Damian Thompson

This article was originally published on Minyanville

It isn’t the long-awaited Facebook IPO, but it just might be the next best thing. It certainly will be the biggest technology IPO to date this year when Zynga goes public. Zynga is an online game maker whose name might not be a household word, but its games most likely are. Famous for such Facebook games as Farmville, Mafia Wars, andCityville, Zynga is expected to be valued at $20 billion.

IPO Details From the S-1
In its IPO filing, Zynga is seeking to raise $1 billion. The investor prospectus gives us an in-depth look at Zynga’s finances and details about its business.

Q1 2011 revenue: $235. 4 million
FY 2010 revenue: $597.5 million
FY 2009 revenue: $121.5 million
Proposed stock ticker symbol: Not known
User numbers: 232 million in 166 countries

Who Stands to Gain the Most on Listing Day?
Zynga’s chief executive and founder, Mark Pincus, holds the largest stake in the company. Mr. Pincus and his related entities own almost 16 percent of the company. He has already $109.5 million worth of shares this March. This isn’t his first IPO as he was the chairman of Support.com (SPRT), which went public in 2000. He owned 17 percent of that firm at the time.

Venture capital firms that got in early also have significant positions in Zynga. Kleiner Perkins controls 11 percent of class B shares. Union Square and its related entities own 5.5 percent of Zynga’s class B shares. Institutional Venture Partners owns 6.1 percent of the pool. Foundry Venture Capital was one of Zynga’s earliest backers and owns about 6.1 percent of the pool. Avalon Ventures also owns approximately 6.1 percent. Finally, if it is a huge Web company on the verge of publicly listing, DST Global will have a position. In this case the Russian late stage investor has 5.8 percent of the pool.

Not All Shares Are Created Equal
Zynga’s IPO consists of three classes of stock, class A, B and C. Class A shares will be issued to public shareholders, while class B and C shares will stay in the hands of its top executives and venture capital investors. Mr. Pincus owns all of the highest-rated Class C shares and should most likely have a very strong controlling vote.

This should raise some eyebrows and was even stated in the prospectus as an investor issue. “This concentrated voting control will limit your ability to influence corporate matters and could adversely affect the market price of our Class A common stock.”

 

This article was originally published on Minyanville

In the past six weeks Groupon has started a Chinese affiliate company, launched a mobile coupon platform, and is now in discussions about a possible IPO valuing the company upwards of $25 billion dollars.

You might think that’s moving fast, and you would be correct, but it is nothing new for a company that in less than two and half years has grown to billions in revenue and is the dominant player in a category it created.

A Rough Timeline

2007 Groupon CEO Andrew Mason launches ThePoint.com.

Nov 2008 After ThePoint fails to attract enough ad revenue or user base, Mason switches focus to daily-deals and calls new business Groupon

Sept 2010 Growth of business explodes rapidly expanding into 150 markets in the US and 100 globally. Copycats start to flourish as well.

Apr 2010 Groupon raises $135 million from DST, a late-stage investment firm.

Aug 2010 Company valued at $1.5 billion and becomes the fastest company ever to $1 billion in sales.

Nov 2010 Reportedly spurns $6 billion offer from Google (GOOG).

Jan 2011 Groupon attracts $950 million in investment valuing the company at $4.75 billion.

Feb 2011 Reportedly eying a spring IPO at a $15 billion valuation.

Apr 2011 Speaking with investment firms about possible IPO with valuation up to $25 billion.

To put that in perspective, in 28 months the company is expecting a public offering value higher than Google’s $23 billion market value when it floated on the exchange. Another example of its meteoric rise is the explosion in headcount. At the end of December 2009, the company’s payroll numbered 124 people; today it has a global work force of more than 5,900, roughly half of which signed on in the last four months.

Threats

As Groupon grows, it is facing increased pressure from competitive daily deal sites and the No. 2 in the market, LivingSocial, recently raised another $175 million. Larger players, meanwhile, are also plunging into the market. Google is testing a rival product called Google Offers, and Facebook is expanding Deals, its location-based deals program.

There is also some backlash by users of the service complaining about the inability to profitably service the coupons offered and seeing no marked increase in longer-term business after the deal is over. According to Forrester Research analyst Sucharita Mulpuru, Groupon is having trouble retaining businesses.

“They have more employees than I think Facebook has, they’re making less money, they’re in markets as third tier as Sioux City and Greensborough and they haven’t got many merchants to do more than one Groupon per year,” she said.

“They have salespeople who are hounding every small and large business in America but even then, they’re having a hard time renewing and getting other merchants to agree to do Groupons,” Mulpuru added.

For further analysis of the competitive landscape and pressures, see Groupon’s a Sure Thing — Right?

Is It Worth It?

There is a marked difference between whether it will IPO at such sky-high valuations (probable) and whether it is worth such a huge sum (unlikely).

We know that Groupon generated $760 million in sales in 2010, according to a leaked internal memo from CEO Andrew Mason in February. Plus, rumors at the time of the Google acquisition talks had it that the company’s projected 2011 annual revenue was $2 billion.

The company’s growth is impressive but enough for it to quintuple its value in four months, that is a huge stretch. More likely, Groupon’s inflated valuation comes as desperate investors want to get in on the action as witnessed by the increased activity in the secondary markets for pre-IPO shares for companies such as Facebook and Twitter.

Closely held consumer Internet companies like Groupon are “being valued as though they are going to be the next Google or eBay (EBAY) or Amazon (AMZN),” said Claire Enders, the founder of London media-consulting company Enders Analysis. “But their business models may reach their limits a lot more quickly, or not work in as many markets.”

According to Groupon, it hasn’t decided how much it plans to raise from the initial offering of its stock to investors, but it could be as much as $1 billion, according to the people familiar with the matter. The IPO is currently planned for the second-half of 2011.

This could be the “big one” investors have been looking for and it might start the avalanche of tech IPOs with Facebook, Twitter, LinkedIn, Skype, Pandora, etc. to follow.

This article was originally published on Minyanville

We are three months into 2011 — the year of the supposed resurgent tech IPO, and there hasn’t been a blockbuster yet.

Sure Demand Media (DMD) is up over its issue price and can be considered a success at this point, unless Google (GOOG) gets its way. But even if it dodges Google’s brand of justice, it wasn’t the smash hit the market is clamoring for.

Then take Skype, who filed their S-1 in August of last year but has delayed their IPO until later this year. Why? Let’s take a closer look?

Can you Call Yourself a Business if no one Actually Pays?

Well, not no one, but not many. As of November 2010 only 6% of the Skype user base actually forks over any cash at all and the company is constantly looking for ways to increase that conversion rate as well as add new revenue streams. For a company that is still running at a loss, more revenue from its VoIP technologies, both in the consumer and enterprise sectors, is essential.

Earlier this week the newest revenue stream was announced: advertising.

Banner ads? How 2001 of You

The advertising will appear in the home tab of the consumer versions of Skype for Windows in the US, UK, and Germany initially. Skype will show one brand ad per day in each of the markets where advertising is being sold. The company has been testing ads over the past month and will be working with a number of advertisers, including Groupon, Universal Pictures, and Visa (V).

So in a blast from the past, dotcom 1.0 fashion, Skype’s revenue woes will be fixed by advertising? It’s a bit more intricate than that according to the company.

“We think this is an interesting opportunity for advertisers,” says Doug Bewsher, Skype’s chief marketing officer in an interview in Ad Age. “This is a premium placement to engage with our users.” Indeed, people spend a lot of time on sites like Skype, and while Bewsher notes that ads on other social networking sites like Facebook can be small and unobtrusive, ads in Skype may offer more user engagement – “click to call,” perhaps.

The interesting thing to watch will be the future experiments the company might roll out. What Facebook has been able to accomplish is highly targeted advertising and Skype is hoping to offer similar services. The company warns that it “may use non-personally identifiable demographic data (eg location, gender and age) to target ads.” At this stage users can opt-out of this targeting.

However, the power behind Facebook advertising is the “like” feature that creates an eerily correct profile of each user. Skype collects nowhere near that data on user preferences or actions, and just how targeted the ads can be seems in doubt.

What is Skype Worth?

Let’s hope for investors’ sake that this advertising gambit works, as the road to this point has been rocky for the market leader in consumer voice over IP (VOIP) technologies. It was three years ago when eBay (EBAY) announced that it would be spinning off the Internet telephony company it purchased three years earlier for an astounding $2.6 billion.

Last November, eBay sold the majority of Skype to Silver Lake and other investors in a transaction valuing the company at $2.7 billion.

Although Skype is used by hundreds of millions of people, investors have raised concerns about its ability to generate revenue and profit from its vast user base. Skype’s service reputation also took a hit last December when its service crashed, taking millions of users offline for a full day, prompting the company to issue free service days to paying clients to make up for the gaffe.

Things are Looking Up, But…

In a recently updated S-1 for the company, Skype’s average monthly-connected users have increased by 38% and average monthly paying users by 19%, from the three months ended December 31, 2009 to the three months ended December 31, 2010. Net revenues increased by 20% from $719 million in pro forma 2009 to $860 million in 2010, and Adjusted EBITDA increased by 43% from $185 million in pro forma 2009 to $264 million in 2010. Skype’s net loss in 2010 was $7 million, compared to a net loss of $418 million on a pro forma basis in 2009.

So things are headed in the right direction, but serious competition looms in the form of the 800lb gorilla of the industry: Google. Google chat is quickly becoming the internet messaging standard of choice, and with Google voice allowing free calls in the US through the end of 2011, it seems you can add Skype to the list of tech IPOs that won’t be the slam dunk the markets have been anxiously awaiting.

This article was originally published on Minyanville

While social media heavyweights Facebook and Twitter are weighing their choices as to if or when they enter the public markets, business-focused social networking company LinkedIn is downright giddy with the prospect of an IPO.

Profitable? Yeah, Kind of, Sort of, not Really…

LinkedIn filed its S-1 application on January 27 to raise up to $175 million in an initial public offering. As such it’s attracted significant interest as the first social networking company on track to become publicly traded. But is the attraction warranted? Investors are poring over the financial details with a fine-tooth comb, trying to determine how much the company is worth.

“It’s only recently that their earnings have turned positive,” says Jay Ritter, a professor of finance at the University of Florida.

LinkedIn has posted increasing revenue over the past two years but has also posted several quarterly losses during the period. It’s been profitable for the past two quarters according to its filing with the US Securities and Exchange Commission. However the company doesn’t expect to be profitable on a GAAP basis in 2011 due to investments and a declining rate of revenue growth.

Quick Data From the S-1:

Net revenue, January-September 2010: $161.4 million
Net revenue, 2009: $80.8 million

Total expenses, January-September 2010: $148.9 million
Total expenses, 2009: $84.1 million

Net income (after tax), January-September 2010: $10.1 million
Net income (after tax), 2009: -$3.4 million

Cash on hand (as of September 30, 2010): $89.6 million
Total assets (as of September 30, 2010): $197 million

Revenue Breakdown: 

Job listings, January-September 2010: $65.9 million (41% of revenue)
Job listings, 2009: $23.75 million (29% of revenue)

Advertising, January-September 2010: $51.37 million (32% of revenue)
Advertising, 2009: $23.8 million (30% of revenue)

Premium subscriptions, January-September 2010: $44.1 million (27% of revenue)
Premium subscriptions, 2009: $33.2 million (41% of revenue)

LinkedIn Metrics:

Registered users: 90 million (as of December 31, 2010)
Unique visitors: 65 million (average of October, November and December)
Pageviews: 5.5 billion (average of October, November and December)
Employees: 990 (as of December 31, 2010)

LinkedIn did not disclose the target price for its IPO or the date, though it widely projected to be in 2011. Morgan Stanley (MS) will be the lead underwriter for the IPO.

Financial Sleight of Hand or Slip of the Tongue?

The most troubling aspect of the filing is the past untruths it seems to have uncovered. LinkedIn CEO Jeff Weiner has loudly and proudly proclaimed to journalists the profitability of his firm. But the S-1 filings don’t back this claim up.

In August 2009, Weiner told Business Insider, “the company is ahead of its financial plan, profitable, and that ad sales — just one of LinkedIn’s three sources of revenues — are up 50% year-over-year.”

But according to its IPO filing, LinkedIn actually lost $3.4 million in 2009.

This discrepancy is interpreted by some as a misunderstanding and that LinkedIn is profitable, explaining away the costs of heavy investment in infrastructure. But that is not how accounting works. In fact it’s exactly this sort of “fuzzy” accounting practice that got us into trouble with the dotcom bubble; an expense is an expense, and a cost is a cost.

This is the type of “salesmanship” investors have to be vigilant against, and ensure they spend more time reading the materials and poring over the numbers than believing everything that comes out a CEO’s mouth.

Slam Dunk Social Media IPO?

If 2011 is to be the year of the tech / social media IPO — as many think it is — there may be better companies to lead the charge.

Although LinkedIn was profitable in 2010, an income of $10.1 Million isn’t that strong for a company with an expected market cap in the billions. Also, as previously stated, they’re not expected to be profitable this year when they list. Add a CEO that is at best “loose” with his usage of generally accepted accounting principles, and while not exactly smacking of the go-go ‘90s, LinkedIn isn’t the most rock-solid bet in town either.

However saying that, will the IPO be successful? If it’s the first cab off the rank: most likely, which is probably the reason its pushing to beat its much larger and more profitable companies like Groupon and Facebook to the bell.

This article was originally published on Minyanville

During the news graveyard at close of business last Friday, Pandora, a web radio service that recommends and plays music based on users’ tastes and preferences, filed an S-1 form with the Securities and Exchange Commission — the first step in the process of going public. Rumors of an IPO had been intensifying over the past month, with the company said to be looking to raise $100 million in an offering.

What the Hell is a Pandora?

Pandora uses what it calls the Music Genome Project to match songs to a user’s preferences. When a user picks a particular station, based on an artist or a song, it finds the best matches to fit your taste.

Pandora has more than 80 million registered users, with the average listener tuning into the service for more than 10 hours per month. The majority of that activity now takes place on mobile devices

Pandora explained that its service today is primarily a personalized radio station streamed over the Web and mobile phones, but in the future it has aspirations to do much more. Naturally there are improvements to the service, plans to create additional advertising units, growing its outside sales force, expanding distribution to other consumer electronics and automobiles, and international expansion. It also wants to add traditional radio formats beyond music such as talk radio or sports.

A Better Look Inside Pandora

In the details of the S-1 are some very interesting items.

Advertising has accounted for more than 90% of the online radio’s revenue for most of the site’s life. There’s only a small amount from subscriptions, even though there are more than 80 million subscribers that streamed more than 3.9 billion hours last fiscal year. Advertising revenue dropped to around 87% of the company’s total revenue throughout 2010.

Pandora has consistently lost money for the past three years, but that loss tapered off between its 2009 and 2010 fiscal years according to the filing. Pandora lost $28.2 million in 2009 and $17 million in 2010. The company’s revenue more than doubled between 2009 and 2010 — Pandora brought in $55 million in revenue in 2010, mostly from advertising — compared to only $19 million in 2009.

But the company has been profitable for the past two quarters. Pandora made $1.6 million in the second quarter of its 2011 fiscal year and $1 million in the third quarter, according to the regulatory filing. The company has brought in $90.1 million in revenue as of the first three months of its 2011 fiscal year, and has lost around $300,000.

Historic Rough Seas

Although Pandora has enjoyed recent growth, over various points in the company’s existence an initial public offering seemed improbable.

Founded by musician Tim Westergren, it has endured several hardships, including severe budget shortfalls and a 2007 showdown with the music industry over royalties.

Mr Westergren admits to maxing out 12 credit cards to sustain the company he started back in 2000 as the Music Genome Project.

Four years ago, red tape nearly killed the company with a federal ruling that more than doubled royalty payments for Web radio stations. To save the company, Mr Westergren sent a mass e-mail to customers asking them to write to members of Congress to demand the ruling be reviewed. Nearly 2 million Pandora users followed suit, and the ruling was amended.

This wasn’t the only difficulty Pandora has faced; Mr. Westergren speaks often about being rejected by more than 300 Venture Capitalists in the past 10 years.

Tide Turns but it’s not yet Smooth Sailing Ahead

The tide began to turn in 2008 when the company introduced its popular iPhone (AAPL) app, resulting in a significant and rapid increase in the user base. But those new users bring problems of their own: the royalty fees. To wit, the company says:
 

As our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses… In addition, we expect to invest heavily in our operations to support anticipated future growth and public company reporting and compliance obligations.

On top of royalty fees and government interventions there is still the age-old challenge of competition; rivals include companies such as Rhapsody and LastFM. There’s also the new threat of international competition from services like Spotify, which is a major player in Europe and starting to roll out here in the States. And what’s to stop a company like Facebook from entering the fray to keep their users even longer inside their network?

Potential Windfall?

An IPO would be a fairly significant comeback for Pandora. The company says it plans to use the proceeds from the initial public offering to pay about $25 million in dividends to investors and for general expenses. In addition, Pandora said it might use a portion of the proceeds for acquisitions and other strategic investments.

The deal will benefit investors Crosslink Capital, Walden Venture Capital, and Greylock Partners. Mr Westergren owns a relatively small 2.39% of the company. Check out the full rundown of the investors.

The IPO suggests (once again) that the market for initial public offerings continues to improve, setting up a strong year despite companies like Facebook, Twitter and Zynga remaining private — for now at least. LinkedIn filed for an IPO last month with Skype already filing and companies such as Kayak and Groupon waiting in the wings.

This article was originally published on Minyanville

Ah the year 2000, such a glorious year. We were introduced to Jon Bon Jovi as not just a solo artist but also an actor, with a seminal cameo in the classic Young Guns II, as if Young Guns I was ever going to be enough. The dawn of the decade also brought some of today’s technology heavyweights to the public market through several of the most high profile initial public offerings ever. Think about how different your everyday life would look if such juggernauts as pets.com, Webvan, and govWorks hadn’t gone public…

I kid of course, but given the buzz for web 2.0 IPOs this year a little perspective is in order.

Current state of play

It’s been a long seven years since the last tech household-name company went public with Google’s (GOOG) IPO in 2004.

The New York Times notes that In the wake of the financial crisis, there were just 45 offerings of tech companies in 2010, according to investment firm Renaissance Capital. The year before, only 16 debuted.

And increasingly, IPOs are less attractive to many young entrepreneurs who do not want the associated bureaucratic burden, increased costs, and regulatory scrutiny. Thus many company founders are turning to bankers.

Facebook has raised more than two billion dollars from several rounds of financing, and Groupon has raised over a billion after just recently closing a $950 million dollar round.

The largest tech IPOs of 2010 are hardly household names: Verisk Analytics (VRSK), Emdeon (EM) and Fortinet (FTNT), which raised $2.16 billion, $422.5 million and $179.7 million, respectively.

This year that’s all likely to change.

Wishful Thinking?

Most of the tech IPO talk is focusing on Facebook, Groupon, LinkedIn, and Zynga, as it should be. These are all very strong companies with revenues in the hundreds of millions of dollars. They are profitable and growing fast. They are ostensibly everything the failed dotcoms of the late ’90s weren’t, meaning they are real businesses that deserve to be traded on the open markets.

What’s also different is that most of these firms, excluding LinkedIn, aren’t bullish on rushing to the stock market and are instead utilizing additional rounds of venture capital.

Everything Old is new Again

So while the tech darlings are possibly sitting this one out, let’s focus on the companies that are most likely to float. Many of these have a strong dotcom aroma to them.

The most well-known startups sitting in the IPO pipeline — meaning they filed an S-1 but have yet to price — include voice over internet provider Skype and car rental outfit Zipcar. Demand Media, a content farm, IPO’d last week on January 26.

Let’s take a look at each in more detail.

Demand Media (DMD) went public Wednesday on the New York Stock Exchange and despite having never made a profit, closed up 33% — $5.65 from the initial open at $22.65, and trading as high as $25 on the day.

The company’s revenue strategy is to create thousands of niche content sites targeted at search engines. The company has been criticized as essentially a low-cost content-farm that pays freelance workers meager wages to produce mediocre stories at massive scale. The company has tried to battle this perception with mixed results, but the unflattering coverage was even cited in its IPO prospectus as a risk factor.

“We have had a net loss in every year since inception,” the company said. “As of September 30, 2010, we had an accumulated deficit of approximately $53 million and we may incur net operating losses in the future.”

Prior to Demand’s IPO, the Securities and Exchange Commission approved a controversial accounting technique allowing the firm to amortize its content costs over five years. Demand says the “evergreen” content it creates will garner internet traffic for a longer period of time than traditional news articles, which tend to expire on the next day.

Possibly the biggest threat to Demand is its heavy reliance on Google to drive revenue. In the first three quarters of 2010, Demand’s advertising agreements with Google accounted for nearly one-third of its total revenue, according to the company. The firm also faces competition from other web publishers, including AOL and Yahoo.

Zipcar is a car-sharing company that operates in 14 major metropolitan areas and on more than 225 college campuses in the US, Canada and the UK. It specializes in short-term rentals. The company claims that each new Zipcar ordered takes 15 to 20 vehicles off the road, and its fleet now consists of more than 8,000 vehicles. The company’s growth in the UK came from acquiring Streetcar Limited in April 2010, and this is expected to be its growth model to get into Europe.

Zipcar’s most recent financials show a $10.4 million loss on $79 million in revenue for the first six months of 2010, compared to a $4.6 million loss on $57 million in revenue during the year-earlier period. A slump in average revenue per member over the last two years and mounting fleet costs contributed to these losses.

The company is planning to raise $75 million in an IPO, but recently raised $21 million in a series-G financing round. (Companies don’t usually raise money and then IPO so close together.) The strangest part of the most recent round is that none of the existing backers participated — not generally a good sign.

While Wall Street generally loves unique position plays such as Zipcar’s sharing service, there are a handful of so-called peer-to-peer (P2P) car-sharing startups that think they have a solution that could let them become profitable faster, while bringing car sharing to more markets and more potential users.

Skype is the most prominent tech company that’s actually filed for an IPO, submitting registration papers in August of 2010. So far, no IPO date has materialized, and a CEO change in Octoberlast year further muddied the waters. But Reuters reported recently that the company plans to make its move this year with an offering intended to raise up to $1 billion. A Skype IPO could occur as early as July, according to the report, citing people familiar with the matter.

Of 124 million monthly users, only 8.1 million (6%) actually pay for the service. In the first six months of 2010, Skype’s revenues totaled $406 million, a 25% increase over 2009, when it reported $324 million in revenues. Its income, on the other hand, totaled $13.1 million, less than 4% of revenue.

Skype’s new chief executive, Tony Bates, will make a decision about the right timing for the offering once he becomes more familiar with the staff and products, sources said.

Dot Com Taste Test

While each company is different, there are a few troubling signs of mistakes made a decade ago.

Very little profit to wildly unprofitable? Check.

Over reliance on a single revenue source? Check.

Utilizing “fuzzy” accounting to achieve over-stated goals? Check.

While each company has it’s pros and cons, none of them look like the slam-dunks the market is hoping for.

 

This article was originally published on Minyanville

If you’re reading enough news about the tech industry you’ll notice that Groupon, the social buying company, is pretty much the hottest company on the planet right now.

But before we get too far ahead of ourselves let’s remember that the tech industry, and especially the media machine surrounding it, is fickle. At this point last year, Foursquare was the darling of the media and the “next BIG thing.”

The biggest difference between the two? While Foursquare might have figured out the coolest way to send a virtual badge to your laptop or phone for being the mayor of your local coffee shop, Groupon just turned down a reported six billion dollar offer from Google (GOOG). Oh, and then raised 950 million on a 4.75 billion dollar valuation (more on that later) because it’s producing hundreds of millions of dollars in real revenue, and are assured lasting success and a place at the big kid’s table.

Or are they?

Challengers at Every Turn

The first and most obvious challenge is the competitive landscape. Although when most people think of crowd-sourced coupons they probably think of Groupon first, the field is crowded. The closest competitor in size and scope is Living Social. While currently in fewer than half the markets that Groupon operates, it’s the fastest growing social buying site.

In November of 2010 visits to Groupon’s site outnumbered those to Living Social by a factor of 10 to 1. According to Bill Tancer at Hitwise, as of a week ago that was reduced to 2 to 1. While site visits aren’t the most important stat, (registrations and actual use would be) there is surely a correlation between the two. 

Amazon (AMZN) clearly believes so — it recently invested $175 million in the company and offered a very unique 2 for 1 promotion that attracted more than a million purchases.

Other more targeted niches sites are popping up daily as well. Gilt is a company that sells luxury goods online at huge discounts in short-term “flash sales”, and recently launched its own version of exclusive coupons called ‘Gilt City‘. The service is available in New York City for now, but if successful they’re likely to expand rapidly. Like Groupon, Gilt City offers deals from local businesses that are available in limited quantities and for a limited time.

Other entrants to the market include technology and marketing firms that are teaching companies how to launch their own deal sites or offers from their existing infrastructure. This will be interesting to watch as many larger retail companies such as Saks (SKS) and Gap (GPS) could climb on board.

The 800 lb Gorilla

Shortly after being spurned by Groupon, Google announced its own foray into the field, Google Offers, and it appears this service is already live in an introductory way. Offers are currently being listed on Google Maps where businesses can advertise their listing via their Google Places account. Tech Crunch has a sneak peek at Google Offers. While not yet a direct competitor to Groupon, don’t expect Google to sit still in such a large advertising market.

Flaws in the Model or Spilled Milk?

Besides competitors both direct and indirect, Groupon has other issues. Many businesses that have used the service complain that not only does Groupon insist a business’s deal be at least 50% off or better, they take 50% of all revenue generated from the deal as commission. Business owners are also stuck with the credit cards fees, so there is a high chance that unless a campaign is carefully planned it could be a substantial monetary loss to the business.

The efficacy of the business model is being called into question by academics [pdf] as well. Utpal Dholakia, an associate professor of marketing at the Jones Graduate School of Business at Rice University, published a study on that very question. “How Effective are Groupon Promotions for Businesses?”

In his study, Professor Dholakia found that almost a third of the businesses that used Groupon were unprofitable in their promotion. Also, Groupon consumers did not spend a great deal above the face value of the coupon, or return at a later date to purchase additional goods or services.

The very fact of the number of negative reviews from small businesses caused Dholakia to question the viability of Groupon and services like it. “There is evidence from this study that raises some concerns about the sustainability of social promotions as they currently exist,” he concluded in his study. “These promotions are structured in such a way that they give too much value to consumers and not enough value to the small businesses that run them.”

Karen Mallia, Assistant Professor of Advertising at the University of South Carolina backed up Dholakia when speaking to Minyanville. Mallia has also been conducting research in this area and concludes that a number of companies ”are frustrated that the Groupon customer comes for the discounted service and never returns again. In essence, the bargain-hunting consumer attracted by Groupon and the like are unlikely or unwilling to pay full price in the future. Essentially, they abide by the old adage, “never pay retail.” ”

A new Buying Paradigm or Just Flavor of the Moment?

Groupon’s rapid rise and success are certainly impressive and its impact on consumers’ consciousness is not to be taken lightly.

However, there are a number of hurdles for Groupon to clear before it is the safe bet being portrayed by many in the tech and investment community. Even CEO Andrew Mason has voiced some concerns regarding keeping staff focused with all of the hype surrounding them.

According to The Next Web, “one of his biggest challenges at present was “managing expectations” and keeping staff level-headed in the midst of hype around the company’s $15bn valuation and rapid growth. He described all-hands meetings as morbidly sober, with staff having to be (metaphorically) “beaten with sticks… We have a long road ahead.” “

With LivingSocial growing so quickly, Google launching a competitor, companies learning to do it themselves, and rumors that Facebook might enter the market — success is far from guaranteed.

Those six billion dollars might’ve gone a long way.

Read more: http://www.minyanville.com/businessmarkets/articles/groupon-social-media-social-buying-crowdsourcing/1/28/2011/id/32473#ixzz1uiHP7DcW