When Clones Attack (a business model)

I have been unabashedly bullish on the daily deal space for over a year now, in both private and public markets.  When Andrew Mason turned down 6 billion from Google I said Kudos.  When every media and vacation site started a Groupon clone, I said no brainer.  It has made a ton of sense to be long these names, and investors have been duly rewarded.  Just take a look at TravelZoo and Priceline today.

It’s time to be cautious.  Not on the daily deals model itself, oh no, that ain’t going anywhere, it is marketing for the 21st century and we are in the first few innings of that model.  What you need to be cautious on are the individual companies themselves who are offering these deals.  Why?  Simple, margin compression.  The daily deals market is easy to enter, there is even a company building deal sites for third parties in a matter of weeks.  The market is now flooded with Groupon clones, and many have attacked specific verticals, like Jewpon, the Groupon for Jews, hilarious and awesome.

Groupon is taking about 50% of each deal right now, that is going to quickly get eaten away.  In the end I suspect they won’t get more than 10%.  The Wall Street Journal had a good article out yesterday about business owners shopping their deals around different sites to get the best rate.  The experimentation is over, it’s no longer a novel thing to have a daily deal for your business, owners are getting wise to the fact that they have options and can play one site off against another.  Yes we all knew this was going to happen, but trading and investing is not about understanding something is inevitable, it’s about understanding when to flip that switch, when will the market decide to care.

Yes there is an enormous amount of growth to be had both here in the states and overseas, but the fact remains that each site’s business model will degrade over time and we are just starting to push over the edge of that curve, it’s only downhill from here.  Groupon is making 100 million dollars in revenue a month now, they will probably end up making many times that, but the profit isn’t going to increase at the same rate.

Rumor is that Groupon is looking to be taken public at a valuation around 25 billion by Goldman Sachs.  Good luck to anyone buying into that IPO.  That IPO should be watched very carefully afterward in the public market, my guess is that it calls a top for the individual daily deal distributors.

But that shouldn’t be the end of the story for this whole new category of business.  There are many other ways to invest in this trend and companies that will  make a killing going forward which aren’t linked to the margin compression which Groupon and its clones will see.

Take a look at Yipit, the premier daily deal aggregator/search engine.  There are now over 300 daily deal sites, you can’t track all of them on your own, let Yipit send you an e-mail every day with only the type of deals you want, in my case, for restaurants in NYC.  They will only benefit from the increased number of deal sites.

There are daily deal resale sites like CoupRecoup which provide a secondary market for these things.  They will only continue to grow.

My girlfriend has founded a startup in the daily deal space which is in stealth mode right now.  There are plenty of tools and layers to be thrown over this whole space which are going to produce great companies down the road.

I have no doubt that Groupon will continue to innovate and execute on its model.  My issue now is that their model is beginning to be eaten away at.  Until they IPO I highly doubt there will be a change in trend regarding the valuations for these companies, on both the private and public markets.  But once they do, I would be very cautions of both and look towards all of the tools that are going to be built to help both companies and consumers in this new advertising model.

Burned By Daily Deals Craze, Small Businesses Get Savvy (Wall Street Journal)

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