Groupon, Facebook, etc.

Copyright 2011 by John T. Reed

I am a Harvard MBA. One of the things I learned there is you need to have a unique uncopyable business to sell branded products. The alternative to a branded product is a commodity.

In commodity businesses like wheat, the lowest cost producer wins. Everything goes by price in commodities. Low man wins.

In a branded product, you can have a higher profit margin because you are the only supplier.

There are a number of big internet successes who seem to me to be commodity businesses, but who are considered huge branded successes, namely Amazon, Facebook.

Recipe, copyright, patent

Coca Cola is a branded product. It may be the number one branded product in history. What is their unique angle? A secret recipe—literally.

Microsoft Windows is a branded product. Its owner Bill Gates is one of the richest men in the world. What is his unique angle? He owns the copyright on Windows.

Other branded products are the subject of patents, like prescription drugs for which there is not yet a generic equivalent.

So how do Amazon, and Facebook prevent competitors from eating their lunch? In my review of the movie Social Network, I noted that Mark Zuckerberg, head of Facebook, has no secret recipe, copyright, or patent, and probably never will. So what is to stop new competitors or companies like Google or Microsoft from simply copying Facebook and possibly making their own improvements to it and/or integrating it with their existing software or service thereby taking advantage of network effect?

Good idea, but not a business

In other words, I see no reason why Facebook cannot be the My Space or Netscape of 2011.

Many will no doubt say, “Hey, baby! Zuckerberg is rich. He’s a billionaire and always will be.”

We’ll see, but I would like to hear how he stops competition from simply copying Facebook. One guy says he has an “installed base.” That means little when it comes to a free service. Most of us use several social network services. I used Twitter and Linkedin in addition to Facebook. If one of those or Google’s social network works a little better or is better integrated with something I use even more, like Google search, I can switch without spending a penny and without spending much time learning the new service—especially if the new one copies Facebook which they can in the absence of a secret recipe, copyright, or patent.

Groupon

A month or two ago I was watching Charlie Rose when yet another smug, self-satisfied 20-something billionaire wannabe was on. He is the head of Groupon.

Groupon sends out emails telling people of one-time discounts offered by local merchants. They are typically about 50%. They get half the discounted price—in other words 25% of the whole pre-discount price. The retail merchant also gets 25% of the original price. The consumer gets the 50% discount.

This often produces an enormous jump in the sales of the merchant in question. Groupon is growing like crazy. The smug muffin was offered six billion dollars to sell out. He turned it down.

Idiot.

Reminds me of the geniuses at Yahoo who rejected a huge buy-out offer from Microsoft, only to see it disappear when the 2008 crash occurred.

The Yahoo shareholders were REALLY pissed!

Inventor of the 50% off coupon?

The Groupon guy has no secret recipe, copyright, or patent. He already has 425 competitors and counting according to Forbes magazine. Big national companies he has approached ask, “What do we need you for? We can offer a 50% discount whenever we want without you.”

Mom and pop merchants, one presumes, lose money on the deal. Forbes says only 20% of the customers who take advantage of the 50% discount return to that merchant for a second purchase.

Sounds like the kind of deal that might make sense for a brand new pizza restaurant, but not for established businesses.

Anyway, Forbes says that Groupon’s market share is plummeting as their competitors take business away by simply copying them. I do not get the impression they do a lot of repeat business with the same merchants. How many times can you give the store away to make some wannabe boy billionaire richer?

Cheap margaritas

One of Groupon’s most successful tricks seems to be offering coupons for cheap liquor.

But wait a minute. Liquor is a special product. You have to have a liquor license to sell liquor. Is Groupon selling liquor? Well, they are getting half the proceeds of selling it. Also, gimmicks to get people to buy and consume more liquor are often regulated or prohibited. For example, Groupon is in trouble in MA for violating their anti-Happy Hour law. Groupon is also getting into trouble about sales tax and the 10% federal tanning salon tax.

Forbes has a number of “What me worry?’ sort of quotes from Groupon’s biggest shareholder. That’s real smart. Gratuitously antagonize prosecutors and regulators on your way to making your billion from your four-year-old business. “Toto, I don’t think we’re running a lemonade stand anymore.” I’m not sure Groupon has enough grownups, or lawyers.

Novelty wearing off

The gimmick’s novelty is also wearing off. Originally, 66% of recipients opened their Groupon emails. Now only 40% do. 40% is still good, but it appears because of competition and novelty wearing off the percentage will continue to fall. I have never opened a Groupon email.

Google now has its version of Groupon.

I think all Groupon ever had was an idea to advertise local businesses via email.  A consultant is quoted at the end of the Forbes article saying Groupon is more of a business model than a company. I don’t think it’s either a busiess model or a company. It’s just a one-shot idea for attracting customers to a new business—like having a local radio DJ broadcast live from the business in question. Putting a big discount coupon in an email instead of the local newspaper is sort of obvious considering that young people do not read newspapers.

The biggest morons in the Groupon story are not the boy wonder founder. They are the biggest shareholder, the merchants who give away the store for one day so the boy wonder can get rich, and the biggest moron of all is the guy who offered to buy Groupon for $6 billion in December 2010.

Some of these businesses, like Amazon, which is nothing but the 1890s Sears Roebuck direct mail company only with orders coming in by Internet instead of mail, really have no basis for being considered hot stuff.

Jobs is the real deal

Apple’s Steve Jobs has real talent and numerous copyrights and patents. They also have a genuine skill which seems to exist almost nowhere else with regard to creating yet more such products.

Amazon, Facebook, Groupon, and many others do not appear to me to be doing anything that cannot be replicated by a lower cost producer.

Some of these guys like Amazon have gotten away with it for some time. Others, like Netscape, Alta Vista, Sony Betamax, did not. Dell turned personal computers into a commodity business, then had difficulty retaining the low-cost producer title as Asian companies replicated his business model.

My Harvard Business classmate Bobby Haft turned the book store business into a commodity with his Crown Books. But he had no secret recipe, copyright, or patent on discounting books and no way to be the low-cost producer. So everyone else promptly did it. Crown Books disappeared, and now the rest of the trade book business seems to be going down the same drain—most recently, Borders went bankrupt.

My point is business success—even spectacular business success—can be extremely fragile.

it is not magic. Business success stems from application of best practices and logic and good execution. Innovation is a powerful force, but some innovation cannot be the basis for a successful business.

Hula hoop was a craze but not a business

When I was a kid in the 1950s, the hula hoop craze hit. My dad managed a 5¢-and-10¢ store, the main seller of hula hoops. At first, he could not keep them in stock. Suddenly, every company on earth was selling them.

“Can’t the guy who thought of it patent it?” I asked him.

“How do you patent a hoop?” he responded.

Good question. The hula hoop was a fantastic idea, but a crap business. So it seems to me with Groupon and Facebook and a lot of other good ideas that have no recipe, copyright, or patent.

John T. Reed

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