Dear Amazon and LivingSocial: I thought you might like a list of services I don’t plan to purchase in the near future. Karate lessons are one. Salon highlights are another. A third is car washing. Actually, put that first, since I live in New York and don’t own a car. No car, ergo no car wash needed. And if I did need a car wash, I’d probably choose one that wasn’t halfway across the city.
I’m laying this out here because all these are things that my Amazon Kindle Touch with Special Offers (capitalization à la Amazon) tried to sell me. I bought it two weeks ago, expecting that the special offers would be tailored to folks who read books. For example, discounts on other books. That’s a fairly obvious strategy, and Amazon does offer regular e-book deals. So why instead of those did my Kindle greet me every morning with AmazonLocal, or NotSoLocal, offers for karate classes?
Maybe Amazon is trying to get bookworms into shape. It seems more likely, though that there’s something else at play here: namely, Amazon’s investment in LivingSocial, the source of the deals I saw (and as far as I can tell, all the Amazon deals in New York City).
It’s hard to avoid the impression that the ads plastering my Kindle screen are about maximizing the value of that investment. If that’s the case, then things could be headed down an unpromising path the markets have seen before.
In its latest annual report, Amazon, which owns 31 percent of LivingSocial, revealed some details of the deals site’s operations. The bottom line, literally, was that last year LivingSocial lost $558 million:
- Revenue: $245 million
- Operating expense: $686 million
- Other expense: $117 million
- Net loss: $558 million
This may reflect a strategy popularized a few years ago as staking out turf in a “land grab.” Geekwire, the news site that seems to have been the first to report this, says it reflects some heavy marketing early in the year. Alternatively, it may all just come down to a variant of the Borscht Belt line about the tailor:
“Sure I lose money on every suit I sell, but I’ll be making it up on volume.“
Bloomberg reporter Danielle Kucera asked Amazon for more detail on this, but they wouldn’t comment beyond what was in the filing. That’s too bad, since it would be interesting to know whether any of those LivingSocial costs involve paying Amazon to advertise on the Kindle. We’ll know a lot more about that if LivingSocial files to go public.
What’s worth considering here, though, is how a public offering would play out for LivingSocial and Amazon. The folks at LivingSocial have at least thought about this, as would anyone who’d raised a billion dollars in funding.
At that point, public market investors will be presented with a me-too company distinguished from Groupon by an apparently even more aggressive commitment to losing money, and a high profile partnership with Amazon. Say investors overlook the first of these, the IPO is a success, and Amazon comes out with a sizable profit. Then Amazon can keep its investment and continue to use LivingSocial to send out offers of car washes to people who don’t have cars. Or it could take its profit and go home.
That’s far from unheard of. Consider Orbitz, the online travel service. That went public in 2003 with big fanfare thanks to its backing from four major airlines, when there still were more than four major airlines. Eventually the airlines collected their winnings and left the table, Orbitz’s relations with the airlines today are pretty much the same litigate-one-day, partner-the-next as those of other travel companies.
More directly relevant, albeit older, is the history of Amazon’s own investments in the great Internet frenzy of the late 1990s. Then, too, Amazon spread its money around what were supposed to be promising candidates. One was HomeGrocer, a home delivery grocery service. Eventually HomeGrocer got sold to Webvan, one of the most overrated companies of that Internet boom, and Webvan met a swift end in bankruptcy court.
Another was Drugstore.com. As with LivingSocial, Amazon owned a substantial stake in Drugstore.com, more than 20 percent at the IPO. Drugstore.com soared in its public offering, then crashed with the rest of its Internet cadre and limped along for years before getting bought by Walgreens last year. Amazon, in fairness, remained a major owner to the end (then again, since Drugstore.com’s stock never recovered to its heady early valuation, there wasn’t much profit to be made from selling it).
Yes, this was all a long time ago. Still, the history is instructive. I emailed LivingSocial to ask about that history and what Amazon hoped to get out of the deal. On that LivingSocial politely deferred to Amazon. Amazon’s public relations person skipped over the question about earlier efforts like Drugstore.com but helpfully noted that, “Customers tell us they love getting their AmazonLocal deals on Kindle.”
Fair enough. Probably some do. It’s just that what customers want doesn’t seem to be the main part of the equation here. The game of taking a stake in a money-losing startup to give it the big push it needs to get over the IPO finish line is one that Amazon has played before, without great results. Perhaps this time it’ll work out better. Whatever the endgame, it may not have a whole lot to do with creating real value.
Partly thanks to the ads, I decided to swap it for an an ad free Kindle Fire. I bought that on Monday and today I stuffed the Kindle Touch back in its box and returned it. So you can credit that to the Amazon-LivingSocial relationship: if this was a backwards plan to get me to buy the pricier model, it succeeded.