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    How Groupon lost its edge

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    By Alistair Fairweather

    The only consistent thing about the Internet is its ability to surprise us by changing virtually over night. It’s a Darwinian market that crushes the weak and elevates the strong within months rather than years.

    That makes investing in online businesses a roller coaster ride — sometimes exhilarating but more often terrifying.

    So how do you choose who to back? One reliable barometer seems to be how stupid an idea sounds at the time.

    When Google was founded in 1998, the few investors and industry pundits who bothered to check out the company thought it was a pretty dumb plan. The search market was dominated by two giant companies: AltaVista and Yahoo. How would Google — staffed by two goofy-looking dudes from Stanford — ever compete against those juggernauts? Those geeks are now worth a quarter of a trillion rand.

    Twitter is an even better example. In 2006, the idea didn’t just seem foolish, it seemed downright stupid. Using the Web to broadcast 140-character-long snippets to people you don’t even know? Who would want to use that? How would it ever make any money? Five years later the Web buzzes with over 200 million tweets a day and Twitter is worth an estimated US$7bn.

    Contrast this with Groupon. Offering deep discounts to consumers during a recession, and using social media to do all the heavy lifting for you — genius, right? I certainly thought so in December last year when I praised Groupon for rebuffing Google’s $6bn take over offer.

    Now, less than a year later, the idea doesn’t seem so brilliant anymore. Groupon has been threatening to list on the stock market for months now, but keeps putting off the fateful day, perhaps hoping for more favourable conditions. In the meanwhile, its estimated worth has fallen from $25bn to around $10bn.

    What happened? Well, its idea was too obviously “clever”. That made it too easy to copy, and the market has since flooded with daily discount sites. If you’ve managed to avoid their clutches you have been extremely lucky. Daily deals have become the chain letters of this decade — every schmuck on the Internet wants you to join theirs, today, before it’s too late.

    Groupon argues that its nuanced approach, its staff and its technology make it possible to defend its market share and prosper, despite the copycats. The numbers tell a different story. The company was recently forced to restate its revenues for 2010 from $713,4m to $312,9m. Ouch. And this mere months after it emerged that the company is technically insolvent — burning through hundreds of millions of dollars per year.

    Even worse, Groupon is losing its famous sense of humour. Its daily deal e-mails aren’t just tempting, they’re funny — a defining characteristic of the whole brand. But it seems the company can’t take a joke itself. A competitor recently set up a site parodying Groupon’s upcoming stock market listing. Its response? Send in the lawyers.

    Groupon may still triumph and cause me to eat my words, but the combination of disruptive competition and large egos is likely to cripple Groupon’s chances of becoming a true Internet giant. Amazon was unprofitable for years, as were Facebook and Twitter. But all of them had an edge that Groupon currently lacks.

    Part of that edge comes from the head start that “stupid” ideas afford you. They give a company the time to perfect a new technology (as Google did) or steal market share via a back door (as Facebook did at universities) or invent a whole new medium (as Twitter has done).

    By the time the pack realises the value of your foolishness, you are already too far ahead.

    Not all Internet business ideas need to be stupid. Millions of people now make a decent living from solid, reliable ideas such as online shopping or distance learning. But to become great you have to be willing to be seen as foolish right from the start. Groupon has never looked foolish, until now.



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