Sunday, June 5, 2011

Helping Give People What they Want

Is Groupon a flash in the pan, or a major transformational Internet company as the CEO suggested recently? An article by James Surowiecki in The New Yorker provides an interesting assessment.

The article begins with a reference to some previous big winners and missed opportunities:

"The history of the Internet is, in part, a series of opportunities missed: the major record labels let Apple take over the digital-music business; Blockbuster refused to buy Netflix for a mere fifty million dollars; Excite turned down the chance to acquire Google for less than a million dollars. Time and again, businesses with seemingly dicey prospects have ended up becoming huge successes, and price tags that once seemed absurd have turned out to be bargains. But big companies have learned their lesson: these days, they’re positively obsessed with not missing the next big thing, and are willing to shell out huge sums of money in order to insure that they don’t. And when Google tried recently to acquire the two-year-old daily-deal site Groupon, for the seemingly outlandish sum of six billion dollars, it was hard not to wonder if the lessons of history had been learned too."

By the way, Groupon is a portmanteau of two words, group and coupon, and offers a local deal of the day on food, merchandise or services and it can be anywhere from 50 to 90 percent off the regular price. The catch is one only gets the deal if enough people buy. Imagine getting up to 90% off in your favourite restaurant or spa.

The writer's assessment is that Groupon is more an "old school company" that makes excellent revenue but requires a large work force to keep up writing and promoting ads and growing a global clientele. On the other hand, companies like Facebook, Twitter, and You Tube are "revolutionary companies with distinctive technologies" which have harnessed the network effect to grow.

The article concludes that the company will end up making a lot of money. "These days, the Web is full of good, solid businesses that may not be remaking the world but that are helping give people what they want. If that’s what Groupon ends up being, well, there are worse fates."