LivingSocial Experiments with Diverse Services and Business Models

Most of the recently listed Internet stocks have taken a beating. Daily deals site Groupon saw its stock fall more than 60% since its IPO in November 2011. The prevailing market conditions have forced Groupon’s competitor LivingSocial to revisit IPO plans. Analysts believe that the Internet deal market in the U.S. will grow to $4.17 billion in U.S., up from $1.97 billion recorded last year. Despite these rosy projections, LivingSocial is now not eying an IPO on the Nasdaq until next year.

LivingSocial’s Financials
LivingSocial has seen significant market expansion in the recent quarter. The subscriber base grew 45% over the year to more than 66.5 million. Revenues have risen significantly from $59 million a year ago to $138 million for the quarter ended June 2012. But the company has yet to turn a profit. During the quarter it lost $93 million, compared with a loss of $198 million reported a year ago.

In December 2011, LivingSocial raised a fresh round of $576 million in venture funding from its existing investors. To date, the company has raised $808 million in funding from investors, including Steve Case, Grotech Ventures, Revolution, US Venture Partners, Lightspeed Venture Partners, T. Rowe Price, and Amazon. Despite the continuous inflow of funds, its market value has taken a beating. Compared with the $6 billion valuation it had when it raised the funds last year, LivingSocial is now estimated to be worth less than $3 billion.

LivingSocial Betting the Allure of High-Quality Full-Priced Offers
LivingSocial is focusing on expanding its service offerings. Last quarter, it acquired online and mobile ordering software provider Onosys to help it provide additional services to its restaurant merchants. Founded in 2003, Onosys provides restaurant industry with marketing and online ordering solutions. Its client list includes Panera Bread, Papa John’s, and Applebee’s. Through its products, restaurants can receive orders over the Web or over mobile phones. While the purchase price was not disclosed, analysts believe that LivingSocial will have paid at least $6.5 million for the acquisition.

Last quarter LivingSocial tied up with AEG, an event services provider that owns and operates venues across the U.S. As part of the partnership, LivingSocial’s members will be able to buy vouchers for AEG events to access unique packages such as VIP access or early admission at AEG venues. AEG is among the largest sports and entertainment companies in the world and either owns or is affiliated with more than 100 venues in the country. Contrary to its regular business model, LivingSocial will not sell these entertainment tickets at any discount. It is instead offering full-priced vouchers for entertainment and unique experiences.

Earlier last month, LivingSocial also launched its answer to Groupon Goods. As part of daily deals, LivingSocial subscribers now also get messages about some products that are sold by LivingSocial at a heavy discount for a limited period. Analysts believe that LivingSocial has the potential to earn more than $200 million in revenues from these sales.

All in all, LivingSocial continued on its scattered path to grab market share. Given its lack of profitability, I remain skeptical about its valuation. The business model needs a strategic rethinking; otherwise, under public market scrutiny, it could well implode.

However, 66 million users is a tremendous asset, and if the company can monetize that with a sustainable business model, needless to say, it could do very well. It is better, however, to perform the experiments as a private company.