T.J. Prebil

All Eyes On Groupon

Tuesday, October 25th, 2011

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

Wednesday, June 29th, 2011

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

Sunday, March 6th, 2011

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

Wednesday, February 2nd, 2011

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.

Goodbye Desktop Software?

Saturday, October 30th, 2010

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.

Can 203 economists be wrong?

Friday, January 30th, 2009

The CATO Institute placed an advertisement in the New York Times and Washington Post whereby hundreds of economists voiced their disapproval of government’s latest stimulus package. Unfortunately, they were outnumbered by 244 democratic politicians.

If Keynesianism is any indication, it will be long time before the economy recovers.

Natural Ingredients?

Tuesday, January 20th, 2009

Recently, Pizza Hut came out with a new line of products touting all natural ingredients such as pepperoni, sausage and beef.

I found this to be an odd admission for a company who has been serving pizza for more than 50 years.  If the company has only now decided to start including natural ingredients in their pizza, what have they been serving us for the past five decades?

Personally, I’m not sure they should be marketing this fact so aggressively.

A gift that keeps giving!

Thursday, January 15th, 2009

I received a Sony digital picture frame for my birthday a few months ago and recently had the chance to take it out of the box, load pictures and begin to enjoy its functionality.

The frame itself couldn’t be easier to use and, like a modern thermostat, I was able to program time variables to that the frame turns on at 6 PM and rotates through pictures (450+) until midnight.

If you don’t already own a digital picture frame, I highly recommend buying one. It’s been a delight for me to pass by the frame throughout the evening and see special moments from my life literally flashing before me.  The frame has helped me keep many experiences, friends and family fresh in my mind.

It just goes to show…

Wednesday, January 14th, 2009

…you can’t buy class!

Earlier this week, a man named Marcus Schrenker tried to fake his own death by abandoning his plane in mid-flight and then parachuting to the ground.  Fortunately, no one was injured, or killed, when his plane eventually crashed in the Florida panhandle.

I’m sure legal proceedings will result in a lengthy prison term for Mr. Schrenker, but in the court of public opinion, I think he’s guilty has hell.  Guilty of being a low-class slime-ball, that is.  If a picture is worth a thousand words, then this picture will tell you all you need to know about Mr. Schrenker.

Really Mr. Schrenker?  Did you really hire a professional photographer, wash your plane, wax your car, get dressed up for a night on the town and then wait until sunset to take this picture?  I mean, who on earth does this?  I kind of feel bad for the photographer.

In an article on Foxnews.com, I guy named Charles Kinney said “we’ve learned over time that he’s (Schrenker) a pathological liar — you don’t believe a single word that comes out of his mouth.”  No sh*t!?!  Again, the photo says everything you need to know about this guy.

Attention Kindle Shoppers

Saturday, January 3rd, 2009

Amazon.com’s Kindle was a hit this holiday season.  The company’s electronic book reader sold out well before Christmas and is still on back order today.

And while a portable electronic reader, where one can read books, magazines and newspapers, without carrying a single piece of paper, actually makes a lot of sense, I’m not going to pay $359.00 for such a device anytime soon.

Why?  Because there’s a small company in California called Apple.  With rumors already beginning to surface about a larger screen iTouch, why would anyone pay for a Kindle when a similar priced device will let users play movies, surf the internet, listen to music, play games and read (I’m assuming) books, newspapers and magazines?