Will Amazon Buy LivingSocial?

Back in 2011, BIA/Kelsey pegged the daily deals market in the U.S. to grow 35% annually to be worth $3.9 billion in 2015. In an optimistic view, the report estimated the market to be worth $6 billion by 2015, translating to a 47% annual growth rate. But, market prospects don’t seem as bright right now. Last year, daily deals market leader, Groupon listed on the NASDAQ but soon saw its stock price and valuation tumble. The poor performance by Groupon even led to the ouster of founder and CEO, Andrew Mason. Things don’t seem to be going that well either for LivingSocial, the second-largest daily deals provider.

LivingSocial’s Financials
Amazon holds 29% stake in LivingSocial and thus disclose LivingSocial’s financials in their quarterly reports. The recent report continued to paint a bleak picture for LivingSocial. According to Amazon’s results, LivingSocial reported an operating loss of $44 million during the first quarter this year. The losses have narrowed from $90 million a year ago, but remain significant despite LivingSocial controlling operating expenses. Late last year, LivingSocial laid off nearly 10% of its workforce to control costs. Revenue for the quarter grew from $110 million a year ago to $135 million.

LivingSocial wants to turn profitable by this year after reporting a whopping loss of $650 million last year despite more than doubling revenues from $250 million in 2011 to $536 million. Reaching profitability in such short notice is a tough task.

Among operating metrics, LivingSocial now has a subscriber base of more than 70 million users across 613 markets worldwide. Its offerings are now available in 19 countries across five continents. To date, it has sold 123 million vouchers.

Earlier this year, it raised a controversial $110 million from existing investors, with $56 million coming from Amazon.com. Given LivingSocial’s lackluster performance, the market is not too pleased with investors feeding in more funds in the business. Analysts also believe that the latest round of funding was “emergency” financing to prevent the company from collapsing completely. Its valuation has also fallen significantly from the exorbitant $10 billion-$15 billion figures it was boasting of earlier to $1.5 billion. With the latest round of funding, LivingSocial has received $918 million in venture investments so far from investors, including Steve Case, Grotech Ventures, US Venture Partners, Revolution, Lightspeed Venture Partners, Amazon, T. Rowe Price, and JP Morgan.

LivingSocial’s Growth Plans
LivingSocial plans to use the new funds to increase its mobile and marketing efforts. Recently, it announced that its mobile app will now be able to support the Windows Phone 8 platform as well. The app comes with features such as local offers, curated vacations, and unique experiences in the neighborhood.

LivingSocial is on shaky ground. If investors were looking for an IPO as an exit route right now, they are in for a long wait. Given the falling valuation and the current depressed daily deals market conditions, an IPO may not deliver the best results. I would wait for LivingSocial to improve its business model to better leverage their online merchant and subscriber database before seeking an IPO exit.

On the other hand, if Amazon’s plan is to eventually acquire the company, and make it a part of its broader portfolio, they can conceivably do it relatively inexpensively. I imagine, however, they will do so only after they have a clearer visibility of what kind of a business model would work to turn LivingSocial into a sustainable business, what kind of margin structure would that settle into, etc.

Thus, LivingSocial’s exit may still be a long way away.