Tags: LivingSocial | Groupon | high-tech | bubble

Fortune: Another High-Tech Bubble Is Popping

By Michael Kling   |   Monday, 03 Dec 2012 08:17 AM

Listen closely and you can hear the sound of another high-tech bubble popping.

LivingSocial, an online coupon business, announced it is laying off about 400 employees, about 9 percent of its work force.

That shouldn't be a surprise, according to Fortune. The hype and tons of investment that LivingSocial — and other online couponing outfits like Groupon — once drew never made sense in the first place.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

The online couponers were once the darlings of the tech media world. Tech blogs gave Groupon a Crunchie award for the best social commerce app in 2010, and its CEO, Andrew Mason, was named the Crunchie CEO of the year.

Groupon's fortunes quickly reverse. Mason was accused of violating the initial public offering (IPO) quiet period and approving improper accounting, Fortune reports, and some top executives quit. After skyrocketing, its stock dropped 80 percent.

Although its cash flow became positive for the first time, LivingSocial reported a $566 million loss last month and a $496 million charge on loss of value of acquisitions.

Early fans of online couponing companies failed to see the inherent flaws in the companies' business models, according to Fortune. Consumers use the coupons get discounts — sometimes quite substantial ones — from local businesses, but rarely return to become loyal customers paying full price. And the barriers to entry are small. Anybody can jump into the business, and for a time it seemed like everyone did.

Online coupon firms are doomed, agrees Daily Beast.

Online coupon users, who focus on getting deals, are unlikely to return to a business and pay full price without a coupon, it says, quoting David Reibstein, a marketing professor at the Wharton School at University of Pennsylvania. That means businesses give them a deal, sometimes at a loss, and get nothing in return.

Groupon's financials show that its revenue growth has shrunk, according to Daily Beast. The company's marketing and sales costs are increasing since it needs more salespeople to get fewer dollars from each customer. Its stock was recently trading at $4.50, a fraction of its $20 IPO price. The company laid off 954 workers in the third quarter and 80 more in November.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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