What LivingSocial's biggest deal means for Amazon

January 24, 2011: 11:58 AM ET

The implications of the Amazon flash sale go beyond 24 hours.

Photo: LivingSocial

Last week, LivingSocial offered a flash sale that lit up the web. For 24 hours, it sold $20 Amazon gift cards for half that price, and customers eagerly chomped at the deal. In the end, 1,378,938 million cards -- the equivalent of 7,600 an hour or 80 per second -- were sold in the U.S., and the resulting frenzy made headlines as the biggest LivingSocial sale to date and what the company argues was possibly the biggest flash sale ever.

"Overall what this deal showed is the power of the LivingSocial platform," says Maire Griffin, LivingSocial's Communications Director. "It was a great opportunity for members, new and existing, and it was great for Amazon, too. It proved that LivingSocial is here to stay."

Griffin is probably right, but the power of the platform really rests with the power of one of LivingSocial's biggest investors: Amazon. In the past, daily deals from Living Social have primarily focused on local services: a massage, a yoga session, dinner for two at a restaurant. But the Amazon (AMZN) gift card sale was notable for several reasons. LivingSocial wasn't just offering up another service, but veritable currency from the number one online marketplace -- and at half its value. Given the wide array of stuff consumers can buy off Amazon, it's almost like giving customers $10 for free. In which case, how could the deal get better?

Some "gamers" thought it could. In the online shopping forum FatWallet, consumers piled into forums discussing questionable ways to get around the "one per customer" rule like opening multiple email accounts and using different credit cards for each one to buy multiple gift cards. And while it ultimately failed in many cases -- the daily deals site combed through purchases after the sale closed for such transactions -- it's another testament to how hot the sale became.

It wasn't just a win for LivingSocial, but for Amazon, also. Last month, the e-marketplace invested $175 million in the daily deals site not long after buyout talks between Groupon and Google fell through, giving Amazon a vested interest in the company's long-term outlook.

In the immediate short term, the flash sale succeeded in drawing attention and conversation away from Groupon, technically the leader in the daily deals services space, and elevating awareness regarding LivingSocial.

The sale also has long-term benefits. With more than 1.3 million gift cards sold, Living Social made $13 million in sales in one day, a site record. Amazon obviously lost money on the deal, but the goal here wasn't to turn of a profit, but drive traffic. (With over $25 billion in revenues last year and a solid reputation, Amazon obviously isn't hurting for either.) If sales are any indication, regardless of how many people attempted to "game" the system, then mission accomplished.

"This sends a strong message from Amazon that they're supporting their new investment in LivingSocial," says Forrester analyst Augie Ray. "We've seen too many big companies buying or investing in small companies that haven't thrived because the big companies haven't helped in some way."

Ray points to start-ups like the location-based service Dodgeball, acquired by and eventually shuttered by Google (GOOG), or News Corp.-owned social network-turned-entertainment hub MySpace, which just laid off roughly half its staff and is contemplating a sale or spin-off. In both cases, he argues the larger companies didn't do nearly enough to leverage its big brother status and bolster its investment by driving more traffic and capturing new users. In MySpace's case in particular, Ray says the lack of funding from News Corp. (NWS) contributed to its failure in the social networking space.

Other companies like Foursquare recently attempted to raise awareness with partnerships of its own. Last year, the location-based service offered discounted Frappuccinos for "mayors," people who check into a particular location the most, and in the UK, Dominos offered mayors free pizza once a week for a limited time. It was just another example of a big company giving free goods -- or at least heavily discount goods --and leveraging its reputation for the benefit of a start-up.

For Amazon, its investment comes just three years after LivingSocial launched, so it's coming into the company's life span during a pivotal period of potential growth. Though LivingSocial is still crunching numbers, Griffin did admit a substantial number of Amazon gift card purchases came from new customers and subscribers. Ray predicts that many of these new customers will stick around. Even better, all of this happened by way of the cheapest, most effective advertising channel possible: word of mouth.

In that respect, $13 million, or $10 per user, sounds like a small price to pay if it means gaining a toehold in the booming daily deals space.

Join the Conversation
About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

Email JP
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.