Groupon at $6 billion?

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Rumor has it that Google is going to buy Groupon, the premier localized “deal-of-the-day” website, for an astronomical $6 billion.

If a $6 billion valuation for a company that started less than two years ago that competes in an industry with almost zero barriers to entry seems crazy, it’s not.

Groupon has 30 million subscribers.  Assuming that Google is paying a 10x revenue multiple for this business, they’re estimating revenue of around $600 million per year or $20 per user per year.

Using some reasonably conservative numbers, the revenue model they're using to justify such a valuation could look something like this:

  • 30 million emails sent per day
  • 5% click-through rate
  • 10% buy rate
  • $10 revenue per buyer
  • 365 days per year

That gives Groupon revenue of $547 million per year, just short of the 10x Google valuation.

My math includes a lot of assumptions and has a lot of moving parts so I’ll be the first to admit that there’s plenty of room for error.  But it does show that this valuation isn’t as crazy as some are suggesting. 

With all of that said, there’s quite a bit of risk to Groupon, specifically in the form of competition and acquisition and retention of merchants.

One report said that in Boston alone there are already more than 50 Groupon clones.  The business is extremely easy to setup; just hit the streets with a media kit, write some catchy copy and some simple code.

And the reports of unsatisfied merchants keep coming.  With all of their competition, their rumored 50% revenue share is not sustainable.   I’m also told that their first significant national deal with the Gap -- 50% off with no restrictions -- will never happen again.

Regardless of whether Google is paying too much or too little for this deal, this should be a fun one to watch.

 

542542...

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542 ...is a service that you can send a text message to that will answer any question you want for $0.99.

I saw the commercial earlier and I had to try it.

I texted, "Who played third base for the Detroit Tigers in 1984?"

They responded with, "Howard Johnson", the right answer, in under a minute.

Then I asked them, "Why doesn't private unemployment insurance exist?"

They responded in 41 minutes with, "Overall there is no private market due to the state benefit. It was set up as a social net for people out of work."

Not the insight I was looking for. But a pretty cool service nonetheless.

Private Unemployment Insurance

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Combining the rampant fear of losing one's job with the limits on state-funded unemployment insurance, you'd think there would be a big market here.

The primary effect that this would have would be to reduce the general fear we have with losing our jobs. I suppose this a good and bad thing.

It would allow people to take more risks at work which has its benefits and dangers.

I'm curious why this product doesn't exist already.

Fake Followers

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I read the other day that some 'Tweeters' are buying followers (e.g. $100 for 5,000 followers.) Some are even creating phony Twitter accounts to fraudulently increase the number of followers they have.

While this may sound kind of silly, if you're trying to spread something, it makes a lot of sense as it will likely have the result of increasing your number of real followers; as we know, people like to follow people that other people are following, just because they're being followed.

I'm watching Twitter's progress pretty closely these days because I think it's so fascinating to watch this little startup evolve into what could be the most powerful communication tool ever conceived.

An Internet Business Idea

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Here's an internet business that I'd be happy to invest in and I hope someone creates. A website where I can select my favorite clothing retailers, my zip code and my sizes. The site will feed back items in my size and location that are on sale. I could then reserve the items I like and if I get to the store within, say, 24 hours, the items are mine.

Of course the site would have email alerts for specific items I'm watching. This wouldn't apply to a widespread sale across the whole store or across an entire clothing line. I'm referring to a specific item that the store believes it can't sell at full price and gets stuck on a sale rack, never to be found.

Someone out there really wants to buy it at that price but there's no mechanism for the retailer to tell that consumer that it's available.  This website would facilitate that communication.

The value for the consumer would be savings and good clothes at the right price point. The value for the retailer would be far more efficient inventory management, increased traffic and sales, more intelligence to set prices and enhanced customer loyalty.

Twitter

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Ashton Kutcher now has one million Twitterers following his daily twits.  This is actually pretty significant news. 

I signed up for a Twitter account today. I don't plan to post anything or use it all that much at this point but I have to say that I'm completely fascinated by it.

I've read a ton about it and I truly don't think anyone fully understands the power and magnitude of this technology.The telephone, arguably one of the world's most revolutionary technologies, gave us the ability to have a real-time conversation with someone that's thousands of miles away. Now it turns out that Twitter allows us to have a real-time conversation with millions of people that are thousands of miles away. The ramifications for marketing are hard to imagine.

Newspapers

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Paul Mulshine had a good column in the Wall Street Journal recently defending traditional journalism (newspapers) and criticizing the amateur bloggers that are putting them out of business.

He makes the point that because most bloggers aren't paid for their work they'll be less willing to, say, sit through a three hour school committee meeting and summarize the key points in an easy to read article. So in the future, the casual follower of events at the school will be left unaware of what transpired at the school committee meeting.

I agree with the Mr. Mulshine that, generally speaking, this is scary and would no doubt be a bad thing.

Here's where we differ: it's not going to happen.

Blogs and newspapers have fundamentally identical business models; they generate attention or "eyeballs" that can be monetized in the form of advertising fees. Some also charge nominal access fees though typically this doesn't generate significant revenue relative to ads. On a macro level it is this business model that dictates what does and doesn't get reported or blogged on. To make money, editors and bloggers have to answer a simple question: what will generate attention? If an article on the school committee meeting will generate eyeballs, then it will be reported on, or monetized.

Newspapers are disappearing not because people don't care about the school committee meeting, they're disappearing because people's attention is shifting online. Quickly. And the scalability of online advertising doesn't change the underlying business model.

Because many bloggers are unpaid, amateur, dishonest and uninteresting, Mr. Mulshine assumes that the industry will remain this way. But assuming there's always demand for information from honest, reliable sources, the blogging industry will slowly morph into more of what we know as traditional journalism, only better.

As is true with most industry changes, I think we'll find that the maturation of blogs and web content and the absence of newspapers is good for everyone -- including newspaper reporters.

Bloglines and Bloggers

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One other thought on Bloglines. (the blog aggregator that I plugged in an earlier post). The interesting thing about these services is that they allow a reader to completely avoid the ads served up on blogs. That is, you never actually leave Bloglines' site -- they simply feed you the text from the blogger's most recent post(s). Most of the blogs I read don't actually serve ads. They're simply using the forum as a way to generating interest and eventually selling more of their product or service. But for those bloggers that are generating substantial revenue by serving ads, these services present a big challenge.

Bloglines

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I visit Bloglines more than any other website. Probably 3 or 4 times a day.

Bloglines is a free service that aggregates all of my favorite blogs onto one page for easy reading. They're plenty of these sites but Blogines is a very user friendly site that can be easily navigated on my laptop or BlackBerry. I'm not sure how they make money (my guess is they're charging for premium services or will be soon) but if you read a lot of blogs like I do they're definitely worth checking out.

Leasing Everything?

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I heard about a pretty cool idea on the Harvard Business Review podcast today. There's a company (can't remember the name) that is basically leasing high-priced handbags to women. Women can't afford to buy more than one or two of these things but they'd like to be seen with way more than that. Leasing them allows them to use several different handbags based on the season or to match the outfit they plan to wear. The idea could easily be applied to cars as well -- you could have a convertible in the summer and an SUV in the winter.

I suppose you could also do it with a high-end snowboard and a high-end bike. Maybe an HDTV during football season? Or a BBQ during the summer?

I think this model is consistent with consumer's increasing demand for mobility. That is, I believe consumers want less stuff and more of the ability to move around; freedom is becoming more important than material items. If I'm right the economics could work for this model.

I think we're going to see a lot more leasing in the future.