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Groupon vs Facebook vs Google: The Rush for Multibillion dollar valuations.

April 5, 2011 13 comments

Back in the 2000s, Google was the darling of Silicon Valley. Social networking was at its infancy. It was fragmented with Friendster, MySpace and a few other niche players. If we imagine ourselves a couple of years back at the pre-Facebook era, Google was so dominant that, to the ‘uninitiated’, it was synonymous with the Web. (Some of you nerds might be saying, “Wait a minute, I was thinking AltaVista, Excite, Lycos, Yahoo!, FTP and Bulletin Boards on my superfast US robotics 14.4kbps modem”. I said a few years back, not freaking time-travel.)

Google, the Pre-FB years….
I, like most people then, did not think Google would be eclipsed quickly. Instead of creating a portal-like destination on the World Wide Web, Larry Page and Sergei Brin, both Stanford PhD dropouts, sought to organise and index the World Wide Web. Due to the explosion of information on the web, it was originally a cluttered place and users had no real way of finding the information they wanted with ease. Page and Brin devised a method of ranking search results by relevance. How would they know what was relevant? Bearing in mind search engines were not new then and Google was not the first, in fact far from it. How would Google distinguish between quality information and junk? Page and Brin reasoned that by ranking the results of the query in the order of the number of links linking back to that page, Google was presenting its users with results that other website/users have referenced – therefore the more ‘linkbacks’ a site has, the more relevant it would be. Hence the higher it would rank. It made perfect sense, as quality information would attract more people. Sort of like the same concept with academic citations and ‘wisdom of crowds’ or crowd sourcing. (Disclaimer: SEO has evolved greatly since those early days.)

Google’s superior search ranking algorithm helped direct users to the right place. In exchange for that free search service, Google opted for text- (only) based advertising that relates to the user’s search query – Pure Genius. Google went against the prevailing trend of banner advertising, flashy images and animated GIFs that were quickly polluting websites during the early days of the World Wide Web. So they built a money-generating machine and, for a long time, most people were unaware that Google was in fact the largest ‘advertising’ company in the world. The rest is history. Google’s clutter-free website still stands today as a testament of how successful their model is.

Facebook’s exponential growth
Along came Facebook. MySpace and Friendster already had millions of users. In a business of critical mass, that can and often results in an unassailable lead. Facebook kicked off with the premise of ‘exclusivity’ and relevance. In order to sign up, you first had to be a member of that particular school/college with the right email domain address. It became a platform for its users to find out what their classmates or dorm friends were up to. I mean come on: ‘Pokes’, ‘Relationship Status’, ‘Sending Sheeps’, and ‘Status Updates’ (newsfeed was to come later) – that was pure genius on Zuckerberg’s half!!!

While most of my friends were still on Friendster and MySpace (you know who you are), I had already defected to Facebook. Two years ago, I wrote about Facebook – why it deserves its valuation and more and why Google should be afraid. Everything I said has come to pass. For reasons as to why Facebook’s advertising monetisation is superior to Google’s read my earlier post.

 

Facebook really only came to dominate our daily tech news in 2008, when it crossed the 100 m user threshold. At the same time MySpace (which Murdoch paid $580m for in 2005 – Ouch!) was at its peak. Murdoch even tried to play a white knight in the Microsoft-Yahoo! struggle by proposing to merge MySpace into Yahoo! and save Yahoo! from Microsoft as long as Yahoo! agreed to value MySpace at >$10 billion. (Yahoo! was not that stupid.)

Facebook’s valuation grew exponentially. In terms of the sheer speed of its growth as a tech company, Google was eclipsed. I’ll be honest, I never thought Google would be unseated so quickly. I knew it would be unseated maybe 10-20 years down the line, but NOT in such a short space of time.

Groupon
Just when I thought the rush for multiple billion dollar valuations cannot come any faster than Facebook, along comes Groupon. I mean c’mon: talks of a $25 billion IPO valuation within two years?? I am just in awe. Like Facebook, which fended off a $1billion takeover from Yahoo! in its early days, Groupon turned down a $6 billion offer from Google when it was two years old! (Groupon almost failed before it stumbled on its current business.)

Groupon is a spinoff from The Point, which started life as a fund-raising site. It used a “tipping point model” whereby a threshold amount has to be crossed before there was any ‘deal’ – a feature that forms the premise of Groupon today.

You know why I like Groupon more than I like Facebook? Because of its simple Win, Win, Win business model. What is the Win Win Win I am on about? We first have to dissect the already simple Groupon business model.

You sign up to Groupon and you receive daily geo-located deals that are offered at cutthroat prices. The offers only last for 24 hours. Advertisers can afford to slash their prices on Groupon because of the volume of business it can generate in return. You on the other hand leverage your buying power by joining forces with hundreds or thousands of other buyers made possible by Groupon. In short, Groupon provides economies of scale to both sides of the value chain – Buyers and Sellers. Groupon magnifies the retained value for everyone.

I mean, how else would a freaking tiny Fish Pedicure business in London generate over 2000 paying customers in 24 hours? Sure, Groupon takes a cut. But it is great business for the vendor and great for the customers because they pay a fraction of the original price. Groupon has leveraged the power of economies of scale for the individual. Groupon users collectively have the purchasing power akin to large businesses and they enjoy a huge discount in return. Customers are happy with the bargain. Groupon is happy for taking a cut of the revenue. The businesses are happy because they enjoy more volume than they can cater for.

It is a Win for the consumers, a Win for Groupon, and a Win for the supplier (advertising business in this case).

Now that is a winning business model! How many business models can actually proclaim that? Look around you, how many businesses can claim that they are not ripping their customers off AND not twisting the arm of their suppliers AND instead are beneficial to them both AND YET still make decent money for itself?

It is the simplicity and effectiveness that amazes me.

In addition, Groupon takes this further. It encourages you (the user) to help it advertise by giving you credits towards your next (already wholesale discounted price) purchase. Once you have bought a discounted item/service from Groupon you have the chance to get your friends in on it. And with every friend you recommended that makes a purchase, you get free credits. It is an ecosystem that feeds on itself. With enough credits, you literally get freebies!! This is as close to a free lunch that you will get on Wall Street or any street for that matter.

Like Facebook and Google before it, “We want to know what our friends are doing”, “We value their recommendations more than plain vanilla advertising”. This emerging theme of “wisdom of the crowds” appears dominant across all three Google, FB and Groupon business models.

Financials
And now for the financials… Facebook already has a $70 billion valuation if Secondmarket figures are to be believed. But Groupon is talking about a $25 billion IPO this year at just two years and three months old!!

I will spare you the financial modelling details on how analysts justify those figures. One thing for sure is that the assumption of revenue growth must keep pace with projections. According to WSJ, Groupon is “projecting that the company is on pace to make $1 billion in sales faster than any other business, ever!”

Are we talking about a mania? A tech bubble all over again?? Well, it is always and only a bubble in hindsight – never in foresight. Because given what we know now and based on the funnymentals (uh I meant fundamentals), we would avoid the bubble if we knew it was a bubble! DOH!

From the tulips mania in 1600s to the South Sea bubble in 1720, up until the housing bubble in the 2000s – it was never a bubble until it burst. To quote the greatest stock operator that ever lived –

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again” – Jesse Livermore 1877-1940.

I have been raving about Facebook’s valuation. However, I think that Groupon might be slightly ahead of itself (just a tiny bit).

One thing that concerns me with Groupon is the fact that LivingSocial.com is snapping right at its heels. Although you could argue Facebook came from way behind to trounce MySpace. Secondly, perhaps more importantly, unlike Facebook, Groupon does not have that ‘stickiness’ factor. I would hazard a guess that most of you who read this probably spend more time on Facebook than any other site on the Internet (including Google)!!! Groupon on the other hand, you get in, get your shit and get out.

I would go way out on a limb here and say Groupon’s rush to IPO is to cash in on what they ‘know’ is a replicable model. In other words, Groupon, LivingSocial.com and other social buying sites are cannibalising each other (even though they have created this new ocean for themselves). Plus, both Groupon and LivingSocial advertise on Facebook, thus driving up ad prices, which will only benefit Facebook.

Strategy wise, Facebook seemed to have really positioned itself to capture and monetise the migration of our social lives onto the Internet. Then again, Google’s success was a black swan, so is Facebook’s and now Groupon’s. I look forward to the next big idea…

UPDATE: I have always maintained that the next big tech company will be one that facilitates the migration of our lives onto cyberspace. When pundits were saying that Facebook was just another Friendster, MySpace or Bebo and MSFT overpaid, I knew they were wrong. I argued that if Zuckerberg wanted he could literally incorporate Skype, EBay or payment services into Facebook. Facebook can do to Amazon and EBay what Apple did to everyone else. Like Google’s vision statement of organising the world’s information, I think Facebook is quietly positioning itself to organise our digital social lives. The latest upgrade on Facebook takes us one small step closer. It has combined chat with email to facilitate our evolving online communication preference. It has a history of all our chats, emails, places, friends, status updates and whatever you care to put on it. It literally owns your social life! Furthermore, Zuckerberg is young and savvy enough that he does not have the corporate America image (yet), so if China friends Facebook all bets are off…

Update 2: As of August 2011, I have now turned around and think Groupon’s biggest mistake is to turn down an offer from Google. I would short Groupon all the way to zero if they ever went public. Great concept, poor execution.

 

 

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Free News vs Paid News (Microsoft, Google, News Corp)

November 23, 2009 1 comment

Question: What happens when an industry is losing revenue and two giant companies are trying to outdo each other?

Answer: The consumer suffers and ends up paying for it.

The digital news landscape is changing fast, with Rupert Murdoch now deciding to charge for online news content. The media mogul’s News Corporation, the firm behind papers from the Wall Street Journal to the Sun (UK), is planning to stop Google from indexing its news websites.

You may ask, “What’s the problem?”  After all, the newspaper industry is suffering from declining print and advertising revenues as increasing media consumption is taking place over the Web, so certainly it makes sense for newspapers to charge for their content.

The problem is, as with everything else in life, nothing is ever so cut and dried. Throw Microsoft in the equation and things become interesting. The software giant’s search engine Bing has been playing catch up to Google ever since… god knows when.

Microsoft has been having discussions with News Corp, where the software firm will pay the news company to stop Google searching and indexing its news website. The desired outcome would be that Microsoft’s search engine Bing would be the place users will turn to for news – and if Google wanted to retain that kind of news content, it would have to start paying. It seems clear that Microsoft’s interest will also hurt Google’s margin.

This suspicion was confirmed when the Financial Times reported that Microsoft has also approached other big online publishers to persuade them to remove their sites from Google’s search engine.

What is clear is that Microsoft and News Corp are united against the idea that Internet news should be free. Microsoft is willing to offer money to publishers to switch allegiance and News Corp is prepared to use legal means to prevent Google ‘stealing’ news.

However, if Internet users decide that Microsoft Bing’s results are biased because of alliance with news providers, they will be more reluctant to switch from Google and the plan could backfire.

In the words of James Harding, editor of the Financial Times, “We are setting out to rewrite the economics of gathering and delivering news…”

Harding likens the culture of free (news) to that of the music industry, which (according to him) has been all but destroyed (by P2P/piracy). Well, if the music industry is any indication of where the news industry is heading, then I am sure Harding himself would realise the concept of ‘free’ will never be completely stamped out. Just take a look at the amount of Internet traffic that is generated from P2P downloading. The ‘culture of free’ is still rife and there is nothing the media companies can do about it.

Nevertheless, I have always subscribed to the notion that whatever has value is worth paying for (this includes good quality news and information). But I cannot help but feel we, as consumers/users, are being seriously short-changed here.

Before: We had good ‘unbiased’ search results from Google and we had free news
After: We have ‘biased’ search results from Microsoft, and we pay for the news.

Go figure!

DWTC says: Competitive advantage is never sustainable. Rival companies will always find ways to chip away at your success. Google’s USP of being able to deliver accurate unbiased search results will be undermined if Microsoft was to have its ways. Do not be surprised if we one day see ‘pay per search’ on Google. DWTC is hoping Google will one day foray into news industry so he can cancel his Wall Street Journal subscription.

 

What you should know about the Facebook Juggernaut

November 8, 2009 3 comments

facebook-logoMark Zuckerberg, founder and CEO of Facebook, debuted on the Forbes billionaire list with a $1.5b net worth, then dropped off when the economy turned sour.

Zuckerberg was quickly dubbed the next Bill Gates. Apart from the obvious similarities that they both dropped out of Harvard, both are in the tech sector and they both had been accused of gaining initial success from software codes written by someone else (Microsoft with DOS, and Facebook with ConnectU), they both share a lot more less obvious similarities.

Both Gates and Zuckerberg enjoyed creating computer programs and playing computer games in school. Both had professional parents (Gates’ father is a lawyer; Zuckerberg’s father is a dentist). And, both attended exclusive, private secondary schools.

Now Zuckerberg is back on the Forbes list with a $2 billion valuation from his 20% stake of Facebook, as the company he founded accepts $200m from a Russian investment group.

With 300 million registered users (and millions joining every month), and the countless hours we spend on the site every day, Facebook’s monetisation programme might just prove highly successful.

Facebook has already overtaken YouTube as the third most popular site on the Web. It hit all the important milestones faster than any company before it. Facebook also launched a new real-time search engine, a clear jab at Google.

Facebook has always been in a position to take a lead in real-time and social search because of the sheer amount of data the site has collected about what people are doing, the things they’re interested in, and what their social graph looks like. Paul Buchheit, the founder of FriendFeed, said the human link data at sites like Facebook “could ultimately be more valuable than the link data from the web” that Google’s search engine is based on – someone just needs to mine it.

Zuckerberg, an uber-geek, has been described as being “oblivious” and a “boy in the bubble” by Rolling Stone magazine. Regardless of what has been said, anyone who has met venture capitalist luminaries in pyjamas just because he could, and had “I’m CEO, Bitch” written on his business card, commands respect.

One thing that bugs me is the question of “How did Google let this happen [Facebook get away with it]?”. Google is a company with the keys to the “library of Alexandria” and the ability to technically render “two Sat-Nav companies worthless” by providing its services for free.

If Google couldn’t stop Facebook, who can?

The smart money is already betting that he is the next Bill Gates. History will look back and say: Gates and Microsoft revolutionised the way we use computers, whilst Zuckerberg and Facebook revolutionised the way we social network. When Facebook goes public, it will be a big payday for a lot of employees.

Can Facebook unseat Google as the new darling of Silicon Valley?

No Business Plan? No Problem

November 8, 2009 2 comments

Can you really follow the mantra “Build it and they will come”? Apparently, yes, you can. Gather a large following first, then figure out how to monetise it later. YouTube did it, Facebook did it, and now Twitter is going down that same route.

Twitter recently closed another round of funding which values the company at one billion dollars. The only problem is there is “no clear” business plan, or at least that is what the media would have us believe. A simple Google search on the keywords “Twitter business plan” returned 275,000,000 results. I guess I am not alone when it comes to the obsession with Twitter’s plan to make money.

Sound like the ’90s dotcom boom? Well, not really.

If the ’90s dotcom boom taught us anything, it is, IPO first, make money later. The problem is they all had a “plan”, they just did not keep to the plan.

If YouTube, Facebook and Twitter are going to teach us anything, it is to build a large following first, make money later. Even though they had “no plan”, they are all making money (except Twitter for now) or show great potential to.

Moral of the story: most business plans are not worth the paper they are printed on (or the hard disc they are ferromagnetically etched on)

Leaked documents show Twitter is hoping to be the first to one billion users, and, in their own words, to become “the pulse of the planet”,

Think Google and Facebook are gonna sit and wait and do nothing? (Forget Microsoft, Bill Gates is too busy redistributing his wealth now that he’s retired.)

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