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This company is the opposite of “do no evil"– Groupon


Its been a while since I wrote about Groupon.  Back then my main issue was their misuse of accounting rules to ignore marketing costs when calculating profits and basically falsify profitability.  They were called out on that by the SEC.  However that might be chicken feed compared to what they are up to now.

Groupon is essentially a sub-prime lender that does zero risk assessment | reDesign

Well, for starters, it’s not a coupon company nor a marketing company. At its core, Groupon’s U.S. business is a receivables factoring business, as I wrote last year. They give loans to small businesses at a very steep rate (the price of the discount plus Groupon’s commission). They get the money to fund these loans from credit card companies such as Chase Paymentech. Groupon is essentially a sub-prime lender that does zero risk assessment. And as word continues to spread about what a terrible deal running a Groupon is for many categories of businesses, the ones that will choose to run Groupons are the ones that are the most desperate. For U.S. based businesses, the only time I can definitely recommend running a Groupon is if it is otherwise going to go out of business.

The nature of Groupon business model is to bring out the worst in business practise and the worst businesses that practise those practices.  This company is the opposite of “do no evil".

Written by Colin Henderson

April 3, 2012 at 22:18

Posted in Uncategorized

Groupon pulls off a $700 million launch / $13 Bn valuation


I am flabbergasted.

Groupon Prices at $20 a Share; More Than 10x Oversubscribed

Groupon has priced its public offering at $20 a share, several dollars above the expected price range of $16 to $18. That will garner $700 million for the start-up, which is only several years old, at a valuation of close to $13 billion.

Also here

http://www.ft.com/cms/s/0/a44264f4-0677-11e1-8a16-00144feabdc0.html#axzz1cOQ3SoMc

Written by Colin Henderson

November 3, 2011 at 23:41

Posted in Uncategorized

Groupon efforts to give a bad name to accounting are caught out


The Groupon situation continues to deteriorate.  As noted earlier, their financial forecasts were full of holes.  Now they are altering their revenue forecast to reflect the earlier fiction of gross income which is now restated to reflect payments to merchants. 

If a groupon costs $10 then $5 +/- is paid to the merchant.  Previously Groupon claimed $10 as revenue.  Their restated S-1 to the SEC reflects real revenue as $5 in this example.

Who knows if they will even make IPO.  There is so much insidiousness about this company.  Their last raise was designed to pay out investors and founders.  Not a good sign.

Written by Colin Henderson

September 25, 2011 at 01:27

Posted in Uncategorized

Groupon promise of ability to scale is weak


There has been a fair bit written about the Groupon IPO and while some have touched on it, there is one key point that needs to be made.  I remain sceptical about online advertising and affiliate marketing in terms of long term sustainability, and yet that is the basis of Groupons model, and that they can improve their margins by scale.

Groupon is not any kind of testament to whether we are in a dot com bubble or not.  Groupon is a classic case people becoming muddled by large numbers, and I will explain that in a moment.  The others that somehow Groupon  became associated with, Linkedin, FaceBook and Twitter are completely different.  Linkedin have gone public, and they have a potential profit story.  The other two have not tried to go public so there is nothing to defend there.

Groupon is a different story.  This from the SEC S-1 filing.  The story here is whether they can scale, and I do not see it.

image

 

First a brief explanation of the business model.  Groupon sells coupons to consumers, and pays 50% of the proceeds to the business that offers the coupon.  The first thing we notice is that the gross margin say in the 2011 3 months result is not $322 (50% of the revenue) but $52 million less.  There must be sufficient operational costs associated with getting the 50% back to the merchants, or from acquiring merchants, that it eats up almost 20% of the Groupon share of the revenue.

Next and sticking with the March 2011 results, we can look the marketing costs of $208M which all but wipes out the gross margin.

Revenue              $644

Cost of revenue  $375

Marketing           $208

Surplus               $  62   9.6%

A 9.6 % contribution to operational expenses is not good.  This company is just churning money.

image

If we boil the numbers down to their product, groupons, here is how it shakes out.

Revenue $644,708,000
Gross revenue $270,000,000
Marketing $208,000,000
Groupons sold 28,094,703
$23   Revenue per     groupon
$10   Gross revenue per groupon
$7    mkt cost per     groupon
$62,000,000 Total contribution to operational costs from Groupon sales

While the number that gets the attention is the $644M in 3 months, that is not the story.  The story is the gross contribution per groupon after acquisition costs, is less than $3.  The cost to acquire each groupon is what matters, and to what extent can the company reduce that cost with scale, a claim that is throughout the S-1.

To return to the point made at the beginning.  Groupon is not a story of internet companies.  It is a company based on extremely high marketing costs.  It is not clear why with scale of 5 times more groupons sold, or 5,000 more groupons sold, that the individual marketing costs of acquiring the consumer for each groupon will change.  That would require Groupon re-invent marketing beyond the current framework represented by typical online marketing (from S-1 – (online marketing initiatives, such as search engine marketing, display advertisements, referral programs and affiliate marketing).

The thing about FaceBook is that they have developed their own eco-system of users.  This can potentially open up new customer engagement and revenue opportunities that would not be available to others.

I don’t see that with Groupon.  This is a company based entirely on customer acquisition using the commodity that is standard online advertising, and commodity advertising  just get more expensive, not less.  The owners and investors might do well on this IPO but I see little in terms of benefit to others.

 

Written by Colin Henderson

June 4, 2011 at 20:22

Posted in Uncategorized

Beware Rolled Down Benefit (RDB) and other obtuse terms; S&P ruled incompetent by Aussie Court


One of the sad facts of the banking crisis, is that the derivatives markets remain quite opaque and too complicated for most to understand.  Enter the Federal Court of Australia.  Judge J. Jagot has taken the time to understand in this 1,376 page ruling and not just understand but to explain. 

There is another lesson here when attempts are made to hide behind newly created terms.  This reminds be of Groupon and their attempts to bypass accounting profit and loss realities using new terms thatexcluded marketing from their expenses.

The result is a damning ruling against Standard & Poors, as well as ABN Amro. Federal Court of Australia.

Here Felix Salmon of Reuters has taken the time to digest the ruling and summarise the outcome.

Hero of the day, CPDO edition

Put it all together, and you get a very shocking view of S&P. Here’s the list:

  • S&P used the wrong model input for starting spread.
  • S&P used the wrong model input for volatilty.
  • S&P used the wrong model input for average spread.
  • S&P completely ignored ratings migration.

If S&P had just got any one of these things right, the CPDO would never have gotten that triple-A rating. If it had got them all right, the CPDO would almost certainly not even have been investment grade, let alone triple-A.

Basically S&P did little or no diligence of their own, accepted ABN Amro assumptions willy nilly, and the result was a meaningless AAA rating.  Some aspects of the instrument that S&P rated are ponzi in nature.  They developed a concept called roll-down benefit or RDB, which somehow involved rolling in benefit of 7% from periodic shift in the investment.  As Felix explains:

Every six months, the CPDO would exit its existing positions, and buy new positions in the index maturing six months later. In general, bonds which mature later have higher yields, so S&P assumed that on average, the new index would yield 7bp more than the old index. And that was an utterly crucial assumption. Never mind the triple-A rating: without the RDB, the CPDO couldn’t even get an investment-grade rating. It wouldn’t even be triple-B.

This ruling will have ramifications for courts in US and UK, but more importantly it has ramifications for common sense in investment evaluation.

Written by Colin Henderson

November 5, 2012 at 17:33

Posted in Uncategorized

FaceBook stock decline is a business model and management issue


This is an important piece at the NYT.

When the Network Effect goes into reverse | NYT

James Stewart covers Facebook, as well as Yelp, Groupon, LivingSocial and Linkedin.  The title is somewhat provocative and the article notes that the network effect has not yet reversed.  But he makes two main points that are possibly related:

  1. Revenue growth is not as rapid as user growth
  2. Mobile usage is the most rapid growth, yet traditional advertising on mobile is not clear given the small screen size

He also speaks about the FaceBook employee shares coming up for sale in November and notes others comments that this is a red herring relative to the share price decline.

I believe that FaceBook stock decline is a business model and management issue, and goes to the core of my beliefs about internet and marketing.

Lets look deeper.

Relevance to Bankwatch:

I have always been bearish on internet as an advertising medium, and especially social media for advertising and continue to to believe that.  This comment is in the NYT piece comments, and sums it up for me:

Stu’s Law: Over time, most of the value created by network effects will be captured by the users of the network, not by the builder of the network.

Brilliant.

Everyone I know is active on FaceBook.  They use it to both observe their family and friends activities and to stay in touch.  For that use it is brilliant and fills a voice that letters and even emails cannot.  With pictures, stories and comments people can asynchronously and conveniently follow each other.  When we layer on the advent of apps smart phones with location and photo capabilities, that convenience factor grows exponentially.

But then what.  As the user base enjoy that convenience and new found access to their friends and family the network owner is increasingly pushed into the background and the winners are the users.  The idea that their convenience would be interrupted by intrusions such as ads flashing across the screen is considered ridiculous.

By the same token the network owner finds it ridiculous they must spend all this money developing the network with no benefit.

So we have a stand off, and meantime the stock is dropping and P/E ratios are brought in to question and stock prices will align with traditional media unless some creative thinking is brought to bear.  That would price FaceBook stock at $6 +/- just to put the problem in perspective.  But that speculation is for other blogs.  My concern is business model related.

Lack of creative thinking:

Online advertising has grown little since the original banner ads in the ‘90’s.  There is a host of sophistication in the back end designed to place the right ad for you based on your implied preferences, implied location, and implied demographic but at the end of the day its just a banner ad that intrudes on your time and screen space.

Is a banner ad really the only way to get attention from people?  This is is old thinking that comes from newspaper, radio, billboard and television.  I would have thought that by 2012 and 20 years after the first graphic internet web page, that someone would come up with new models.  In fact with the user base and smart people, why has FaceBook not accomplished that, instead falling back on the ancient advertisement interruptus model.

I do not even pretend to know the answer, but it has to have its roots on some co-operative model that engages users as part of the process.  The ubiquitous “Like” and “G+” buttons go some way but not very far.  The outcome will still be a banner ad, an email or some notification.  Where is the sophistication that takes the Likes and engages users without interrupting them.

Is internet even the appropriate place for advertising as we know it?  I have always been chastened by the idea that internet was designated ‘media’.  Somehow the marketers took over web site management in the 90’s, something I was not happy about but that’s another story.  Internet is a tool that provides utility.  I do not expect to see an ad on my hammer.

That’s why I believe this is a problem that will not be solved by marketers.  Sorry folks to all my marketing friends.   The tools and training just do not allow for a solution, and that’s why Groupon, and Facebook fail at advertising.  the more people they drive ads to the larger the ad supply and the prices drop.  What happens when ad prices drop to zero FaceBook.  That day is coming.

No, this is a technology problem that involves, algorithms, big data, site design, page design, different user engagement and more.  There are some clues in Vendor Relationship Management (VRM) which is a concept I believe in but has yet to manifest itself successfully.  The idea is that you, the user, control your advertisers (Vendors).  This is the correct line of thinking.  While as extreme as traditional advertising is on the other end of the scale, it should drive a better line of thinking that will allow for a model that produces revenue for network builders, and satisfaction for users.  VRM says that users decide if, when and how they will interact with merchants.  I can hear aghast marketers crying foul, and they will lose their 0.001% penetration rates.  Really?  How do you know you would not get better and more meaningful penetration?

Business model considers all alternatives for revenue, including subscriptions, freemium charges, and others.  Being stuck on advertising and advertising as currently structured is a losing proposition.

Meantime FaceBook is a short sell, and it is not because of all those employee shares coming on the market in November.  This is a business model problem, just as was Groupon.

Written by Colin Henderson

August 18, 2012 at 15:39

Posted in Uncategorized

Some thoughts on internet marketing and the challenge facing FaceBook and Twitter


Every once in a while I have to get back to the value that is yet to be proven for internet marketing.  When I say yet to be proven I am thinking here of the promise to get beyond sub 0.5% conversion rates usually seen in traditional marketing.  This is the promise that is held out for the Twitter and FaceBook models that somehow they have transcended the value which traditional interruptive marketing brings.  (For my thoughts on Groupon)

Mathew Ingram writes a succinct summary of the problem on GigaOm:

Both are seeing their share of the ad market grow, but there is still one big question standing between them and the multibillion-dollar valuations they have received from investors — namely, do ads inserted into social activity actually work?

Brilliant.  Everyone gets excited about volume of eyeballs, but that is old thinking.  Mathew summarises the problem perfectly here.  Will people actually buy things that somehow are selflessly promoted by their friends.

The bigger story is highlighted in this thoughtful piece from Brad Stone on Business Week.  There are several anecdotes about GM, Ford and Newt Gingrich levering twitter in ways that reflect more on the troll like activity we used to see in 1990’s newsgroups, than in valuable sharing of valuable insight.  There is nothing about product quality or why I should buy in.

Where do I see shared value?  It lies in places where control is exercised by the owner and gaming is not possible.  Amazon recommendations for example are (I believe) largely based on my own activity.  That makes me more loyal to Amazon and more likely to use them, the more I see the value in the recommendations.  There is another important point here;  no-one can game what I do and buy.

A similar trend exists on Goodreads.  I choose who I observe, and their book choices hold value for me when I associate with what I know about them and what they are reading.  Again it is very hard to game because it would stand out if a thoughtful friend or person I know and respect who specialized in war history suddenly started buying bodice ripping romantic novels.

So there is another trend there;  knowing the individual on the other end.

There are possibly three things that marketers could learn from these small observations over a period of time:

  1. My own behaviour is valuable to me
  2. The behaviours of real friends and of people I know and/ or respect are valuable.  Their recommendation’s less so.
  3. I am highly distrustful of big media trying to interpret me based on my postal code or click preferences.

I don’t know if the book model I describe is extendible at scale but FaceBook at least has some of the pieces in place to be thinking about that.  Twitter I have no hope for.  Twitter is that yappy group in the corner, and while I might pick up on gossip from them, and even get a smile or two, it will not impact my purchasing habits.

Written by Colin Henderson

March 3, 2012 at 17:30

Posted in Uncategorized

Whats next after clicking ads?


The big debate at the moment is whether we are into another technological bubble.  This is fuelled by the valuations of FaceBook, Groupon and Twitter.  But there is a deeper issue, and this Bloomberg article by Ashlee Vance does a really good job at capturing it.

His general thesis is the differentiation of foundational technologies and those that sit atop the foundational technologies.  He makes the point that there is nothing particularly new about FaceBook, Twitter and Groupon.  He notes that Groupons legacy for the world is cute emails.

Worse, the smartest people in Silicon Valley are the mathematicians and he write about Jeff Hammerbacher.

As a 23-year-old math genius one year out of Harvard, Jeff Hammerbacher arrived at Facebook when the company was still in its infancy. This was in April 2006, and Mark Zuckerberg gave Hammerbacher—one of Facebook’s first 100 employees—the lofty title of research scientist and put him to work analyzing how people used the social networking service.

But …

Hammerbacher looked around Silicon Valley at companies like his own, Google (GOOG), and Twitter, and saw his peers wasting their talents. "The best minds of my generation are thinking about how to make people click ads," he says. "That sucks."

The article speaks about the billions in revenue that are being generated by these new companies and many of the ‘me toos’ that show up every day. 

Perman is a successful entrepreneur that sold web tv to Microsoft many years ago, so he understands add on technology.  When asked about the outcome if the bubble pops;

So if this tech bubble is about getting shoppers to buy, what’s left if and when it pops? Perlman grows agitated when asked that question. Hands waving and voice rising, he says that venture capitalists have become consumed with finding overnight sensations. They’ve pulled away from funding risky projects that create more of those general-purpose technologies—inventions that lay the foundation for more invention. "Facebook is not the kind of technology that will stop us from having dropped cell phone calls, and neither is Groupon or any of these advertising things," he says. "We need them. O.K., great. But they are building on top of old technology, and at some point you exhaust the fuel of the underpinnings."

Relevance to Bankwatch:

After reading this article, you are left to wonder if the real end game of internet is no more than fancy ways to make you click ads.  Will be another foundational change or shift that will be driven out of a bubble popping failure of the current race to ad supremacy, that will be replaced by something we have yet to understand.

There is much talk of big data and Hammerbacher’s new company Cloudera is taking that one step further with an operating system approach to understanding patterns and clues within enormous amounts of disparate information. 

A thought provoking article, definitely worth the time to read.

I can’t say it better than the final paragraph:

There have always been foundational technologies and flashier derivatives built atop them. Sometimes one cycle’s glamour company becomes the next one’s hard-core technology company; witness Amazon.com’s (AMZN) transformation over the past decade from mere e-commerce powerhouse to e-commerce powerhouse and purveyor of cloud-computing capabilities to other companies. Has the pendulum swung too far? "It’s a safe bet that sometime in the next 20 months, the capital markets will close, the music will stop, and the world will look bleak again," says Bridgescale Partners’ Cowan. "The legitimate concern here is that we are not diversifying, so that we have roots to fall back on when we enter a different part of the cycle."

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Written by Colin Henderson

April 28, 2011 at 09:31

Posted in Uncategorized

The value of social is nowhere to be seen so far


Ron Shevlin, it is terrific how you simply capture my beliefs and this post went over the top by capturing two of them!

The 2010 Marketing Tea Party Awards

Twitter won’t ever succeed as an advertising channel.

Bottom line is that Groupon was crazy for declining a $6 billion offer.

Relevance to Bankwatch:

Ron is dead on with both observations and they are connected.  Social media is just that, social.  Business whether it be banking or fish mongering is not social – it is business.  Business introduces other aspects that go beyond personal, and involve budgets, brand consciousness, peer pressure and a host of other constraints. 

Twitter is a great tool for sharing what you think:  it does nothing for ‘why’ you should think, which is what advertisers are interested in.

Groupon brings in ‘social’ aspects by requiring people to aggregate around a product based on deep discounts.  There is no suggestion of loyalty there.  What that is worth $1 never mind $6Bn is beyond me. Or maybe not;  it turns out the CEO had some kind of deal in place that put him in lottery heaven prior to the Google discussion.  So maybe there was a rationality to the decision but it most certainly was not based on anything social.

Written by Colin Henderson

December 12, 2010 at 01:50

Posted in Uncategorized

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