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Groupon and The Ghost of Startups Past

"You always had an entrepreneurial streak," you tell yourself with a chuckle as you reflect over a hot cappuccino at your favorite coffee shop. With an undergraduate degree in computer engineering and a soon-to-be-granted Master's of Management degree, a startup sounds like a perfect way to jump back into the real world. While the global crisis during the last few years has put the squeeze on venture funding, potentially good ideas still get attention. Color.com got $41 million from heavy hit- ters like Sequoia Capital and Bain Capital before it even had launched, and the payoff could be handsome-just a few months back, Groupon had received a buyout offer of $6 billion from Google after a little more than two years in operation. . . and turned it down!!

As you ponder the issue, you reflect on lessons from tech ventures of the past. One that you know quite well was eBay, having been an avid buyer and a successful seller as a teen, and having followed the company over the years. In fact, you remember an interesting article from back in 2004 drawing a paral- lel between eBay, Inc. and Amazon.com. At the time, the two firms were respectively 60th and 66th in Busi- nessWeek's Top 100 Brands1 and were considered the poster-children of eCommerce, having helped to cre- ate the category. "EBay and Amazon.com, the Inter- net's top two e-commerce sites, are taking opposite approaches to growth. EBay raised its prices this month for the fourth year in a row, while Amazon renewed its pledge to keep cutting prices even if it means lower profits."2 You recall Meg Whitman, at the time the eBay chief executive officer, saying: "The eBay mar- ketplace is a powerhouse [....] We continue to enjoyever-bigger, ever-faster cycles of success, fueled by the unlimited opportunity of our huge addressable market." At the time, eBay was reaching the peak of its financial achievement and growth. You recall in the same article, Amazon's founder and CEO Jeff Bezos was quoted say- ing: "We will, for years and years and years, consistently give back the gains we get in lower operating costs to our customers in the form of lower prices." You also recall the numbers quoted in the article: "EBay's gross profit margin-its revenue minus the cost of sales-was 82 percent. That's after subtracting the cost of running its Web site, customer support and payment process- ing operations. And eBay's bottom-line profit stood at 22 percent of its revenue after subtracting all other expenses, including the hefty $172 million that eBay forked over for marketing and sales expenses. Amazon's gross profit for the same quarter, by contrast, was 22 per- cent, and its bottom-line profit was under 4 percent."

Was Groupon applying some of eBay's lessons? Was Color.com? As you ponder your next move, you cannot help but think that replicating eBay's early and sustained success is predicated on understanding these dynamics.

DISCUSSION QUESTIONS

1. Why have these two companies taken such diametrically opposite approaches?

Please start this discussion by explaining and comparing the value proposition for amazon and ebay, for example : brand recognition, ecommerce business model, how does each make $$$?, do you trust each company?

2. Why is Ebay in such a strong position?

1) Digitalization of content

2) Exponential price-performance improvements

3) Increasing returns to adoption

4) Standardization and commoditization of IT layers

5) Switching costs and lock -in.