Thursday, August 16, 2012

Groupon is Not A Tech Company

Tl;dr A tech company is a company who's business model centrally relies on addressing a problem with a unique or novel technological solutions. Groupon's use of technology is incidental to its business model. 

I was reading this article today in Wired about how Groupon's stock fall-off is sharper than other "tech giants." While that is interesting, I think it is incorrect to call Groupon a tech company, and, accordingly, I don't know that it is quite fair to compare Groupon to tech companies. This is in no way a judgment on the quality of Groupons services, the dedication or talent of their team, etc. They executed well and have many very satisfied customers; that alone is praiseworthy. However, Groupon simply is not in the tech business: They sell coupons, en masse. That's it. Doing so did not require any technological innovations, either in software or hardware, and that is why their model is infinitely replicable. This, in fact, it its primary weakness: Groupon simply has no barriers to perfect competition. And when I say 'perfect competition' I mean a competing product offering that is 100% satisfactory and 100% fungible. This is not to imply that technological innovation is necessary to create such barriers: many, many non-technology based services do have such barriers, ranging from businesses that rely on artistry, editorial content, licensing, to networking and access to supply chain, etc.

Importantly, the simple fact that a primary sales interface is web-based doesn't make a company a tech company any more than selling products in brick and mortar stores would disqualify a company from being a tech company. Let's compare to Amazon.

Amazon, at its inception, sold physical books over the internet -- at first glance, this does not appear to be a 'tech' company. However, Amazon was confronted with a variety of relatively new engineering problems regarding the scalability of their website, online sales and computerized supply chain management. So, despite the fact they sold books, they heavily utilized technology to do so, and one of their main competitive advantages was their leveraging of technology to create this massive scalability. Since then, Amazon has firmly cemented itself as tech company, as Amazon Web Services powers much of Web 2.0 and the Kindle fire is a truly revolutionary product.

So, in comparison, Groupon has not apparently solved any problems with novel applications of technology. Neither did Pets.com.

Importantly, Groupon's primary advantage is that it was the first mover, and this advantage will not last long. And it's for that reason that I think that Pets.com and Groupon will share a similar fate. Anyone can sell kibble on the internet, and anyone can offer coupon deals online. In fact, quite in contrast to Groupon's model, which is based on employing warehouses full of comedians to write haikus about discount massages, many companies are popping up left and right that do leverage technological solutions to offering online couponing that are scalable at nearly zero marginal cost. Groupon's model, however, is not scalable, and probably, is not sustainable either. I wish them all the best, but I truly believe that unless they start innovating technologically, they will soon lose their first mover advantage. I believe that there are enough talented people at Groupon to make the pivot, but whether they will pivot or simply try to double down on being the first to market is yet to be seen.