Why Google’s Groupon buy makes sense

December 3, 2010

Vinicius Vacanti has a very smart analysis of the economics of Groupon, which also helps explain why companies like OpenTable are trading at such stratospheric valuations. The real value of Groupon lies in its email list. But Groupon’s list is a list of bargain-hunters. Companies with large lists of people who have already demonstrated their ability and willingness to pay full price—companies like OpenTable—can present an even more attractive proposition to would-be advertisers.

This doesn’t mean that Google’s overpaying for Groupon at $6 billion. No one else has cracked the local-advertising-online conundrum nearly as well as Groupon has, and, as Evelyn Rusli points out, the multiples involved are significantly lower than Google has paid for other acquisitions. Besides, shareholders want Google to put its enormous cash pile to good use and try to get a decent return on it, rather than letting it just sit there gathering dust or returning it to shareholders who wouldn’t know what to do with it either.

There’s also something a little snobbish about the criticism of the deal:

Despite Groupon having some social media trappings, and being profitable, it feels oddly old-fashioned.

Groupon amasses groups of users to take part in mass one-off discounting programmes by retailers – hence the name. In the US, where coupon-clipping is still popular, despite the power of Wal-Mart’s “every day low prices”, it grown very rapidly…

Buying an electronic coupon company? Is this the way to revolutionise the world?

No, it’s not a way to revolutionize the world: Google’s good at growing those in-house. Instead, it’s just a natural way for Google to expand its ad revenues: it started with simple text ads, moved into display with the acquisition of DoubleClick, got into mobile with AdMob, and is now doing coupons.

Sure, there’s defensive strategy involved here: Google doesn’t want Groupon ending up in the hands of Facebook or Yahoo. But Jon Fortt, when he says that Google would be better off buying Gannett, does a good job of presenting Google’s dilemma. Local advertising dollars have historically flowed into local media companies, and Google has no desire whatsoever to be in the business of producing local media. It wants to be a pure advertising play, with no editorial content of its own. And it also wants to be online: its attempt at selling print ads was a disaster.

Groupon gives Google access to a whole new market segment it otherwise would have great difficulty reaching. Maybe the acquisition will turn out to be overpriced. But Google can afford to make a $6 billion mistake. So the risk is worth taking.


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