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Summary:

According to multiple reports, Google is considering an acquisition of Groupon for as much as $6 billion. Why would the web giant want to pay so much for a two-year-old startup? Because social advertising — and especially local advertising — is the company’s future.

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After a week of on-and-off rumors about Google making an offer for Groupon, there are now multiple reports that the web giant is close to paying as much as $6 billion for the social-shopping service, which has been growing faster than just about any tech-related company in recent memory — including Google. If true, the deal would be almost twice the size of the search company’s largest acquisition ever (the $3.1-billion purchase of DoubleClick in 2007), and would be a gigantic bet on two trends that Google has so far failed to really take advantage of: namely, the movement of local advertising onto the web, and the rise of social behavior online.

Google’s $1.65-billion acquisition of YouTube in 2006 makes a good comparison for its apparent interest in Groupon: At the time, online video — and just as important, the sharing and embedding of that video — was clearly the future of the web, but Google was a tiny player in that market and wanted to get big quickly. So it paid what seemed like a massive amount of money at the time for the startup, and has spent the past few years trying to figure out how to monetize that content.

The nice part about Groupon is, while YouTube was located more towards the social end of the spectrum and less the monetization end, the group-buying service is a monetization machine — although one that is also socially oriented, since it takes advantage of consumers’ desire to trigger discounts by forming a group. Clearly one of the big attractions for any acquirer is the fact that Groupon is bringing in an estimated $50 million in revenue a month, and expects to close the year with more than half a billion dollars in sales. That’s after less than two years in existence.

Why has Groupon been able to grow so quickly? As I outline in my latest GigaOM Pro report (subscription required), the startup’s rapid success is a sign of how explosive the power of social media can be when applied to a revenue-generating idea like coupons. As co-founder and angel investor Eric Lefkofsky described in a recent interview about Groupon, the company (which was originally called The Point, and focused on connecting people around social issues and activism) didn’t really take off as a business until it married the viral nature of a group-buying offer with the desire by local retailers to reach out to potential customers. Email is the company’s primary method, but it’s also fueled by social networks like Twitter and Facebook.

More than anything, Groupon has been riding the social-advertising wave, which is something Google desperately wants to own. In many ways, it’s the next step beyond AdWords and AdSense: While those products involve advertising keywords that sit next to searches and capture surfers who are looking for information about specific topics, Groupon reaches out to people who may not even know they want the item yet. The company’s DoubleClick acquisition gave it control of banner advertising, but banners are the past; social advertising is the future. As Macquarie Research analyst Ben Schachter said in a research note this morning, the purchase “is about much more than Google generating revenue from emailed coupons — it’s about Google’s ability to potentially access and utilize the social graph for eCommerce.”

The other important aspect of the deal is that it is primarily focused on local or regional businesses. Groupon has also started promoting national deals of the kind it did with The Gap, but the company’s real power is in helping small and medium-sized retailers, restaurants and other merchants connect with customers directly, and boost demand for their services and products. That’s a market Google hasn’t been able to really capitalize on, despite attempts to do so through its Places feature. That was the rationale behind the web giant’s reported interest in buying Yelp — a deal which didn’t go forward, for unknown reasons — and it is driving its interest in Groupon as well.

What would web advertising look like if Google were to acquire Groupon? Instead of just keyword ads targeted to what you searched for, you could start to see offers directed specifically at your location, or based on things you have searched for in Google Places, or places you have checked in at through Google Latitude, or services you have rated via the web giant’s new and somewhat underwhelming Hotpot recommendation service. Google’s knowledge of algorithms could provide better matching and sorting of those deals, and the search company could also use the knowledge that it gains from Groupon’s millions of users and advertisers to fine-tune some of its other locally focused services.

In a recent interview, Don Rainey of Grotech Ventures — an investor in Groupon’s largest competitor, LivingSocial — talked about a future in which consumers and local businesses could participate in a kind of real-time auction-style marketplace for deals on products and services, so people looking for deals on dinner tonight could survey the offers from local restaurants and pick the ones they wanted, and merchants could fine-tune their offers based on real-time demand. That is one future that Google desperately wants to be part of, and $6 billion probably seems like a small price to pay for a seat at that table. For more on Groupon, please see my GigaOM Pro report.

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Post and thumbnail photos courtesy of Flickr users Groupon and TechCrunch

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  1. Don’t overstate the “social” nature of Groupon. The fact is, it’s mostly an email list of people. Most deals are not “tipping” b/c of Facebook and Twitter integration. It helps, but when you have enough users on your email list, have a great deal with a limited time, it’s no wonder that every single deal tips.

    Amazing company. But social ads are the secret of their success? Totally disagree. If Google buys, it’s because Groupon is the first online company to successfully tap into the vein of offline local advertising at scale.

    1. Thanks for the comment, Steve. I don’t think I am overstating the social nature of Groupon — and I agree that bringing local advertising online at scale is a big part of the appeal, as I discussed in the post.

    2. As a merchant who has actually used Groupon very successfuly I totally agree with you. Groupon’s strength is in its email database of users (the biggest of all the similar sites now popping up) not because of Facebook and Twitter… While people can share deals on social Networks that’s just an additional way for user to share with their friends. If FB and Twitter weren’t there, Groupons would still be sold in the millions because people get these deals through their inbox, their holy of holies. It’s all email and you have to experience it to see just how powerful it is. Far more powerful than Facebook and Twitter combined. Social networks are part of it… people love to share good deals. But Steve is correct.

  2. The investors will ultimately speak on the wisdom of this deal. GOOG is down $8b in cap since romors start

  3. I hope google can do a better job showing the deals than groupon. Maybe something similar to http://grouponbot.com

  4. What if opposite happens? Facebook extends its ads to every web publisher on a revenue share basis just like adsense?
    Do read this: http://digitalinspiration.com/17260/what-will-happen-if-fb-starts-a-program-like-adsense
    Result will be: Before “google goes social in ads”, facebook will go in and grab the market “ads via social”. isnt it? Well i smell something. what you say Mathew :)

  5. I think Social Ecommerce is much more powerful than the mundane Click Ads that humans have evolved to ignore on websites. I am more likely to purchase an item just because my peers are buying it than buying something from clicking an Ad.

    People don’t want to make all purchasing decisions made for them most want to go with the flow.

    1. That’s a great point, John — thanks for the comment.

    2. “just because my peers are buying it”

      Really??? Even you dun need it and you dun want it?

  6. Google goes coupon-clipping with Groupon | John Gapper’s Business Blog | FT.com Tuesday, November 30, 2010

    [...] Ingram of GigaOm argues that Groupon would be a way for Google to strengthen its presence in “social [...]

  7. I’d say that the key ingredient for Groupon or any other site which is focused on the deal of the day market is in effect, the ability to market itself. Just a few months ago, we had an explosion of this kind of sites in Mexico, and none of them have been able to pick up more than 800 deals a day (Groupon Mexico included).

    Technologically, anybody can create a Groupon site (in fact, many companies have), marketing-wise, not anybody can make it work. It seems that social marketingis a ripe field for sowing this kind of business, and that takes skill.

  8. I’d say that the key ingredient for Groupon or any other site which is focused on the deal of the day market is in effect, the ability to market itself. Just a few months ago, we had an explosion of this kind of sites in Mexico, and none of them have been able to pick up more than 800 deals a day (Groupon Mexico included).

    Technologically, anybody can create a Groupon site (in fact, many companies have), marketing-wise, not anybody can make it work. It seems that social marketing is a ripe field for sowing this kind of business, and that takes skill.

  9. Data Driven Marketing Tuesday, November 30, 2010

    Great article and an even better opportunity for Google. It’ll really help them out in the local business market. And with Google’s infrastructure behind them, perhaps Groupon’s site will be a little more stable and stop crashing whenever there is a good deal or a lot of publicity. I think the $6B number being discussed is a fair number given the situation, despite what they naysayers might think. Here’s to hoping this one goes through.

    -C
    Data Driven Marketing

  10. This deal seems silly to me. The barrier to entry for social buying is so low. Groupon is hot today, but sites like livingsocial seems to be hot on it tail.

    I read an article that made complete sense to me. It said that Google has a penchant for algorithms and everything must be reduced to numbers and data. Groupon is more about the human touch. The salesman on the phone closing the deal. These two cultures are not compatible. A better fit for Groupon would have been Amazon. Their hands off approach+ is ideal for a newbie company like Groupon that is still finding it’s rhythm. Google should follow Amazon’s approach with this deal if they don’t want to see their 5 billion dollar go up in smoke.

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