For the moment, LivingSocial now has a stake in its largest competitor’s success. In Eric Lefkofsky’s largest acquisition since stepping in as chief executive, Groupon has bought Korean daily deals site Ticket Monster from LivingSocial for $260 million in cash and stock. The deal, which was announced during the company’s earnings call Thursday, comes as the company posted a wider-than-expected loss in the third quarter due to continued weakness in international markets as well as rapid slowdown in the growth of its goods business.
The announcement sent shares down, and then up again after the call with investors. The company saw revenue growth slow to 5% year-over-year as revenue in its EMEA segment dropped by nearly 20% compared to a year earlier. While growth in its North American goods business came to a crashing halt, dropping to 5% year over year down from 112% a quarter earlier, local revenue, which includes its core local deals business, grew slightly year-over year.
During a call with investors Thursday, Lefkofsky attributed the weak earnings in part to a double-digit drop in email open rates caused by recent changes to Gmail as well as changing cashflow dynamics due to its ongoing effort to shift from a daily deal purveyor, pushing flash sales to customers over email, to a marketplace where users search for deals of their own accord.
“In our original daily deal email model consumers needed to buy everything upfront, which meant that our sales were front-loaded around newly launched deals,” Lefosksky told investors on the call Thursday. “In the new marketplace model customers can wait and buy deals closer to when they actually use them… [which] we believe this has created short-term pressure on our email business.”
Part of what’s driving the strategic shift toward a more search-oriented model is the rapid growth of Groupon’s mobile business, which accounted for more than half of all transactions in North America last quarter. As more consumers look to buy on their mobile devices, and contextual search — the sort of product that the company tried and failed at with its Groupon Now initiative — becomes exceedingly more important, there need to be enough active deals to make it worthwhile for users.
Beyond the effect on its balance sheet, the shift also means that search engine marketing and optimization will play a much bigger role in Groupon’s bottom line. Lefkofsky told investors that the company intends to invest “invest heavily in SEM and SEO,” and expects revenue, generated from search, to be on par with other ecommerce sites.
The shift explains, in part, an apparent increase in a debated practice of buying branded keywords on behalf of merchant deals. Critics question whether the tactic, which effectively targets ads to users who search for the name of the business, is effectively intercepting, and generating revenue, from consumers who were already searching for a merchant. With its investment in search set to increase, the practice and the underlying question of whether the company is bringing customers to business who would not have made a purchase otherwise, will likely persist.
With email on the decline, and mobile usage exploding, much of the targeting technology which the company has built over the past five years is now effectively inconsequential. The question for Groupon is whether it can succeed where it has failed in the past, creating the kind of local discovery experience where the draw of a discount outweighs the deep content advantage of competitors like Yelp, which has added commerce capabilities in recent months.
Steven Jacobs is Street Fight’s deputy editor.