T.J. Prebil

All Eyes On Groupon

It’s troubling that without an IPO, Chicago-based Groupon may not survive more than a few months. As the company begins its road show, average investors should be wary.

The VCs will make their money, investment bankers seem to be ignoring basic fundamentals knowing their involvement will generate millions in fees and the company founders…well, the company founders have already had their payday.

A while back, Groupon’s numbers were irresistible – 50+ MM users, thousands of business customers, 400+ markets and $760 MM in sales in 2010. Heck, it’s the fastest growing company in the history of technology companies, so you can’t blame anyone for eying early retirement when conducting due diligence. But numbers rarely tell the entire story and here a few of my observations about the company…

Lopsided Model
As an evolutionary promotional tool, Groupon has massive sales and it has saved consumers $980+ MM. But how much money has the company made its customers – you know, local businesses? This information isn’t paraded around on the Groupon’s website or in its press kits, and there’s a reason for this!

As reported time and time again, only two of the three parties involved are guaranteed to come out ahead with each transaction. Groupon is great for making money for Groupon, and saving money for consumers, but the company has been lousy at helping its “real” customers generate revenue.

To maintain its position as a worthwhile promotional tool, Groupon must find more balance between every party involved in the transaction.

Wrong Customers
Forrester analyst Sucharita Mulpuru noted “the winner in this space will not win because it has the largest list but the best list…the customers are who will spend more than the value of the deal and who will come back to frequent a business.”

“Grouponers,” paradoxically, are notorious for spending the absolute minimum possible when exchanging a promotion, as the owner of Posies Bakery recounted. A few months ago a local sandwich shop near me threw a end-of-a-year-of-Groupon-misery party, complete with six mini kegs of premium beer to celebrate the end of a promotion that nearly put them out of business.

Without evidence to prove consumers will return to make future purchases, how many business owners will continue to sacrifice narrow margins to acquire these types of customers? The reality here is that when it comes to the delivering the “right” customers, Groupon’s model is still completely unproven.

Fool Me Once…
Groupon-like models have been existed for years – and successfully at that – but only within certain verticals. Priceline and Woot help businesses clear excess inventory whereas BitsDuJour and others have built comfortable models selling software. But local businesses, those with tangible overhead, limited bandwidth and honest valuations, must be more realistic.

It’s expected that Groupon will continue to grow for a bit in the U.S. as well as abroad but what happens when businesses start saying no, or start demanding more favorable terms, and investors keep demanding returns on par with 2010? To survive, Groupon will lower its commission rates, create more restrictions on promotions and focus on higher margin items (e.g. museum memberships). As deals lose luster, Groupon will find itself in unfamiliar territory.

In a race to grow as fast as possible, add eyeballs and fully exploit every transaction, Groupon may have forgotten that it too is a business. And if a Rice University study holds true – where upwards of 40% businesses that have used Groupon are unlikely to return – the writing may already be on the wall. Groupon, in all its media glory, could easily find itself on a downward trajectory steeper than its meteoric rise.

Cheap Oil

My first installment of why I believe the economy will continue to flounder for foreseeable future has to do with oil prices. I don’t expect this post to come as a surprise to anyone, especially in light of recent trends, but the cost of oil will hold the U.S. economy hostage for the next decade, possible longer, because:

1. almost everything we surround ourselves with in our daily lives is impacted by oil in one way or another (Charles Hugh Smith put together an interesting list) and
2. we, as country, have no real solutions to a post, or reduced, oil dependent society.

The reality is that, as a limited resource facing increased competition, not to mention greedy speculators, oil prices can only increase. Sure, there may be some fluctuations but $5.00+ for a gallon of gas is inevitable; my prediction is that we are less than a year away.

A friend who follows the energy markets believes it would be entrepreneurial of the U.S. to allow more drilling in Alaska. To me, the greatest entrepreneurial opportunities exist in developing alternatives to an overly oil dependent society…might just boost economy too.

The U.S. Economy

In October 2010, Goldman Sachs’ chief U.S. economist – Jan Hatzius – made headlines when he noted the economy would be “fairly bad” or “very bad” for the next six to nine months.

With access to the best data, top industry analysts and decades of historic figures, Mr. Hatzius’ predictions are taken very seriously. After all, numbers don’t lie, right?

***

Now I’m not an economist and I don’t follow the markets on a daily basis. As such, I admit that I’m nowhere near as familiar with the U.S. economy as those Wall Street, or many of my friends who work as traders, VCs or at hedge funds.

But even with all the data in the world and the best analysts in the industry, there are enough signs – provided one looks around – indicating it could be six to nine years before the economy returns to respectable bullish levels.

Over the next few posts, I will outline 4-5 observations – none are difficult to grasp – on why I believe nation’s long term economic growth could be much worse than what some of the best minds on Wall Street are predicting.

Stay tuned!

The Content Wars

Eight tracks to cassette tapes, groovy! Cassette tapes to CDs, totally awesome! CDs to MP3s, phat! VHS to DVDs, dude! Standard cable to HDTV cable, rock on! Paperback to eBook, I’ll bring the French onion dip to the next book club meeting!

DVD to Blu-ray, whatcha-talkin-about, Willis? HDTV to 3-D, really?

With the growing popularity and impending ubiquity of streaming content, we’ve arrived at the final frontier of media formats. Why would anyone upgrade to Blu-ray when six months from now they can stream any movie anytime for a fraction of the cost? From this point forward it’s winner take all in the Content Wars.

Odds favor Apple – that sleek company that designs its products in California but manufacturers them in China – as the big winner. And with their i-everything – iTV, iPad, iPod, iPhone and iTunes – seamless integration and off-the-charts brand equity, it’s tough to bet against them.

Of course, Apple’s not the only player. Sony, NBC, Google, Netflix, Microsoft and scores of lesser-known concerns are scrambling to find a chair before the music stops.

If I had to hedge my bets on a frontrunner, however, I’d double-down on Amazon! Putting aside the company’s distribution might – a undeniable ingredient to their success – Amazon has a leg-up because they’re purposely not trying to create a walled garden (RIP AOL) around content.

Want to watch a movie on your computer, no problem! Want to stream the movie to your TV through Ruko, done! Want to read a book on your Kindle, easy! Want to read that same book on your laptop/desktop, iPad, iPhone or Android-enabled smartphone, pie! Want to download a song or album to play on your iPod, computer or other device (not sure such a device exists), checkmate!

Soon consumers will demand the ability to purchase/rent/download/stream movies, books and music from any type of device – regardless of manufacture. If this prediction holds true, Amazon will win the Content Wars.

Throw us a bone, Quinn!

Just three days after being sworn-in as Governor of Illinois, Pat Quinn signed legislation increasing the State’s personal income tax by a whopping 67%. Why? Because, as 60 Minutes reported recently, Illinois is bankrupt.

Clearly the lagging recession and record unemployment hasn’t helped but should the State’s businesses and citizens be asked to shoulder the load alone?

The State could stay in everyone’s good graces if it would extend a few olive branches, such as:

• Taking after California and requiring all State employees turn in their government-owned cell phones.
• Freezing all salary increases for anyone that works for the State for three years, or until the budget is balanced.
• Eliminating union contracts (yeah, right). Ok, how about refusing to do business with entities unwilling to negotiate on benefits, scheduled salary increases and efficiency guarantees.
• Providing incentives for every State department to save money across the board. In fact, for every $100.00 a department saves, why not let the employees split $5.00 to $10.00 in bonuses.
• Stop nickel and diming people in other ways (e.g. bogus convenience fees on State websites, which actually improve efficiencies).

Au Revoir Halloween

With Halloween 2010 now ancient history (e.g. ended less than 12 hours ago), CVS is wasting no time in setting up for the Christmas season. I took this picture this morning.

Unearned Interception

Similar to unearned runs in baseball – where a pitcher’s earned run average (ERA) is not impacted when a run is scored as a result of a fielding error – I believe the NFL should track how many interceptions occur as a result of a receiver error.

If a ball is tipped at the line of scrimmage, a pass is mis-thrown or a defensive back makes a great play, which results in an turnover, the interception should be credited to the quarterback, as is the case with current rules.

However, if the quarterback throws a “reasonably” catchable pass, which the intended receiver is unable to hold onto – that results in a turnover – the inception should be credited to the receiver.

Goodbye Desktop Software?

When creating strategies and plans, marketers look at a product’s life cycle to determine the stage of its growth. Generally, all products, at one point in time – as seen in the chart below – will go through a development, introduction, growth, maturity and decline phase.

Where some products (e.g. Tickle Me Elmo) have relatively quick life cycles that might last a year, others – like Diet Coke – may last for decades. Depending on a product’s life cycle, marketers will adjust promotional tactics and spends accordingly.

***

I used to work for an e-commerce company which specifically catered to software vendors who sold their products online. Nearly all of the company’s revenue was derived from selling desktop software applications, with a particular emphasis on anti-virus, anti-malware and PC utilities (e.g. think late night commercials for solutions that claim to revitalize your computer).

In the year since I parted ways with that organization, I’ve been amazed to see how much the landscape has changed. In fact, if recent reports are any indication, the desktop software market – as an industry – has reached its decline phase. One needn’t look any further than what’s happening with some of world’s most prominent technology companies for tangible examples.

Further, I see these trends in my daily workflows as, other than a browser and occasionally a basic text editor, I rarely use desktop applications anymore. And with more people accessing data via tablets and smart phones, web-based computing will continue to gain momentum, cannibalizing the desktop market in its wake.

Are desktop applications going away tomorrow? No. But I believe the industry has reached its decline phase, and that’s a significant leap from where I thought the industry was a year ago.

Premature Gift Giving

Is it just me, or does anyone else think it’s a bit premature of Mark Zuckerberg to commit a reported $100 MM to Newark, New Jersey schools?

Granted, Mr. Zuckerberg is in an enviable position and stands to “actually” be worth a fortune one day. However, Facebook’s value to date has largely been determined by ambulance-chasing venture capitalists, not sound business fundamentals. The folks at 37 Signals have some interesting thoughts on this matter.

Personally, I think Mr. Zuckerberg should have waited a decade or two to make this announcement. In other words, go public, prove your quarterly earnings over several years and let the market dictate the company’s value. Chances are it’s nowhere near the $33 BB starstruck Forbes claims it is.

If Mark Zuckerberg were Bill Gates, Warren Buffet or any other seasoned billionaire, no one would question his generous donation. Unfortunately, committing $100 MM when the company you founded is taking on venture capital, hasn’t gone public or developed a proven business model, seems a lot like the dot com glory days of the late 1990′s.

$0.84 Saves $109.16

I’m always dismayed with fees and surcharges associated with improving the efficiencies of an organization, in particular when transacting online. Often referred to as “convenience fees,” these small charges rarely amount to more than a dollar or two. However, they are counterintuitive to the efficiencies of online commerce.

Of course, some fees are understandable. For instance, fees associated with purchasing movie tickets online, calling American Airlines to reserve a flight (when a flight can easily be booked online) or sending money through PayPal all have merit.

Ticketmaster, on the other hand – with convenience charges, service charges and processing charges – is notorious for causing angst among consumers. It’s not uncommon for fees to amount to 50-60% of the cost of a concert ticket.

Switching gears a bit, I’ve owned an S-Corp in the State of Illinois since August of 2000. As such, I’m required to file an annual report and to pay a nominal fee to the state. With August a few days away, the deadline for filing this year’s report is quickly approaching. Furthermore, I own an assumed name for my company so, every 5 years, I must re-register and pay a $150.00 fee. In my opinion, these costs are understandable!

Like many states, Illinois offers business and consumer services through a website, so naturally I began there (Cyber Drive Illinois). That was, until I realized the fees!

As you can see from the screenshots below, Illinois adds a $5.00 processing fee and an un-opt-out-able $50.00 expedited fee for 24 hour processing.

In other words, had I continued with each transaction, I would have incurred $110.00 in extra fees just for filing this year’s reports. That’s equates to an additional 44% for the “convenience” of filing online. No thanks! Instead, I slapped a stamp on each envelope and saved $109.16 in unnecessary government processing fees.

While I’m sure many business couldn’t care less about state filing fees, for a small businesses like mine, these costs are unreasonably high. I did have the choice to mail my applications – which I did – but unchecked fees like this can only occur in a monopoly. If the State of Illinois actually had to complete for these services, or Ticketmaster didn’t not have exclusive contracts with so many concert venues, there’s no way that consumers would tolerate these fees, especially for contributing to a more efficient process.