Facebook's recent announcement that it is planning to roll out a discount deal service to its members in the coming weeks leaves me wondering whether Facebook is trying to unsettle the trend-setting group-buying site Groupon.
A number of companies have come out with their own versions of group deals in an attempt to replicate Groupon's success and now that number has increased by a big one. Facebook is sniffing an opportunity here. Facebook says, "Local businesses will be able to sign up to use this feature soon and people will be able to find Deals in the coming weeks." Google (Nasdaq: GOOG) is also planning to offer a Groupon-like service named Google Offer.
Will Facebook start with an upper hand?
Facebook's main strength lies in its user base. Any site that has more than 500 million users is expected to make a difference if it steps into any new arena of business. According to BIA/Kelsey, a consulting company, such a huge user base establishes Facebook as a considerable threat to those that have already carved a niche for themselves in the field. LivingSocial, in which Amazon (Nasdaq: AMZN) invested $175 million recently, and Groupon have registered huge user bases for themselves. Greg Sterling, a senior analyst at Opus Research, compared this with Google's gradually capturing of all the spheres in the market. I think the comparison holds since Web giants have some significant added advantages.
Facebook's modus operandi
Without a doubt, Facebook is forward-thinking. A few months back, it rolled out the location-based service Facebook Places to inform users about discounts offered by local merchants. I think Facebook will capitalize on that initiative since the success of a group-buying site largely depends on convincing local merchants and having them agree to offer great deals. The local merchants will definitely be willing to get publicized on Facebook's platform, so they will coordinate with Facebook's sales team. At the same time, Facebook will not restrict itself to local merchants solely. One of the reasons most medium-sized group-buying companies can't attract big merchants is that they themselves aren't that well-known. Since it doesn't apply to Facebook, the company can look forward to collaborating with big product and service providers.
How Groupon will meet this challenge?
Facebook's entry is a serious challenge for Groupon. Its current user base is nearly 60 million and it has sold around 40 million deals so far. But once Facebook enters the fray, Groupon will have to adopt a qualitatively new approach. In my view, the best way to explore new dimensions in this field is to incorporate the existing ideas and come up with something new. If Facebook steps into the market with something of this sort, it will be too late for Groupon.
Another interesting potential ramification of the rise of Facebook's deal offerings is how it will affect existing competitors of Groupon and other deal sites. By that, I mean companies operating in the restaurant space like OpenTable (Nasdaq: OPEN), companies that are offering various vacation packages like priceline.com (Nasdaq: PCLN), and companies that are offering various specialty goods like Overstock.com (Nasdaq: OSTK). All of these companies are uniquely affected by the existence of Groupon, and if Facebook were to add its massive scale to the mix, we might see some serious downstream effects on Groupon, the companies mentioned above, and others.
The Foolish bottom line
It's hard to anticipate the long-term effect Facebook's new service will have on the market. The short-term effects are easy to see, though. The smaller Groupon clones are likely to have a difficult time keeping up. Consolidation is likely to occur in this industry just like any other. However, full-fledged participation from local merchants will create an overall positive impact on the market. Also, users will be more receptive to deals if they are featured by companies like Facebook and Groupon and in this way, the potential of the group-buying industry will come out. I personally think this industry is so dynamic that even Microsoft (Nasdaq: MSFT), with its massive cash surplus and below average growth expectations, or other tech giants can enter here any day and contribute to the industry. This could be a way for mature companies to tap into fresh sources of growth.
Along with this, big companies will eventually invite big investments. The Goldman Sachs investment into Facebook is fresh in our memories because of the waves of commotion it caused. As this industry and its financing needs grow more established, expect to see such big time investments in the group buying sphere as well.
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