Facebook Doesn’t Want to Deal

The social-networking giant has decided to abandon its online-based daily deal pilot program, Facebook Deals, after a four-month trial period. But why?

When Facebook first entered the daily deal space with a plan to offer its users deals in five cities, daily deal startups—at least those that were not among the lucky few working with Facebook Deals as partners—were apprehensive.

The social-media giant, if it did things right, was expected to be a brand-name competitor at the very least, with some observers dubbing it a "Groupon killer." But on Friday, Facebook announced that it is abandoning the online deals it debuted in Atlanta, Austin, Dallas, San Diego, and San Francisco.

One analyst suggested that Facebook may not have thought deals to be profitable enough because it is an overcrowded space. "The Groupon group-buying phenomenon is a commodity. There are no barriers to entry. It's just not going to work because everybody offers it and therefore the margins go down," Jeremiah Owyang of Altimeter Group told Reuters when the news was announced.

The official statement from Facebook obtained by the news agency explained: "After testing Deals for four months, we've decided to end our Deals product in the coming weeks. We think there is a lot of power in a social approach to driving people into local businesses. We've learned a lot from our test, and we'll continue to evaluate how to best serve local businesses."

To that end, the social network will still offer Check-in Deals, a Facebook app that lets users find deals when they are on the go.

Read between the lines and it seems that Facebook doesn’t think traditional daily deals that users sign up via email to learn about are the best (read: most lucrative way) for it to work with local businesses. The move is certainly good news for daily deal companies like leader Groupon, which has filed to go public, and LivingSocial, which is the No. 2 deal site and also the subject of IPO talk. But it says a lot about the deal space too.

Mobile Is Where It’s At

While Facebook is abandoning the online-based deals it was offering, its plan to carry on with the Check-in Deals component, a subset of the now defunct Facebook Places, shows the strength of the fledgling mobile offers space.

Check-in Deals allows users to check in from restaurants, supermarkets, bars, and coffee shops using an app that will offer them rewards with discounts, coupons, and free merchandise. It is part of a Facebook push to get its users to share information on where they are whenever they post to the site, although this location sharing is an opt-in feature.

Although they have mobile apps too, companies like Groupon rely heavily on email marketing to send out their deals, and those cost more than they would like. Facebook is betting on mobile as the medium of the future for such deals, and we’re going to assume that it is doing so, in part, because it’s a heck of a lot cheaper.

Local Sales Forces Aren’t Cheap

When Facebook had initially launched Facebook Deals, it did so with a host of site partners that could help it offer social-oriented discounts, including KGB Deals, Zozi, Gilt City, and PopSugar City.

Facebook had a small sales team of its own, but it teamed up with the other sites because each had existing staff that made deals with local or specialty merchants in various cities, local “boots on the ground” that Facebook did not necessarily have in those locations.

It costs money to have a dedicated staff in various cities. By choosing to continue on with the Check-in Deals app only, Facebook will be able to offer deals more passively. Users let the network know where they are, and merchants who want to be part of it will likely have to make it known to Facebook that they have deals to offer. This may make it easier for national retail chains to get in on the deal action.

The Deal Space Is Crowded and Competitive

While there are low barriers of entry into the daily deal space, that doesn’t mean it’s an easy business in which to thrive. Even the deal leader, Groupon, which has seen astounding growth for a startup, is losing money as it expands. Still, it's a hot area, and Facebook did seem like a natural fit for social-outing type deals, especially.

"It is surprising that Facebook ended their deals product after just four months," Vinicius Vacanti, cofounder of Yipit.com, which aggregates daily deals and tracks the industry, told Reuters. "On the other hand, Facebook Deals had been an underwhelming product and experience."

In an interview that appeared today in the Wall Street Journal, LivingSocial CEO Tim O'Shaughnessy points out that even for successful companies in the space (his Washington, D.C.-based startup, just two years old is anticipating $1 billion in revenues this year), the daily deal business holds a lot of unknowns and hundreds of companies that got into it have already left.

“This business is much harder to scale than maybe we realized. So I think you've started to see maybe some of the new entrants started to slow down a bit, or there are some sort of retreats occurring,” he said.

From portfolio.com