The same week that Google (GOOG) reportedly offered $6 billion to buy social-shopping site Groupon, Amazon (AMZN) has purchased a major stake in the No. 2 group-buying site, LivingSocial. The world's largest e-tailer Thursday confirmed it had invested $175 million in LivingSocial. Along with an $8 million round from Lightspeed Ventures, the deal gives LivingSocial a one-day cash infusion of $183 million.
By most accounts, LivingSocial is a distant second, with less than 20% of the total group-buying market. That said, LivingSocial is apparently on a run rate of $500 million in revenues for 2010, an impressive number that would justify a $1 billion valuation.
The news could silence naysayers who have pointed to group buying as a faddish venture-capital frenzy with zero barriers to entry and guaranteed margin erosion. In an earlier post, I argued that the hundreds of group-buying clones have actually insulated Groupon and LivingSocial. Having so many options has essentially diluted the market, making it harder for any of the smaller services to be able to guarantee enough customer volume to attract the most sought-after merchants.
Growing Through Acquisition
Aside from the cash boost, LivingSocial sees Amazon as a valuable partner that could help it grow. "To be the biggest player in the local commerce space, there is no one better to work with than Amazon," LivingSocial CEO Tim O'Shaghnessy said in a press release Thursday.
That may be true, but if Google ends up buying Groupon, Google would likely give Groupon an advantage as well. The search engine and media giant has a massive advertising reach via AdWords, AdSense, DoubleClick and YouTube, and a big audience with Gmail -- all of which could be extremely helpful to Groupon.
And even as they are courted by investors and would-be buyers, LivingSocial and Groupon are also involved in their own acquisition war: Each is buying up smaller rivals (primarily outside of the U.S.) to grab marketshare and subscriber lists.
With so many pieces in play, it's too early to tell who will ultimately win. But at least one thing is certain. All those Groupon and LivingSocial ads that are following you everywhere around the Internet? They aren't going away any time soon.