1.3 Million Reasons for Google to Buy Groupon

I knew that LivingSocial's deal for Amazon.com (Nasdaq: AMZN  ) gift cards yesterday was going to be huge, but even I didn't think it was going to be this big.

By the time midnight rolled around in Honolulu, the social coupon website had sold more than 1.3 million $20 gift cards for just $10 apiece. The $13 million in voucher sales tops rival Groupon's record of $11 million when it sold 441,000  Gap (NYSE: GPS  ) $50 vouchers for $25 each back in August.

Cynics will wonder if Amazon committed a big mistake here. Selling merchandise for $0.50 on the dollar isn't going to pan out for an established company sporting gross margins of 24% through the first nine months of last year. We'd have to be looking at a dramatic uptick in incremental sales for bigger ticket items for the math to play out in Amazon's favor and that's unlikely to happen.

However, Amazon knew exactly what it was doing. It limited the deal to one per person (though some have reportedly used multiple credit cards to load up on the offer). It also violated the viral rule of group-buying by prohibiting additional vouchers to be purchased as gifts. This deal was never about Amazon trying to drum up new business. The leading e-tailer was simply trying to drum up the value of last month's $175 million investment in LivingSocial.

After all, just as Groupon arrived after the Gap deal, yesterday is the day that LivingSocial became a worthy competitor.

LivingSocial has been a distant silver medalist in this race. Web trends watcher Hitwise reported last month that LivingSocial was drawing just a tenth of Groupon's traffic. Yesterday's deal is going to dramatically narrow the gap going forward.

The network effect was playing into Groupon's dominance in this nascent space. Buyers go where the deals are, and merchants go where the buyers are. Groupon was leaving LivingSocial, BuyWithMe, and the countless other rivals in the dust. LivingSocial's sales team is going to have an easier time with merchants now: "Why, yes, we are the site that moved 1.3 million Amazon gift cards in a day. How can I discount you?"

This naturally brings me back to Groupon's decision to reportedly back away from Google's (Nasdaq: GOOG  ) $6 billion offer last month. A stronger LivingSocial means market share -- and likely valuation -- erosion for Groupon. This move also opens the door for a new way for lesser group-buying sites to attack Groupon. If BuyWithMe isn't scheduling meetings with Wal-Mart (NYSE: WMT  ) or eBay (Nasdaq: EBAY  ) to smoke out an Amazon-esque partner, the world's leading discounter and online marketplace, respectively, can just find somebody else to knight as the new bronze medalist.

There are also cracks beginning to appear in the Groupon model. As a penny pincher monitoring deals in my home state of Florida, this week has seen more than a few hiccups.

  • A travel deal in Miami yesterday from a Caribbean vacation discounter began to unravel when folks spotted even better deals on the travel website without having to fork over $20 for the certificate.
  • In Orlando, a limo operator with a great $45 hourly rate was also asking buyers to pay $35 in gratuity (or 20% of charge-laden $180 hypothetical rate). That's somewhat understandable, but the operator was also tacking on a $15 tax based on the $180 hypothetical rate. I'm no accountant, but that's not how taxes are calculated.
  • Back in Miami, a cupcake maker advising buyers to order a day ahead of time bumped the lead time to a week or two after the voucher purchases began to stack up.

Groupon has also suffered recent embarrassments overseas, including a Japanese meal that wasn't up to snuff and a Brazilian club that didn't honor all of the vouchers that were sold.

It's widely believed that price alone wasn't a factor in the Goo-pon deal unraveling. Gaining antitrust approval would have been a challenge. However, now that LivingSocial is a serious contender, regulators will be more likely to sign off on a deal.

Google needs Groupon, especially if this is more than just a passing fad in online lead generation. Groupon now needs Google, using Big G's Rolodex as a way to pull away from LivingSocial again.

If the two companies aren't talking again this morning it would be a shame.

Did you take advantage of LivingSocial's deal yesterday? Share your thoughts in the comment box below.

Google and Wal-Mart Stores are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Amazon.com and eBay are Motley Fool Stock Advisor picks. Wal-Mart Stores is a Motley Fool Global Gains recommendation. The Fool owns shares of Google, Wal-Mart Stores, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz wonders if social coupons will be a passing craze or if thriftiness is forever. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 02, 2011, at 5:39 AM, jeff432 wrote:

    Have you guys heard of the new Groupon like site?

    It's the same thing as Groupon except when someone signs up through your referral link, if they or anyone they sign up ever buys a coupon from this site (which you get in a daily e-mail), you earn 5% commission of the coupon purchase price! You earn 5% commission up to 5 levels deep!

    Also, if you sign up a business and they ever offer a coupon, you get 2% of all of their coupon sales!

    About 1000 members are joining everyday now.

    It is 100% free to join.

    There are no coupons yet since the company is in pre-launch.

    It is launching around March 2011 though!

    Check it out:

    http://newgroupon.thecustomeradvantage.com

Add your comment.

DocumentId: 1426093, ~/Articles/ArticleHandler.aspx, 4/20/2014 5:20:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement