Groupon’s Rise and eBay’s Decline

Groupon screenshotA pair of ecommerce powerhouses made news last week for very different reasons. The fast-growing daily deal site Groupon was courted by Google for an acquisition valued at up to $6 billion before the talks fell through. Meanwhile, a New York Times report highlighted how moribund eBay has become, saying that revenue from the company’s auction site will be outstripped by its subsidiary PayPal within a few years.

At first glance these stories have little in common, but the truth is the economic factors contributing to Groupon’s growth should be doing the same for eBay, had eBay not made a long series of strategic blunders.

Groupon is still a relatively new service, which makes the acquisition talks with Google all the more impressive. Launched in November 2008, the company’s revenue is already reported to be around $50 million per month, with gross margins in the range of 50 percent. Its revenue grew by nearly 900 percent in the 12-month period through September. Forbes called Groupon the fastest-growing company in history.

This would be an amazing accomplishment in any business environment; it’s all the more impressive given the lackluster economy. But the terrible economy hasn’t been a barrier to Groupon’s success — on the contrary, it’s been a boost. To understand why, you first have to realize that small businesses in America are still in critical condition. A recent WSJ article noted that there are 100,000 fewer companies (with at least one employee) than there were a year ago. As the American consumer deleverages and the credit markets remain stagnant, small businesses are desperate for new revenue sources. Enter Groupon.

Businesses selling a product or service offer Groupon members a discount of 50-70 percent off the retail price and split the remaining proceeds with Groupon, which advertises the deal on its site and blasts it out to thousands of email subscribers. This discount and pricing structure leaves retailers with only 20 to 25 cents on the dollar, making a Groupon campaign far from a sure thing. A study by a Rice University professor recently found that one-third of Groupon promotions are unprofitable, and small business owners vocally debate whether Groupon is good for their business (e.g. the comment section of this NYT blog post). But whatever the risks, the weak economy is prompting small businesses to roll the dice with Groupon at a breakneck pace.

This environment should benefit eBay, as well. While pop culture portrays eBay as a site populated by collectors and hobbyists, small businesses have always been the backbone of its sales. The auction site left behind its Beanie Baby past in the late-90s as so-called “power sellers” — small businesses who used eBay as a primary distribution channel — flooded the site with electronics, computers, and even automobiles.

As I detailed in The PayPal Wars, we saw this firsthand at PayPal. The service started as a handheld mobile payment system, but we changed the product’s direction because small businesses on eBay desperately needed an alternative to paper checks and began encouraging their buyers to use PayPal. By the fourth quarter of 2003, eBay was moving three-and-a-half times more gross merchandise than Amazon, and a small industry of services built around eBay listing and inventory management was flourishing.

eBay should have been poised to share in Groupon’s recent success by giving small businesses a cost-effective sales channel to distribute goods and services. But instead, revenue from the site’s marketplace is stagnant, growing only 3 percent last quarter, compared to 22 percent for PayPal. The turnaround that CEO John Donahoe tried to jumpstart when he took the helm in 2008 still hasn’t arrived.

The reasons for eBay’s stagnation come down to leadership. During former CEO Meg Whitman’s tenure, the company’s culture became increasingly bureaucratic, and improvements to the site became few and far between. eBay hiked fees aggressively while doing little to improve its user experience. The company misjudged the threat posed by Google’s advertising network, which effectively decentralized ecommerce by making it viable for small businesses to sell directly from their websites. Also, as my former PayPal colleague Keith Rabois asserted, eBay started out as a fun, social ecommerce site but it failed to grasp the advent of social networking. As sites like Facebook and YouTube offered consumers new venues for amusement, eBay failed to adapt and actually became less fun.

The party may be winding down at eBay, but over at Groupon it’s in full swing. As an entrepreneur and advocate of small businesses (my own startup CapLinked gives companies tools to raise capital, find investors, and sell assets), I hope that eBay can roll back the clock and recapture some of that innovation it had a decade ago.

Or at least poach some of the Groupon team.

Eric M. Jackson was part of PayPal’s marketing team from 1999 to 2003, where he served as interim vice president following eBay’s acquisition of the company. He is the author of the book The PayPal Wars and currently is the CEO/co-founder of CapLinked, an online platform for companies to share deals and communicate with investors.