GroupOn Gets Anti-Social


Stocks traded within a tight range on Thursday, and ended the day essentially flat, with the S&P 500 , and the narrower, price-weighted Dow Jones Industrial Average losing 0.1% and 0.8%, respectively. For the month of February, the S&P 500 managed to eke out a gain of 1.1%; year to date, the index is up 6.2%.

The VIX Index , Wall Street's fear gauge, gained 5%, to close at 15.51, but remains well off the high of 18.99 achieved on Monday. (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming thirty days.)

GroupOn to its CEO: Go socialize elsewhere
On Wednesday, deals site GroupOn announced pitiful fourth-quarter results after the market close. Today, the shares lost a quarter of their value; the company then announced it was jettisoning CEO Andrew Mason. What's going on at GroupOn?

According to the Financial Times, GroupOn CFO Jason Child told analysts and investors yesterday that the company would continue to operate for growth, adding "our results are inherently unpredictable." My question, then, is: Growth to what end? For a business that's incapable of earning it cost of capital, growth only serves to burn increasing amounts of precious capital. As to the unpredictability of GroupOn's results, I'd agree only up to a point: They're predictably awful, but it's quite true that there is significant uncertainty regarding just how bad they will be.

A business that doesn't create value for its customers cannot hope to keep their customers, unless it's secured by legal fiat or a monopoly position. A business model that doesn't create value for the customer is only sustainable for as long as you can continue rolling your customer base over, i.e. finding new customers who aren't aware of the adverse economics of your proposition. With regard to its daily deals, GroupOn's customers aren't the individuals who derive value from these deals -- it's the businesses that provide them who don't. As far as GroupOn Goods is concerned, the company has absolutely no competitive advantage whatsoever, and is starting far behind established players in e-commerce.

Social networking shares were a bubble that is now collapsing before us, whether it be GroupOn or social games company Zynga . Some business models will survive, others will disappear -- that process is firmly underway, and it will only keep accelerating. Investors should adjust their bets accordingly.

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