Is Groupon Worth More Than Facebook?

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What if I said you had to invest in one of two large Internet companies. The first company debuted in 2004. It finally cracked $1 billion in revenue in 2010, and it's on track for $4 billion in 2011. In the last two years, its user base has quintupled to 600 million, but almost all of them use the service to browse rather than spend money.

The second company has been around since 2008. It made $750 million in 2010 and is also tracking $4 billion in 2011. It has 70 million subscribers, all of whom use the service to spend money. Its valuation has increased by a factor of nineteen in the last year, and its monthly revenue tripled between Fall 2010 and January 2011.

Where would you invest?

***

In case you didn't guess, the first company is Facebook, and the second company is Groupon.

At first blush, the question posed in this article's title sounds ridiculous. The idea that Groupon, an up-start online coupon company, could be more valuable than Facebook, the social media godfather, doesn't make any sense. Facebook's goal is to be the world's Internet portal and history's first trillion-dollar company. Groupon's goal in the meantime seems to be to outlast LivingSocial. Facebook is valued at more than $75 billion. Groupon is eying a public offering at one-third that figure.

But the side-by-side comparison is striking. Would you have guessed that Groupon and Facebook are projected for the same 2011 revenue? Or that Groupon's January earnings this year were a fifth of Facebook's total revenue last year?

Private investors value Facebook over Groupon for the same reason NFL spotters trust speed and fundamentals over college players' stats: Scouts always look for upside. And it's hard to think of a company with more upside than Facebook. The social network's user base is twice the size of the United States. Facebook accounts for one out of every four page views in the U.S., and it sends more traffic to newspaper and magazine websites than Google News.

In short, Groupon is a coupon site. Facebook can be a coupon site. And a global newspaper. And an Internet-wide marketing platform. And a thousand more things.

Groupon is looking to inject itself into the American zeitgeist, too. Its new innovation, Groupon Now, is an app with two buttons: "I'm Hungry" and "I'm Bored." Click one and Groupon hooks you up with companies offering real-time deals to fill slack in their inventory. The technology would help small businesses become more like airlines, matching supply against demand to maximize revenues, Brad Stone and Douglas MacMillan explain. For consumers, it's means something more:

"We want people to think about Groupon every time they walk out the door," [founder Andrew Mason] says ... The daily deals present an invitation to get people to do something they ordinarily wouldn't--dine at a new restaurant, take sky-diving lessons, get their backs waxed. Groupon Now "is a carrot that gets them to turn left or right," Mason says.

Unlike Groupon's daily deals, which tend to generate a flood of customers, Groupon Now might lure just a few, but at the right time. Rob Solomon, Groupon's president, says the true promise of Groupon Now is to help eliminate perishable inventory--food ingredients, labor hours, and anything else that's wasted if not used immediately. "If we can eliminate 10 percent of perishability, we can change the dynamics for small business owners," he says. Small businesses would become more like airlines, matching supply against demand to maximize revenues. "If we get this right," Solomon says, "we are going to influence what tens of millions of people are buying at a frequency that we have never seen before."

The idea is potentially revolutionary. But Groupon Now could backfire if it delivers only the dredges of commerce. Bars might want to offer deals at noon, but do you want an app soliciting you for an 11AM scotch every morning? "I don't know if it would be beneficial to have an ongoing deal," a restaurant owner told the authors. "There's no reason for customers to come in all the time if they can always get a discount. That's the reason we like Groupon; it's only a one-time deal."

***

To answer my own question, if somebody gave me $1 million to invest in Facebook or Groupon, I'd choose Facebook. Having won the social network race, Facebook's true potential is still an unknown unknown. After all, it didn't get into the local daily deals space until seven years after Zuckerberg wrote the site's first code. But that's the thing about six hundred million users living and following each other online -- it's the kind of foundation on which you can build just about anything.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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