The Living Social Amazon Deal

The Internet is buzzing this morning about the $20 dollar Amazon gift certificate for only $10 dollars on livingsocial.com. As of right now they are selling 100,000 an hour or about 30 every second. Lets take a quick look at why this is a big deal for everyone involved. First of all, most people know that the CEO of Groupon turned down an offer from Google to buy Groupon for 5.3 Billion. This rejection was big enough news to make Groupon a household name. But how did Groupon get popular enough for Google to want acquire them? Word of Mouth was helpful yes. But it took something even bigger than Word of Mouth and the entire Internet combined. And that was Oprah. A mention by Oprah in the middle of November last year for a $25 off $50 gift certificate sent the Groupon website to its knees. The number of Groupons sold? Around 70,000. Google subsequently submitted their offer to buy Groupon two weeks later.

Today's Amazon promotion is already a much bigger deal. With Living Social taking about $5 dollars of every $10 dollars, Amazon is taking a big hit. 400,000 purchases means Amazon will make about $2 million in revenue but they will have to give away $6 million in merchandise. And we still have 20 hours to go on this deal. Those numbers could easily multiply to $12 million and $36 million if there is no limit.

Additionally, Living Social is generating a lot of revenue today, the amount of which is equal to what Amazon will make. We can put that amount at between $2 and $12 million dollars.

So why is Amazon doing this? The answer is simple. About a month ago, Amazon invested $175 million into LivingSocial.com. Compared to $175 million, a $6 - $36 million dollar marketing expense to make Living Social a household name is peanuts. It only took about 70,000 Groupons for Nordstroms (and admittedly 400,000 groupons for Gap a few days after the Oprah incident) to make Groupon a household name.

This should end up being a very sound marketing investment for Amazon. Look for Living Social to start giving Groupon a run for its money. There are still many unanswered questions in this emerging social buying market. Is there a big enough market for two major players? What about all the other imitation sites that are starting to pop up? What will the future of the Industry be like? Is it really worth it to smaller businesses to offer their products or services at essentially 75% off the regular price?