Last week, No. 2 group-buying company LivingSocial sent out an email announcing a new policy that it will stop paying commissions to daily-deal aggregators like Yipit, DealGator and Dealery. These affiliate fees have so far been the aggregators' lifeblood and their only real revenue stream. The people I know who run smaller group-buying sites say the aggregators are by far the best source of new customers and new traffic.
And last time I checked LivingSocial, while big and valued at $1 billion, it was still a whole lot smaller than the big kahuna Groupon. So why would LivingSocial take this tack?
This is particulary mystifying because Groupon itself continues to offer affiliate deals. On the face of it, LivingSocial likely feels it's big enough, has enough money and enough momentum that its own marketing efforts can sustain torrid growth. The company has said it plans to double in size over the next year.
Is It All About Amazon?
In the wake of a $175 million capital injection from e-tailer Amazon (AMZN), LivingSocial also hired a new chief financial officer, indicating it's ready to make a serious run for either additional capital or an initial public offering (which is unlikely, considering the Facebook situation). Yes, LivingSocial can certainly count on aggregators to continue listing its deals in the short term, but as the number of daily-deal sites continues to proliferate, users of aggregators likely won't even notice if LivingSocial drops off the list.
Unless, of course, the Amazon tie-up is about to yield exactly what my DailyFinance colleague Kevin Kelleher suggested in a previous column -- namely, that Amazon would allow LivingSocial to promote its offerings via the e-tailer's enormous email newsletter offerings, which reach many millions of customers. If that's the case, then LivingSocial could well end up giving Groupon a serious run for its money.
Even though Groupon is growing furiously, it has begun to slow as the group-buying phenomenon has reached near-saturation in major markets like New York, San Francisco and Los Angeles. As I noted earlier, merchants are now getting deluged with group-buying sites trying to sign them up for their service. And some other big guns with huge, loyal customer roles and millions of email recipients, like ratings site Yelp! and restaurant reservations site OpenTable (OPEN), are also plowing into the group-buying scene.
Still, I would bet that LivingSocial will be forced to reverse its decision as the market grows even more mature. The simple fact is that everything moves to aggregation after the novelty of these types of services wear off. Even the biggest players in e-tailing offer affiliate deals. Witness Amazon, which boasts an enormous affiliate program that puts its listings into nearly every major shopping search engine and e-commerce aggregation site. Amazon, of course, is known as the savviest merchant online. So if Jeff Bezos & Co. did the math and decided affiliates were a good deal, they probably had good reason.
Watch closely, also, whether this affects LivingSocial's subscriber growth in any way. A quick glance at Google (GOOG) search results indicate it might. LivingSocial is already getting a lower search ranking in many major metro areas that mom-and-pop group-buying startups target. Yes, LivingSocial is buying the top AdWords results on those pages. But that's a very expensive marketing strategy to pursue considering the likely cost of these placements -- and that these costs will probably escalate further.
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