Groupon, the leader in the red-hot daily-deal market, was founded in 2008. It's expected to make $1 billion this year and $1.5 billion in 2011. LivingSocial was founded a year earlier, but switched its business model to that of Groupon's in summer 2009. Analysts expect it to see $500 million in revenue next year.
The companies are growing quickly because, like OpenTable (OPEN), they have found a way to let small retailers and restaurants to connect with their customers on the Web. Their success is coming so quickly that Web giants want a piece of the action. So, Google (GOOG) was reportedly willing to pay as much as $6 billion for Groupon, and Amazon (AMZN) invested $175 million for a stake in LivingSocial. It's the end of adolescence for both startups.
Groupon Wants to Remain Young
Groupon, for its part, doesn't seem like it's in a hurry to grow up. Late Friday, The New York Times reported that Groupon was rebuffing Google's offer. Earlier, the company passed on a $2 billion offer from Yahoo. This week, as reports of a Google deal swirled, CEO Andrew Mason jokingly hoped that "someone totally weird" like McDonald's (MCD) or Exxon (XOM) would buy the company.
An acquisition by another company, whether Exxon or Google, would certainly change things for Groupon. What's not so obvious is that the Amazon investment in LivingSocial could end up having just as much impact on shaking up the online daily-deal business.
Take a look at this chart, courtesy of Hitwise, showing LivingSocial gaining ground against Groupon earlier this year. But LivingSocial's market-share growth changed direction once Groupon went viral this summer, and LivingSocial has seen its share of the market wither away. With Amazon's backing, LivingSocial has a second chance to boost its market share.
Is LivingSocial Ready for a Growth Spurt?
It all depends on how much Amazon wants to help LivingSocial. If the relationship between Amazon and LivingSocial is based solely on the $175 million investment, then LivingSocial will strengthen its hand against other daily-deal startups by expanding its presence in cities around the world and hiring people to sign up restaurants and retailers as customers.
With Amazon's backing, LivingSocial has a much better chance of surmounting a barrier faced by Groupon clones. There are at least 180 startups offering Groupon-like deals by one count, with LivingSocial the only one of the bunch in striking distance of Groupon's lead. As DailyFinance's Alex Salkever pointed out, restaurants may get calls from many of these daily-deal shops, but they only have patience for a few.
The Advantage of Staying Small
LivingSocial and Groupon, Salkever noted, are buying up ad keywords that help in generating the traffic restaurateurs want from a daily deal. The money from the Amazon investment will help here, and the connection with the Web's premier retailer will make a handy calling card when approaching small businesses.
LivingSocial has another opportunity that is, ironically, emerging as a result of Groupon's success. According to Mashable, some small businesses that have used Groupon in the past are irked by what they perceive as the company's willingness to toss them aside in favor of big brand names like Gap and Nordstrom's. Such disenchantment opens the market to a competitor focusing on small businesses.
Of course, the daily-deal market is still small enough that both Groupon and LivingSocial can grow for some time without having to steal market share from each other. According to JPMorgan, only 10% of the online world uses such sites, suggesting that market penetration is still low. Provided that these daily-deal sites don't turn into one of the Web's short-lived fads, this race has a long way to run.