Making diffuse information about the Internet and Social Media crystal clear. In this Issue:

• Social Gaming: o Zynga, Crowdstar and

Facebook Credits branch out from Facebook’s platform

• Facebook: o Facebook finally launches

app for iPad; acquires Friend.ly and upgrades analytics

• Social Commerce: o Groupon Amends S-1 and

prepares for offering o Forrester publishes study on

online coupon users

OCTOBER 27, 2011

THE INFORMATION HEREIN IS ONLY FOR ACCREDITED INVESTORS AS DEFINED IN RULE 501 OF REGULATION DUNDER THE SECURITIES ACTOF 1933 OR INSTITUTIONAL INVESTORS. Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see page 25 of this report for analyst certification and important disclosure information.

1000 Wilshire Blvd, • Los Angeles, CA 90017

213.688.8000 • www.wedbush.com MEMBER NYSE/FINRA/SIPC

PROGRESS REPORT IN SOCIAL MEDIA

PRISM

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Zynga Unleashed; Project Z, New Games, and a Move towards Diversification According to Reuters, Zynga is rumored to begin trading on the NASDAQ under ZNGA during the week of November 14th. Zynga recently hosted Unleashed, its first major press conference since announcing its intention to go public. The company rolled out 10 new games and its own web-based social network called “Project Z” as part of an overarching “Zynga Direct” initiative. The new platform for social games was launched in partnership with Facebook, utilizing deep integration with Facebook Connect and allowing users to easily traverse between Zynga’s own platform and Facebook without losing game progress. The new platform was designed to enable users to enter a social playground, separated to a degree from their non-gaming Facebook friends while easily sharing, chatting and forming communities around games like Zynga’s Empires & Allies. Zynga is also providing users with “Ztags” as an identity across any platform that a Zynga game runs on.

Source: Zynga Zynga stressed that its primary focus was on First Time User Experience (FTUE), believing the first few clicks on a new Zynga product is how long the company has to sell a user on the experience. Zynga spent over a year developing the new games, utilizing the cloud (including a private “Z cloud”), deploying over a 1,000 servers at a games launch, and building a game engine from scratch on Adobe’s Flash 11. Three of the new mobile games from the company were built with HTML5, allowing a smoother gaming experience, quick response times and faster loading. Source: Zynga

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The first games to be available on mobile HTML5 are Words With Friends, Poker, and Farmville Express. Zynga’s new games will help the company reinvigorate growth following a recent lull.

CastleVille – The game was developed by the Dallas Zynga team, which was formerly Bonfire Studios before being acquired last October. CastleVille allows users to participate in a massive multiplayer RPG game that takes place in a fantasy genre medieval kingdom, drawing on the development team’s former expertise building the Triple-A PC game Age of Empires. Zynga used a Seattle based 75-piece orchestra; attempting to give the game a more original feel by taking the soundtrack to the next level.

Source: Appdata.com

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Zynga Casino’s Zynga Bingo – Together with Zynga Poker, we assume that Bingo is one of the first amongst a growing casino based genre. Players can play bingo in rooms with themes like Pirates and Vegas. Hidden Chronicles – The first in a new genre for Zynga called “Hidden Objects”, the game borrows characteristics from Playdom’s Gardens of Time; challenging gamers to find thousands of hidden items in order to unlock pieces of a story. The game is meant to be a memory oriented challenge, while allowing users to both compete and compare scores with other gamers in their network. DreamZoo – One of the more original games developed by Zynga, DreamZoo allows players to build a collection of exotic animals. The game allows Facebook friends to help one another take care of their animals, and will soon be available as a mobile game.

Source: Zynga Mafia Wars 2 – The team that created one of Zynga’s early mega-hits, Mafia Wars, launched a sequel that is likely the most anticipated among Zynga’s new titles. Users build empires out of Mafia crews and collaborate with friends to commit crimes. The game has three different gaming domains which a user can play in:

• Lock Your Land – Users build up their own territories using over 100 different decorations and actual establishments like banks and casinos.

• Savage Saga – Users travel across seven worlds completing missions of revenge, fighting bosses, and building their own empires

• Battles & Bloodshed – Users fight in three different arenas and can call on friends for help

Source: Zynga

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The new game has over 300 different types of objects, which include different types of armor, weapons and vehicles. MW2 is available in 16 languages, the greatest number ever for a Zynga game. The game went immediately live on Google+ as well as Facebook. Inside the virtual game the geography is expansive as well, with new cities like Moscow and Chicago. New users can choose from 20 million different personalized avatars with a variety of over 600 articles of clothing. There are added 3D virtualization features and more consequence-based game play, which is similar to Zynga’s recent Adventure World title. Zynga’s push towards increased off Facebook usage will grow engagement beyond its current 202M MAUs (calculated under the new Facebook measure), 2 billion daily minutes of play , 4 million neighborly connections, and 416 million daily social actions. We believe that the new Mafia Wars comes at an opportune time to reverse a franchise previously in decline. We should also point out that the sharp drop in MAUs on the 15th is due to Facebook’s revision as to how the metric is calculated.

Source: Appdata Zynga is not the only company that is attempting to diversify away from Facebook’s platform. Social game developer Crowdstar is implementing what it calls “Project Trident”, an initiative to spread its hit Facebook games off Facebook and onto different platforms internationally. One of its first moves will be to launch its hit female oriented games It Girl and Top Girl on NHN, which is a South Korean game portal operator. NHN maintains an affiliate site in Japan, which is where the two games will be launched first, in addition to owning Hangame which has over 24M registered users and is South Koreas largest gaming portal. Like Zynga, Crowdstar will be initiating the new platform with eight new games being launched before the end of the quarter. With nearly half of the company’s revenue being derived from mobile games and over 4 million mobile downloads of It Girl, the company has decided that it will ensure all future games are available on iOS, Android and a large number of other foreign social networks, essentially putting the company on a trajectory of diversification away from Facebook. Crowdstar’s CEO Peter Relan believes that Project Trident will triple Crowdstar’s addressable market and allow the company to grow past 10 million monthly users by year end. The Project’s three “prongs” for expansion are female orientation on Facebook, expansion to mobile and expanding in Asia.

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Source: Crowdstar The company is backed by Intel Capital, Time Warner Investors and several other firms, recently raising $23 million. Backing is significant in Crowdstar’s case due to the company’s access to IP through Time Warner and understanding how to program for mobile through Intel. An example of the partnership is the integration of Time Warner’s hit show Gossip Girl being integrated into It Girl. On Facebook, Crowdstar’s most successful games include Happy Aquarium and Happy Pets. Crowdstar’s most recent game launch is Wasteland Empires; a post-apocalypse game that is real time strategy and includes social elements like friend alliances. Users also are incentivized to ask friends to join the game with virtual currencies. The game is similar to hardcore strategy games like World of Warcraft which have yet to gain mainstream traction on Facebook.

Source: Crowdstar Facebook has not been idle as developers expand off the Facebook platform. Testing partnerships have begun between Facebook and a select few game developers which include Gamehouse’s Collapse! Blast Online, implementing Facebook credits within non-Facebook games. The utility for developers come from decreased payment friction for gamers who don’t have to spend time inputting PayPal or Credit Card info. Facebook will

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gain on the tax it levies on any credits bought, although it will likely be less than the 30% taken from all Facebook games.

Source: Gamehouse Facebook has also changed the way MAUs are measured for games on its platform in a way that substantially reduces perceived traffic to dominant Facebook developers like Zynga. This may encourage new developers to build games for the Facebook platform as they feel less intimidated by larger players who they may have thought had completely saturated the market. The new metric no longer counts users as those who visit the app; instead counting only those who grant authorization to the app to access their profile. Between the top 10 gaming developers on Facebook there was a 26% drop in MAUs in the past month, reflecting the implementation of the new metric. Zynga declined 25% which heavily skewed the average, and only King.com managed to gain MAUs using the new metric.

Developer 9/15/2011 10/26/2011 ChangeKing.com 16.5 18.1 9%Telaxo 16.1 13.8 -14%EA 84.6 68.2 -19%Wooga 40.2 31.9 -21%Zynga 272.2 202.9 -25%Playdom 33.9 20.5 -40%Crowdstar 19.6 11.7 -40%Ubisoft 13.9 7.5 -46%Digital Chocolate 14.9 8.0 -46%Social Point 14.6 7.4 -50%Total 526.5 389.9 -26%Source: Appdata

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Facebook’s iPad App And Redesigned Mobile Platform Finally Launch The new iPad optimized Facebook app had been delayed since May, rumored to have been a cause for argument between Facebook and Apple. The use of HTML5 and the impact of allowing other apps to circumvent the Appstore were of apparent concern to Apple. Furthermore, there have been rumors that Facebook was using the release as leverage to be more closely integrated with the new iOS 5 (which Apple recently launched with deep Twitter integration). Until now iPad users have been using the iPhone Facebook app, which was not optimized for the iPad, or third party apps like Mypad, iFace and Friendly. Earlier this year, several users figured out a way of accessing the iPad optimized version by using a jail broken iPad and adjusting the UI settings; Facebook quickly blocked the loophole.

Source: Techcrunch

A blog post last month by Jeff Verkoeyen, the frustrated Facebook designer who headed the project before leaving to Google, revealed the extent of the apps delay: "Over the past 8 months I dedicated a significant amount of time toward building this app, sometimes putting in over 80 hours of work in a given week in the hopes of meeting the perpetually moving two-weeks-away launch date” every software developer fears. After the app reached feature completion in May and I was told that it was going to be delayed yet again, I stopped working on the project entirely”

Source: Facebook

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The new app has a range of new functionalities which are optimized for iPad usage:

• UI which is customized for scrolling and zooming by touch • Larger photos and a full-screen mode take advantage of the iPad’s display • Left-hand menu which facilitates easy navigation within the Facebook platform • Ever present notification bar allowing drop down navigation • Multi-Conversation Chat

The second (more important update) this week is a new mobile platform. The new site was developed with HTML5 and provides a richer, more interactive user experience. Users will now be able to see new notifications from an ever-present notifications bar, which overlays current activities with an overlying dropdown bar. There will also be a bookmark bar which is similar to the iPad apps menu bar, synching game bookmarks throughout the multiple platforms a user may use to log into Facebook.

Source: Facebook The platform is designed with new features that increase the utility of Facebook for app developers who use Facebook as a viral referral channel. Developers will not be forced to build Facebook apps in HTML5 in order to utilize the new Facebook referral features, which means that they can continue to use Apple’s payment system (by offering native apps) as a source of monetization relative to web based apps, which will be using Facebook credits. The new “Authenticated Referral” feature keeps a potential new user logged into Facebook through out the transition from an interaction within their newsfeed to the point where users signup for the new app; which is automatically pre-populated with a user’s required registration information.

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Source: Facebook Requests can now be sent between friends regardless of the platform being used, which means that if a friend shares a social game action from a desktop, a mobile notification will lead the user to download the mobile version of that game.

Source: Facebook Another significant part of the new rollout is the extension of Facebook Credits to mobile web apps. A serious motivation in the push towards HTML5 for Facebook is the ability to be independent from underlying platforms (iOS and Android). This means that if a user wants to play a Zynga game on Facebook, they will not have to download the game on their Iphone (native app), and instead can play directly on their browser. This eliminates the need to use and pay the 30% App Store tax.

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Source: Facebook

Because HTML5 is still in the early stages as a technology, there are still significant impediments that it faces when put against building a native app; including access to a phone’s hardware and speed.

Facebook acquires Friend.ly; Expands Social Depth Friend.ly, which first launched in March, is a platform which facilitates new friendships through close integration with Facebook and a set of targeted question which are meant to drive new social interactions. By answering questions based on a user’s likes and interest on Facebook, a new comer to Friend.ly is exposed to existing users who can instigate an interaction simply by pressing a “Smart”, “Funny” or “Cool” feed back button on a particular answer. Users often continue the interaction by reciprocating with another question, allowing completely strangers to meet and engage in a less awkward environment than typical chat rooms or dating sites.

Source: Friend.ly

When registering, the first step is to connect your Facebook account with Friend.ly, which initially drove incredible viral growth through posts in a user’s newfeed.

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Source: Friend.ly The site chose to not include a “friend” function; instead users would be directed back to Facebook in order to become friends. Although the site initially grew at an incredible rate, usage tapered off and has fallen by nearly 50% in the last month. We believe that like previous acquisitions, Facebook is more interested in the idea and talent behind the product. The Friend.ly team managed to come up with a way of generating friendships, in contrast to Facebook’s expertise in generating engagement among existing users. Friend.ly had originally received $5 Million in backing from top VCs including Lightspeed Venture Partners and Ron Conway.

Source: Appdata

1)

Forrester’s Online Coupon Report: A Shift In Consumer Perception

According to a report by Forrester, 22% of U.S. households use online coupons, up from just 12% in 2005. Heavy coupon users, defined by use of coupons for over 25% of online purchases, expected a 17 point increase in coupon usage over the next 12 months; rising from an average of 56% to 73% of online purchases per household with children. Online spending by households who use coupons, is set to outpace overall online spending, increasing 11% vs. 2%. An interesting result from the survey indicates a significantly higher online spend by those who plan to utilize online coupons often.

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Source: Forrester According to travel site executive that Forrester interviewed; “50% of our affiliate coupon site traffic is new and incremental business”. This is inline with the survey Forrester conducted, which finds that 74% of active coupon users (6+ coupon uses per year) would be willing to try a new brand if they were to receive an online coupon.

Source: Forrester One particular data point which we found interesting, was 80% of respondents indicating that online coupons improve a company’s brand image, and 88% indicating a “positive feeling” towards brands that offer coupons; a contrast to the perception that offering coupons cheapens a brand’s image. Coupon users seem to spend 13% more than average online shoppers, and 18% more frequently, indicating an average yearly online spend of $1,576 for coupon users vs. an average $1,397. Another key take away is how useful the use of coupons can be to close the deal on undecided purchases.

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Source: Forrester Full Forrester Report: http://bit.ly/p8R7CF

Facebook: New Ad Analytics Yet Another Step Towards Ad Spend Domination

Source: Facebook The new Page Insights developer tool by Facebook is yet another step towards making social ad spend as useful for CMOs as Search advertising has been for the past 7 years. The new “People Talking About This” function gives page owners a sense of how compelling their content is. The metric is a compilation of Likes, Shares, Mentions, Check-ins, and comments, on and regarding a particular page.

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Source: Facebook The other three metrics that are core to analytics on Facebook, are Likes, Friends of Fans (total number of friends that all your fans have aka max reach), and Weekly Total Reach (number of users exposed, both organically and paid). The “People Talking About This” will be accessible for public view on each particular post on top of the Like tally, while other metrics will be solely available for administrators. There will also be a new tab which will allow a pages owner to view the Reach, Engaged Users, Talking About This, and Virality (Talking About This divided by Reach) of the last 500 posts since July 2011.

Administrators will also be able to see unique users by frequency, as well as the break down for how content has grown viral.

Source: IndsideFacebook

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In tandem with the new ad analytics, Facebook released a new type of ad format, which is slightly bigger than the usual premium Facebook ads, and populates a clip of a movie a friend has liked on the right side of the home page.

The Wall Street Journal recently announced that Facebook will be partnering with the U.S. Chamber of Commerce and National Federation of Independent Business to give away ≈$10M in advertising ($50 to 200,000 small businesses). We believe that altruism is not the sole motive behind this move, as this will allow Facebook to educate a largely underutilized base of potential advertisers who very likely have not been exposed to the Facebook ad platform before. We find interesting, that according to a recent survey by Collective, 62% of marketers plan to increase spend in social media ads over a 6-month period, event though only 12% believed that the social aspects of advertising are valuable attributes. 25% of marketers surveyed felt compelled to use social ads even though they admitted not understanding the value, with an average of close to 20% of online budgets being directed by marketers towards social media. We believe that as Facebook develops and expands its ad platform and continues marketing aggressively with initiatives like the partnership with the Chamber of Commerce, there will be continued shifts in ad spend growth from search to social display as marketers begin to better understand and more easily utilize targeted social ads.

Source: IndsideFacebook

Source: Techcrunch

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2)

Hubspot: Social Medias Drives Page Views

Hubspot reported some interesting statistics on how Facebook and Twitter drove page views across blog posts of over 5,000 customers. Hubspot’s data found that blogs shared over Twitter had on average 117% more page views than posts that weren’t tweeted, and 63% more views than posts shared via Facebook. Inbound Links also saw a sharp increase (+149%) when shared through both Facebook and Twitter, although Twitter remains the lead driver for blog posts (+54% more inbound links relative to Facebook).

Source: Hubspot Bloggers who share posts via Facebook and Twitter so an average 55% increase in comments. Comments seem to be the single category where Facebook generates slightly higher engagement relative to Twitter.

Source: Hubspot

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Groupon Amends S-1 and Hits the Road An amended S-1 filed by Groupon prices shares between $16 and $18 with expectations of an offering on November 4th. Assuming underwriter overallotment options are fully exercised, Groupon would be offering 34.5 million shares or 5.4% of outstanding common stock; valuing offered shares between $552 million and $621 million. The share price implies a valuation between $10.2 billion and $11.4 billion; a significant premium to Google’s $6 billion bid in late 2010. Earlier speculation of a $25B IPO has caused disappointment among Groupon stakeholders. A Wall Street Journal source claimed that a key shareholder had planned to sell 1/3 of the shares offered, ultimately refrained from selling due to the lower valuation. The company had raised $950 million in January from Andreesen Horowitz, KPCB, DST and several other major VCs.

Source: Groupon Groupon’s latest amendment to its S-1 reflects 3rd quarter earnings for the company. Gross billings increased 25% Q/Q from $929.2 million to $1157.2 million. Revenue growth was anemic, growing 10% Q/Q from $392.6 million to $430.2 million. The Revenue-Gross Billings ratio was pushed lower on a quarterly basis, falling from 42% to 37%. A $10.6 million quarterly loss reflects marked improvement from the $101.2 million loss in Q2.

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Source: Groupon Subscription growth continues to decelerate on a quarterly basis; growing 23% to 142.9 million in Q3. Featured Merchants and Groupons Sold remained fairly constant as Groupon continues to implement quality control measures that limit continued expansion of deals featured per day. Average revenue per subscriber fell 15% to $3.3 per subscriber, to a large degree due to subscription growth outpacing growth in revenues (23 vs 10%). Cumulative Repeat Customers continues to outpace other operating metrics, growing 33% since Q2, as unique paying customers continue to grow (16 million vs. 12.1 million in Q2) in tandem with loyalty programs.

As Groupon shifts focus from front-ending its customer acquisitions to optimizing profitability, growth in operating metrics are likely to slow and possibly decline.

Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11Subscribers (MM) 0.2 0.6 1.8 3.4 10.4 21.4 50.6 83.1 115.7 142.9Cumulative Customers (MM) 0.0 0.2 0.4 0.9 2.4 4.6 9.0 15.8 23.1 29.5Featured Merchants (Thousands) 0.2 0.8 1.6 2.9 9.6 18.7 35.1 56.8 78.5 78.6Groupons Sold (MM) 0.1 0.3 0.8 1.8 4.1 8.2 16.2 28.1 32.5 33.0Avg. Revenue Per Subscriber $15.9 $10.3 $7.6 $7.7 $5.6 $5.1 $4.8 $4.4 $3.9 $3.3Avg. Cumulative Groupons Sold per Customer 3.3 3.2 3.3 3.4 3 3.3 3.5 3.8 4 4.2Avg. Revenue Per Groupon Sold $10.4 $11.7 $12.1 $11.5 $9.5 $9.9 $10.6 $10.5 $12.1 $13.0Cumulative Repeat Customers (MM) 0.0 0.1 0.2 0.4 1.1 2.2 4.5 8.2 12.1 16.0

Source: Company Data, Wedbush

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The company’s public roadshow provided insight into management’s core strategy and long-term plans: (Presentation: http://bit.ly/rSteIi Slides: http://slidesha.re/pLLGXa

)

Arguing that Groupon had potential to disrupt the Retail, Leisure and Ad markets, Groupon’s CEO Andrew Mason calculated the company’s total addressable market in the trillions of dollars. Mason pointed out that the company had a “win-win-win” business model which benefited Merchants, Consumers and Groupon. He believed that local was the “last great white space” that has yet to be revolutionized by technology. Mason explained that Groupon saw contribution margin profitability by the 3rd quarter of an early marketing campaign and therefore decided to frontload expenses in order to capitalize on the opportunity.

Q/Q Growth - Groupon Operating Metrics

0%

50%

100%

150%

200%

250%

300%

350%

Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11

Subscribers (MM) Cumulative Customers (MM) Featured Merchants (Thousands)Groupons Sold (MM) Cumulative Repeat Customers (MM)

Source: Company Data, Wedbush

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Source: Groupon Some key points from the presentation: • In some markets there are 9+ month waiting lists to do a Groupon offer • 50% of merchants featured in Q3 have previously been featured • Groupon is willing to pay a fixed cost upfront to generate revenue over time • The company is 5x the size of its closest competitor • There are more than 10,000 employees focusing on finding deals • Operating in 145 countries • Groupon Promise: Will reimburse any unsatisfied customer • More competitors results in confusion so consumers go to Groupon for simplicity

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Source: Groupon Mason believes his company can leverage its critical mass to implement technologies like SmartDeals, which analyzes user behavior patterns in particular locations, integrating with DealTypes, which adds thematic tags to deals for customization and targeting. He also touted Groupon Now! as a real time marketplace that utilizes a pull mechanism for merchants to attract customers (see included analysis by David from Yipit), stating that merchant density is necessary for the platform to be successful. Mason attempted to present Groupon as a potential commerce “Operating System” that will provide 3 core necessities to any business: 1. DailyDeals: High ROI customer acquisition tool 2. Groupon Now: Yield management for businesses 3. Groupon Rewards: Merchant loyalty and customer retention

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Source: Groupon Although Groupon has retained leadership within the majority of international markets, there remains a very real threat of competition within both domestic and international markets. In the U.S, LivingSocial continues to make inroads. The company recently forged a partnership with Clear Channel Radio; a media company that controls over 850 radio stations in 150 cities reaching 237+ million monthly listeners in the U.S. The deal gives LivingSocial exclusive access to Clear Channel’s radio platform, allowing the company to promote deals on a local basis in order to expand beyond it 47 million members. The company attempts to address investor apprehension in its S-1:

Google Offers is small and not growing. In the three markets where we compete, we are 450% of their size Yelp is small and not growing. In the 15 markets where we compete, our daily deals are 500% of their size. Living Social's U.S. local business is about 1/3rd our size in revenue (and smaller in GP) and has shrunk relative to us in the last several months. This, in part, appears to be driving them toward short-sighted tactics to buy revenue, like buying gift certificates from national retailers at full price and then paying out of their own pocket to give the appearance of a 50% off deal. Our marketing team has tested this tactic enough to know that it's generally a bad idea, and not a profitable form of customer acquisition. Facebook sales are harder to track, but are even less significant at present

Internationally Groupon has been unable to gain traction in the highly saturated Chinese deals space, remaining far behind market leaders QQ, Lashou, and 55tuan. The company’s joint venture (49%) with Tencent (40%) and Yunfeng (10%) cost Groupon $49.2 million and operates under the name “Gaopeng”, which began selling group deals in March 2011 with an estimated 4.2% marketshare. Groupon’s roadshow presentation lists the company as a distant 12th in China; demonstrating eroding market share relative to the company’s position as #8 in August when Andrew Mason’s internal memo was leaked.

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Groupon’s successful execution should not be underestimated. Once the third largest player in the space, daily deal competitor BuyWithMe recently laid-off over half its 200+ U.S. workforce due to lack of access to capital. After having raised over $21 million in funding, the company had gone on a buying spree of smaller sites that ultimately led to capital deficiencies even after an additional $10 million infusion by Matrix Partners and Bain Capital. Source: Crunchbase, Company Data

QQ, 12.0%

55tuan, 9.6%

Lashou, 9.0%

Meituan, 7.0%

Dianping, 6.8%

Manzuo, 6.6%Nuomi, 5.8%24quan, 5.6%

58tuan, 5.0%

Ftuan, 4.3%

Gaopeng, 4.2%Ganji, 2.8%

Gocn, 2.2%

Juhuasuan, 2.2%Didatuan, 2.1%

Juqi, 1.8%

Ayatuan, 1.4%Pintuan, 1.2%

Tuanok, 1.0%

Shuangtuan, 0.8%

Others, 9.0%

Funding $5.5M Series A Matrix Partners 1/20/2010Funding $16M Series B Bain Capital 7/7/2010Acquisition LocalTwist Daily Deals 3/11/2011Acquisition DealADayOnline Daily Deals 5/3/2011Acquisition Groop Swoop Daily Deals 5/25/2011Acquisition Edhance Loyalty Programs 7/18/2011Acquisition ScoopSt Daily Deals 8/16/2011Acquisition TownHog Daily Deals 9/9/2011

BuyWithMe

Source: Dataotuan: Top 20 Chinese Daily Deal Sites 9/2011

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Source: RunningShoes.com

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Groupon Now!, Groupon’s Bet on the Future, Off To a Disappointing Start Guest Post:

By David Sinsky, General Manager of Yipit Data for Yipit, Inc. With Groupon’s IPO roadshow kicking off on Monday, Groupon executives will be spending the next two weeks busily pitching investors on the future prospects of their company. Groupon recognizes that with the growth of its core daily deals business (Groupon 1.0) already slowing, the company needs a new source of growth to justify its $10bn+ valuation – a Groupon 2.0.

Groupon Pitching Now! as the Future Groupon pitches itself to investors as a “local e-commerce marketplace” rather than a daily deals company and as Groupon CEO Andrew Mason clarifies in the company’s roadshow presentation, “Groupon Now! is that marketplace”.

Groupon Now! is Groupon 2.0.

Most importantly, Groupon Now! offers the hope of real barriers to entry

. Groupon’s primary competitive advantage is its sheer scale and Now! turns Groupon’s scale advantage into a powerful network effect. Unlike the traditional daily deal model, Now! has the potential to be highly defensible due to the high density of merchants and users needed for such a product to succeed.

Slide from Groupon online roadshow via www.retailroadshow.com

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When Now! launched in May, Groupon predicted that mobile deals would represent 50% of Groupon’s sales within two years. In its pitch to investors, Groupon calls Now! the company’s “most important innovation to date” and

claims that Now! represents a larger opportunity than Groupon’s current daily deals business.

Nearly six months after the launch of Now!, Groupon has not provided investors any indication of how Now! is performing. However, Yipit has been collecting comprehensive data on Now!’s performance since its launch and, so far, Now! has been disappointing. Disappointing Start Now! generated just $1 million of gross billings in September, despite being available in 25 markets – only $40k per market. In other words, the product that Groupon is telling investors to view as the future of the company, still represents less than 1% of Groupon’s total gross billings in North America

.

Slide from Groupon online roadshow via www.retailroadshow.com

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From its launch in May through September 30th, Now! generated only $2.6 million of total gross billings. Given the lower commission rates from Now! deals (15%-20% compared to 40%-50% for regular Groupon deals), this means that Now! has generated less than $1 million of net revenue in the five months since its launch

, representing less than 0.5% of North American net revenue for the period.

While the platform is still growing, the rate of growth is slowing considerably – a worrisome sign for such a new product. After rapid initial growth, gross billings from Now! grew by only 7.6% in September. Even in its strongest market, Chicago, Now! is on pace to generate less than $1.5 million of gross billings annually.

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Groupon is Heavily Promoting Now! The failure of Now! to gain traction is not due to a lack of marketing effort, as Groupon has promoted the product aggressively. Groupon regularly emails its massive subscriber base encouraging subscribers to download its mobile app and try out Now!. It has even offered $10 of free credit towards any purchase on Now!. Now! benefits from the fact that Groupon’s overall iPhone app is incredibly popular. It’s the most downloaded “Lifestyle” app from the iPhone app store and is the 39th most downloaded iPhone app overall (making it more popular than the apps from the likes of Netflix, Yelp, ESPN and Fandango). However,

despite millions of users knowing about Now!, having access to it, and being given free credit, they just aren’t using it.

Is Now! Scaling Back? Now! expanded rapidly from one market in April (Chicago) to 25 by mid-July, but

Now! has not launched in a single new market in over three months.

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Also troubling, Groupon recently began reducing the number of merchants and deals on the platform.

For a product whose key competitive advantage is sheer scale, the fact that Groupon is already reducing the size of the platform indicates that Now! is in need of significant improvements before further expansion.

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Challenges Facing Now! While Groupon may argue that it is too early to judge Now!’s success (or lack thereof), this ignores the rapid traction that its other new products have gained. Groupon has launched three other new products this year (Groupon Getaways, Groupon Live and Groupon Goods). Each of these products reached $2.5 million of gross billings within three weeks of launch – a milestone that took Now! nearly five months.

Clearly, the struggles of Now! represent something more than just the normal growing pains of a new product launch. Rather, Now! faces several unique hurdles that these other products did not face. • Pull vs. Push: Getaways, Live and Goods are, like Groupon’s traditional local deals, examples of “push”

products, as Groupon “pushes” these deals to its subscriber base via a daily email. Now! is a “pull” product, requiring users to proactively open the Groupon app and search for a deal that appeals to them. While Groupon has clearly mastered the ability to create successful “push” products it has yet to prove to investors that it can create equally successful “pull” products.

• Unfavorable Economics: Groupon’s commission rate for Now! deals is typically 15%-20% compared to

the 40%-50% commission rates for traditional Groupon deals. Additionally, each merchant on Now! generates significantly less gross billings. In September, the average merchant generated approximately $180 – an annual rate of just over $2,000 per merchant (assuming zero merchant churn). At this rate, Groupon generates less than 10% of the net revenue from a GrouponNow! merchant than it does from its traditional daily deal product

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*Groupon Now! figures represent annualized gross billing and net revenue figures based on September data. Assumes 45% net revenue margin for Groupon deals and 20% net revenue margin for Groupon Now! deals. • Self Serve. Given the much lower net revenue per merchant, Now! will likely only become a profitable

product if Groupon can get merchants to create deals in a self-serve manner, rather than relying on its traditional labor-intensive sales process. While many companies have tried to get local merchants to “self-serve” online marketing products, one of the keys to Groupon’s rapid success was its willingness to invest in a huge salesforce that could assist (and convince) local merchants to create deals that customers would love. Investors may remember that Groupon’s only other attempt at a “self-serve” product (Groupon Stores) was a complete failure that was shut down within weeks of launch.

• Quality Assurance. Groupon invests heavily in quality assurance – making sure that the merchants it

features and the deals it creates will provide great experiences for its users. Like the sales process, this has historically been a very labor-intensive process. Given the significantly lower net revenue per merchant, it will be difficult for Groupon to maintain this rigorous level of quality assurance for each merchant. In fact, one reason that Now! has failed to gain traction among consumers is the perception that Now! deals are typically lower quality than traditional Groupon deals.

Not only is there likely less effort devoted to making sure that Now! merchants are high-quality, the deals themselves are less appealing to consumers. While the average Groupon deal has a discount of 55%, the average Now! deal has a discount of only 40%.

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Why is Now! Important to Groupon? Groupon is asking investors to value the currently break-even company at over $10 billion on the promises of significant future growth, despite growth from the core business slowing considerably.

Groupon needs investors to believe that Groupon Now! will transform Groupon from a daily deal company today into a highly defensible “local e-commerce marketplace” of the future. Groupon Now! may have the potential to deliver on that promise. However, several months in, it’s unclear how long delivering on this promise will take.

Get Access to Yipit’s Proprietary Data Yipit tracks the performance of Groupon, LivingSocial, Travelzoo, Google Offers, Amazon Local and hundreds of other daily deal sites. Yipit licenses its data to leading investors and daily deal companies to provide real-time updates of competitor performance. To access Yipit’s data – including information on Groupon’s October performance, please contact data@yipit.com. David Sinsky is the General Manager of Yipit Data for Yipit, Inc. Yipit is North Americas the leading aggregator of daily deals and aggregates deals from over 500 daily deal sites including Groupon, Living Social, OpenTable, Travelzoo, Gilt City and many more. Yipit Data provides leading daily deal sites, investors and other interested constituencies with comprehensive industry data as well as market insight and intelligence. Mr. Sinsky previously worked at Mill Road Capital (a hybrid private equity/hedge fund) and Lazard's Investment Banking Group.

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About Wedbush Securities Private Shares Group The Private Shares & Social Media Group of Wedbush Securities covers the growing base of privately traded securities, with an emphasis on those in the social media space. We source and distribute deal flow in the space (including “initial private offerings”) and are actively originating and trading other alternative investment opportunities across private shares for our institutional and accredited private clients. About Michael Pachter Michael Pachter is the Managing Director, Equity Research providing coverage across the Digital Media sector and Head of Research for the Private Shares Group. He has been recognized as StarMine’s “Top Earnings Estimator” year after year and “Best on the Street” by the Wall Street Journal. Michael brings over 20 years of experience as a financial professional to the Private Shares Group along with extensive knowledge across the social media sector in both public and private companies. Mr. Pachter holds an M.B.A. from the Anderson School at the University of California at Los Angeles, a juris doctor from Pepperdine University, an LL.M. in Taxation from the University of Florida, and a bachelor’s in Political Science from California State University, Northridge. About Yoni Yadgaran Yoni Yadgaran joined Wedbush over a year ago from Bank of America Merrill Lynch. Originally covering Internet & E-commerce within Equity Research, he later moved on to help pioneer the Private Shares Group’s Research efforts. Yoni is a CFA level 3 candidate and received a B.B.A in Finance from Baruch College. Contact Wedbush Securities Private Shares Group: Michael Pachter Managing Director, Equity Research Head of Research, Private Shares Group (213) 688-4474 | michael.pachter@wedbush.com Twitter: @michaelpachter Yoni Yadgaran Research, Private Shares Group (212) 938-9924 | yoni.yadgaran@wedbush.com Kevin Cohen Director of Trading, Private Shares Group (213) 688-8089 kevin.cohen@wedbush.com About Wedbush Securities Founded in 1955, Wedbush Securities is a leading investment firm that provides brokerage, clearing, investment banking, equities research, public finance, fixed income sales and trading, and asset management to individual, institutional and issuing clients. Wedbush currently ranks the #1 liquidity provider for NASDAQ, and was ranked #1 stock picker for 2010 by Barron’s. Headquartered in Los Angeles, with over 100 offices nationwide, Wedbush focuses on relentless service, client financial safety, continuity, and advanced technology. (www.wedbush.com)

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IMPORTANT DISCLOSURES

The information contained herein is intended for accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933 or institutional investors.

WEDBUSH SECURITIES Wedbush does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The analysts receive compensation that is based upon various factors including WS’ total revenues, a portion of which are generated by WS’ investment banking activities. ANALYST CERTIFICATION I, Michael Pachter, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report. Capital Markets Disclosures as of October 27, 2011

Company Disclosure Google 1 eBay 1 Electronic Arts 1

Research Disclosure Legend 1. WS makes a market in the securities of the subject company. 2. WS managed a public offering of securities within the last 12 months. 3. WS co-managed a public offering of securities within the last 12 months. 4. WS has received compensation for investment banking services within the last 12 months. 5. WS provided investment banking services within the last 12 months. 6. WS is acting as financial advisor. 7. WS expects to receive compensation for investment banking services within the next 3 months. 8. WS provided non-investment banking securities-related services within the past 12 months. 9. WS has received compensation for products and services other than investment banking services within

the past 12 months. 10. The research analyst, a member of the research analyst’s household, any associate of the research

analyst, or any individual directly involved in the preparation of this report has a long position in the common stocks.

11. WS or one of its affiliates beneficially own 1% or more of the common equity securities. Private securities may involve a high degree of risk and are intended for sophisticated investors who are capable of understanding and assuming the risks involved.

Private securities may have a high level of volatility. High volatility investments may experience sudden and large drop in their value causing losses that may equal your original investment.

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Private securities are illiquid and may not be readily realizable and it may be difficult to sell or realize those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.

Investors should obtain advice from their own financial advisor and only make investment decisions on the basis of the investor’s own objectives, experience, risk tolerance, and resources.

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