reDesign

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):

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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.

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