you) at Northwestern. I sent my economic analysis of Groupon to a respected economics professor there and his response was “Wow, that’s the most brilliant analysis of Groupon I’ve ever seen.”

The broader point here is that in the last few weeks, some of the smartest analysts I know have described Groupon as “doomed,” “trainwreck,” “Ponzi scheme,” “low on dough,” “insolvent” and close to “going bankrupt.” (I didn’t write any of those.) The only people who have had positive things to say are Groupon insiders, including your co-founder Eric who violated SEC quiet period rules by telling Bloomberg West that Groupon would be “wildly profitable.”

I’ve never seen a company about to go public where a founder has to publicly defend the basic legality of its business. What’s next, releasing a video of Eric saying “I’m not a crook”?

Your new businesses suck

You tout Groupon Getaways and Groupon Now! as the future of Groupon and huge opportunities. These are both going to be terrible businesses in the short- to medium-term.

I’m not just saying that because Groupon Getaways burned me out of $500 this week. After being told that I could use my Groupon Getaway “tomorrow”, I called to reserve a room for a trip I’m taking to Santa Monica this weekend. I was told that the voucher was not valid until early September. (This information is cleverly hidden away on a separate tab; other sites display the restrictions more prominently.)  Even on dates when it is valid, the rooms that are available to Groupon customers are limited. There were dates where I could buy a room, but I couldn’t use my Groupon.

Diane in customer service tells me Groupon will refund my money. That’s great. But until then you have free use of my money. (Well, as of this moment, it’s Discover’s money.) But Groupon Getaways is a business where you’re selling vouchers that customers may never be able to redeem. People who book air travel or make other arrangements expecting to use a deal will be scrambling at the last minute to make other plans when they’re told the Groupon won’t be honored.

There are many other problems with the Groupon Getaways business, including profitability to hotels, registered seller of travel laws, taxation, etc. But they’ll have to wait for a future post. In the meantime, it looks like you’re using large amounts of revenue generated from these deals to help cover your cash flow issues. (A $500 travel deal is much more revenue in one shot than your typical laser hair removal deal.)

Groupon Now! has a lot of issues itself. The two biggest: merchants today aren’t ready for self serve and you’re taking too big a cut. For a restaurant, my advice after doing a deep analysis of Groupon Now!, is that they’re better off leaving a table empty than serving a Groupon Now! customer.

We don’t suck as much as LivingSocial is not a winning argument

You allude to LivingSocial’s tactic of selling $20 Amazon gift cards for $10 and eating the loss. You say that buying revenue is a terrible idea. This is another area where I’m in complete agreement with you. This is also why I’ve advocated that Groupon book net revenue and not gross revenue. Booking gross revenue is a recipe for game playing of this sort.

LivingSocial shouldn’t buy revenue, even if it does generate a lot of press.

But I believe you’re guilty of doing the same. You have frequently sold movie tickets below what they should cost you. As far as I’ve been able to determine, you’re using this to get a credit card on file.  And every one of those customers who bought the movie ticket deal counts as a customer in your S-1. (Keep in mind that most people buy only one Groupon.)

There are other reasons why LivingSocial’s model may be more unstable than Groupon’s. But that doesn’t make Groupon itself more stable.

Rocky’s daily deal

Your business is incredibly complex. I frequently talk to investors about Groupon and explain the model to them. Just yesterday, I was talking to a top-tier VC about Groupon. His jaw kept dropping as I explained the multiple levels of risk inherent in Groupon’s current model.

No one who understood risk would ever design a model that was as prone to failure as Groupon is. It’s so complex and there are so many holes that I’m confident many people who work at Groupon don’t understand it.

I usually charge $900 an hour for my consulting services. But I’ll make you a deal, valid September 1 through 6, when I’m in Chicago: buy me lunch and I’ll be happy to share more of my insights. You can even use a Groupon to buy lunch.

Note to current and former Groupon employees who may be reading this: if you’d like to get together, please see the details of my trip to Chicago.

See also:

August 24, 2011

For Groupon employees: my visit to Chicago

Filed under: Uncategorized — Rakesh Agrawal @ 7:28 pm

I’m interested in meeting with Groupon employees and former employees when I visit Chicago next week.

I will be in town from the evening of Sept. 1 through the evening of Sept. 6 and would love to meet with you. Please email dailydeals@agrawals.org. (Please put “chicago” in the subject line.)

Some things you may be wondering:

Who the heck are you and why do you want to talk to Groupon employees?

I’m a journalist who has been writing extensively about Groupon and the daily deals space. You can read and watch my coverage on my Groupon resource page. I want to talk to Groupon employees to share a more complete picture of what Groupon is all about.

Are you interested in only negative stories?

Absolutely not. I want to share the good and the bad about Groupon. Yes, my reporting has been largely negative — but that reflects what I’ve been able to cover in talking with merchants and employees. If you have a positive story, I’d love to share it.

Will you keep my identity confidential?

Absolutely. If you would like to remain anonymous, I will honor that.

Where will you be?

To preserve anonymity, I won’t be sharing locations, but will schedule a time and location that works for both of us.

I can’t meet with you while you’re in Chicago, but I’d like to share my story. How can I do that?

Drop me an email and we’ll find a time to talk on the phone.

Do you pay for interviews?

No. Like most respectable journalists I don’t pay for interviews.

August 22, 2011

Moo does things right

Filed under: Uncategorized — Rakesh Agrawal @ 7:09 am

Business cards from Moo

A couple of years ago, I’d ordered some business cards from Moo. At the same time I’d prepaid for my next pack. Atypically for me, I forgot to note the details of the offer.

When it came time for me to re-order cards, I went back to Moo and could’t find any record of the cards I was due. I wrote to customer service and said that I thought I’d prepaid for 50 or 100 cards and wanted to order them. Moo replied with a code valid for 200 cards with free shipping.

Not only do they have great customer service, the product is fantastic, too. Both sides of the cards are printed in full color on heavy stock. The front has my contact information and the back has 1 of 34 pictures I’ve taken. I’ve found these to be great conversation starters as people want to talk about the various pictures.

Designing and editing the cards is easy, too. Moo integrates with flickr’s APIs, letting me easily select the pictures I wanted to use.

Add to that sustainably sourced stock produced with wind power and it’s a company I’m happy to do business with.

Pictures above include the road to South Point, Big Island, Hawaii; Blue door, Santa Fe, New Mexico;  Stingray at Hamelin Bay, near Perth, Australia; Hawi wind farm, Big Island, Hawaii; Sunset over Berlin; Great Cruz Bay, St. John, U.S. Virgin Islands; Persian Ceiling by Dale Chihuly; hanggliding on Kauai; and A lonely, colorful holdout, Detroit, Michigan.

August 20, 2011

Roundup of my Groupon and daily deals coverage

Filed under: daily deals, groupon, livingsocial — Rakesh Agrawal @ 6:39 pm

If you have experiences — good or bad — that you’d like to share, email dailydeals@agrawals.org. I also maintain a companion blog focused on sharing Groupon, LivingSocial and other deal experiences.

Start here

Analysis of the S-1/third amendment

Analysis of the S-1/second amendment

For businesses considering using Groupon

For potential investors

For consumers

My daily deals stories on TechCrunch

My comments in other media outlets

My series on local search

Groupon IPO at risk/Groupon in danger of collapse stories from other outlets

Other great resources on daily deals space

Originally published June 12, 2011; regularly updated.

August 15, 2011

The terrible numbers that Groupon doesn’t want you to focus on

Filed under: groupon — Rakesh Agrawal @ 4:14 pm

Note: If you have Groupon or other daily deal experiences to share, please email dailydeals@agrawals.org.

Even in its revised S-1 issued last week, Andrew Mason’s letter directs potential shareholders to three key metrics: gross profit, free cash flow, and the much laughed at adjusted CSOI. (The fact that they still mention this dog should tell you tell something.) Two of these three metrics are, in a word, crap. They paint an extremely optimistic view of the business.

Gross profit (what I consider revenue) is the only one that is a useful measure of the company’s fortunes. And the growth rate on that has plummeted.

Also read my editorial on how Groupon is trying to hide these numbers from investors.

Here are some numbers that Groupon doesn’t want to focus on.

Revenue and subscriber growth

  • The median number of Groupons sold to each Groupon customer (someone who has bought anything): 1.
  • The median number of Groupons sold to each person on Groupon’s mailing list: 0.
  • Sequential revenue* growth from Q4 2010 to Q1 2011: 76%.
  • Sequential revenue* growth from Q1 2011 to Q2 2011: 26% (a drop of 50 percentage points in one quarter).
  • Sequential growth in Groupons sold from Q4 2010 to Q1 2011: 73%.
  • Sequential growth in Groupons sold from Q1 2011 to Q2 2011: 16% (a drop of 57 percentage points in one quarter).
  • Sequential growth in featured merchants Q4 2010 to Q1 2011: 62%.
  • Sequential growth in featured merchants from Q1 2011 to Q2 2011: 38% (a drop of 24 percentage points in one quarter).

Revenue share to Groupon

  • Average revenue share to Groupon (what Groupon calls “gross margin”) in Q1 2011: 42%.
  • Average revenue share to Groupon (what Groupon calls “gross margin”) in Q2 2011: 39%.
  • Revenue share that American Express is expected to take in its Facebook deal: 3-4%.
  • Reasonable expectation for Groupon’s revenue share in the long term: 10-20%.

Subscribers and acquisition cost

  • Percentage of mailing list who has purchased even one Groupon: 20%.
  • Cost per new list subscriber: $5.37.
  • Cost per new customer: $24.08.
  • Real revenue per subscriber: $3.43.
  • Real revenue per customer: $17.55 (less than acquisition cost — keep in mind most people buy only 1).
  • Real revenue per Groupon sold: $10.49 (less than acquisition cost).
  • Amount spent on marketing, full year 2010: $241.5 million.
  • Amount spent on marketing, first half of 2011: $345.1 million.

Merchant liabilities

  • Amount owed to merchants Q1 2011: $290.7 million.
  • Amount owed to merchants Q2 2011: $391.9 million (a 35% increase).

Sales effectiveness

  • Average sales per sales rep, Q1 2011: $172,000.
  • Average sales per sales rep, Q2 2011: $138,000.

Staffing

  • Ratio of Groupon employees to Facebook employees: approximately 3:1.
  • Ratio of Groupon editorial employees to Groupon technical employees: approximately 3:1.
  • Growth in headcount from Q1 to Q2: 35%.
  • Growth in sales headcount from Q1 to Q2: 37%.
  • Growth in editorial headcount from Q1 to Q2: 27%.
  • Growth in technology headcount from Q1 to Q2: 50%.
  • Percentage of Groupon employees employed in technology: 4%.

Misc.

  • # of purported class actions against Groupon: 16 (up from 15 in 1Q).

* This is based on net revenue, what Groupon calls “gross profit”.

Also see these stories about how soon Groupon could collapse (not written by me):

Could Google use Motorola and mobile to muscle its way into social? Does antitrust law matter?

Filed under: facebook, google, social networking — Rakesh Agrawal @ 10:47 am

Today’s announcement of Google’s acquisition of Motorola Mobility shines a brighter light on the antitrust conversations that were getting louder at the end of last week.  Bloomberg reported that companies such as Microsoft, Expedia and Yelp may have been asked to provide information to the FTC.

It also brings up the question of what happens in social — and mobile is the future of social. Already, more than 250 million people use Facebook on their mobile devices. In many parts of the world, a mobile device is the only computer most people will have.

More than a month in, Google+ still feels like a very boring place. Today’s news has diversified the conversation in Google+ from being primarily about Google+ to primarily about Google+ and Google/Motorola. My feed remains dominated by the tech elite. Conversations from real friends (those who are not geeks) are few and far between.

Google must figure out social. If you think about how people solve problems in real life, starting with friends and family is often the first step. If I need a dentist, I start by asking my friends first. (I’m visiting the dentist tomorrow, one recommended by my friend Tristan Walker.) Travel is often the same way — many friends post requests to Facebook asking about what they should do in a new city. Facebook has already started detecting topics in status messages and promoting related content.

To the extent that Facebook can capture these requests, it represents a significant threat to Google’s business model. Of course Google knows this, which is why they keep trying to get social right.

So far, its efforts have been failures. The only buzz that buzz got was for violating users’ privacy. Wave was greeted by the ennui of baseball fans who are so bored with the game that they start doing the wave.

Although Google+ has reached more than 25 million unique users, a company with as much traffic as Google can do that by accident. What matters is whether people truly engage and adopt the platform. So far, I’ve seen little sign of that happening. Friends still primarily post on Facebook — because that’s where their friends are.

Importance of mobile

Google has an important weapon in this fight, one that hasn’t been fully brought to bear: Android. In its second quarter earnings call, Google touted more than 550,000 Android activations each day.

Four years ago, when Facebook first appeared on iPhone, I wrote about the importance of mobile to social and how the iPhone would be the center of the social network. This was before Android existed, but the same could apply to Android.

Among the features a social-network centric phone would have:

  • Pick up a new phone and enter your account information. Your contacts are automatically populated, complete with pictures of your friends. No need to fiddle with re-entering all your data.
  • Check the status of your friends before you make a call. If you see that your friend is on the phone, you can call later or send a text message. (Similar to presence on IM.)
  • When a contact changes their phone number, the new information is automatically updated. You don’t have to worry about outdated phone numbers.
  • Pull up a map of where your friends are when you’re trying to meet up.
  • Take pictures and videos and upload them straight to your social network.
  • Get reminded of events in your network without having to manually add them to another calendar. The reminder leads straight to maps and directions.

Every one of these features now exist in some form on some phones, whether it’s an Android or an iPhone. But the integration is often clunky, some require separate app downloads, others work only a very limited number of handsets. And even a minimal amount of friction in these applications can dramatically reduce adoption. Deep integration of features like these would greatly enhance the social experience.

One thing that is becoming increasingly common in social situations is connecting with others on the spot. Someone adds you to their Facebook network from their phone when you meet them. But right now, it has a lot of friction — it takes a lot of steps and requires entering someone’s name.

Imagine an alternate scenario: you meet someone and all you have to do is tap your phones together. Using the NFC chips, your ID is transmitted to the other phone and vice versa. You’re automatically added to each others Google+ networks. The phone could automatically capture where you were and when. (No more wondering how you met.) If you were attending a scheduled event like a conference or a party, that could also be noted. Inferences could be made about whether it was a business or a social relationship. This makes for a much richer social graph.

Android and Google+

Google could do all of this with Google+ and Android. By deeply integrating Google+ with Android, it could improve the adoption that Google+ is currently lacking.

There are already signs of this: although I’ve been generally bearish on Google+, one feature I really like is the automatic upload of photos from the phone to Google+. As soon as you take a picture with the camera app, it’s automatically uploaded and ready for you to share on Google+. It’s the lowest friction way to upload a picture that I”ve seen yet.

Google could also integrate your calling, SMS, email and IM habits into Google+. As much as we use social networks for communications, they don’t capture all of our activity. The activity in other modes of communications often capture relationships that aren’t fully expressed within the confines of a social network.

With the potential deeper hardware integration that a Motorola acquisition offers, Google could add in other sensors.

Google and antitrust

Integration like this can be extremely useful to consumers because it removes a lot of tedium and data inconsistency.

The big question is whether Google will let others integrate at this level with Android. Will Google allow open access to others trying to integrate deeply into Android? Or will we see a return of the Microsoft vs. Netscape wars of the 90s?

Google is already reportedly under FTC scrutiny with respect to its dominance in search. As Google has grown, it has introduced many new products that compete with these companies. Many Google products rank very highly in Google search, which is the de facto starting point for many Internet users. A top 3 three ranking can mean a lot of traffic; being dropped “below the fold” can kill an otherwise thriving business.

Google claims that it doesn’t alter the search order to favor its own products. This is technically kind of sort of true, but also misleading. The positions in organic listings doesn’t change. But take a look at this result for the search “GOOG”:

The most prominent spot on this page takes you to Google Finance

The most prominent spot on this page takes you to Google Finance.

The thing with the big stock quote and chart? That doesn’t count as an organic listing. Click anywhere on the big graph and you’ll go straight to Google Finance. (Yahoo! Finance is the first organic listing.)

I worked on search products at AOL. A presentation like the stock chart above can easily garner 40-50% of all the clicks on such a page. The graph is where the eye will go and what people will click.

Other Google products are often presented in their organic order — but with a different, more prominent presentation. Even small changes in presentation can have huge impacts on clickthrough rates.

In this screenshot, compare the treatment of the YouTube video with the same content on Bloomberg’s site. Even if were ranked lower in the results, the video with thumbnail would get higher clickthroughs.

Comparison of organic results in Google search

Comparison of organic results in Google search

Google’s aggressive moves in mobile

Even before today’s announcement, Google has been taken an aggressive stance in the mobile space.

Skyhook Wireless, which pioneered WiFi location-based tracking, is suing Google over allegations that Google interfered with a deal it was trying to do with Motorola.  In my conversations with Google, I’ve been told that at least the NFC chips will be locked down and not available to other applications. Google’s introduction of its free navigation product on Android has decimated the markets for companies like Telenav, Garmin and Magellan.

Google has also made it known to Android manufacturers that it wants to preserve the Google experience on its handsets, even threatening to withhold access to early code of future releases. Will Google make Google+ a required part of Android? And will it try to keep OEMs from preloading Facebook? If the acquisition goes thorough, it’s safe bet that Google+ app will get prominent placement on Motorola devices.

Does antitrust law matter?

Increasingly, it seems antitrust law doesn’t matter. Even if you win, it’s most likely a pyrrhic victory — just ask Real and Netscape how their antitrust victories worked out for them. Regulators just don’t move fast enough. By the time they make a decision, the market has already moved.

Antitrust law has almost no deterrent value. The penalties for going too far are infinitesimally small compared with the rewards that come from plowing forward aggressively.

Facebook has two big advantages over Real and Netscape: a brand that consumers love and network effects. Facebook is one of the most important applications on a mobile phone. If Facebook functionality were crippled, it would influence my selection in phones. Carriers know the draw that Facebook has. The sheer magnitude of Facebook’s social graph should also serve as a barrier. Switching from Netscape to IE was painless; switching from Facebook to Google+ would be a lot of work, for you and your friends.

August 13, 2011

Why big tech companies often fail

Filed under: aol — Rakesh Agrawal @ 10:28 am

AOL closed an awful week with market cap of $1.26 billion. In December 2005, Google had invested $1 billion for 5% of AOL, giving the company an implied valuation of $20 billion. In less than 6 years, AOL has lost about 94% of its value.

Recently I was talking to a company about their hiring philosophy. They told me that a position had been open for months, but they were in no hurry to fill it. They would hire only when they found a great person to fill the role. And if they found a great person and there wasn’t a position open, they’d make space for them somewhere.

That’s a remarkable contrast to my time at AOL. I spent about 3 1/2 years there. I survived many rounds of layoffs. I finally succumbed to one, just a day before my big social product was to launch. (AOL had a huge early lead in social, which it squandered. I’ll write about that someday.)

The game at AOL was to fill reqs, not hire great people. “Hire before the req gets taken away” was a frequent refrain. Even if the person was barely acceptable, it was better than having the role taken away. Unfortunately, it’s not uncommon in large companies to measure managers by the number of direct reports they have, not by the quality of their output. The more direct reports, the more important you are. That leads to bigger salaries, bigger offices, bigger egos.

But it doesn’t lead to great products. Hiring great, smart people does. Smart people energize other smart people. As a product guy, the most exciting thing for me is designing new product features with great people. It’s incredibly energizing.

Working with mediocre people is demotivating. If I’m the smartest guy in the room, I’m doing something wrong. (The people who worked with me on the social product were all terrific; I’d work with them again any day.)

At the time I left AOL, another person who was leaving was told by management “we need followers, not leaders”. That’s what AOL got and look what happened. That person — a true leader — has gone onto unbelievable success. He helped build one of the most talked about companies in Silicon Valley. And he doesn’t have to work again if he doesn’t want to.

August 11, 2011

Comments from an Australian daily deals site that pivoted

Filed under: daily deals, groupon — Rakesh Agrawal @ 11:47 pm

Here is an email exchange I had with an Australian deals site that pivoted away from the daily deals model. Note that, as I’ve said in the past, an upfront payment model encourages fraud from merchants who take the money and run.

Dear Rakesh,

Having read your commentary on Groupon, I must say that we agree. This space is a house-of-cards. We ran a business in the “traditional” daily deal model for approximately 6 months before coming to the conclusion that the space was unsustainable.

We have sinced re-spawned as www.twodollardeals.com.au ….. whilst we obviously forsake significant revenue in the short term, we believe our model IS sustainable and will ensure that we are a permanent feature of our merchant’s marketing strategies (rather than a one-off, never again experience). The merchant pays ZERO commission – they just have to put a good deal together.

It also benefits our members significantly – they get fantastic deals, only pay when they receive the service/product (not weeks or months in advance of redemption), get treated as cash-paying customers …AND, have the ability to refuse to pay if the service or product is not as promised.

Keep up the good, insightful work !

We previously traded as www.dealmonkey.com.au (we are currently converting this site into a deal and coupon aggregator).

ps. further to your commentary, we had four merchants do the “cash and run” job on us.

The SEC should have Groupon start over on its S-1

Filed under: groupon — Rakesh Agrawal @ 8:03 pm

I’ve spent much of the last two days dissecting the second amendment to the Groupon S-1. I was hoping to post my complete thoughts tonight, but I’ve seen so much shoddy reporting on this S-1 that I want to make sure that I’ve polished the most important pieces. What I’ve read in the S-1 makes me so angry that I’ve expanded the scope of my analysis to essentially re-calculate all of the key numbers from Groupon’s highly misleading document.

Although Groupon has largely eliminated the controversial adjusted CSOI metric — for which it was rightfully beaten up by just about everybody — there is still a lot of stink on this S-1. Groupon and its underwriters have done a masterful job of torturing the English language to make things seem very different from what they are. At every turn, Groupon tries to get investors to focus on misleading and inflated metrics while ignoring the ones that are economically important.

There are the major issues, such as gift card liability, gross vs. net accounting and inflated customer numbers that I talked about before this amendment was released. (See my blog post about Groupon’s accounting practices and my conversation with Emily Chang on Bloomberg TV.) Based on my revised estimates, Groupon has between $500 million and $750 million in liabilities it is not showing on its books.

But there are many others.

In the revised S-1, there are some new metrics. Although they should elucidate, they again only serve to mislead. One new metric, the average Groupons purchased per consumer, would lead the average investor to believe the business is going well. It has been reported in the press that the average consumer purchased four Groupons. While that is technically true, it is highly misleading.

The number that Groupon provides is the arithmetic mean; the most relevant number is the median number of Groupons purchased. That number is 1 — more than half of Groupon customers have only purchased 1 Groupon.

Here is a quick explanation of mean vs. median. Assume that there are 100 people in a room. Each is worth $100,000. The mean and median in this case is $100,000. Now, Bill Gates walks in. Add in his $56 billion net worth and the new mean is $555 million, but the median is still $100,000. (See Khan Academy’s video on averages for a more in-depth explanation.) Groupon is similarly distorting its financial reporting. I’ll dive more into this later.

If Groupon truly believes that the arithmetic mean is the appropriate measure, its management is grossly incompetent. If they are putting out a number to deliberately mislead, then the SEC should freeze this offering.

Groupon’s median sales to Groupon list subscribers is… Zero. This company literally can’t get 80% of its mailing list to buy money at half off.

Groupon also shifted its financial reporting to emphasize year-over-year comparisons vs. quarter-over-quarter comparisons. Given that the company is still at an early stage, the only numbers that matter are the quarter-over-quarter comparisons. Groupon blended its first and second quarter results in the front section of the document. This has the effect of hiding the substantial declines in its business in the second quarter.

Likewise, Groupon is hiding the numbers for its poor performance of its Asian operations in its more lucrative European operations. The characteristics of the markets are so different that they should be reported separately.

Even the basic terminology Groupon uses has the effect of misleading potential investors. The term “gross profit” has no resemblance whatsoever to a profit. It is what should be considered “revenue”. What Groupon calls “gross margin” is really its weighted average (mean) revenue share percentage. (This is an important metric and I expect it to collapse within the next year.)

It isn’t unusual for IPOs to have shareholder lawsuits. Groupon co-founder Eric Lefkosky has had more than his share with previous companies, according to Fortune. Investors and employees have been left holding the bag while Lefkosky has profited immensely. Lefkosky and his family have already pocketed $382 million from Groupon, according to Fortune. The depth of deception in this S-1, if gone unchanged, will give plaintiff’s lawyers a lot of ammunition. (As will the many news stories generated every time Groupon fudges metrics.)

I know I’ve disappointed many interviewers when I’ve refused to describe Groupon as a Ponzi scheme or a pyramid scheme. I researched those terms today. Those terms are not technically accurate. But we may soon start using the phrase Groupon scheme.

For some of the best analysis on Groupon’s second amendment to the S-1, see:

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