coupons.com coupon printer

Box.net. sync (just going to access via web on this computer – stick with Dropbox)

Bonjour.  wtf is this on my windows box anyway?

Hulu desktop (since they went paid, I don’t use it anymore)

iCloud. (this is a windows box and iCloud doesn’t sync shit right anyway)

Java 6 update 30, have later version

join.me (never use it)

McAfee security scan plus.  (relying on Microsoft )

Mobile Broadband Generic Drivers (from old wireless card)

MobileMe control panel (don’t use it)

MyCurrent (from Overstock.com never use it, it polls a lot)

Safari – use Chrome and it polls

AliBaba trade manager (does a lot of polling, runs at startup takes up memory)

OpenAL.  No idea what it is

Last Friday, I said that Groupon would report/spin favorable Q1 results and the short sellers would be squeezed into a pop on the stock.  If you had bought the stock friday and sold monday on the short squeeze you would have made almost 40%.  Today, as the news sets in and people actually read the 10Q, the stock is trading back down.  Here are a couple observations from my reading of the 10Q that may explain some of this.

1.  Margins are down.  1Q11 gross margin (gross billings/GAAP revenue) was 44.16%, in 1Q12 it is 41.25%.  Margins generally in Groupon Goods are lower so as that business grows, margins decline, and margins in traditional local offers are getting squeezed by competition. 

2. lower marketing spend is slowing growth.  In Q111 when Groupon spend 54% of their revenue on customer acquisition, the active customer count increased 49%.  In Q112 when they spend 21%, the customers only grew 9.5%.  Groupon would have you believe that lower marketing spend and increasing revenue mean margins are going to improve. This has not happened.  At this rate of marketing productivity decline, you could see marketing spend go to 10% of revenue and growth go to zero (only flat customer numbers to replace churning customers).  That is where this is headed in my mind.  10-15% marketing spend, flat customer growth.

3. in Q112 despite huge revenue and billings growth, they only increased shareholder net asset value by $16M ($701M to $717m).  All those sales and expenses are not improving shareholder assets.

4.  While Y/Y marketing expense was down $230M-$116M, Y/Y SG&A was up EVEN MORE $142M-$283M.  Makes me wonder if the accountants are reclassifying marketing as SG&A in and attempt to keep the party line about lower marketing expenses going. I wouldn’t be surprised by another “restatement” in the near future.

5. Not only are the gross margins deteriorating (see #1), even more concerning, the NET margins are deteriorating Y/Y very rapidly.  I suspect this is in large part due to the higher cost of Groupon Goods shipping, warehouse, etc.  Q111 net margin (cost of revenue/ Revenue) was  39/295 = 13.22%.  Q112 net margin was 119/559 = 21.28%.  Ouch, so as Groupon grows, the cost of running the company is increasing faster than their revenue and margins are shrinking.  That only ends one way.  zero. 

6. Hidden returns numbers. There has been a lot of reports in the press about increased returns at Groupon, especially in Goods. There is no way in the 10Q to figure out the size, shape of the return issue. It looks like they are hiding it, so I am sure investors are nervous.  They fear another restatement based on hidden returns liability.  The company does admit in the “restatement” on page 10 that part of the increase in cost of revenue is from putting the returns over there instead of in marketing.  So yea, marketing is down, but the costs are still there, they are over in cost of revenue and SG&A. 

7. More insider dealings.  On page 22, as part of the expansion into Groupon Goods, the company entered into an agreement with Echo Logistics, Inc. “echo”, a company co-founded by three groupon guys including chairman of the board Eric Lefkofsky.  Given how much Eric has pulled out of Groupon ahead of current public investors, more insider dealings like this are giving some investors stomach aches. 

8. No comments on where growth is going to come from or separating out Now/Goods, Travel or any other business. Believe me if those businesses were growing and giving great margins, they would be called out.  The fact they are not tells shareholders they are underperforming.

Summary:

Groupon is maturing, slowing and trying to expand but it is not going well.  They are moving from High margin business (local offers) into low margin business (products).  Contrast that to Amazon going from low margin (products) to high margin (Cloud and Amazon local).  Amazon is being rewarded for margin growth, Groupon is being punished.  Despite the revenue growth, cost remain too high and are increasing faster.  I expect growth to slow and profits to be down next quarter.

All,

It is with great regret we announce to you the closure of Digital Doorstep through Chapter 7 Bankruptcy.

Digital Doorstep has experienced fatal technology challenges to our redemption system causing severe late payment of over $3 Million in past due receivables by 23 Digital Doorstep Clients. Digital Doorstep's clients refusal to pay for services rendered has left Digital Doorstep in a position where it must formally send consumers seeking their product back to the Daily Deal site they purchased the product on.

For the next 45 days Digital Doorstep will continue to capture all consumer information when seeking redemption and forward consumer code request for your deals directly to you weekly from codes@digitaldoorstep.com

Launched in February of 2011, over 1 Million consumers have purchased Digital Doorstep "Experiences" ranging from Date Night to Girls Day Out and many more. Digital Doorstep has successfully serviced on the behalf of our daily deal clients over 600,000 consumers in the past 120 days. We pride ourselves in customer service and are shutting down redemptions to prevent further frustration by consumers.

We respectfully deny any attempts to "increase breakage" or to delay consumers in any manner whatsoever. Our redemption model has not changed from day one, it is simply a process of entering your code on our website and having the cards or codes emailed or postal mailed to you. Prior to our technology crash and late payment issues Digital Doorstep flawlessly serviced over 500,000 codes through our redemption process.

A company of our size simply cannot sustain $3 Million in unpaid accounts receivable.

Effective immediately Digital Doorstep will direct all consumers who have purchased a Digital Doorstep experience through your website  to seek an immediate refund or request direct delivery of their "experience" from your site.

Digital Doorstep has listed you as a potential creditor and you will have the opportunity in the next 45 days to ensure your claim is paid through our asset liquidation. The U.S. Bankruptcy court and a U.S. Bankruptcy trustee will be responsible for liquidating Digital Doorstep's over $3 Million in past due receivables, undelivered inventory of $2 Million in gift cards and digital codes,  and finally our database of over 700,000 active buyers to distribute funds to our clients who have paid in full and have open redemptions in our system.

For the forseeable future, Digital Doorstep will handle all client inquiries through our attorney Tom Polis and all consumer inquiries at info@digitaldoorstep.com

Thomas J. Polis, Esq. 
Polis & Associates, APLC
19800 MacArthur Blvd., Ste. 1000
Irvine, CA 92612

Formal bankruptcy filing information, including case number and details on the claim process will be forthcoming.

We sincerely thank you for the opportunity to have partnered together and will cooperate fully with the U.S. Trustee to ensure any and all financial impact to your company is handled through an expedited asset liquidation process.

Sincerely

Digital Doorstep Team

Smart Hacks 6 pack of Sugru.com fix all silicon

Replacement Gibbons Slack line for one left at camp last summer. This time I bought the “Funline” model which is a little wider and the treewear tree protectors.

The following item was ordered:

Burlesque [Video On Demand] $3.99 Sold By: Amazon Digital Services, Inc.

New Crib coming!

1	"Bloom Alma Mini All-in-One Package, Harvest Orange/Coconut White"

1 "Wilderness Medicine, Beyond First Aid, 5th Edition" William Forgey; Paperback; $9.86 In Stock    Sold by: Amazon.com, LLC 1 "Kill Or Get Killed" Rex Applegate; Paperback; $24.00 In Stock    Sold by: Amazon.com, LLC

Delivery estimate: June 2, 2011 1 "Saxx Men's 24-Seven Trunk, White, Large" Apparel; $23.99 In Stock

hello letterly authors,

In the Daily Deal space, I am constantly surprised by the outrageous restraint of trade attempts made by some vendors.  I can only think that those who practice exclusivity and heavy handed tactics are hoping merchants don’t read their contracts.  Here are a couple of “gotchas” that you should look out for in some of the OTHER guy’s contracts.  This is actual contract language from a Groupon contract.  I have heard that merchants can negotiate these provisions if they know they exist.  I recommend you do so all your options promoting your business can be on the table.

Groupon has 90 day LOCK UP.  You can’t promote your business with any other deal site for 90 days.  At Tippr we do not restrict your ability to market your business.

Groupon holds your money for up to 60 days.  What isn’t a Billion dollars enough?

Groupon tries to muzzle their merchants and asks for “injunctive relief” if merchants talk about their Groupon deals.  That is not very friendly.

The bottom line.  Read your Daily Deal contract.  Object to anything that limits your ability to market or operate your business.  Don’t get muzzled or hobbled.

One such overnight success story is the site Living Social (full disclosure I run a competing platform at Tippr.com). While the site has been a consumer success, they have had more than their fair share of technical challenges. Initially these technical challenges had to do with scaling to meet consumer demand ( a good problem to have). Now unfortunately there are serious security and commerce transaction holes being exposed. Unfortunately Living Social is not just a site with funny pictures of cats. It is a commerce site dealing with hundreds of millions of dollars of transactions on behalf of their merchants and customers. Bugs in commerce sites can lead to GIGANTIC losses for everyone involved. This is not just "whoops the site is down" stuff. This is REAL MONEY.

Here is the latest problem. Living Social doesn't do server side quantity validation (at least they didn't yesterday). Who cares you say? Well Amazon.com for one. Their latest offer of a $20 gift certificate for $10 has the explicit restriction of ONE per customer and no gifts. You see, Amazon actually only wants to discount their product for new customers or existing customers only on $20 of merchandise. If Amazon knew there was a way to buy say 100 vouchers and receive $2000 of Amazon merchandise for $1000, they would probably blow a gasket. Jeff you better sit down. Because Living Social only validates restrictions on order quantity in the client, and not the server, there is a simple inspect element command in many browsers that lets you change the "1" to any number you want. See the screen shot below.

I won't go into all the details of how to perform this hack in your own client and I am only posting this near the end of the Amazon offer because I don't wish this liability to be any worse than it already is. Unfortunately I have received notification of this vulnerability from multiple sources today. Based on the feedback I am getting on the extensive use of this hack on this particular offer, I hazard to guess that thousands of people have exploited it. From the magnitude of the exposure, I wouldn't be surprised if 50-75% of the total purchases of this deal were in violation of the one per person rule (meaning that amazon only got a hundred thousand or so unique customers not over a million).

Bugs are unfortunately a fact of life in software. But this particular vulnerability is not a bug. It is a DESIGN flaw. Programmers took a short cut by putting quantity validation in the client. They hacked the site together and are holding it together with bailing wire. I hope for the benefit of Living Social merchants and advertisers, they take some of their $175M and hire some top notch commerce architects. This didn't need to happen.

Don't let anyone tell you software is easy. Don't trust your business to software cobbled together as a hobby that just happened to take off. Don't underestimate the value of good software engineering. At scale, when you are selling real volume and doing serious business, the details matter.

UPDATE 10:58PM
Thank you to all of you who have written and sent further proof of this and other vulnerabilities in the Living Social system. Here are two screen shots I received anonymously which confirm the hack and show purchased vouchers hitting the credit card and in a user account.

In addition, I received two MORE ways to circumvent the limits by using the browser back button and a simple e-mail address hack (no I won't explain). A reader with the first hack purchased 7 vouchers and a guy with the second hack purchased 5 vouchers.

Business Insider has also made a note of this hack and contacted the company. The CEO claims that they "intentionally" designed their system this way (uhm, ok Tim) and that the server takes care of everything later at settlement. Well I am sure the server does that NOW that the vulnerability is public and I am glad for Amazon's sake that the site is working overtime to fix this problem. Tim further suggests that the problem is not wide spread and that client side hacks are not showing up in the number sold. The screen shots above tell a different story. I have an inbox full in screen shots like that. One person with 100 vouchers in their account. That is not a client side hack that was ignored by the server. 100 of the over million sold were certainly sold to one person. The number sold on the live site that ticks along as people purchase is certainly overstating the unique purchasers by some significant amount. Maybe I just have alot of hacker friends and my 50-75% overstatement is off. When LS runs their "server side reconciliation" and washes out all the gamers (as they claim they will), I wonder if they will issue the "adjusted" number sold. I suspect not, especially if it tarnishes in any way their "biggest day ever".

But this post is not about Living Social sales. It is about quality software development and doing right by your business partners in the deal business. If there were alot of gamers, Amazon just gave 50% off on over $25M worth of merchandise that they probably would have sold at full price to these same people anyway. Amazon are incredible at measuring the ROI on any promotion. If this one turns out to be a dud, I doubt they would admit it publicly, but they will know.

Daily deals done right on a quality software platform with appropriate controls can be the most effective customer acquisition tool an advertiser has. Done poorly they can degrade your brand and erode your value proposition. I hope this Amazon promotion ends up the former not the later.

I am a tech nerd.  I know the difference between a bit and a byte.  I know how to code (not well).  I am passionate about product and technology.  While with Microsoft in the early days (1989-1997), the place was full of similar tech nerds with bad hygiene and hyper focus.  In recent years, Google has become the place for the smartest tech nerds to go.  Google is fundamentally an engineering driven company like Microsoft was.  Back in the early days of online services I remember Microsoft trying to get into the content business with MSN (to compete with AOl) and hired a lot of creative hollywood type people.  The culture clash was crazy bad and I believe eventually that is what killed Microsoft as a content company. Engineers just don’t do content. 

Now onto Groupon/Google.  Groupon is run by a guy who’s last job was in a band.  One of their most prized assets is the editorial voice of a talking cat.  This is a consumer brand/entertainment company.  This is not an engineering driven organization.  The culture clash between Google and Groupon is going to be epic.  If it happens I will enjoy watching the destruction from the sidelines. 

As a Google fan and an ardent believer in the engineering driven culture (it is what we have at Tippr), I will be sad if the merger happens.  It would be a giant mis-step for Google and it will fail. 

Today, this was brought home in spades while reading a story on Business Insider about a Google/Groupon rumor.  Business Insider has a group commerce section which is Powered By Tippr.  What shows up in the middle of the story about Groupon/Google?  A Pipeline deal which is powered by Tippr.  Got to love it when it all comes together.

Tippr ran a deal for Weekly Cinema as they were getting into the market which offered customers 4 movie tickets for $20.  $5 per ticket.  See it here in seattle. After this became one of our most successful deals, Groupon took notice and called Weekly Cinema offering them an exclusive long term relationship.  Now of course the conspiracy gremlin in my head is telling me Groupon is doing that to kill Tippr and deny competition any meaningful revenue.  There is some of that I am sure, but lets look at what happened to consumers. 

Consumers lost out.  Groupon now has 6 tickets for $38 in NYC.  By my math that is $6.33 per ticket.  That is a bad deal.  Groupon costs consumers money an limits merchant’s ability to market their business.