Count me among the Groupon skeptics. The business is losing money and failing to attract repeat customers, while Google (Nasdaq: GOOG ) and Facebook use their extensive reach to steal group-buying contracts from Groupon and its chief rival, LivingSocial.
Or at least, that's how it was. Late last week, Facebook officially ended a four-month trial of a would-be Groupon competitor called Deals. "We've learned a lot from our test, and we'll continue to evaluate how to best serve local businesses," the social network said in a statement emailed to Reuters.
Some will be tempted to look at this with relief, as if Groupon and LivingSocial have a lot less to worry about. I suppose that's true to some extent. But let's also not kid ourselves; both of these companies face hundreds of local competitors. HomeRun and Denver Daily Deals send my family offers all the time.
Nor is the model unique. Groupon's travel deals service isn't materially different or better than what Travelzoo (Nasdaq: TZOO ) offers. And OpenTable (Nasdaq: OPEN ) already has relationships with thousands of restaurants. Why use Groupon or LivingSocial if your primary reservations partner -- a partner your customers already like -- offers a similar service?
From where I sit, backing is the only reason Groupon or LivingSocial are still considered relevant. Big-name venture capitalists Accel Partners and Kleiner Perkins Caulfield and Byers have joined with big fund operators Fidelity and T. Rowe Price in funding Groupon, while Amazon.com (Nasdaq: AMZN ) has taken a stake in LivingSocial.
Alas, these are early investors. If Groupon and LivingSocial go public as expected, VCs and corporate backers will rake in millions (billions?) pushing junk stock to unwitting common investors who may never see a dime of profit.
Too harsh? Perhaps, but to me Groupon is salesforce.com (NYSE: CRM ) without the stickiness. Customers never commit; they just come and go. My family's bought more from Denver Daily Deals than we have from Groupon. Why? They pitched coupons we'd actually use.
In this sense, neither Groupon nor LivingSocial possesses the sort of brand power that allows other commodity operators to thrive. Rackspace Hosting (NYSE: RAX ) and Netflix (Nasdaq: NFLX ) offer services that are slightly different than their peers, allowing them to profit handsomely despite their abundance of well-funded competitors.
Facebook is out of the group buying business. Good for you, Groupon. Live it up, LivingSocial. Take a breath and then get back to work. Your businesses aren't any better-positioned than they were a month ago.
Do you agree? Disagree? Please weigh in using the comments box below. And if you're in the mood for more stock ideas, watch this free video special report. You'll walk away with a better understanding of the cloud computing movement Facebook is cashing in on and a winning pick from our Motley Fool Rule Breakers scorecard. Click here to watch now -- it's 100% free.