Wednesday, June 8, 2011

Groupon IPO: I'm Forever Blowing Bubbles.

Brett Arends of MarketWatch says he has waded through the 280 page prospectus for the Groupon IPO. Normally a fairly circumspect type when he wrote for the Wall Street Journal, he describes the transaction as "one of the most ridiculous things he's seen."

One fact he cites caught my eye relative to my earlier post on Ask Jeeves. Founded in November 2008, Mr. Arends says that Groupon has run up a total of $522 million in losses. Ask Jeeves had run up $765 million in losses two years out from its IPO. Groupon looks like it should surpass this pace, based on some of the basic statistics Arends presents for subscribers, purchasers, and conversion rates.

In a direct marketing business, executives and security analysts always looked to calculate "lifetime value" of a twelve-month customer, or a repeat buyer. In these Internet businesses, the difference between a subscriber and a purchaser gets glossed over, and since there is no barrier to entry for these businesses, and little "site loyalty" it seems impossible to justify the current valuations based on any reasonable hypothesis about lifetime value of their customers.

From its inception, Amazon put a great deal of emphasis on building customer loyalty and repeat business, and that was something that Jeff Bezos focused on as part of their identity. Now, with the Internet having become an overcrowded, noisy bazaar, it is going to be much more difficult to engender loyalty and sustained, repeat business.

I love the idea of Open Table, for example. However, I know that for a new restaurant, the economics of Open Table can be very onerous. I often use Open Table to see what's available on for a restaurant I've chosen, and then call the restaurant directly to make the reservation, saving the entrepreneur a few critical bucks. How does the Open Table model continue to justify its lofty growth assumptions? There are already competing systems out there, many of which are local.

It just feels like this euphoria for these types of businesses has to end badly.

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