By SHAYNDI RAICE (From Wall Street Journal)
Groupon Inc. Chief Executive Andrew Mason wants to prove his company is worth the fuss after its roller-coaster ride to an initial public offering last year.
CEO Andrew Mason on Groupon's long-term prospects and what people got wrong during the company's Nov. 2011 IPO.
The 31-year-old founder took his Chicago-based daily deals site public in November at a valuation of $13 billion, well below the $15 billion to $20 billion price tag Groupon once thought it could command. The IPO also brought on questions about another bubble in the Internet sector and the viability of the daily-deals business model.
Critics pointed out that Groupon was unprofitable and was spending heavily to acquire new subscribers amid a flood of competition from daily-deal clones. The company also raised eyebrows at the Securities and Exchange Commission over an unusual accounting metric called Adjusted Consolidated Segment Operating Income, which showed the company's revenue minus certain marketing costs.
Groupon's stock soared 31% above its $20 IPO price on its first day of trading, but withered in following weeks. Shares closed at $19.63, down 2.1%, in 4 p.m. trading Monday. The company is set to report its first quarterly results as a public company next week.
Mr. Mason, who sometimes posts online videos of himself in his underwear doing yoga or dancing, sat down for a recent interview in his Chicago office to discuss challenges facing the company and his ability to handle them. Edited excerpts:
WSJ: Do you think you're mature enough to be the CEO of a multi-billion dollar company?
Mr. Mason: I got the company this far. To the degree I was weird, I was weird before we were a public company and managed to get it worth whatever it's worth. I'm going to continue doing my thing and work my butt off to add value for shareholders and as long as they and the board see fit to keep me in this role, I feel enormously privileged to serve.
[GROUPON]
WSJ: Groupon has been criticized by analysts and investors for not being profitable. How important is profitability?
Mr. Mason: We believe that the most important thing for us to be focused on is growing the business, building something that our consumers and our merchant partners love. And when you focus on those inputs, revenue and profitability is the output and it follows naturally.
WSJ: Some critics say the daily deal model is too easy to replicate.
Mr. Mason: There's proof. There are over 2,000 direct clones of the Groupon business model. However, there's an equal amount of proof that the barriers to success are enormous. In spite of all those competitors, only a handful are remotely relevant.
WSJ: Why?
Mr. Mason: People overlook the operational complexity. We have 10,000 employees across 46 countries. We have thousands of salespeople talking to tens of thousands of merchants every single day. It's not an easy thing to build.
WSJ: You had a rough IPO. What was the hardest part?
Mr. Mason: After filing the S-1, we entered a quiet period that greatly restricted our ability to have a conversation with the public. It was frustrating to not be able to directly address many of the concerns that people raised about the business.
WSJ: Including discussing "Adjusted Consolidated Segment Operating Income?" You were accused by critics of trying to hide your high marketing costs from investors.
Mr. Mason: Groupon spends money on marketing in a way that's different from traditional Internet and e-commerce companies. Our marketing spend is designed to drive subscribers to our daily mailing list. A traditional e-commerce company is driving transactions. Our own proprietary advertising network can continually advertise to our customers at virtually no additional cost. There's an upfront investment that we know pays off over the long-term.
WSJ: Was it a mistake to include that metric?
Mr. Mason: In retrospect, I think it was naive, and I wouldn't have included it. The list of companies that have added their own financial metrics is not a savory group. It created a distraction that wasn't worth the benefit.
WSJ: The SEC also took issue with a memo you wrote to employees during the quiet period that was leaked to the press.
Mr. Mason: I wrote the memo because 23-year-olds were coming into my office and asking how they should respond to their parents when they ask if Groupon is about to go bankrupt. The risks of not communicating to my employees were greater than the risks of doing otherwise.
If I knew it was going to leak, I would have been less bizarre, and I wouldn't have made a joke about my now-wife. She was upset. (He joked that his then-girlfriend asked him why he never said anything nice about her.)
WSJ: Groupon's stock price is trading below its IPO price of $20. Why?
Mr. Mason: Luckily there are people smarter than me in this world that know the answers to those kinds of questions. I leave that to the financial community.
I'm aware of it [stock price], but I think as a company we aren't driven by it. Even in our short time as a public company, we've seen enough examples of the stock shifting 5% or 10% based on nothing, that you're very quickly trained that it's a futile exercise to be responsive to the stock.
WSJ: What opportunities are you most excited about for Groupon?
Mr. Mason: The fundamental innovation of Groupon is that we've found a way to enhance local commerce using the Internet. We've used the discount to deliver more buying power for consumers, as well as solve better inventory management for merchants, delivering them more profits. The "daily deal" is the first incarnation of local e-commerce. We can turn Groupon into a daily habit for consumers, and something that enhances every transaction for merchants.
Tuesday, January 31, 2012
Sunday, January 29, 2012
How the iPhone Zapped Carriers
By ANTON TROIANOVSKI (from Wall Street Journal)
Americans are glued to their mobile devices, obsessively calling, texting, emailing and downloading applications. So why is the U.S. wireless industry in such straits, as shown by AT&T Inc.'s crucial but failed plan to buy T-Mobile USA?
A big reason is that carriers are losing power to the device and software makers riding the smartphone boom.
[appleiphone_dig] Tony Avelar/Bloomberg
An advertisement for Apple's iPhone 4S at a Sprint Nextel Corp. store in Palo Alto, Calif.
They're saddled with rising capital costs while much of the profit growth continues to accrue to Apple Inc., manufacturers using Google Inc.'s Android software, and companies making popular wireless apps. And carries haven't figured out the most profitable way to charge consumers for their greater use of data.
In short: Device makers and app developers are having the fun, while the carriers are doing the grunt work.
The wireless industry has always been capital intensive, but the recent move to build faster and more reliable networks to support a deluge of data has weighed on these carriers.
Now that AT&T's pursuit of T-Mobile is over, those two companies are expected to join the rest of the industry in mulling expensive deals for rights to the airwaves—a game that's become a lot more difficult in recent weeks after Verizon Wireless spent nearly $4 billion purchasing spectrum rights from four different cable companies.
The U.S. wireless industry spent $24.9 billion on capital investments like networks and infrastructure in 2010, the highest annual total since 2005, according to industry trade organization CTIA.
But in 2010, AT&T and Verizon Wireless were the only companies to earn a return on their wireless network investments greater than their cost of capital, according to Bernstein Research.
More
* Deutsche Telekom Hunts for a Plan B
* Heard: Trouble on the Verizon for AT&T
At the same time, the rapid rise of Apple's iPhone franchise reflects many of the challenges the telecom industry faces even as Americans' reliance on their phones grows.
Wall Street analysts have projected AT&T's wireless profit margins in the fourth quarter will be the worst in at least four years, despite AT&T saying it would sell more smartphones—including the iPhone 4S—than any other quarter.
That's because every time a new iPhone model comes out, it's the carriers—not consumers—that shell out the biggest bucks. Analysts estimate that carriers pay Apple a subsidy of about $400 each time a consumer buys an iPhone with a two-year contract.
AT&T and other wireless carriers say that subsidizing the iPhone heavily amounts to an investment that will make their customers more likely to stay and increase the amount of money they're willing to spend for the carrier's services. But some analysts say those benefits have yet to materialize.
At AT&T, Nomura Securities analyst Michael McCormack says, the profit margins on wireless service haven't meaningfully improved since the company started carrying the iPhone in 2007.
"For the most part, it's really been a wealth transfer from AT&T shareholders to Apple shareholders," said Mr. McCormack, who predicts AT&T's fourth-quarter profit margin will fall to 30% from 44% in the third quarter.
Apple missed financial expectations in its latest quarter due to a delay in the iPhone 4S launch, but sales of iPhones and iPads continue to surge, driving earnings up 54% over a year ago to $6.62 billion.
For the wireless carriers, average revenue per user has been falling in recent years despite increased smartphone adoption as the companies added more connections for lower-revenue devices like e-readers and tablet computers. In the third quarter, wireless carriers were being paid $46.09 a month by the average user, $2 less than a year before, according to UBS AG.
While carriers have to pay higher subsidies for smartphones such as the iPhone, such devices allow carriers to charge customers for data plans. Google's free Android software for smartphones also helped drive smartphone sales and boosted demand for wireless bandwidth even more.
Just in the last year, the amount of wireless data consumed monthly more than tripled among teens and doubled for just about every other age group, according to Nielsen.
Meanwhile, revenue from voice calls, which take up far less bandwidth than, say, watching a YouTube clip, has been declining for years. And even extremely profitable text messaging is threatened by new applications, like Apple's iMessage, that allow smartphone users to interact without racking up texting charges.
Now, carriers are seeking to forge a new pricing model that allows them to monetize surging data usage. Before the smartphone boom, many carriers sold data access on an unlimited basis, making it hard for them to profit.
Earlier this year, Verizon followed AT&T in implementing a tiered data plan, in which heavier users of data pay more.
In trying to buy T-Mobile, AT&T bet that government officials would see the wireless industry's difficulties amid the smartphone boom as a justification for allowing the second-largest industry player to buy the No. 4 player. Regulators didn't see it that way.
Now, analysts say AT&T will have to pull out its checkbook and spend billions more to acquire spectrum rights and invest in building capacity on its network.
For AT&T's smaller competitors, things are even tougher. AT&T and Verizon Wireless earn roughly 80% of the industry's profits and have fared better in adjusting to the smartphone boom than smaller competitors.
The giants are able to use their scale to provide broader coverage and land access, sometimes exclusive, to the hottest devices, such as the iPhone and choice Android phones from device makers like HTC Corp.
The third-largest carrier, Sprint Nextel Corp., decided this year that it needed to carry the iPhone as well. But to do it, Sprint had to commit to paying Apple $15.5 billion for the devices, whether or not it could find buyers for them. The company acknowledged that subsidizing a customer buying an iPhone would cost 40%, or about $200, more than another kind of phone, on average.
T-Mobile, meanwhile, is the only one of the top four carriers that isn't selling the iPhone, one reason for its customer losses. In the first nine months of the year, T-Mobile lost 850,000 contract customers.
Write to Anton Troianovski at anton.troianovski@wsj.com
Corrections & Amplifications
In the third quarter, wireless carriers were being paid $46.09 a month by the average user, according to UBS AG. An earlier version of this article incorrectly gave that as an annual figure.
Americans are glued to their mobile devices, obsessively calling, texting, emailing and downloading applications. So why is the U.S. wireless industry in such straits, as shown by AT&T Inc.'s crucial but failed plan to buy T-Mobile USA?
A big reason is that carriers are losing power to the device and software makers riding the smartphone boom.
[appleiphone_dig] Tony Avelar/Bloomberg
An advertisement for Apple's iPhone 4S at a Sprint Nextel Corp. store in Palo Alto, Calif.
They're saddled with rising capital costs while much of the profit growth continues to accrue to Apple Inc., manufacturers using Google Inc.'s Android software, and companies making popular wireless apps. And carries haven't figured out the most profitable way to charge consumers for their greater use of data.
In short: Device makers and app developers are having the fun, while the carriers are doing the grunt work.
The wireless industry has always been capital intensive, but the recent move to build faster and more reliable networks to support a deluge of data has weighed on these carriers.
Now that AT&T's pursuit of T-Mobile is over, those two companies are expected to join the rest of the industry in mulling expensive deals for rights to the airwaves—a game that's become a lot more difficult in recent weeks after Verizon Wireless spent nearly $4 billion purchasing spectrum rights from four different cable companies.
The U.S. wireless industry spent $24.9 billion on capital investments like networks and infrastructure in 2010, the highest annual total since 2005, according to industry trade organization CTIA.
But in 2010, AT&T and Verizon Wireless were the only companies to earn a return on their wireless network investments greater than their cost of capital, according to Bernstein Research.
More
* Deutsche Telekom Hunts for a Plan B
* Heard: Trouble on the Verizon for AT&T
At the same time, the rapid rise of Apple's iPhone franchise reflects many of the challenges the telecom industry faces even as Americans' reliance on their phones grows.
Wall Street analysts have projected AT&T's wireless profit margins in the fourth quarter will be the worst in at least four years, despite AT&T saying it would sell more smartphones—including the iPhone 4S—than any other quarter.
That's because every time a new iPhone model comes out, it's the carriers—not consumers—that shell out the biggest bucks. Analysts estimate that carriers pay Apple a subsidy of about $400 each time a consumer buys an iPhone with a two-year contract.
AT&T and other wireless carriers say that subsidizing the iPhone heavily amounts to an investment that will make their customers more likely to stay and increase the amount of money they're willing to spend for the carrier's services. But some analysts say those benefits have yet to materialize.
At AT&T, Nomura Securities analyst Michael McCormack says, the profit margins on wireless service haven't meaningfully improved since the company started carrying the iPhone in 2007.
"For the most part, it's really been a wealth transfer from AT&T shareholders to Apple shareholders," said Mr. McCormack, who predicts AT&T's fourth-quarter profit margin will fall to 30% from 44% in the third quarter.
Apple missed financial expectations in its latest quarter due to a delay in the iPhone 4S launch, but sales of iPhones and iPads continue to surge, driving earnings up 54% over a year ago to $6.62 billion.
For the wireless carriers, average revenue per user has been falling in recent years despite increased smartphone adoption as the companies added more connections for lower-revenue devices like e-readers and tablet computers. In the third quarter, wireless carriers were being paid $46.09 a month by the average user, $2 less than a year before, according to UBS AG.
While carriers have to pay higher subsidies for smartphones such as the iPhone, such devices allow carriers to charge customers for data plans. Google's free Android software for smartphones also helped drive smartphone sales and boosted demand for wireless bandwidth even more.
Just in the last year, the amount of wireless data consumed monthly more than tripled among teens and doubled for just about every other age group, according to Nielsen.
Meanwhile, revenue from voice calls, which take up far less bandwidth than, say, watching a YouTube clip, has been declining for years. And even extremely profitable text messaging is threatened by new applications, like Apple's iMessage, that allow smartphone users to interact without racking up texting charges.
Now, carriers are seeking to forge a new pricing model that allows them to monetize surging data usage. Before the smartphone boom, many carriers sold data access on an unlimited basis, making it hard for them to profit.
Earlier this year, Verizon followed AT&T in implementing a tiered data plan, in which heavier users of data pay more.
In trying to buy T-Mobile, AT&T bet that government officials would see the wireless industry's difficulties amid the smartphone boom as a justification for allowing the second-largest industry player to buy the No. 4 player. Regulators didn't see it that way.
Now, analysts say AT&T will have to pull out its checkbook and spend billions more to acquire spectrum rights and invest in building capacity on its network.
For AT&T's smaller competitors, things are even tougher. AT&T and Verizon Wireless earn roughly 80% of the industry's profits and have fared better in adjusting to the smartphone boom than smaller competitors.
The giants are able to use their scale to provide broader coverage and land access, sometimes exclusive, to the hottest devices, such as the iPhone and choice Android phones from device makers like HTC Corp.
The third-largest carrier, Sprint Nextel Corp., decided this year that it needed to carry the iPhone as well. But to do it, Sprint had to commit to paying Apple $15.5 billion for the devices, whether or not it could find buyers for them. The company acknowledged that subsidizing a customer buying an iPhone would cost 40%, or about $200, more than another kind of phone, on average.
T-Mobile, meanwhile, is the only one of the top four carriers that isn't selling the iPhone, one reason for its customer losses. In the first nine months of the year, T-Mobile lost 850,000 contract customers.
Write to Anton Troianovski at anton.troianovski@wsj.com
Corrections & Amplifications
In the third quarter, wireless carriers were being paid $46.09 a month by the average user, according to UBS AG. An earlier version of this article incorrectly gave that as an annual figure.
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