Groupon and Its Carbon Footprint
While the latest social network IPO may have a reasonable business model, its carbon footprint can be felt in its daily content distribuition and rapid market expansion.
The Groupon IPO has been filed and I have been waiting and ready to comment on it. I'm certainly no fan of Al Gore and the global warming camp, but I started thinking about carbon footprints as related to company business plans a while ago. I don't mean just how much fossil fuel is consumed, but rather all the carbon involved on a day-to-day basis. After all, employees are carbon based life forms. Let's focus on media, digital media, and internet companies.
Starting with old media, The New York Times' (NYT) business model starts with their employee's carbon; creating proprietary content, printing it on carbon based media, and physically distributing it using people and a lot of fossil fuel. To make it worse, tomorrow the entire process has to be repeated. Whether people, paper, or fuel, carbon it is expensive and it's not going to get cheaper in the future. In terms of carbon intensity, NYT is about the worst business model you can develop.
Moving to the opposite end of the spectrum is Google (GOOG). Here the carbon is built and maintains a silicon based search engine and server fields that ship only one thing -- photons. In exchange for these photons, companies and people with content or actual physical products send money to Google for ad placement. There is one more measure of carbon intensity -- customer service. For search, GOOG's customer service is as follows:
"Thanks for helping us improve our search. While we aren't able to respond directly to comments submitted with this form, the information will be reviewed by our Search Quality team."
No phone number, no email, no online chat, no nothing. I suppose that ad customers can talk to somebody, but for all of the rest of us, Google isn't wasting any carbon. In terms of minimizing, the company has the perfect business plan.
This model of creating a platform and letting other people fill it with content hasn't been overlooked. Facebook and Twitter come to mind, but the revenue and profitability generating potential of these platforms doesn't seem to match what search can accomplish.
If I had thought about this back in 2004 shortly after the Google IPO, shorting NYT and buying GOOG would have been the perfect pairs trade. Alas, "shoulda, coulda, woulda" does nothing for your trading account balance.
But thinking about carbon intensity leads to the original great outlier -- Amazon (AMZN). Judged by carbon intensity, AMZN's original business model is terrible. The company warehouses all sorts of carbon; books, CDs, DVDs made of plastic, etc. They get an order over the Internet, but they have to find it, package it, and ship it -- all carbon intensive. In addition, there is a big customer service component in the company... more carbon. I think AMZN is way overvalued, but I have to hand it to Jeff Bezos; he realized that net downloads were the wave of the future and created the Kindle. As physical media starts to transition to digital downloads AMZN becomes less carbon intensive, but that also reduces the barrier to entry. There is no way that Apple (AAPL) and GOOG would ever think about replicating AMZN's warehouses and competing in that market, but iTunes and Google can compete nicely in any future digital media market.
With that view, let's look at the Groupon initial public offering. The sales growth is astounding, having increased from $3.3 million in Q2 of 2009 to $645 million in Q1 of 2011. This is absolutely phenomenal for an Internet company because it developed a business model that generated cash up front. You really can't find another model that did it that fast, not even Google. But while silicon runs through the veins of Google, what runs through the veins of Groupon?
Revenue has been great, but wait until you see the employee growth. In Q2 of 2009 it had 37 employees, in Q1 of 2011 was 7,007. That's fantastic, but does that mean it will have "Googleish" profitability? Nope, Groupon only lost $146 million in the first quarter of 2011. Apparently the poets are sucking down some serious cash.
Groupon is the Anti-Google. From a carbon based business plan it is slightly better than The New York Times, putting it into TheStreet.com (TSCM) arena where every day requires new content from carbon based sources, while distributed via silicon. I am not going to deny that Groupon has proven a reasonable business model, but it has already expanded into 175 North American markets and 43 countries while losing serious money.
Relishing the curmudgeon role, here's one of my favorite Groupon moments: When you have cash to burn and are not worried about profitability you can come up with cute programs like Grouspawn, which claims it will give a college scholarship to a couple that used a Groupon coupon on their first date, married, and had a kid (not sure if the order matters) who eventually goes to college. I will let accountants and lawyers determine the future expense liability.
However, here is the best Groupon offer that I have ever received. The names have been deleted to protect the innocent vendor:
In ancient times, self-conscious nobles attained brighter smiles by sitting in the midst of snowbanks with mirrors in their mouths. Find a less frosty route to a dazzling grin with today's Groupon to XXXX. For $105, you get a comprehensive evaluation, including an oral-cancer screening, plus your choice of one of the following services:
- an above-the-gum-line teeth cleaning and full-mouth series of digital x-rays (a $326 value)
- an above-the-gumline teeth cleaning and one-hour teeth-whitening treatment (a $680 value)
- a full-mouth series of digital x-rays and one surface filling (a $378 value)
First date, a dental cleaning, and a college education thrown in! These guys must have been overwhelmed by demand. Seriously, all I smell is local poet desperation (and maybe local dentist desperation too). The art world will be better when it comes from a tortured soul instead of bagging a local dentist.
I think the Groupon experience will quickly evolve into "fool me once shame on you, fool me twice shame on me". The restaurant coupons are the only reasonable market. Will restaurants find additional customer flow after the first Groupon test proves worth an additional Groupon test? The S-1 does not seem to address this issue.
I thought the IPO price action to LinkedIn (LNKD) was purely inane and I was proven correct, but LNKD has a better business model than Groupon. I get 3-5 regular coupon deals a day, equivalent to Groupon deals and primarily from local newspapers that hit local merchants daily.
In my opinion, Groupon will be driven by local markets. It already covers most of the main markets in the US. Groupon has "been there, done that" in market coverage. If the stock market goes crazy with the revenue gain, sit back because earnings really do matter. But as a short, I'm really looking forward to the IPO.
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