GroupOn’s Big Idea

As I expressed, I’m not sold on GroupOn as a business in its current form, and expect it to flame out on a massive scale.  However, I do think the company will be known for one key contribution: it’s lock-in mechanism.  GroupOn’s deals don’t go into effect until a sufficient number of subscribers opt into the deal.  At this point, the lock-in serves little function for GroupOn; all its deals reach the threshold, and I doubt anything would change if it disappeared.  But the lock-in idea is a powerful tool for collective action and has powerful implications across a wide range of businesses.

For instance, combine a lock-in mechanism with real estate.  Part of what drives a person’s decision to live in a particular building/neighborhood/city is whether other individuals are also going to move there.  Right now, it’s hard to know.  But with a lock-in mechanism, a building owner/neighborhood real-estate association/municipal government could offer individuals a way to commit to moving to a certain location only if enough other people do so.

As an example, Detroit is not an attractive destination for people in their twenties.  There are many reasons for this, but one key reason is that Detroit is not an attractive destination for people in their twenties.  If someone in their twenties knew that a large number of people in their twenties were about to move to Detroit, it would become a much more appealing destination.  So suppose the city of Detroit, working with real-estate owners and developers, offers a GroupOn-like deal to non-residents in their twenties, allowing them to buy or rent units in Detroit at a certain low price (Detroit real estate is extremely cheap right now), but the deal only kicks in if 100,000 people sign up.  If fewer people than that sign up, no one is locked in.

But wait, there’s more.  Another reason Detroit may be an undesirable location is because it lacks nice stores/restaurants and good jobs.  The reason it lacks these is that store-owners and employers don’t want to set up shop in Detroit, because there aren’t any good customers or employees there.  Instead, businesses head to a city like Chicago, even thoughts rents are higher, because that’s where the young people are.  This is, again, a collective-action problem, and one that can be addressed through a lock-in mechanism.  Expand the real-estate GroupOn, such that it only kicks in if a) 100,000 people in their twenties move there, b) 300 major employers agree to move into town and higher from the 100,000, and c) 1,000 store owners decide to open up shop.  Residents, employers, and store owners alike can sign up for the deal, but it only goes into effect if all three conditions are met within a certain date.  Otherwise, everyone’s off the hook.

So who will start this business?  I don’t know…maybe GroupOn?

Science Is a Map, not Territory

Some scientists have a habit of misunderstanding the map-territory relation.  In doing so, they overstate their knowledge base, understate future possibilities, and make themselves susceptible to paradigm shifts.  In short, scientists need to realize that what they’re doing mostly involves expanding and refining existing maps of the universe.  What they’re not doing is defining the universe, and their existing theories, models and ideas are not the universe itself, but rather representations of it.  As such, scientific models are subject to being replaced at any time by superior models.

I once heard a particle physicist, whose livelihood depends on government-sponsored pure research, declare that it would be impossible for ongoing particle research to solve the world-energy problem.  As I can tell, this belief is actually fairly well-accepted amongst particle physicists.  Of course, any public statement to this effect is terrible, terrible marketing by particle physicists.  The pitch made by pure scientists is that their work will lead to future gains that are presently unknowable: “give us funding, and all sorts of good stuff could happen”.  To then turn around and say that a certain type of result is impossible contradicts the claim that we can’t predict which gains will occur.  Let the lay community believe that the research might solve the world-energy problem if that’s what they want to believe; know who’s buttering your bread.

But more importantly, scientists who believe that new research cannot solve the world-energy problem are entirely wrong.  For it to be true requires that existing particle physics theories are the territory, when in fact they’re a map.  Furthermore, scientists know that their best maps are unable to explain certain phenomena within particle physics and cosmology, and that their maps conflicting with each other.  The priority for particle physicists right now is to run experiments that provide new observations of phenomena, which will lead to new theory.  This theory will be built on existing work, but it will also deviate from past theories in order to explain the world better than we currently can.  This deviation opens the door for considerable re-think of existing knowledge, which includes the possibility of discovering new ideas that help address the world-energy problem.

Contra GroupOn

I probably have an irrational hatred for GroupOn.  It annoys me deeply that someone built a $5B company on the idea, Let’s sell coupons on the internet. But I do think I have a valid claim as to GroupOn’s overvaluation, for two somewhat connected reasons: first, I predict fatigue by both customers and merchants with regard to GroupOn’s value proposition; second, I don’t see how the company withstands competitive pressure.

GroupOn is a media channel that helps retail outlets advertise sales of their product at drastically reduced prices.  It uses large regional sales forces to persuade merchants to launch drastic price-reduction deals, and to advertise them exclusively through GroupOn.  GroupOn then communicates these deals to a large number of subscribers, who have the option to take the deal, by paying an up-front fee, and redeeming it for a considerable value of product.  For each subscriber that takes the deal, GroupOn takes a (fairly significant) cut of the up-front cost of the deal.

For the merchant, the value proposition is advertising and customer acquisition.  For a cost, merchants induce a large number of potential customers to try their product.  (There may be secondary value propositions linked to cash-flow and coupons not redeemed, but I suspect these are minor.)  The value proposition for the merchant improves as more GroupOn subscribers are exposed to deals, as the merchant’s ability to retain customers improves, and as the magnitude of the discount shrinks.

For the subscribers, the value proposition is information and customer surplus.  For a cost in time, customers learn about drastically reduced prices on goods and services they might be interested in, and have the opportunity to participate in these deals by paying an up-front fee.  The value proposition for the customer improves as deals are better tailored to what they want, and as the magnitude of the discount grows.

The squeeze for GroupOn is thus: subscribers want bigger discounts; merchants want smaller ones.  Both sides want to squeeze out the middleman, which is GroupOn.  If the market were a stable monopoly, GroupOn might be set.  But in actuality, there are numerous competitors emerging–LivingSocial being the largest–and these represent a huge threat to GroupOn’s bottom line.  In short, why would a merchant choose GroupOn do advertise its deal when it could get a better deal from a couple competitors that together have equal reach?  I also think there’s a fairly skewed perception by merchants and or subscribers as to how good these deals really are for them.  Merchants will realize their customer retention is lower than they think; subscribers will realize that merchants are sneaking in hidden costs (i.e. shipping costs, increasing prices prior to launching a GroupOn); and both sides will realize that it’s really not worth their time.

Beware Penumbra

Bryan Caplan writes about a libertarian penumbra, which includes ideas that aren’t explicitly libertarian, but are nonetheless disproportionately embraced by libertarians:

Libertarians have many beliefs in common that have little to do with the consequences of liberty.  They’re just part of our vibrant, iconoclastic intellectual subculture.

Penumbra (a word I didn’t know the meaning of) when used in this sense, is even more present in more mainstream political movements, which are defined less by coherent though frameworks, and more by coalitions of groups with compatible but independent objectives.  It’s hard–not impossible–to tie opposition to abortion, tax cuts, and gun rights together a common theory.  But people who believe strongly in one of these are more likely to support the other two.  The mechanism for this, I think, is that strongly holding one of these views leads you to vote Republican.  This in turn exposes you disproportionately to other members of the Republican coalition, who will present you with a disproportionate number of arguments supporting their stance.  The same mechanism applies to liberals, libertarians, and any group of like-minded thinkers.  In most cases, people who hold certain views are more likely to listen to people who share their views, even when the ideas being presented are entirely unrelated to the shared views.

Caplan asks:

Which [libertarian penumbra ideas] are most subject to abuse?  Are there any that make you cringe?

My answer: all of them.