Is The Daily Deal Backlash Overblown?

According to the business maxim, you can always tell who the leader is in a given market: it’s the one with all the arrows sticking out of its back.

While this axiom is applicable across the business landscape it is particularly relevant in the startup world given that most leaders in an emerging market end up taking as much incoming fire from me-too startups coming up from the rear as they do from incumbents threatened by the continued advance on their territory.

I raise this point because I’ve been surprised in recent weeks at the backlash in the media and across the venture landscape against daily deal sites, most notably Groupon and LivingSocial.

To be sure, the daily deals business has become ferociously competitive. There are now dozens of venture-backed businesses pursuing some configuration of the daily deal/social buying/demand aggregation business model. To this number add the emerging group of established web companies now brand extending into the deals business–Facebook, Yelp, Travelzoo, OpenTable, Amazon, and Google, to name but a few.

The birth of any new industry is rarely elegant, planned or pretty. With little argument, whenever one is dealing with the kind of torrid growth that both Groupon and LivingSocial have experienced one will find plenty of areas to criticize. However, I think some of this criticism is misguided. To call a marketplace with hundreds of competitors vying for consumer dollars emerging might be an oversimplification, but emerging it very much is. Let’s not forget that like the early days of social networking, the winning model in this space has not yet been fully realized. Constant iteration is underway, all being attempted at the breakneck pace one would expect in a marketplace still decidedly in its land grab phase. This means things are going to break — loudly and often. This is not altogether bad.

The daily deals space is the kind of web phenomenon we have seen before: Explosive growth, high user engagement, huge cash flow implications for the companies, lofty valuations, investors elbowing their way into funding rounds, and lots of media attention to fuel the frenzy.

In this environment, Groupon and LivingSocial have broken out as the market’s de-facto leaders and built robust businesses. Revenue growth has been nothing short of spectacular. In turn, the companies have responded by raising sizable funding rounds to further consolidate their positions and extend their reach into new markets. Investors and employees have every reason to be proud of these accomplishments. So far, so good.

This, however, is far from saying that their status as perennial leaders is a fait accompli or that they cannot be felled by either other participants or by their own strategic missteps. Indeed, it is still early days. This is perhaps why I find the latest hand-wringing over Groupon’s recent stumbles in the media somewhat disconcerting.

Massive customer churn is to be expected. Explosive growth, particularly as relates to web companies, raises the notion of the shiny new object theory. This notion should inform us that exponential growth and buzz brings huge consumer curiosity which, in turn, brings an influx of users that will try the product/service once and never return. Is this a reflection of a company that has provided a poor user experience? Or, is this simply the realization that 30-40% y/y revenue growth is likely unsustainable and that large swings in customer churn will be in evidence for a long time to come? I am in this latter school of thought.

The “churn” issue so often cited by critics is not simply a matter of consumers being fickle but one of SMBs and merchants as well. They are still trying to figure out how to work with deal sites and whether such marketing campaigns are right for their specific businesses. This will take time.

The Spaghetti Test. Additionally, daily deal sites are incented to build vast Rolodexes and cover wide areas of terrain to extend their brands. This means lots of offers are being written across broad categories of SMBs where the suitability of the daily deal model is still not thoroughly understood and where there is little historical frame of reference. While most managers are loath to admit it, the Spaghetti Test of  ‘throw it against the wall and see if it sticks’ inevitably drives a lot of iteration around determining which offers resonate and which do not. This results in a lot of mediocre offers that don’t perform well which can leave merchants and consumers with a poor experience.

Work to be done. Critics are right to point out that there is still a lot of work to be done in elevating the daily deals business to deliver on the full promise of its massive potential–both for consumers and for businesses. Merchants need better post-deal monitoring and CRM-like tools to help with yield management and provide better tracking and analysis. Merchants also want more control and flexibility over how offers are created, sold and redeemed so they can maximize profits while minimizing the impact on their organization when the “crush” of redemptions comes. [Fortunately, startups are already innovating around these themes to fill precisely these voids.]

Consumers, for their part, are demanding better offer targeting, more consistency in pricing and redemptions, and less intrusive appeals in order to fight against emerging deal fatigue now evident across the space. Personalization software needs to catch up so that users can better tag offers of interest and opt-out of those that are annoying or redundant (Cupcakes? Again?)  Also, Hyperlocal and Location-Based-Targeting need to demonstrate that they are more than just elegant theories.  Too many service-oriented SMBs (i.e. hair salons, etc) have gotten burned in money-losing offers for premium services to out-of-town customers with whom there is no opportunity to develop a long-term customer relationship. That kind of mismatch is being corrected but hyperlocal offer targeting has a ways to go.

Ultimately, the scale that Groupon and LivingSocial have achieved has likely put them beyond the reach of most competitors. The battles ahead, therefore, will be over how best to go vertical. The winners will be those most savvy at customer segmentation and in finding unique offerings positioned against specific themes and product categories. Predictably, there are numerous companies doing precisely that — tweaking group-buying mechanics and applying them to niche, premium markets and making a successful play in those areas. In another market in another time, this “go vertical” approach may have doomed a company to a market insufficiently large to support its efforts. However, as companies such as Gilt Groupe and One Kings Lane have demonstrated, the daily deals market is large enough that even pursuing a niche approach and a narrow customer segment can prove to be enormously lucrative.

eBay’s Whitman should go.

There’s trouble in the Kingdom; send a message to the King.

..or in this case, Queen.

It seems a cabal is forming in tech circles, in the media, and the blogosphere around the notion that it might be time for Meg Whitman to be shown the door at eBay. Henry Blodget (yes, that Henry Blodget) makes a compelling case for the prosecution in his blog. So, too, do MSN’s Kim Peterson and BloggingStock’s Gary Sattler, albeit in a more measured way.

If this comes to pass, this will be quite momentous for a variety of reasons. I, for one, will have mixed emotions as I consider her stewardship at the company by and large a success, but — in the aftermath of some questionable moves and clear stumbles (Skype!?!) — not an unqualified one.

Without argument, Ms. Whitman guided eBay through serious competitive challenges in its early days to bring the company to its current status as a bona fide ecommerce juggernaut. Her leadership in those years was the sine qua non of the company’s success as the undisputed leader of online auction retailing. During her ten-year tenure, eBay has seen enormous growth, is now active in 40 markets, and has more than 230 million registered users. As I have alluded to in earlier posts, those coveted but elusive “network effects” that all VCs and management teams strive earnestly to achieve in their own companies (but rarely do so in the real world) are in clear evidence at eBay. There are precious few other companies that can demonstrate that in such an abundant, palpable way. The liquidity of eBay’s marketplaces across categories is what draws buyers and sellers to its platform over all other auction-based retail offerings (Yes, there actually are a few competitors to eBay out there, believe it or not.) Each new participant – whether buyer or seller – that participates in the marketplace thereby enhances the total value of that marketplace and the value to all members. And so on and so forth. Competitors could scarcely land a glove on eBay once its marketplaces grew to that level of liquidity.

But, as they say too often in this rough-and-tumble capitalist world we inhabit, that’s old news. What have you done for me lately, Meg?

I’m only half joking, of course. The proponents of the ‘Dump Meg Now’ brigade loooove to point to Skype as their Exhibit A. I will grant them that, but is goes deeper than Skype. There is also the prattling on about her decision to sign up as financial co-chair of the Romney campaign, or the loss of heir apparent Jeff Jordan (now comfortably ensconced at Open Table and, I would imagine, eating well.), or the debacle of eBay China, or the seller revolt last year over restrictive policies and fees, or the God-awful interface that remains as clunky and unrefined as ever. All worth debating, but my sense is it has been the strategic missteps and missed opportunities in growing eBay beyond its core business that is most glaring. — and, by extension, most responsible for the abysmal performance of its stock. I believe that upon examination, and with all the relevant facts, one can conclude in a clear, measured way that eBay needs new leadership. And that time is now.

eBay peaked early, one might say, but has been unable to broaden into new areas of retailing that other competitors — most notably Amazon — have seemed capable of doing with speed and effectiveness. Some cynics have gone as far as to opine that eBay’s market position and momentum when Ms. Whitman came aboard was such that its eventual and lasting domination of its core market was almost pre-ordained. I reject that argument. To her credit, Ms. Whitman has continued to try new marketplaces and new ideas, but lately they have brought largely unsatisfying results. Some ideas simply made no sense. [Does anyone remember eBay real estate? Hello?] Other ideas that made a LOT of sense and were seemingly slam dunks were left to languish so long that the initiative and the window of market entry were lost [i.e., re-launching eBay Motors’ auto parts marketplace. It’s still the mess it was in 2001 when they were (briefly) recruiting an auto parts expert to build the business. Their bloated, glacial hiring process turned off good candidates, they never ended up hiring anyone, and the idea died on the vine; potentially a billion dollar revenue opportunity, blown.]

In past years, eBay’s leadership position would insulate it from these blunders, but not any longer. Amazon has done a remarkable job building a truly inspired marketplace and is now the benchmark for online retailing. It has become a destination site for a whole host of activities beyond purchases — product research, reviews, community features, etc. Amazon has also beefed up the features and functionality that allow users to sell their own items on the site which, naturally, is one step closer to a direct attack on eBay’s core market and raison d’etre. Craigslist, the quasi-crunchy global bulletin board, is another obvious threat; but to date, Messrs. Buckmaster and Newmark seem content with their current market position and — according to their 60 Minutes profile, at least — do not seem bent on online world domination. We’ll see how long that lasts. If Mr. Newmark starts to change his demeanor, or simply takes a few pages out of the Bill Gates competitive playbook now that Bill G will be hanging up his full-time skates come July, eBay will have its work cut out for it in staving off Craigslist.

Amazon’s stock price has skyrocketed, reflecting the company’s new vitality. In contrast, eBay stock has languished at $30-35 last year and had a lousy 2006. For some shareholders, this alone is grounds for a beheading. For me, the issue is that, quite simply, eBay seems utterly bereft of a clear, decisive strategic vision.  Moreover, this comes at a time when the competitive landscape is changing rapidly. Old assumptions must be reconsidered and new approaches applied. For a variety of reasons, Ms Whitman is not the person to implement the kinds of changes and the overhaul required to right this ship. I believe it is high time to thank Ms. Whitman for her long service and to bring on a more visionary leader with bold new ideas to reinvigorate the company and reassure the rank and file, jumpy shareholders and irate users that the future of eBay is bright, exciting, and compelling.