Amazon CEO Jeff Bezos (Image credit: AFP/Getty Images via @daylife)
One of the most surprising findings in Amazon's recent quarterly earnings was its massive writedown of its investment in LivingSocial, the number two company in the daily deals market, $169 out of an initial $175 million investment.
At first, that sounds like a disaster. When you look into the details, it looks like LivingSocial had to write down a lot of goodwill in its acquisitions (ie restate the value of acquisitions on its balance sheet), and that itself is due to the comparables LivingSocial uses to value those assets. In other words, Groupon's stock crash means LivingSocial had to post a huge writedown.
Anyway, that's not the point. The point is that LivingSocial is now cheap to buy for Amazon. Even if LivingSocial's business is foundering (LivingSocial says it's still growing), it still has very valuable assets ; namely a huge opt-in email list, a big salesforce and relationships with zillions of merchants.
And it's key to remember the arcane reason why Amazon didn't buy LivingSocial outright in the first place: because until recently, Amazon didn't collect sales tax in US states where it didn't have a physical presence. Acquiring LivingSocial would have given it a presence in virtually every state. But now Amazon has decided to collect sales tax in every state where it operates (it has undertaken a giant warehouse buildout as a result). So that barrier is gone. It can own LivingSocial outright.
Heck, Amazon should also buy Groupon while it's at it. Groupon is clearly undervalued: its market cap is about $3 billion; if you take out its $1 billion in cash, that's a $2 billion enterprise value, for a roughly 1X revenue valuation. For a company that's demonstrated profitability and is growing at double digits in the $100 billion local advertising market, that's insane. Some of Groupon's stockmarket-related troubles have been self-inflicted, with the company misstating earnings and so forth, but on the fundamentals Groupon seems pretty undervalued.
Amazon could easily buy LivingSocial and Groupon for, say, $5 billion in cash and stock, and turn it into Amazon Deals.
But why Amazon, and why should it do this?
First of all, the synergies are obvious. There's clearly overlap and duplication in Groupon and LivingSocial's email lists, sales forces and so forth, as well as some fixed costs that can be spread around. LivingSocial has built an "experiences" business to differentiate itself, that could be sold to Groupon's bigger list; Groupon has been hard at work on daily deal personalization technology, which would work better with a bigger list. Groupon could clearly use some financial and operational rigor, at which Amazon excels. Daily deals have been shown to be a scale business, and Amazon is all about economies of scale.
So right off the bat, if Amazon buys LivingSocial and Groupon it can turn them in a much better business than they are as standalone companies.
Second of all, local is the next big frontier in ecommerce. Helping people buy close to them and around them and shifting local advertising dollars online is a gigantic opportunity which, as the leader in ecommerce, Amazon can't ignore. (It's why it invested in LivingSocial in the first place.) Local advertising is generally estimated to be a $100 billion market in the US.
Those two reasons are already pretty significant, but there's a third, absolutely excellent one: it would be a killer app for the Amazon smartphone.
We know Amazon is coming out with a smartphone at some point. We know the smartphone will be based on Android, but come with the Kindle experience, software and content ecosystem. We know Amazon will find a way to compete on price to sell the smartphone. And we know advertising will be part of the way Amazon makes money on the device. That's the Kindle playbook.
Daily deals aren't just daily deals anymore. Groupon Now, which Groupon believes to be its future, is an app that gives you real-time discounts for stuff around you. For merchants, it's yield management ; for Groupon, it's a way to build a network effect and a bigger moat around its business, and sell more than just once a day to its audience.
Now imagine the following slogan: "With Kindle Phone, you can get experiences around you at up to 50% off."
This is just killer. It's price competition, which is right up Amazon's alley. It's a unique and great selling proposition. It fixes the biggest problem with Groupon Now, which is the chicken-and-egg problem common to marketplaces: it needs a lot of people on the platform for it to make sense to have deals there; with smartphones flooding the market with Groupon Now built-in, you at least get the chicken. It's obviously a win for the consumer, who gets deals. It's a win for Amazon, which can discount the phone very heavily knowing how it's going to make money on the backend. It's a win for the daily deals business as such.
There's almost no doubt that Amazon has been hard at work on a phone. The Kindle ecosystem needs to have a phone, and the global smartphone market is estimated at around $150 billion. The question has been, how to make a difference in the market. The Kindle Fire made sense, because it was different: it had a specific pricing model and content ecosystem.
This is how to do it.
