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Tuesday, August 30, 2011

Why Facebook and Yelp Are Dumping Daily Deals

Posted By on Tue, Aug 30, 2011 at 12:45 PM

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When Groupon started getting tons of "next big thing" coverage a couple of years ago, I instinctively wondered how this could possibly be. I didn't question whether online coupons could be a viable business -- that seems obvious -- but valuations in the billions and talk of public stock offerings seemed crazy to me.

Eventually, the inevitable backlash came. Local businesses started talking about how coupons did them more harm than good. Details emerged showing that Groupon's financial performance perhaps wasn't as strong as had been thought. Most tellingly, other companies piled into the business.

And therein lies the core issue: there are few barriers to entry in the online-coupon business, so it quickly becomes commoditized, and nobody can make any real money. Facebook realized this after less than four months of experimenting with its own local-deals service. It announced on Monday that it's pulling the plug. And Bloomberg News reports that Yelp is scaling back its own deals service.

Deals will surely live on. Many consumers love them even if local businesses don't, and many businesses will continue to participate as long as consumers want them. Yet despite Groupon being called "the next eBay" and "the next Amazon," it's hard to imagine any one company similarly dominating the coupon business to the point where they have pricing power or where they can command a huge part of the market. That's because, unlike on those sites, coupon consumers can easily take their business elsewhere. It just takes a click over to LivingSocial or any one of hundreds of other competitors that essentially offer the same thing.

People go to eBay because that's where all the sellers are. Hence, eBay has pricing power. They go to Amazon because that's where all the stuff is (and, among other reasons, because Amazon offers a superior user experience and generally excellent customer service -- which, relatively speaking, aren't important considerations for coupon sites.)

The backlash against Groupon reached a zenith in recent weeks, culminating last week in a bit of gossipy intrigue. The Atlantic's Nicholas Jackson wrote on Aug. 19 that Groupon was "running out of cash." That might or might not be an accurate assessment, but either way, profits are being squeezed. Groupon CEO Andrew Mason, however, wrote a memo ostensibly meant for his employees where he called Jackson's article one of a number of "insane accusations," against the company.

The company is restricted as to what it can say publicly because it's in its IPO "quiet period." Mason's memo was leaked to the Wall Street Journal's Kara Swisher, however, which simply brought fresh attention to Groupon's shaky financials and renewed criticism of its accounting practices, which are being probed by the SEC.

Whether the memo was purposely leaked by Mason or another Groupon executive or investor isn't known for sure, despite what disgraced stock analyst and current business-gossip mogul Henry Blodget might say. It's not unheard of for companies to leak memos like this in order to get around the restrictions. Whatever the case, though, nobody came away from this incident feeling better about Groupon's prospects.

Sometimes, a quiet period is a company's best friend.

Dan Mitchell has written for Fortune, The New York Times, Slate, Wired, National Public Radio, The Chicago Tribune, and many others.

Follow us on Twitter at @TheSnitchSF and @SFWeekly

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Dan Mitchell

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