LivingSocial Counts on Amazon.com's Help in Groupon 'Gunfight'

LivingSocial, the second-biggest website for daily deals, will use a $183 million investment led by Amazon.com Inc. to overtake market leader Groupon Inc., the company’s chief executive officer said.

LivingSocial will more than triple its employees next year to 1,800 and more than double the number of cities where it offers deals, CEO Tim O’Shaughnessy said in his first interview since the Amazon.com investment was announced last week. That would bring the service to 300 markets, about the number that Groupon now serves with its staff of 3,000.

“Having a $183 million investment is an important part of making sure we’re not bringing a knife to a gunfight,” O’Shaughnessy said. “If you want to be the biggest player in local commerce, having an investor that’s the biggest player in e-commerce seemed like a really smart thing to do.”

O’Shaughnessy is taking a different path from Andrew Mason, his counterpart at Chicago-based Groupon who spurned an offer last week from Google Inc. The $6 billion deal would have given Groupon financial backing from the cash-rich owner of the world’s most-used Web search company.

Julie Mossler, a spokeswoman for Groupon, didn’t respond to requests for comment.

Photographer: Katharine Hauschka/via Bloomberg

Tim O'Shaughnessy, chief executive officer of LivingSocial.com. Close

Tim O'Shaughnessy, chief executive officer of LivingSocial.com.

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Photographer: Katharine Hauschka/via Bloomberg

Tim O'Shaughnessy, chief executive officer of LivingSocial.com.

The biggest daily-deal sites have to demonstrate that they offer more than just a list of consumer names to send offers to, said Sucharita Mulpuru, an analyst at Forrester Research Inc. in Cambridge, Massachusetts.

“The winner in this space will win not because they have the largest list, but the best list,” Mulpuru said Nov. 30 in a blog posting. “By that I mean, knowing who are the customers who will spend more than the value of the deal and who will come back to frequent a business. The company that can identify those people, even if it’s just 100,000 customers, will win.”

Customer Relations

To that end, LivingSocial plans to expand internationally, develop programs to help merchants identify repeat customers and broaden its offerings.

O’Shaughnessy founded the Washington-based company in 2007 to build social applications played on Facebook Inc. Last year, he saw how quickly Groupon was growing and changed tack, hiring a national sales staff that now numbers 500 to bring in local merchants of its own.

LivingSocial has at least one sales representative in each of its 120 geographic markets. It will use the recent investment, which includes $175 million from Amazon and $8 million from venture-capital firm Lightspeed Venture Partners, to expand overseas and begin rolling out programs to help merchants retain shoppers. Most small and medium-sized merchants don’t have any form of customer relationship management, an opportunity for LivingSocial, O’Shaughnessy said.

Skeet Shooting, Beer

“What you’ll see us do more of in 2011 is start to build a system where merchants can track their customers and can track who’s coming back and how valuable are they, and really give them more insights into their business,” O’Shaughnessy said.

LivingSocial also will begin focusing more on excursions such as skeet shooting and beer tasting. In October, the company bought Urban Escapes, which offers deals on vacations, events and guided tours.

By mid-November, LivingSocial had sold more than 10,000 such trips, which it dubs “Escapes.” While the deals are usually riskier for the company, since they may involve renting out a venue in advance, they typically have higher margins than most products sold on daily-deal sites, O’Shaughnessy said.

Local Advertising

Groupon, which started in November 2008, has 35 million registered users and is set to record revenue of more than $500 million this year, according to two people familiar with the matter. LivingSocial says it will reach that milestone in 2011.

Groupon and LivingSocial control more than 90 percent of the daily-deal market, O’Shaughnessy said. LivingSocial is gaining a few percentage points of share every month, he said.

“We see a world where lines cross in the not-too-distant future,” O’Shaughnessy said. He declined to provide details.

Both companies are chasing the local advertising market, which is estimated at $133 billion in the U.S. this year and is moving online and away from print, radio and direct mail, according to consulting firm BIA/Kelsey in Chantilly, Virginia.

With hundreds of companies in the daily-deal industry, including BuyWithMe.com and Tippr.com, there is a risk that they will undercut one another on price, driving down profit margins.

Those concerns are overblown, O’Shaughnessy said.

“One of the common misperceptions is that getting into the space is all you need to do,” O’Shaughnessy said. In reality, expanding the business and developing relationships with merchants “is much harder to do than most people realize.”

To contact the reporters on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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