“You guys have let vampires – whether it’s Google or (other) aggregators – take your content. You would think that the vampires run out of victims, because they run out of content. But that never happens in the vampire story. What happens is, someone drives a stake through their heart. That’s the only way to stop a vampire.” - Mark Cuban, Chairman of HDNet, OnMedia Conference 2011

(courtesy of SEOBook.com)

With the rise of internet news, review, video and e-commerce meta-search engines, such as Google, Rotten Tomatoes, Kayak, Rent Jungle and Yipit, this “aggregation economy” claims to improve both quality and pricing of market offerings by reducing information asymmetry between customers and content providers. In an academic vacuum, it is easy to theorize that this disruptive phenomenon delivers overall socio-economic value. However, upon closer inspection of this imperfect two-sided market, not only do aggregators seem pernicious, but they also appear to create a vicious cycle of disincentives for content providers.

Debunking old wives tales…

Although aggregators virtuously claim to monetize the long tail in an online economy, smaller players remain typically underserved in the relationship. The long tail does not increase sales of content publishers much, but it does create massive competition and spiraling downward pressure on prices, resulting in a competition of scale. Unless smaller players can downsize their cost structure, or pivot to adapt to their new competitive environment, abundance of information can destroy value.

Internet trends are equally discouraging. ComScore.com projects online spending to increase 11% this year over last. Yet, in a recent Bing survey, 87% of online shoppers would increase consumption if they could discover deals from one destination instead of from multiple providers. Further, over 50% of online consumers now initiate their product research through aggregators rather than at merchant sites to maximize pricing arbitrage. With escalating data transparency in our post-2008 crisis recessionary environment, online thriftiness is likely to grow.

In theory, online aggregators could be the Web’s Robin Hood; in reality, their wake may be strewn with casualties. As Chris Anderson, Editor-in-Chief of Wired Magazine, points out, “The long tail is all about the shift from hits to niches. But aren’t all those aggregators “hits”? They’re not only the largest players in their category, but they seem to be getting even larger, gaining market share at the expense of their competitors.”

 Going for the jugular…

 Despite enhanced online exposure via aggregation, traditional publishers struggle to monetize original content. Companies are indexed on Google but are unable to convert traffic into advertising or trade dollars. While some value is returned to the original publisher through routed traffic, for most publishers this exchange is not equal, resulting in a net accrual of value from publishers to aggregators.

Aggregators can truncate direct consumer-brand relationships, dent reputations and devalue industries. Not only do original content providers now lack control over pricing, aggregators sometimes offer suboptimal search features which extract incorrect and outdated, or even exclude, critical information from their search results. Aggregators also carry low quality sites as they scrape data from the web. There is simply no way the consumer can verify that an aggregator serves their best interests.

In the worst case scenario, content providers may cease to be motivated to create quality content which ultimately cannot promise a return profitable enough to sustain continued operations, as the balance of power and influence skews towards aggregators. To rediscover market equilibrium, content providers and aggregators must price in the true cost of their interactions to avoid such adverse incentives.

Casting silver bullets…

 To evolve in this turbulent ecosystem, traditional content providers must learn to see adversity as opportunity. Each unit of branded content must be restructured to exist on its own in its disaggregated online ecosystem. Distribution channels must be optimized to convert users who find content via search and other aggregators into subscribers and direct users. Aggregators should solely be considered as a marketing weapon in a content provider’s broader armory, underlying all of which is the key principle of never leaving any money on the virtual table.

Content providers can staunch the bleeding using the following methods:

 ·Share value added by downstream aggregators fairly: Structure legal agreements to charge a fee on all your interactions. If aggregators refuse to play nice, you can threaten to withdraw your content from their platform, and then urge your peers to boycott.

 ·Harness real time information: Share the most up-to-date information critical for decision-making with customers and partners. Eliminate the need for customers to find you on aggregators. Use multiple distribution channels to capture as much mindshare as possible, e.g. allow customers to browse, research or purchase in stores, mobile apps or online. Push viewers to associate with you outside of what they see on aggregators.

·Allow free trials, but erect a pay wall: Leverage aggregators to drive traffic to your site, and then present an ultimatum to join a password protected community. Create a sense of urgency by allowing customers to sample your products for a fee for a specified number of items per month, or a fee giving unlimited access for a specified period of time.

Offer non-financial benefits for direct user sign-up: Promise exclusive product and service packages to subscribers, i.e. CRM, allow users to connect with friends, gain ad-free experiences, stream content faster, and give access to a new features, new levels or scenarios.

·Deploy product (un)bundling and elastic pricing: Allow customers to purchase individual components or packages. Segment pay walls to capture price sensitivities, and create multiple SKUs at different price points, where different levels of engagement can monetize different willingness-to-pay. At the same time, maintain simplicity, so convenience and reward factors at major decision points will tip users towards signing-up.

 ·Sign exclusive contracts and leverage cross-selling opportunities: Acquire loyal fans of influential brands through partnerships to enable charging for a premium. Ford offered 200,000 regular Times readers free digital access until end of 2011 in exchange for viewing ads from Ford. Although Ford pays for this deal on a discounted basis, incremental revenue to the Times is still greater than the value of the same readers on a CPM basis.

·Revaluate cost structure: Streamline operations, as with online aggregation, come compressed margins and competition of scale. Half of the battle for financial longevity is won by succeeding at superior customer value propositions, the other with cost efficiencies at the back-end.

·Content remains king (!): Win “true fans” by focusing on user experience and sustained engagement. Brand equity supersedes the material value of any good. To build this, in scarce markets, you have to predict what will sell. In abundant markets, offer more choices and let the market sort it out. Help your most loyal advocates do the work via peer production methods such as reviews and crowd sourcing.

Driving a final stake into the coffin…

 So, should users agree that online aggregators have improved their customer experience? Yes. Nonetheless, as we can see in American Airlines withdrawal from Expedia, News Corp. CEO Rupert Murdoch’s rejection of Google (“feeding off the hard-earned efforts and investments of others”), and most recently, the Huffington Post’s pending lawsuit versus uncompensated bloggers, we have simply replaced expensive traditional online intermediaries with third party aggregators – a lower cost sheep in wolves’ clothing. In an increasingly competitive “aggregation economy”, at status quo, no doubt the larger players with lowest prices will triumph. By striving to equitably apportion positive externalities, more resources can be made available to incentivize content creation, which will in turn benefit the entire ecosystem in a virtuous cycle. Still, we must recognize that market stickiness will resist a speedy return to this equilibrium. Let us learn to bear arms for the long night ahead.

Groupon’s high profile entry into China in early 2011 made headlines, and its mass layoffs and office closures in August again put it under the spotlight.  Supporters may argue that the jury is still out on whether Groupon’s foray into the Chinese market will ultimately end in failure, but many seasoned veterans of the Chinese internet space have pronounced Groupon doomed to failure from the start:

• A China executive team dominated by foreigners with no experience in China and no Chinese language capability
• Maintaining a high cost structure (Groupon heavily recruited expensive bankers and consultants to join its team) in a market with already razor thin margins (~10% commission per sale vs. 50% in the US)
• Selecting Tencent as JV partner for the China operation, who already has a rival group buy service QQTuan and continues to invest heavily in it over the Groupon JV
• and the list goes on…

Can Groupon avoid the fate of other foreign internet companies?

Not if Groupon maintains the current business model.  While Chinese player copy US internet ideas, the actual business models are very different owing to the vastly different market environment.  The experiences of Yahoo, EBay, MSN, and Google have already shown that transplanting what worked in the US to China will not be successful.  The only way Groupon can survive and (maybe, just maybe) become a relevant player is by adapting to the local market and emulate the leading Chinese competitors.

By the time Groupon entered, there are already hundreds of copy-cat group buy sites in China, with the leading competitors having raised tens of millions of dollars in VC funding.  Groupon would do well to re-examine the way it is approaching the Chinese market:

• Maintain ample funding.  With hundreds of competitors and a multitude of well funded market leaders, the battle for market dominance will be heated and drawn out.
• Keep an eye on costs.  Start with ditching the expensive offices (per footage cost 2X competitors).
• Fire the expats and bring in top local talent with real local internet experience to run the show.
• Focus on the top 10-15 cities, that is where the purchasing power and critical mass is

Doing the above will hopefully move Groupon up the league tables (ranked #8 in Q2 by number of visitors).  However, to be truly distinctive, Groupon will need to differentiate itself from other competitors.  One way it might be able to do that is to focus on delivering a high quality experience when customers exchange the coupons for service at merchants.  For the merchants, group buy is pointless unless they can create repeat customers.  Food and entertainment dominate group buy and a common problem is poor service at the merchants for group buy customers.  Ensuring superior service for each Groupon purchase will both differentiate Groupon and help merchants acquire repeat customers, a win-win proposition.

By: Yu (Rainy) Liu