LivingSocial: Another daily deal meltdown

(MoneyWatch) Daily deals company LivingSocial is getting more antisocial by the day. The Groupon (GRPN) competitor on Thursday said it was laying off 400 people, or almost 9 percent of its staff, probably because of falling demand for its services. The company lost $565 million on revenue of $124 million in the third quarter.

LivingSocial isn't the only one in its nascent industry to face pressure. Groupon's board of directors is reportedly considering whether to fire CEO Andrew Mason, who effectively admitted this week that his performance merits scrutiny. The company's directors appear to have decided to let him stay, at least for now.

Indeed, only a few years into its existence, the entire online coupon business is struggling, with top players still trying to learn how to grow quickly and profitably enough to satisfy investors. The question is not how much more consolidation can go on so much as how many companies might be left to consolidate. According to trade publisher Daily Deal Media, in the last six months of 2011 alone nearly 800 daily deal companies closed their doors.

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As a privately held company, LivingSocial does not disclose financial information. But what is known is that investors in the firm have a lot riding on its success. Last year it raised a massive $176 million as part of a $400 million private placement that valued Living Social at $5 billion to $6 billion.

Last quarter, LivingSocial had revenue of $124 million, down 10 percent from the previous year. Clearly whatever money it raised was not enough to keep the bad times away indefinitely. And those bad times got spread around. One of its biggest investors, Amazon.com (AMZN), recently had to take a $169 million charge related to the $175 million it put into LivingSocial in 2010.

A fundamental problem for daily deal companies is that their identity as businesses reflects the temporary and fickle nature of, well, daily deals. After all, such firms do not simply advertise a special offer on some good or service -- they ARE the offer. And in marketing, no type of offer lasts forever.

That is why companies must keep testing new ways of getting the attention of buyers. But as the novelty of daily deals wear off, the reason for a deal company's existence comes into question. Companies like LivingSocial and Groupon are not only trying to sell their services, but also the very idea of the service, as the fledgling niche continues to evolve. Whatever their size, reputation or level of venture capital funding, such firms are only as good as their last deal.

[captjake28]

I used them I know exactly why there loosing income... I stopped using them only because they wanted 50% of my earnings thats ok if they where my business partner and was helping pay my taxes also! people would probably use them more if they took a way less precentage but 50% is steep groupon.

[susannakelland]

Interesting journalism, Erik. ... "because of falling demand for its services"... not true. But I guess you can report your guess. Where did that fact come from? Actually start ups that grow too fast need to evaluate where they are and adjust, cutting out the unprofitable parts.

[eriksherman]

First, this is a site of analysis, not simply news reportage. That's why, just below my posts, it says that the views are my own. So, yes, that is part of what happens here.

As far as the reason why someone might think demand is falling, that comes from looking at the category overall (Groupon isn't having a smooth time, and it's the market leader) and from the numbers provided by Amazon. The roughly $400 million loss just last quarter, according to Amazon's report in its quarterly filing, is a pretty big suggestion that things are not picking up well. That type of loss is far beyond letting go of 400 people to realign some business units. Sure, they want to cut unprofitable parts, but this is more than readjustment. And if the loss was just an aberrant quarter, Amazon wouldn't have had to write down most of its investment, as it did.