DM CONFIDENTIAL – Last week, we had one of those best of times, worst of times moments when looking at Groupon vs. Instagram. Both are high-flying companies, having gone from inception to a billion-dollar valuation in less than two years. One just sold their business; the other has watched its value get decimated in the past few months, trading for as much as $20 billion in market cap to today’s sub-$8 billion. Depending on where you stand, Groupon’s issues are either unfortunate or deserved, and depending on your level of bullishness or bearishness, this slide in the valuation might go down a little further or to zero. It’s always nice to have a best-case scenario suggesting further decline.
Before either continuing to bash or defend the company, it’s worth putting their achievements into perspective. They successfully raised more money than Instragram sold for. They went from a founding team to a staff of 10,000 in less than three years. And they generate real revenue. In 2011, their gross billings topped $1.6 billion dollars, with more than $900 million coming from overseas. And, for those who think that their revenue, usage and so on has peaked, the third-party data companies that track the industry show Groupon’s business continues to grow. Large revenue. A growing business. Clear market leadership. What, then, is causing the market value and brand challenges? That was top of people’s minds at DailyDealSummit.
You might think a show about daily deals would include a whole bunch of people out of touch with the deal reality, people so committed to the space they don’t think any issues exist. Turns out, it is anything but the case. In fact, an argument could be made for the opposite. One person from a regional site complained that people sounded too negative. He couldn’t understand why people were so negative. In his opinion, they help businesses, and he is right, but that’s when things work for the merchant and the user. Even if they are outliers, there have been enough instances where either party has had bad experiences to raise the cautionary flag. The big discount is a blunt instrument, especially for local service providers. Calling it unsustainable might be too strong, but believing that it needed additional refinement wouldn’t be incorrect.
One of the more interesting explanations for what is happening in the deal space came from Jordan Rohan, the noted stock analyst who compared Groupon to the bubble stocks of the late 1990s. He referenced the Hype-Disillusionment Curve. Unlike Groupon bear Rocky Agrawal, Rohan doesn’t see Groupon destined for a complete meltdown. He sees the company similar to AOL, Yahoo, DoubleClick and a number of the bubble stocks. They went public at the height of their hype, with impossibly high expectations. It’s not that they couldn’t do wrong — they had no room to do wrong. So, when Groupon, for example, reported numbers for the first time as a public company and they were lower than what was expected, investors became disillusioned, and Groupon’s stock price took a beating. Then, at the end of March, when the company said it had to revise lower the already lower-than-expected numbers, well, hell hath no fury like investors scorned. Disillusionment is in full effect. The slightest bit of negative news drives it lower, while positive news is taken with a grain of salt.
The bad news, according to the Hype-Disillusionment curve, is that there is a very real chance Groupon may never hit its all-time high again, which unfortunately for some investors it hit rather early into being public. The good news, at least as far as the company is concerned, is that it can remain a viable concern that dominates a market, making significant amounts of money. They have a platform. They have a model. They have plenty of ways to still make money. They just might not know what “they” are yet. That identity crisis was among the biggest areas of discussion at the event. What does a company do, for example, when its users know it for one thing but it wants to be known for another? That is not just Groupon’s, but the entire industry’s quandary. What does an industry do when so many run away from the term that made it prominent, the term that users still respond to?
Here’s one of the more difficult and uncomfortable questions. Is daily deals an industry? That perhaps brings up another question of what an industry is. The best definition we have heard is a simple one — namely, does someone spend 70 percent of their time on that topic or industry? If we think about search management or affiliate marketing, it’s easy to see how they could qualify as an industry. So, what about daily deals? Our initial thought was that daily deals would end up like search, where every company big and small would incorporate deals. They might decide to do it themselves or use a third-party provider, but no matter what, they can’t live without such a strategy. Whether that happens with deals just isn’t clear. Every business could benefit from them, but only a handful truly understand how they benefit — is it acquisition, retention, branding or any combination of those? And, outside of the deal companies, there still isn’t the role of deal manager. True, small businesses don’t have search managers, but enough aggregators of small businesses exist to create a vibrant dynamic. That’s what we are waiting to see happen in the deal space. Will it happen? If so, will it be around deals, or is this some in between function the equivalent of dial-up to broadband? Either Groupon and LivingSocial will be the Google and Yahoo/Bing of this space or they will be the AOL and Prodigy. If only any of us knew which.