Why Google’s Groupon buy makes sense

By Felix Salmon
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.

7 comments

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Groupon is not worth $6 Billion, but as you point out, Google has more money than it knows what to do with, so why not? I’m from Chicago and have been using Groupon since it came out. They give good deals and raise exposure for local businesses. What’s not to like? But it IS only tenuously connected to social media and it is a pretty old fashioned model, one I think people will grow tired of, businesses might come to question the value of, and is not expandable (a Groupon store? not interested).

Google created the space for local internet searches then pretty much abandoned it, now it is paying huge money to one of the few companies that filled that space successfully. Makes little sense to me. Google could easily have a “deal of the day” pop up whenever you plug a search into google maps. There, that idea must be worth about $2 billion. They seem not be even trying here. There is nothing magical about Groupon.

Posted by LadyGodiva | Report as abusive

“Groupon gives Google access to a whole new market segment it otherwise would have great difficulty reaching.”

i’d disagree with that, and I think LadyGodiva’s comment about really nails it: Google could create Groupon on their own. “They seem not to be even trying here. THERE IS NOTHING MAGICAL ABOUT GROUPON.”

My mind is boggled by Groupon’s economics – they take 50% of the coupon value. By definition, that sort of vig seems impossible to sustain. Some people say that OPEN has no barriers to entry – I think that’s not entirely true – but I think that there are VERY few barriers to entry for Groupon competitors, and cutting price is the first and easiest way to compete.

Like LadyGodiva, I feel that GOOG (And AMZN too) are doing too many things in a mediocre way. I have little doubt that GOOG could effectively launch a Groupon-killer, and AMZN/AAPL/GOOG could launch a NFLX-killer – but they seem to be spreading their nets too wide and not focusing on any one thing

Posted by KidDynamite | Report as abusive

I’m in Chicago too and I have to say the quality of the “deals” offered by Groupon has gone down in the last six or so months. Chicago is a pretty big market with a good selection of varied businesses – I would imagine the amount of time it would take for the Groupon well to run dry in a place like Cleveland would be even shorter.

I know GOOG has a lot of money burning a hole in their pocket, but this isn’t the place to spend it. Seems like Yelp would’ve been a much better acqusition: people already use it extensively, its usefulness doesn’t decrease as time goes on, it has a social networking type “hook” to make users keep coming back and erect barriers to entry. Yelp has a salesforce and could easily deploy a Groupon like deal of the day.

Groupon’s business model is nothing new – we’ve had a thing called the radio shopping show doing something similar for years. The only difference is this whole idea that a deal is only activiated if enough people buy it, but as far as I’m concerned this is a gimmick as I’ve never seen the deal not get activated.

I’m not sure Felix’s classification of this as an “ad” deal is correct either – Groupon is more of a promotions company. The material it spends so much to produce by hiring comedians and writers is limited to the email list – it doesn’t get displayed if I search for that business.

Posted by br_add | Report as abusive

I’m another Chicago reader – I think br_add’s point about the deals losing steam is a good one. Not only can Groupon run out of decent deals to sell, competition – from Living Social, or other, locally-based sites (the Chicago Reader has jumped on board here) – can seriously water-down the deals Groupon can offer. If I own a local business, why would I let Groupon dictate that I have to sell some service for 80% off, if I can go to another site (albeit with a shorter email list) and sell it for 60% off, increasing my margins?

Instead of just a coupon book, Groupon seems to me more like a collective consumer, representing its email list – it can boss local merchants around with monopsonistic pressure, because it speaks for so many people. Right now, Groupon has the upper hand because it’s the biggest kid on the block. If too many coupon sites are competing for deals, though, then the pressure fades and the deals weaken. Businesses can take their bargains elswhere.

Unlike the local band boosters’ coupon book, nobody is supporting Groupon because they like Groupon – the deals are what makes it special. If it loses those, what will be left (other than cheeky copy)?

Posted by MacM2010 | Report as abusive

Originally from Chicago, now LA based. And to qualify, i am directing a Groupon clone. I respectfully disagree with all of you. For my own reasons, I am against the acquisition (it could honestly set the ‘group buy’ industry back 6mos – yr). That being said, it would be the best move Google has made since Gmail. Trust me when I say the ‘group buy’ industry is only going to continue to evolve. ‘Deal’ sites are popping up every day with their own interpretation of the model. The industry is honestly stimulating the the SMB markets.

It’s not easy money. There are many factors at work in the model that the early entries and casual observers just can’t appreciate. Contemporary publishers will take the model in one direction while regional interests could very easily take it in another direction. A pinhole vision of the model makes it appear as just another form of advertising. But it has legs to be so much more. Grab hold of the purse strings of your favorite aggregator (current faves are yipit and dealgator) and hang on, it’s going to be a bumpy ‘start-up’ ride…

Posted by kevinkrejca | Report as abusive

Trying to persuade a local merchant to sell $60 worth of merchandise for $15 is not a business plan.

It shouldn’t take long for them to figure this out – in fact the NYT has already run an article in their “You’re The Boss” section explaining that it doesn’t make any sense. Literate small business owners will probably start reading more such articles. There are a lot of “service providers” who prey on small businessmen and Groupon is just another one on the pile.

Google hasn’t figured this out yet because Groupon hasn’t been around long. And when they do figure it out, Groupon’s losses will be hidden inside the Google behemoth so GOOG won’t have to own up to it.

Posted by johnhhaskell | Report as abusive

KevinK,
I find your take intriguing, especially as someone in the biz. I can tell you as a user of these sites (I have also bought “deals” from OpenTable) I have noticed the competition heating up, and have had a strong negative reaction. The more “offers” that appear in my inbox, the less I will buy of ANY of them. This, plus the inevitable “buyers’ remorse” (what was I thinking when I bought THAT one) make longterm usage of these sites questionable. I bought my first deal about 6 months ago. As I sit here I have two unused (pricey) groupons staring at me from my bulletin board. I feel oppressed by the prospect of HAVING to use them.

I tell you, as an early adopter, this thing will not fly longterm. Now, offer me a special deal on something I was going to buy anyway??? That’s the ticket. Sort of the Lending Tree model, where “banks compete for your business.” Do that and you will win.

Groupon should have cut the deal with Google. They will later regret their greed. My prediction.

Posted by LadyGodiva | Report as abusive