Maybe I don't understand Groupon's business so well, but I don't see what network effects are involved. A person will have no problem signing up for several of these deal sites and purchasing the best deals. Groupon is certainly the market leader and has a brand advantage, but a competitor could quickly spring up in the market if they offer better deals.

This isn't the same as FB where everyone you know is on FB so you have to be there too.

This isn't the same as Microsoft where everyone is using Windows so you have to write software for Windows and people have to use Windows to get the most software.

What am I not seeing?

I think not selling is a huge mistake.

FB could offer their own groupon service within a month or two if they wanted. They already have the customers, they have the targeting. They probably just need the salesforce. Groupon's biggest competitor risk is probably FB right now.

The network effect comes from Groupon getting consumers to spread the word to their contacts and thus multiply the number of users using the coupons and thus growing Groupon's revenue at no effort by the company.

The coupons can get spread around electronically at no marginal cost by Groupon.

They went from 1 million to 40 million subscribers.
They probably suspect they can get to 100 million + easily and double or triple the company's value before selling.

Yes, I see that. They have a large group of customers.

If Facebook decided to launch Facepon, and allow businesses to easily create their own social coupons, Groupon's growth prospects would be diminished. Actually someone could probably write a FB app for this in less than a month and do pretty well.

http://www.facebook.com/blog.php?post=446183422130

Facebook testing it out now

Must be a rush to turn down a $5.3 billion offer

I agree with this literally word for word. The huge price Google is willing to pay just tells me to steer clear of google.

And honestly, with google's infrastructure and ownership of youtube how are they not competing? Plus Groupon advertises so much through them. This deal doesn't make any sense, even before the absurd offer was rejected.

I don't think the next offer for Groupon is going to be over $5.3 billion. Facebook can crush Groupon with a mediocre execution of their deals platform.

Groupon has staff doing copywriting and sales. I fail to see how they are ever going to be able to compete with Facebook on price.

if facebook is at all successful at this (and i don't see why they wouldn't be) the competition is going to crush groupon's profit margins even if it doesn't put them out of business. i seriously doubt they'll ever get a higher offer.

I didn't fully agree with Henry's points, but yours changed my mind. As far as network effects go I was drawing too much of a parallel between Opentable and Groupon... but Opentable has much higher switching costs than Groupon does and that drastically changes the game. I don't think it's as simple or as quick as you make it sound (no chance facebook can be a massive competitor in two months), but there will be unstoppable pressure on Groupon's business in the future.

This offer/rejection is actually very shocking to me as well. Obv groupon is making a killing right now, but I really feel this is company is benefiting from the short-term popularity of something trendy. I signed up for Groupon about 3 months ago to get cheap movie tickets, which was an absolute hassle to use, and have since not seen one "deal of the day" that I would even think of using.

Groupon is actually the worst "deal site" I have ever used in terms of quality of coupons and ease of use, and I am completely baffled that they were worth anything like this. They are making tons of money right now, but I will be very surprised if this time a year from now they are worth anything under the current business model.

Well the two months thing I meant that FB could have a platform ready, and from someone else's post it looks like they already do. Now it's just a question of how much marketing effort they put in. If their platform for coupon delivery is even half as competent as Groupon it's going to be tough for Groupon to compete.

If FB stumbles with their platform Groupon could maintain an advantage for a while because of their specialized salesforce.

From Advertising Age:

"Even without a global partner like Google, Groupon's footprint is spreading at a dizzying pace -- it went from one country to 35 this year alone. With $135 million in new capital from Battery Ventures and Facebook and Zynga investor Mail.ru Group, Groupon entered Europe, Latin America, Asia and Russia largely through acquisition. In May, Groupon picked up CityDeal -- at the time, the European group buying service had sent out its first deal in Berlin only five months prior.

By summer, it was setting up operations in Latin America and, today, it gets 12% of its 21 million in global website unique visitors from Argentina alone, according to ComScore. It went on to acquire Russia's Darberry and Japan's Qpod in August and picked up a trio of sites to get into Hong Kong, Singapore, Taiwan and the Philippines in late November."

http://adage.com/digital/article?article_id=147596

I guess what I just don't get, how is groupon any better than a site like www.slickdeals.net or www.fatwallet.com that group all the best deals across the country together in one place?

I get that they have more localized deals but for the most part there is just not that much exciting stuff in most localities that they can offer day after day to people (and most of the good stuff is already well-known). For example I am not going to sign up for some special hair coloring or NASCAR racing sessions just because it shows up on Groupon (or similar type ideas is all I have seen so far -- nothing I would every actually want).

I guess I am just a different breed. I know what I want and I seek out the best deals on it. I don't depend on "deal of the day" type sites to tell me what I want.

Same here, but I know a lot of people who have signed up to multiple sites and love checking out the daily deals. It's like an Advent calendar for adults.

Here are some recent SF Groupon deals:

http://www.groupon.com/san-francisco...itelinksRecent

The number of buys is surprising to me- much higher than I would have expected- though they've surely left off the less successful deals.

This is exactly right. My friend just sold half of a small business, but he still has a tiny equity share and keeps track of what is going on. His former business did a Groupon, and my friend cited all of the above problems saying it was terrible. He said some businesses might come back for a second Groupon, but rarely a third. This is obv a problem as there are only so many businesses in each locality.

Maybe Groupon is about to get a deal done with FB.

Interview with the founder.
http://www.charlierose.com/view/interview/11338

This would make a lot of sense for turning down $5B

Evidently they know something that we don't, as the people calling the shots on this one were the investors and venture capital firms who own most of the company - and the goal for those guys in any deal is a big dollar acquisition or IPO.

I like that they said no simply because it represents the possibility that they will grow into a Google/Facebook/Amazon/eBay sized company. Too many good startups sellout and lose their true potential.

Imagine if YouTube had not sold out and started branching in other directions - or MySpace. Or any of 100 other companies. I think these buyouts are more to protect market share and bring a future potential rival under their control than they are for revenue streams, technology etc.

If I created an internet company that was offered $1 Billion, I like to think I'd say no as well. Though I might take it and then say no the second time around

Never heard of the first and only heard of the second in passing but the difference based on your description is that those are deal aggregators while Groupon has specific deals unique only to themselves.

The business is quite different. I assume those sites make money from traffic and their costs are whatever effort they put into maintaining the site and searching out the deals. Groupon actually makes money off the deal as they take a 50% cut of all the sales. They also don't just find deals they have a sales force trying to sell the idea to business owners.


I can't see that as making sense. The value of Facebook is that it can target campaigns much better than Groupon so it would be stupid not to take advantage of that.

The story here is not that Groupon stupidly turned down $5B but that Google offered it. It is just the latest is a series of questionable decisions by Google.

Groupon has the infrastructure needed for something like this. Integrating Groupon into Facebook might be easier than developing a new network. These questionable decisions are something that's quite common in the internet/tech market. Just look at how Yahoo is/was wasting money left and right, the AOL/Time Warner fiasco, the bid by MSFT for Yahoo which was ridiculous and got, in an even more ridiculous move, turned down by Yahoo.

The problem with behemoths like Google and MSFT is that they make so much money that even wasting some on bad deals doesn't materially impact long term results. It's just too bad that shareholders get screwed all the time.

I can't see that. Facebook doesn't need the user-base and I can't see how it would be easier to change Groupon rather than just develop something from scratch. The reason Facebook has the potential to destroy anyone in the group deals market is that it has so much information on the users. Groupon doesn't do any targeting except for the obvious geographical location. Facebook has the opportunity to offer businesses a system that targets any demographic the business wants.

If I wanted to buy someone who was already doing this just to have people with experience I would likely go for Tippr because at least I would get my hands on the patents.

i don't understand why all the confusion about turning down 5.3B.

at the rate groupon is growing, there's a great chance they'll be able to sell for 10B in under two years.

from: http://techcrunch.com/2010/05/02/teardown-groupon/

How Big Is Groupon’s Business and How Fast Is It Growing?

"On April 16, 2010, Groupon had 31 deals, 45,910 paying customers and sold nearly $1.3 million worth of coupons. This was a significant increase from the 17 deals, 10,018 customers and $240,000 in gross sales it had on November 6, 2009. Along every measurement I looked at—the number of deals /day, average customers/deal, average deal price, average gross revenue/deal—Groupon is seeing tremendous growth. Of particular importance is that its average deal price is increasing (from $24.65 to $44.94) and it is rapidly opening up new markets."

I wasn't talking about the customer base but more about salespeople, etc.

Obviously FB will be able to crush Groupon with an investment of $5 billion.

The fact that groupon declined the deal suggests the converse.