SAN FRANCISCO (MarketWatch) — I signed up only this April for Groupon — the Chicago-based start-up everyone is talking about after it entertained, and then turned down, Google’s reported $5 billion to $6 billion offer — and I’m now getting at least five rival emails a day offering various fabulous discounts.
Other people may be receiving even more half-price offers (that’s the average discount) from local businesses in their areas. Depending on whom you talk to, there are at least 180 purportedly competing daily-deal Web sites. One start-up executive says there are about 250, and Groupon’s founder and chief executive, Andrew Mason, told NBC there are over 500 “clones.” Read about the collapse of the talks between Google and Groupon.
“It’s crazy,” said Jim Moran, chief executive and co-founder of Yipit.com, a site that offers only the types of daily deals its subscribers have signed up to receive, such as offers only from restaurants. “When we started, there were maybe 20 [daily-deal sites] in the U.S.” Moran only started his seven-person New York company in February. He also has 15 curators working to find the best deals.
Clearly, a shakeout looms, but for now the daily deal is shaping up to be the next Internet Gold Rush.
Beyond Groupon
Two weeks ago, Amazon.com Inc. /quotes/comstock/15*!amzn/quotes/nls/amzn (AMZN 182.59, 0.00, 0.00%) invested $175 million in LivingSocial, Groupon’s biggest rival. The Washington-based firm, which boasts AOL /quotes/comstock/13*!aol/quotes/nls/aol (AOL 24.39, 0.00, 0.00%) co-founder Steve Case as an investor, and other executives from AOL and Revolution Health, said it is booking average revenue of more than $1 million a day and projects “well over” $500 million in revenue in 2011. See Amazon news here.
“This is the next frontier,” said Peter Krasilovsky, an analyst with the BIA/ Kelsey Group. “It’s the most exciting thing that’s happened in local for several years,” he said, referring to the local media and advertising markets.
he bigger players in the Internet are starting to wake up to the daily deal. It’s simple in concept, and, for now, it’s a high-margin one for the service provider.
For example, a neighborhood bistro offers a coupon that costs $25 for a dinner valued at $50. If enough people sign up for the deal, the deal is on, and the restaurant gets a big influx of customers, many of them new, and Groupon, LivingSocial or whichever rival firm sent the email, typically gets a 50% cut of the coupon sale.
“Many small businesses would like to do this kind of thing on their own,” Krasilovsky said. “It’s a lot more efficient than placing a quarter-page ad in the yellow pages.”
Some coupons have also had a viral effect, especially when mentioned by friends in social networks, such as Facebook or Twitter. Some especially hot offers have shown that the daily-deal concept can work even beyond a local market. For example, this summer, Groupon had a smash hit with a nationwide offer of a $50 coupon costing $25 for use at Gap Inc. /quotes/comstock/13*!gps/quotes/nls/gps (GPS 21.46, 0.00, 0.00%) stores.
That’s why companies like Yahoo Inc. /quotes/comstock/15*!yhoo/quotes/nls/yhoo (YHOO 16.72, 0.00, 0.00%) and privately held Yelp are getting into the game, as are media companies, like the Chicago Tribune, which is working on offers with Groupon, one of the hottest tech start-ups Chicago has ever seen.
LivingSocial's O'Shaughnessy
Tim O'Shaughnessy, the former AOL exec who runs LivingSocial, which ranks No. 2 behind Groupon in the group-discount category.
But there are only so many coupons a consumer is going to look at in an overloaded email in-box. And being mysteriously added to new distribution lists by unfamiliar companies is an annoyance regardless of what’s on offer. How much more can the already bogged-down in-box take? Though the barriers to entry are low, this is a category where the first to market really does stake a powerful claim, and many of these start-ups will end up as roadkill.
All together now
There is today a second growing area: aggregation. Yipit.com, for example, was among the first aiming to help users cope with the barrage of offers. “It was 2,000 subscribers when we launched,” said Moran. “And now we are 90,000. It’s all been word of mouth, and we are growing faster and faster.”
Groupon and quirky founder Mason created the idea of leveraging collective buying power to experience “all the great stuff in Chicago,” the company’s website says. Living Social had been founded in February 2008, before Groupon’s founding in November of that year. Living Social was intended as a social discovery site and has morphed into one offering daily deals.
“Groupon is enjoying unprecedented growth,” said Ray Valdes, a Gartner Inc. analyst. “However, the space is crowded with competitors, direct and indirect, and there is a novelty aspect to the business that will fade over time.” Its value is seen as more beneficial to consumers than to businesses, he said, citing a Rice University study from September that reported more than 40% of Groupon business customers would not run their promotions again. See Rice University study results here.
In August, Forbes put Groupon on its cover and dubbed it the “fastest-growing company ever,” noting that it was on track to reach $1 billion in revenue at a faster rate than any company had ever done.
What’s more, Groupon has to be given credit for turning down Google Inc.’s /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 604.23, 0.00, 0.00%) heady offer. Maybe fears about regulatory concerns were a decisive factor right alongside its own desire to make it as a stand-alone company. But it will also be challenging to prove it is not a flash in the pan, with big and deeper-pocketed companies at its heels and copycats everywhere. The clones, of course, face the same issues.
“As these deals become more pedestrian — we have all seen the ‘Buy a balloon trip’ — it’s not so exciting anymore,” said Krasilovsky. “They have to keep it fresh.”
Therese Poletti is a senior columnist for MarketWatch in San Francisco.
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