How ‘local’ can tech get?

Here is the unedited transcript of the panel:

HOST:  Time now to talk about local.  “Reaching Local” is the topic of the next panel.  We’ve assembled some of the biggest players in that area to talk about how local can you get.  So, please welcome Jeff Jordan, Tim O’Shaughnessy, Cyriac Roeding, and Adam Lashinky.  (Applause.)

ADAM LASHINSKY:  And David Krantz with AT&T.  I’ll explain.

First of all, just a quick personal note, the lifeblood of a conference is people who come back year after year and participate.  I  just wanted to thank Ron Conway, who’s in the room, who jetted in today to be with us and rearranged his schedule to do so.  Thanks, Ron, for being here.  (Applause.)

Very quickly I just want to give some context and introduce everybody on the panel.  Jeff Jordan has been a venture capitalist for about seven minutes now, right, Jeff?

JEFF JORDAN:  At least.

ADAM LASHINSKY:  Before he — he still is the executive chairman of OpenTable, was the CEO at the IPO, before the IPO, was the president of PayPal before that.

David Krantz runs AT&T’s —

DAVID KRANTZ:  Interactive.

ADAM LASHINSKY:  — interactive business, and we’ll get into explain what that means in a moment.

Tim O’Shaughnessy is the CEO and founder of LivingSocial, one of the two biggest daily deal companies in the world, country, universe.

And Cyriac Roeding runs Shopkick, which he’s going to have a chance to explain.

So, here’s my high level starter for you, Jeff, which is local advertising has been around forever, right, and it’s a massive, not terribly exciting business, or at least it wasn’t.  And we’ve had Internet advertising for at least 15 years.  Mary Meeker is here, so she probably has a better read on how long we’ve had Internet advertising.

Why now, why local now?

JEFF JORDAN:  You know, it’s funny, all four of our businesses I think are taking — are using offline (sic) to help build offline businesses.  You know, you look at OpenTable, we’re helping fill seats, helping sell goods.  Historically, this advertising did things like Yellow Pages and newspapers.  With the Internet at scale it can get so much personalized and so much localized, and companies like ours can help small businesses achieve things that they can’t do on their own by building networks.

ADAM LASHINSKY:  But what took so long?  I mean, we had the Yellow Pages forever; Dave is going to talk about that.

JEFF JORDAN:  We’re a little slow.  Yeah, sorry, it’s —

ADAM LASHINSKY:  I thought we weren’t slow, I thought we were fast.

JEFF JORDAN:  You know, for our — I’ll talk specifically to OpenTable.  The idea was 12 years old.  In order to bring value to diners to find a place to dine, we have to aggregate a ton of restaurants.  So, it’s taken us 12 years to aggregate about 35 percent of the nation’s reservation-taking restaurants, not for lack of trying, because you’re doing it one at a time going door to door.

So, we’ve been at it for 12 years; it’s just now getting to a point with Internet penetration and our restaurant penetration where it really is a meaningfully advantaged consumer experience.

ADAM LASHINSKY:  I want Jeff to talk about this fascinating thing about the very sophisticated technology industry, and explain very quickly exactly how OpenTable sells.

JEFF JORDAN:  OpenTable sells door to door.  We put sales reps in essentially what are the NFL cities of the country, and they are charged with going door to door convincing restaurants to adopt our system, literally one at a time.  And when we first enter a market, a good sales rep will sell three or four a month, and one of the drivers of that is almost all of our clients own one restaurant.  So, you’re aggregating them one at a time.  Over time, as we get established and we can put diners into that market, the wheels start flying, and we can sell — a good rep will sell 15 or 20 a month, and the network effect takes off.

ADAM LASHINSKY:  Cyriac, 45-second elevator pitch, please, on Shopkick and why is it a local advertising play.

CYRIAC ROEDING:  Okay.  So, Shopkick is bridging the mobile world with the physical retail world.  It’s an app that you download on your phone, and the second you walk into a store you’re receiving a signal that is sent out by this device.  This is $100 or less.  You plug it into a power outlet, and it emits an inaudible audio signal at the range of 21,000 hertz, a really high pitched tone.  And inside is a code.  The cell phone picks it up, the Shopkick app, and the moment it picks up the signal it knows you’re really inside the store rather than in the parking lot or two blocks away like GPS check-in apps.  And in that moment you’re getting rewarded just for coming through the door.

So, you walk in to Target, Best Buy, Macy’s, Sports Authority, Simon Malls, Crate and Barrel, and the moment you walk through the door —

ADAM LASHINSKY:  Those are all actual customers of Shopkick?

CYRIAC ROEDING:  Those are all partners of Shopkick.

ADAM LASHINSKY:  Partners.

And you get what?  I interrupted you; you get what?

CYRIAC ROEDING:  So, you get a rewards currency called “kicks,” and these kicks are a coalition rewards program.  It’s the first in the U.S. where you can earn kicks at Best Buy, and spend them at Target or vice versa, or for an iTunes download or a movie ticket or a restaurant voucher.  So, you can basically collect, collect, collect, and then you get deals, as well as rewards.

And the idea of Shopkick is the average amount of money you spend to bring somebody into a big box retailer to buy something is between $10 and $15.  What if you could bring that down to 50 cents, and bring people back over and over again?  And we’ve started last year in August, and we now have 2 million users in 11 months, which is the largest location-based shopping app in the country now.

ADAM LASHINSKY:  And you were able to do this, you were able to get to that user level more quickly than OpenTable because you have a much smaller number of people to pitch, right?

CYRIAC ROEDING:  Well, it’s actually the friction is slightly lower, because you penetrate into the Smart Phone market, and in the U.S., in the target group like 18 to 40 you’ve got about 50 percent penetration now.  And then you work with the large retailers, and this is interesting because the topic of the panel is local, but it’s very interesting because what we found is that the fastest way to get into local is to work with the larger retailers, not the small retailers, because that’s where 60 percent of the traffic is on the local level.

ADAM LASHINSKY:  And how do you make money, very quickly?

CYRIAC ROEDING:  Every time  you earn kicks, Shopkick gets a share of the value, and every time you use an offer on Shopkick that you find, we get a share of the whole basket, which basically is the equivalent of cost-per-click but in the physical world we call it cost-per-visit.  And the cost-per-action is an affiliate fee in the online world.  We know that from there.  We took it to the offline world.  So, we get a share of the basket.

ADAM LASHINSKY:  Tim, daily deals is another idea that is not new.

TIM O’SHAUGHNESSY:  Sure.

ADAM LASHINSKY:  Would you just briefly recount for us Living Social’s history, you know, when the light bulb went off that this old idea could be a new idea using Internet technology, really e-mail, right?

TIM O’SHAUGHNESSY:  Yeah, I think that is — although becoming increasingly less so, but the concept of aggregating a lot of people together in order to get discounts from a business, whether it’s large or small, is not novel and has been around forever.

I think a couple of things have happened that have allowed this aggregation to occur in a pretty short period of time.  You know, one is as you could actually leverage self-serve advertising platforms to advertise locally.  So, even five, 10 years ago, you couldn’t go to Google, you couldn’t go to Facebook social ads and actually target people at scale in a particular metropolitan area.  You can do that now, so you can actually aggregate that user base.

Second, just from a social platform perspective, you know, if you look at the companies that attempted similar types of models in the late ’90s, you had a world where they were — they couldn’t aggregate enough people in a short enough period of time that it was meaningful for the merchants.  So, now you have various different communication devices that allow much more instantaneous, even though it’s still asynchronous, still it’s much more instantaneous communication, so you can actually aggregate those people in a much shorter period of time.

ADAM LASHINSKY:  And just remind me, when did LivingSocial start, and what cities are you in, and what sort of data can you share about the size of the business?

TIM O’SHAUGHNESSY:  So, the business at this point in time, we’re about four years old.  We’ve been playing around in the online to offline world for most of those four years.  From a daily deals perspective it’s been about two.  We’re in 21 countries at this point in time.  We’re around 2,500 employees.

ADAM LASHINSKY:  I’m sorry, you said 21 countries?

ADAM LASHINSKY:  And how many cities in the United States or cities total?

TIM O’SHAUGHNESSY:  Cities total is around 550, and we’re about 2,500 employees.

ADAM LASHINSKY:  The other day in San Francisco I went into the San Francisco Soup Company two blocks from my office, and there was a line out the door, and the guy, the owner was standing there with a clipboard checking people in.  He said to me, “Living Social, Living Social?”  And I said, “No.”  He said, “You go to the front of the line, because you’re paying full price.”  And these people were waiting so patiently, it was fascinating, to get some for free.

TIM O’SHAUGHNESSY:  Yeah, it was a promotion we did called dollar lunch day around the launch of a new product that we’ve had called Living Social Instant, and it’s kind of a real time product where you as a consumer — and we actually think that this is where a big opportunity will be — you as a consumer, you’re going to go grab lunch somewhere.  There’s probably 30 places that you could go within three blocks of where you live, and right now there’s no incentive for you to go to one place over another.  So, we’re providing the ability for merchants to actually almost bid for your business, and they can do it in a way where if their lunch rush is slow, it’s 12:30, they don’t have as many customers as possible, they can actually put something live at that point in time.

ADAM LASHINSKY:  Living Social Instant sounds a lot like GroupOn Now.

TIM O’SHAUGHNESSY:  Yeah, I think that’s their clone of our product.  (Laughter.)

ADAM LASHINSKY:  Touché, that’s good.

TIM O’SHAUGHNESSY:  Yeah, I mean, look, I think that if you view this as the daily deals business, you’ve probably lost already, and we very much view this as local commerce.  We’ve invested a lot in building up two really big assets.  One is a massive customer base that we have a megaphone in every city that we operate in, and the second is a great merchant relationship and merchant networks.

So, we launched something, we launched LivingSocial Instant, and GroupOn launched their clone of that later.  We launched LivingSocial Escapes; they just launched their Getaways, their clone of that following that.  So, we’re continuing to build new product releases, and really be that connective tissue, and I think at the end of the day, we’re pretty much focused on operating and bridging that gap, and we can do that successfully.

TIM O’SHAUGHNESSY:  I’m just merely stating two data points, which is that we launched LivingSocial Instant and we launched LivingSocial Escapes, and they’ve since launched — subsequently launched competing products.

ADAM LASHINSKY:  Okay, so David, AT&T has a Yellow Pages business.  I learned today that many of the regional phone companies sold off their Yellow Pages businesses, famously to private equity firms, many of which made gobs of money and recycled around multiple times, I think some went bankrupt, I don’t know, but AT&T did not.

DAVID KRANTZ:  Right.

DAVID KRANTZ:  Okay.  So, we decided to keep the business.  We kept the Yellow Pages business.  We have a print business in 22 states, which gives us — when we talk about scale, so Tim built up a sales force, Jeff built up a sales force; we have 5,000 sales personnel who have been there for decades selling this old media print book.  And this print book —

ADAM LASHINSKY:  Let me just stop you for a second.  How big is — I’m sorry, Jeff, how big is OpenTable’s sales force?

JEFF JORDAN:  Well, OpenTable’s sales force, sales and marketing, 120-ish.

TIM O’SHAUGHNESSY:  It’s about 1,400, 1,500.

CYRIAC ROEDING:  Shopkick has 30 people in total.

DAVID KRANTZ:  Obviously that’s the key asset that we started with.

So, then we set about creating an old media/new media conversion, right?  So, we had all this revenue, we had all this infrastructure, we had all these deep relationships.  We bought this YellowPages.com domain name.  We built this local search site called YellowPages.com.  We rebuilt it as YP.com, launched it.  We built mobile apps.

We built — some of these folks talked about aggregation, right?  So, on the Internet to move dollars from print, from traditional to the Internet, you’ve got to aggregate fragmented traffic across all these different sites.  So, we built an ad network, as well.  Most people don’t realize that we’ve got this big local ad network, because we have hundreds of thousands of interactive advertisers that pay us every month for these advertisements.  If you do a search on Bing on a Verizon phone, they call our API, we deliver it out.  We just launched in the mobile local apps.

ADAM LASHINSKY:  Now, unlike Tim, you can and will share some revenue data for your part of the company.

DAVID KRANTZ:  Sure.  We announced our last — our last quarter that we announced was 252 million in interactive revenue.  So, we’re a billion-dollar run rate, interactive, online, local advertising company.  Most people have no idea, because we’re inside of AT&T.

ADAM LASHINSKY:  And that’s not including the print Yellow Pages.

ADAM LASHINSKY:  But I would assume that they’re the ones with the 5,000 salespeople, not you.

So, if I was a startup company, and I could do an exclusive deal with AT&T to be my channel, it would be pretty powerful.  And that’s kind of how we approached it, and we get comped on, you know, similar.  So, it’s very symbiotic as we move — essentially we recognize the business is changing, and we’re going to move those local advertisers into interactive products.

DAVID KRANTZ:  Sure.

ADAM LASHINSKY:  What took you so long, and why aren’t you in every city that AT&T has a presence?

DAVID KRANTZ:  Yeah, sure.  You know, what’s been amazing about what Tim and the GroupOn folks have done, this has grown so quickly so fast, right?  It’s a couple year phenomenon.  It’s been sort of one of the fastest growing things.  So, yeah, sort of, you know, you tap yourself on the head and go, why didn’t we do that earlier?  At the same time, we were building this other billion-dollar business and building all this infrastructure.

ADAM LASHINSKY:  And so here’s the part that I think you will like, which is — and this is the perennial question about LivingSocial and GroupOn, just as the two leaders in this brand new space.  Everybody is offering daily deals now, including AT&T and my local newspaper and so on, and you’ve got this fast profit margin, low growth business to fund this, right?

DAVID KRANTZ:  Sure.  I’m not sure of the nature of your question there.

ADAM LASHINSKY:  So, don’t you agree that that’s a very astute observation about the daily deal?  (Laughter.)

TIM O’SHAUGHNESSY:  Like every observation you make.

ADAM LASHINSKY:  It’s really a question —

ADAM LASHINSKY:  Okay, but LivingSocial and GroupOn are so far out ahead, they’ve shown that not only do they have big businesses already, but they’ve got — but they’re technology leaders as well.  Did I summarize the argument, Tim, for how you’ll stay ahead?

TIM O’SHAUGHNESSY:  Yeah, I think some things are self-reinforcing where we’ve been able to generate so much scale in markets that we actually can go and take New York and not treat it like one market but treat New York like 10 distinct markets, which then means that you have a better offering for merchants and consumers, because you’re more personalized with what you’re giving to them.  And so you need to have — there’s a marketplace element where you need to have enough consumers and enough merchants to be able to do that.   And then I think we’ve been able to grow and we have such a — and generate cash flow where we can really invest in technology.

I sort of view that if you kind of look at local commerce and the relationships between consumers and merchants, it’s a lot of technology solutions that are — you know, whether it’s marketing, whether it’s transactions, point of sale systems, remarketing, et cetera, everything kind of in that vertical stack is either in the process of or is going to be disrupted in the next two to three years.

ADAM LASHINSKY:  I’m sorry, give me one example of something in the stack that you’re referring to.

TIM O’SHAUGHNESSY:  The point of sale systems.  Point of sale systems are incredibly fragmented right now.  It’s one of the only industries where the 80/20 rule doesn’t actually apply.  You know, if you look at the top whether it’s Micros or POSitouch or whatever that the restaurants use, you know, I fundamentally think, whether it’s something like Square or something else, that’s going to be pretty disrupted over the next couple of years, and it’s very, very early at this point in time.

ADAM LASHINSKY:  Jeff, pretend for a moment, if you can, that your firm is not invested in GroupOn, and you’ve been around a bunch of cycles in this industry.  Can you make the case to me that these early leaders, why these early leaders won’t get flattened by a low barrier to entry business?

I think there are significant scale advantages in businesses like this.  So, you take the exact example Tim just gave, the more you can micro-target a merchant offer — so when they first debuted in the Bay Area, I lived 40 minutes south of San Francisco, and they’ll give me a Marin, which is 60 minutes north of where I live, offer; I’ll never use it.  The more they can micro-offer, it brings more value to merchants and to the consumer.  So, there is a large scale aspect to this business.

ADAM LASHINSKY:  But let’s say for the sake of argument they can defend their market share, but their margins is another story.

ADAM LASHINSKY:  Cyriac, you made a passing swipe earlier that I’d like you to come back to.  Would you explain what you meant, the difference between the technology that you’re using and some of the technology that some of these check-in companies are using?  You were referring to one company in particular I assume.

CYRIAC ROEDING:  Well, actually I was referring to the whole group of companies that are using GPS to do check-ins.  And, in fact, the technology I showed to you earlier, we didn’t want to build it; we built it because we had to, because we found out that the area radius of GPS on cell phones when you first fire up an app is about 500 yards.  You can probably check into like 15 restaurants around us right now if you use one of those apps.

And what we went by was the fundamental question that we asked was, and this ties back to what you just talked about, what is the number one challenge of every retailer in America?  Let’s say you took a long trip, and you asked every retailer, what’s your biggest challenge, and they all have to agree on the same one, what are they going to answer?

CYRIAC ROEDING:  And the answer will be —

ADAM LASHINSKY:  Is what?

CYRIAC ROEDING:  — will always be the same, it’s foot traffic, getting people through the door.  And why is that so important?  Because conversion rates in the online world are really bad, half a percent to 3 percent, but they’re really good in the physical world.  They’re between 20 to 95 percent, depending on the category of retailer.  It’s 20 percent in fashion, 15 electronics, 95 percent in groceries.  And it’s, by the way, 99 percent in quick service restaurants, because you don’t go to McDonald’s and figure out you’re not hungry.  So, in other words, getting them through the door is the key.

And so now the next question would be, can we solve that with GPS, and the answer is unfortunately not.

CYRIAC ROEDING:  Because the range is so big that you’re figuring out that somebody is in the vicinity, like two, three blocks away.

ADAM LASHINSKY:  I want to just briefly ask each of you to talk about platforms a little bit, starting with you, Cyriac.  Remind me, remind us what platforms you’ve already developed for and what platforms you haven’t developed for yet.

CYRIAC ROEDING:  We started with the iPhone and then we went to Android.

ADAM LASHINSKY:  And so those are the only two?

ADAM LASHINSKY:  Plans to do more?

CYRIAC ROEDING:  Not at this point.  If the consumer goes to other platforms we’ll always be there, because all we care about is where is the consumer.  But very few people are downloading apps from the Blackberry, and that’s why we’re not on Blackberry.

ADAM LASHINSKY:  Tim?

ADAM LASHINSKY:  Mobile Web means my browser on whatever device I’m using.

ADAM LASHINSKY:  You’ve been doing something with Pandora as well, is that right?

ADAM LASHINSKY:  In other words, you’re an advertiser.

TIM O’SHAUGHNESSY:  Yeah, and it’s just been a deeper partnership than probably the standard relationship has been, but it’s been something that we’ve found very successful over time, because once again, as I said at the beginning, you can actually target people locally via their platform, and you couldn’t do that five, 10 years ago.

ADAM LASHINSKY:  David?

ADAM LASHINSKY:  Do you want to answer this for any of the entities that you’ve involved with, Jeff?

JEFF JORDAN:  Well, I mean, OpenTable is an easy one.  We do everything that can move, because mobile and local are so incredibly important.  They’re not — the returns on Nokia, Windows and Blackberry are nowhere near the returns on iPhone, Android and iPad, but they’re way above breakeven.  And in local businesses mobile is phenomenally important, because — I mean, OpenTable has already done — seated over 10 million diners through mobile applications alone, and it’s a killer function.  You’re in Aspen tonight, you want to dine, it’s 7:00, and you want to know where you can dine.  You say, show me the 20 restaurants closest to me that have availability, one-click, you’re in.  So, it’s an expansive user case.  So, we’re going to be everywhere mobile is.

ADAM LASHINSKY:  That was a very nice plug for OpenTable.

ADAM LASHINSKY:  Very good.

TIM O’SHAUGHNESSY:  It’s a great tie.

JEFF JORDAN:  Shucks.

ADAM LASHINSKY:  One last thing for anyone who wants to field it, which is I think one of the things that’s dawning on this, on our industry, is that Google just did something very interesting very recently, which was they put out a very good social product.  And this was sort of an epiphany, right?  So, should you be very concerned about Google Offers as a result?  Are they getting their product development act together?  Cyriac, you’re nodding your —

CYRIAC ROEDING:  This is a really interesting point.  Our hypothesis is that the leap from social to commerce is too far.  It’s a very large one.  If you think about the two camps, when you think about commerce and local, you’ve got on the one hand Facebook Places and Foursquare, Gowalla, and other social, any other social players.  And on the other hand you’ve got GroupOn, LivingSocial, eBay, and then Google is like more search business and Shopkick.  And if you place the bet on where are people going to go shopping, are they going to go shopping on Facebook or are they going to go shopping on a direct commerce app?  And we’ve seen that, that we produce way more revenue than social apps.

ADAM LASHINSKY:  Before I go to the audience, does anybody want to disagree with that?

DAVID KRANTZ:  Well, I’ll give you a little bit different perspective on it.  So, what I think is you’ve got to have a network and coopetition is going to be key.  So, we go back to the local sales force ability to originate deals, and then we’re going to distribute it.  So, if Google figures out a great way to sell offers, we want to distribute it as part of our network.

We just signed a deal with Foursquare; they’ll distribute our deals.  We’ll work with anybody.  It just is part of getting scale for your merchants.  So, if they win or if Shopkick or somebody else wins, we’d like to be part of that ecosystem.

DAVID KRANTZ:  Yeah.

QUESTION:  (Off mike).  My question is for Shopkick.  I love the idea, it’s amazing, but the one question I have is who pays for the $100 device?  If you walk into a store and you want them to put that device in, not counting what they’re going to have to do to actually do something useful with the device to actually reach out to the consumer —

ADAM LASHINSKY:  Per store?

CYRIAC ROEDING:  Yeah.  It’s kind of a blip on their radar.  If you look at the cost per store, if you’ve got 500 stores, you’re talking about, you know, $50,000.  So, it’s a blip.

But what the real benefit is, if you do the math, and this is not about the kicks, the points coming back to the retailer, this is about an incremental transaction.  Let’s say your basket size is $80, and the gross margin is 32, because it’s 40 percent, right?  And we give you 50 cents every time you walk into a store.  And you game our system, you’re one of the gamers, and you actually show up five times without buying, but then you come the sixth time and you do buy.  We spent $3 on you.  The gross margin is $32.  And that’s why this is such an exciting model.  It’s not about whether you need to install a device, it’s literally a blip.

CYRIAC ROEDING:  No, there’s no maintenance; the things work.  We’ve had like, I don’t know, exchanged out of 2007 that are in stores I think we’ve exchanged about 50.

ADAM LASHINSKY:  Back there, please.

QUESTION:  Courtney Holt (ph).

I think in order to get the merchant side of the business to adopt these things on a more recurrent basis, a lot of work has to go into that.  I think OpenTable has done a good job.  The user experience is good in both bands.

I think that also leads to the second part is deal clutter.  I sign up for these things, so I’m looking at them more as a scientific experiment.  I’m getting 35 daily e-mails right now on deals, and I’m seeing a lot of the same brands and people are showing up throughout them.  I think it’s going to be a complicated thing to get this calibrated between the consumer and merchant.

QUESTION:  It’s about the deals.  The OpenTable experience has been good, because I know when a customer has booked a seat, we’ve made it available.  I have a screen — there’s technology in the restaurant that gives us that.  I mean, you mentioned 12 years of work went into this, but it’s good on both sides.  If I’m booking a reservation, I feel like I’m super-served.  As a restaurant I have a clear view.  And by the way, I see when people are coming back.

JEFF JORDAN:  By the way, we’d like to thank you for your unabashed plug for OpenTable, but that’s —

QUESTION:  Hey, it makes us money.  That’s what it comes down to.

JEFF JORDAN:  Yeah, I mean, I think there’s two things.  One, you know, the technology incorporated in what we do is going to improve.  I mean, it took OpenTable 12 years to get where they are.  You have to keep in mind that this industry is two years old.  So, there’s some manual pieces to things that will get a lot better, and I think you’re starting to see that.

And our instant product I alluded to before is literally like we put a hardware device in those stores, you walk in, you tell them your name, you don’t even take your credit card out.  I mean, that’s a very different experience.  And so that type of thinking will incorporate into most of what happens.

I do think that there’s — you know, one of the reasons why we think brand is important is because at some point in time people will start to understand that certain companies do certain things and have certain types of products, have customer service in a certain type of way.  And if you look at it, you know, our sales have been improving, I think that’s not secret, and we’ve grown, and we’ve launched more markets.  But the ways that people have been buying have been incredibly diversified.

So, that starts to happen, and it’s not going to happen overnight, but it’s just all these incremental things that at the end of the day you have enough scale advantage where it becomes very, very difficult for other people to do.

Before we — I’m going to conclude, I have a couple of announcements before I let you four go.