Reports: Google to Buy Groupon
According to several reports, Google is either close to
a deal or has already agreed to buy Groupon with terms said to be anywhere
from $2.5 billion to $6 billion.
Rumors have been swirling
around the two companies in recent weeks even though the group sales site has
steadfastly maintained a desire to remain independent in the past.
According
to a report by Vator.tv, Groupon generates $50 million a month
in revenues and fundraising efforts have brought its valuation to roughly $1
billion. The company has 20 million subscribers in 29 countries around the
globe.
The site has prospered by offering consumers discounts at between 50 and
90 percent off at local businesses. As a DealBook article pointed out,
it has also attracted national retailers such as The Gap. A Groupon deal with
the casual apparel chain resulted in 440,000 discount offers being sold for
$11 million.
Separately, a recent report by VentureBeat has Amazon.com
looking at a possible investment of upwards of $100 million in LivingSocial,
a competitor to Groupon
Discussion Questions: What do you think of a Google acquisition of Groupon?
What will this mean for the competitive situation surrounding group buying services?
Google has the cash and the ability to expand Groupon’s reach and analytics, so the purchase makes sense. If a sale goes through, Google would be wise to let Groupon be Groupon and run itself with a minimum of parent company interference, much the way that Amazon treats Zappos.
It would also make sense for Amazon to buy or invest in LivingSocial. Amazon dominates e-commerce. Group couponing would be a good fit for Amazon’s business.
Will these acquisitions and investments change for group buying? I doubt it.
Groupon has been an astonishingly rapid success story, even in the context of e-commerce. From its beginnings in Chicago, only two years ago, the concept has spread rapidly all over the country and internationally too. It’s obviously a revenue-driver for Groupon as well as the merchants who participate–and you can make a case that Groupon is still in its infancy.
The acquisition allows Google to expand the Groupon concept exponentially to e-commerce sites, not just bricks & mortar merchants. It also allows Google to continue expanding its reach from its origins as a search engine and advertising vehicle to much broader e-commerce applications.
If Google buys Groupon it could be like lighting a torch with additional salespeople to convince indies that discounting is the way to build a business. Big win for Groupon profits and founders but at what cost to Main Street looking to be profitable themselves?
This is a next logical step for both vendors. While I like the premise of Groupon, I find the majority of deals irrelevant to me. Groupon is essentially “broadcasting” in a given geography (much like the radio or local ads). Google’s expertise is in “narrowcasting” (Ad Sense is a great example of contextual relevance). Google will likely leverage its expertise in algorithms (not to mention what it already knows about you) to make Groupon deals much more relevant to each customer, further driving adoption and monetization. This has to be part of a grander plan by Google to get a significant stake of the e-commerce pie because the deal won’t come cheap.
Google’s acquisition of YouTube was suspect at the time, but with hindsight we can now see it was a good move. Buying Groupon is a similar situation. We’ll all think Google overpaid only to realize that the synergies were actually worth more. Like YouTube, Groupon’s model is easy to duplicate but difficult to attract and retain new users. That will only be more difficult once Google gets control. Google is really focused on enhancing the buying experience, and Groupon fits that strategy.
Google buying Groupon is a logical strategic move for a number of reasons ranging from advertising reach/leverage to customer analytics to defensive purposes. And if you’re Groupon equity holders, it’s a great sale to a strong, cash-rich buyer, at a rich multiple.
Groupon offers an engaged audience that is unique in its elasticity and the insights that can be yielded. It’s a great way to expand their engaged reach from an advertising stand point and to leverage its sales platform.
The biggest risk on the buy side is whether merchants (advertisers) will continue to be attracted to a money-losing customer acquisition play like Groupon. While there are probably enough out there to justify the valuation in the short-term, this is probably not a financial model with a really long tail.
It makes sense today, but it remains to be seen if it will make sense tomorrow. On the other hand, as someone already noted, YouTube didn’t seem like the brightest acquisition at the time.
The acquisition of Groupon seems to be in line with Google’s recent strategy to get in on retail. Google has been seen prominently at trade shows such as the In-Store Marketing Institute’s Expo. Imagine their booth next year at the Expo: Groupon deals plus in-store tie-ins. This is right in line for them. Let’s see where it goes.
News of the Google-Groupon deal makes for interesting speculation, but I’m wary of the value prop because I cannot see how anyone is making money from this scheme other than its founders and VCs.
Groupon trains shoppers to watch for below-cost deals, take advantage once and then wait again for the next offer of interest. Retailers earn little to no profits on the offers and little loyalty is generated; in fact, I suspect just the opposite. Is any data published on repeat patronage?
Groupon’s model seems similar to other broadcasting models in that it distributes each offer to prospects across a geographic area with little to no personalization. Google, on the other hand, is all about digital targeting.
It is certainly notable that Groupon has assembled a subscriber base of 20 million souls spread across 29 countries, but we may safely speculate that very few of them are new to the much larger Google universe. And let’s face it: these days 20 million ain’t what it used to be.
So we may speculate further that the Groupon grope may be part of a wider strategy on Google’s part to extend its monetization machine from advertising to promotion. Acquiring is slightly faster than building from scratch, and Groupon’s brand awareness makes it a “hot” prospect. I suspect the price would be much lower if Google and rivals weren’t swamped with cash.
There are two questions you need to answer to know if Groupon will be a good acquisition for Google:
1) is Groupon a real, durable business, or is it just a fad?
2) is there something special that Google can bring to Groupon that other investors couldn’t?
To the first point, I think the jury is still out on whether running a Groupon helps or hurts a business. If enough of Groupon’s clients become disgruntled, Groupon may hit a wall on its growth.
On the second point, I think Google has a great opportunity to enhance Groupon’s service with several critical differentiators, including:
– finer-grained targeting of offers to each member, rather than simply targeting based on city
– real pre- and post-campaign analytics to help a business understand how the Groupon event impacted their consumer base
– increased reach for Groupons by delivering them across all of Google’s properties
– Location-based tie-ins so that consumers see Groupons based on their current location (e.g., on their Android phone) or the Google Map they are viewing
– layering of Google’s ad inventory on top of Groupons, so that Google can “piggyback” relevant ads on each Groupon purchased or viewed.
It may work, if Google can help prove that Groupon really does create incremental sales, not just margin cannibalization. Still, I think Yelp (the rumor from almost exactly a year ago) would have been better.
This would be a good marriage for both parties, since Google could extend the reach of Groupon and offer it a higher share of eyeballs and share of wallets than Groupon currently has. Add to this increased advertising venues for Groupon to consider and it is a win win for both parties.
Great deal for Groupon as the shareholders will have limited their risk as the longer term viability of a discounting model is tested over time.
For Google, Ben Sprecher laid out several good points, the location and community based promotions being one of the strongest. Instead of offering one “deal of the day” in a geo area, Google may be able to facilitate more deals but targeted to groups of customers with common interest.