Beware the Groupon Groupies, they could be hazardous to your wealth

John Battelle scoffs at those who would question Groupon's business model:

In the current issue of the New Yorker, columnist James Surowiecki, who I generally admire, gets it exactly wrong when it comes to Groupon.

He writes:

" But it seems unlikely that it’s going to become a revolutionary company, along the lines of YouTube, Facebook, Twitter, and Google. ....Groupon, by contrast, is a much more old-school business. It doesn’t have any obvious technological advantage. Its users don’t really do anything other than hit the “buy” button. And its business requires lots of hands-on attention..."

Well, that's a defensible opinion, but after visiting CEO Andrew Mason this week in Chicago, and thinking about it a bit, I must say that I wholeheartedly diasagree.

Many folks think of Groupon as a relatively simple idea. A daily deal, a large sales force, and that's about it. Too easy to copy (there are scores of "Groupon clones"), and too labor intensive (the more small businesses you want to work with, the more sales and service people you need).

(That's "The Wisdom of Crowds" Surowiecki by the way). Battelle's view is essentially that Groupon is the Next Best Thing for The Little (Business) Man:

Groupon has built a new channel into the heart of the the world's economic activity: Small businesses. And it is that channel where the true power lies.

Small businesses create more than 50% of US GDP and create more than 75% of net new jobs each year. But small businesses represent a fragmented, maddeningly difficult sector of our economy - 23 million small pieces loosely joined. Any platform that has connected them and added value to their bottom line has turned into a massive new business.

Battelle thnks Groupon will be better than the Yellow Pages and better than Google at unifying and selling to this market, and he goes on to tie Groupon to Mobile goodness too. The Holy Grail of being the single server to a massively fragmented market is clearly what is driving the Groupon groupies, but is this even viable, never mind is Groupon going to do the task? John eulogises the growth, but brushes off the increasing volume of complaints emerging that it doesn't actually make economic sense:

Sure, some of them buy too much of it, or fail to do the math and lose money on the come. They'll adjust, and if they don't, smarter SBOs will eat their lunch, and the world will move on.

So to summarize, I think those who claim Groupon's business is too simple are focused on the wrong things. Sure, there are other deal sites. But none have Groupon's scale. Sure, Groupon's model of one deal in one city on one day is limited, but it's easy to see how the product scales against category, zip code, time of day, and many other variables. And sure, Groupon has a lot of people who have to touch a lot of businesses and a lot of customers every day. But to me, that's the company's strength: SBOs are in the people business, and therefore, so must Groupon be.

And this, to my mind, is why Facebook or Google can't compete with Groupon. Imagine Facebook or Google with 1,000 people who do nothing but talk to customers all day long? Yep, I can hear the laughter from here....

Those 1,000 salesmen cost real money though, and they do not give added scale benefits, which is why these sort of businesses are low margin ones when they grow up, and low margins means low free cash, which (in real world economics) means utility valuations.

I recall reading his book on Google and thinking that he was writing it at Google's zenith, as it was getting to the end of it's "S" curve growth phase, and that he was making the mistake of assuming the future will look exactly like the past. But, given that John is brave enough to put his predictions out there though, I clearly have to come up with mine. So what do I think is the likely outcome (after the hyped IPO, that I can guarantee - but I still have the nagging sense that it could be Pointcast 2.0).

Well, actually the commentors to the post already have it taped in my view - its a nice, viable business - but not the New New Thing that it is being hyped up to be:

- Harry: There are literally thousands of categories in the yellow pages, not all of them are "Groupon-able" whereas Google still has a considerable advantage for the classifying, mapping and rating of all SMBs (ie, plumbers, divorce lawyers). Flyers, Entertainment Book and Valpak are the ones getting kicked in the pants here.

- Kevin: Groupon's margin is way way way way lower than google's, so revenue is not a good metric. Groupon has yet to build a massively profitable business with a giant core of repeat customers. I think you're wrong, John. To be like google, you need massive, high margin, and repeat customers. Groupon has one of these three.

Once the hype is over - Smaller market, lower margins, back to Coupons 2.0, as another commentator puts it.