The Web Is Becoming One Big K-Mart

When I first started out in Silicon Valley, the Internet was like that clothing label for African Americans, FUBU: for us and by us. Most websites were an echo chamber for highly educated people to hob-nob with one another. Most entrepreneurs took Mike Moritz’s advice to build products for themselves, only discovering other users later by happenstance.

It’s still mostly that way. The kinds of services my friends love to use, like Foursquare and Instagram, don’t appeal to my mother. Many, like Digg, probably never will.

But in today’s era of high-revenue startups, hardly anyone has noticed the emergence of a new breed of companies. The ones that hit $100 million the fastest have cashed in on lower- and middle-class, value-conscious consumers — the kind of people whom their Stanford-educated founders hardly ever now meet.

No one was surprised when the founder of Groupon admitted he doesn’t use Groupon much himself: why would a billionaire snap up a deal for $5 off his next pastry purchase? Building a product first for yourself and yourself alone is what artists do; as a business-man, Tony Hsieh is proud that he built Zappos into an e-commerce colossus without ever really liking shoes.

The first business to reach $100 million of revenues in less than four years, eBay, appealed directly to middle America’s bargain-shoppers with a wide range of odd goods, tantalizing prices and marketing come-ons; its management team probably hadn’t been to a real-world garage sale in years. Back then, eBay was the exception. Now, a generation later, a bunch of companies have reached that milestone more quickly, including Gilt, Groupon, LivingSocial and Zynga, and they are the rule. All take the same approach:

  1. Profit-driven management teams
  2. Focused on hyper-growth rather than sustainability
  3. Targeting a mass-market audience from the get-go rather than early-adopter niches
  4. Marketing aggressively, even in ways that occasionally get it into trouble
  5. Teasing high-frequency, low-cost, impulse purchases

It’s a different world, but instead of one far-flung corner of the Internet galaxy, it now sits at the glowing center, white hot with profits. We’ve hardly noticed the change. If you want proof of how far apart the money-makers and the taste-makers have been, look no further than the Internet’s ultimate taste-maker, Michael Arrington. Mike waited to try Zynga for the first time more than two years after the launch of Zynga’s first game.

By that time, Zynga had already cleared $100 million in annual revenue. When the digerati did finally take notice of these companies, it was mostly to complain about online scams and bankrupt coffee-shops. The Internet’s idealists, the people originally excited by the communities created on Flickr and Digg, still haven’t made their peace with the Internet’s wheeler-dealers.

But the boom this time belongs to Groupon and Zynga as much as anyone else, and that boom is cashing in on America’s bust. The premise of all these services has been to let people play games, go to zoos or buy clothes for much less than they’d normally pay. As the country has gotten poorer during the recession, Silicon Valley has gotten richer by turning much of the Internet into a gigantic K-Mart.

In the same way that communities ask themselves whether casinos and Wal-Marts create more poverty than wealth, America may begin to wonder what this part of the Valley, the one far from Google and Facebook, does for the rest of the country. The fact that the tech economy and the real economy are moving in opposite directions, as TechCrunch observed today, is not just an uncomfortable paradox. It’s cause and effect. The best time to start a deal-driven website is when people really need deals.

And nothing creates a frenzy like a bargain. A bartender in Seattle’s trendy district of Capitol Hill recently complained to a friend of mine that he can always tell when Groupon offers a promotion because the “bridge-and-tunnel” customers flood the place. If it’s a LivingSocial deal, the bartender sniffs, “it’s even worse.”

The problem is that frenzies don’t last. Buying stolen stuff at eBay didn’t always make people feel good, which is why some people a few years ago stopped doing it, and why eBay got serious about cleaning itself up. Now Zynga, Gilt and Groupon face the same challenge.

As we wrote last week, there are plenty of Internet companies now going public that make the world better. But as we realized at Redfin a long, long time ago, if the only thing the Internet offers is the same old thing, but cheaper, a few companies will get rich — quickly but perhaps not for long — and the world will be poorer for it.

Discussion

  • Guest

    Reminds me of the 1987 interview with Steve Jobs for Playboy magazine:
    SJ: Let me compare it with IBM. How come the Mac group produced Mac and the people at IBM produced the PCjr? We think the Mac will sell zillions, but we didn't build the Mac for anybody else. We built it for ourselves. We were the group of people who were going to judge whether it was great or not. We weren't going to go out and do market research. We just wanted to build the best thing we could build. When you're a carpenter making a beautiful chest of drawers, you're not going to use a piece of plywood on the back, even though it faces the wall and nobody will ever see it. You'll know it's there, so you're going to use a beautiful piece of wood on the back. For you to sleep well at night, the aesthetic, the quality, has to be carried all the way through.PB: Are you saying that the people who made PCjr don't have that kind of pride in the product?SJ: If they did, they wouldn't have made the PCjr. It seems clear to me that they were designing that on the basis of market research for a specific market segment, for a specific demographic type of customer, and they hoped that if they built this, lots of people would buy them and they'd make lots of money. Those are different motivations. The people in the Mac group wanted to build the greatest computer that has ever been seen.

    • http://blog.redfin.com GlennKelman

      I love that quote. Thanks for sharing!

  • http://dannyman.toldme.com/ Daniel Howard

    Well . . . middle America needs its coupons . . . though I admit I'd rather be working on stuff *I* found interesting, whenever possible.

    Which is just to say, this is a great, thought-provoking article that helps some of us question what we want from our work.

    -danny

    • http://blog.redfin.com GlennKelman

      Very kind of you to say Daniel. Checked your blog, and I like the idea of the Leonardo-inspired subway map…

      • http://dannyman.toldme.com/ Daniel Howard

        Thanks, Glenn.  That Leonardo da Vinci is a famous famous example of a guy who had to balance creativity driven by his own passions with producing beautiful works to suit his patrons.  There's two types of patronage work: the flash-in-the-pan forgotten-tomorrow trends-of-the-moment, and the Sistine Chapels.  Part of the trick for creators is to suss out which is which.  But even creating for today's fad can be great practice work for a future marvel.  Leonardo filled a lot of notebooks with his crazy mirror writing on the way to creating his masterpieces, and skeptical as I am about some of today's trendy Internet startups, I have talented friends chiseling out the images of Groupon and the rest.

        -d

  • Aburrell

    Glenn,

    Am I reading between the lines in this blog? Is Redfin is moving its value proposition from a discount brokerage to a full service brokerage and steping away from the customer rebate to sustatin after the “frenzy”?

    -a

    • http://blog.redfin.com GlennKelman

      We want to be better and cheaper, not just one or the other. We've never been a discount brokerage. Since my first week at Redfin, I've been saying there's a difference between Half-Price Books and Amazon: one offers the same book but cheaper. The other offers disruptive economics but also a much better customer experience, at least for some readers.

  • http://www.libertyjanepatterns.com Jason Miles

    Glenn, I just found you via Reality Check, nice stuff! Love your writing.

    K-Mart? No. I love the thought, but it is not nuanced enough. The web is becoming a recession tested digital economy, which is something it's never experienced before. The Tech Bubble was a joke compared to what the country is going through now. Our little online baby is learning it's depression era lessons, and smart marketers are finding ways to earn good money in a down economy. You're right, that means not just building the equivelant of digital luxury items, it means making stuff that adds economic value for people who need it most. You'll see the K-Mart's, but people still value good design, and high quality. I believe the recession is going to make the web a more complete trading ecosystem. And that's a good thing.

  • Karl Mueller

    Great article Glenn!

    I disagree slightly on one point. 
    I believe it is small-to-mid sized businesses that drive the discount
    craze, not that people’s desire for a bargain. Groupon’s real product is the
    ability to find businesses willing to bend over backwards to get the sale.  You won’t recieve many Groupon offers
    from Wal-Mart or K-Mart because they don’t need the exposure.  Instead, its as if all the smaller
    retailers had to band together in a larger collective, each willing to occasionally
    sacrifice to compete on price, keep their brand afloat, and claim the dollars
    that would otherwise go to standard discount players.

     

    There will always be a demand from buyers for discounts, but
    sellers will be a lot less likely to supply them when the economy improves.  And when that happens I predict Groupon
    will struggle to keep their offers diverse enough to appease their mailing
    lists.  Maybe you’ll even see a
    groupon FOR groupon?

  • rechngagent

    Glenn,
    a point of consideration might be the disparity between the consumer experience, be it on line or at a brick an morter location.  In the case of retail, many low end shoppers have found the shopping experience to be tetiods and inconvenient.  In the case of Groupon, it is a combination of expanded exposure, (benefiting smaller business), and delivering on the consumer experience.  The key in all of this, what is the consumer looking for? Data to make and informed decision, and execution delivering on the offering.  Retailers with the exception of few, fail miserably in the consumer conversion at a physical store location, while their online business are streamlined and easy to execute.  Real estate is a bit of a paradox, consumers are obsessed with data, and there is voluminous amounts out there. How do we as an industry build a return on the information gatherers, and convert them to closed sales that exceeded the consumers expectation.  I have said it before, your team is on to something great!  You are so correct build a platform for sustained and consistent growth, with a cutting age approach to fulfilling the consumer need and the $hundreds of billions of dollar in market share are yours.

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