GOOG-pon: A Facebook-, Foursquare-, Yelp-, CityGrid- and-Everything-Else-Killer

MIHMORANDUM NO. 727 | November 30th, 2010Reader Comments (10)

OK, so clearly that’s hyperbole that’s associated with seemingly every technology merger and/or hot startup these days.

But if the reported deal goes through, it would represent a colossal shake-up in our little world of Local Search…bigger even than Facebook Places (assuming Facebook eventually executes well on that potential).  The only thing close to the magnitude of this deal would have been the proposed Google-Yelp deal that didn’t go through about this time last year.  And I’m not even sure that was this big, for reasons I try to spell out below.

Greg Sterling has written some typically-insightful posts reflecting his view that Google would be significantly overpaying for Groupon at $5.3 Billion. I don’t pretend to have the M&A / valuation sixth-sense that Greg has from years of experience with this kind of thing, but at a practical level, I think Groupon is the most natural acquisition for Google in any space right now — including Yelp.  Of interest…the Yelp deal was rumored at “only” $750 Million.  So perhaps Greg is right that $5.3 Billion is way too much. He points out that a decent-sized IYP (or even lesser group-buying play) could be had for around half a Billion.

What Groupon has that a typical Internet Yellow Pages company doesn’t is a strong (albeit estimated) direct revenue stream of $600 million/year that is clearly growing.  Again, not having any valuation experience, I’m not sure what Groupon should be valued at on an EBIDTA model.  Maybe somewhere in the $2.5 Billion range…readers can tell me if that’s way off-base?  So it seems to me that would be the starting point for what Google (or any buyer) would offer.

Why are they offering so much more, then?  Peter over at SEO Book astutely points out, “a Google employee could probably knock together a similar site in day or two.”  What does Groupon offer that Google CAN’T replicate in a long weekend?

The answer is that there are a lot of un-financial attractive features of Groupon that could give Google (or keep them with) an enormous leg up in the Local Search game.

“Grokkiness”

Speaking with Mike Blumenthal earlier this evening, he echoed Peter‘s insight that  “search marketing is just too cryptic and time consuming for a lot of small business operations,” and Groupon offers a very strong non-search revenue model for Google and corresponding advertising package to present SMB’s with. It takes two seconds for a business owner to understand how he can make money with Groupon, and how Groupon can make money from him, and it seems like a reasonable deal.

Unlike Adwords, which are too confusing to set up, and for all but the savviest business owner, to track their effectiveness…Facebook, where the revenue benefit isn’t nearly as direct (yet?)…and the Yellow Pages which are easy to understand, but just seem like a rip-off in all but a few select verticals.  An ad-bundle play like CityGrid should be easy for business owners to understand, but only if they first grasp the concept of long-tail local search.  That isn’t always the easiest topic to explain to someone who doesn’t live and breathe the Internet.

With Groupon, business owners are getting customers not clicks, a common refrain as the “holy grail” of a local ad product.  Even if they’re demanding, low-profit customers, they do mean foot traffic and purchase receipts, which the average business owner just naturally groks.

Relating to the Business Owner and Consumer

Most of us in the Local SEO space have long lamented that Google’s laser-like technological/algorithmic focus is a double-edged sword when it comes to the SMB market.  It enables them to come out with amazing products like Places and Hotpot, and yet creates an inability to translate and market these products easily to non-techy consumers and especially business owners.  And then there’s the lack-of-customer-service issue which may eventually backfire–although the recent efforts with Tags have been a great step forward in that regard.

Nonetheless, Groupon reps clearly speak a language that both consumers and business owners can relate to.  I think Groupon is more than a “feet on the street” sales force in this regard.  Perhaps it’s “the softer side” of Google, or something.  Basically, there is real human interaction happening, real hand-holding throughout all (or most?) of the process.

And, although there have been a handful of merchant horror stories of Groupons gone bad, the couple of merchants I’ve talked to offline here in town have a favorable impression of how Groupon has done for them.  Contrast this to Yelp’s continued (albeit out-of-date) struggles with its perception among SMB’s, let alone the Yellow Pages.

Technological Advantages

As Peter and others note, though there’s nothing particularly special about the Groupon platform itself, for Google, this platform can be leveraged in amazing ways.  And with the breakneck pace of their recent rollouts, it seems like they finally seem to have the horses in the Local product stable to be able to execute on it.  As attractive as the first two points are, this third one is where I think Google sees the real value.

In May, Yelp announced they’d reached the 10 million review threshhold.  Let’s say they’ve continued at that pace and are up somewhere around 15 million reviews now.

Well, Groupon has 35 million subscribers.  And offers Google an extremely easy path to follow-up with these subscribers to solicit reviews of the businesses they’ve just visited–much like they do now with Google Checkout purchases.  It’s instant UGC.  On that front alone, Groupon has to be seen as at least three times as attractive as Yelp was last year–even if each subscriber only leaves one review a year.  Tack on an extra $1.5 Billion to the EBIDTA valuation.

With Hotpot, Google is clearly trying to muscle in on the Local-Social space that has up til now been Facebook’s sole domain.  Well, Groupon acts a bit like a Facebook-lite (and from a business standpoint, perhaps a more effective version of Facebook) by asking subscribers up front what kinds of businesses they’re interested in receiving deals from.  The demographic and social recommendations that can be blended with Hotpot and Groupon seem, on the surface at least, to offer pretty exciting possibilities.

Google can also horn in on Foursquare’s (and other location-based services’) territory with check-ins and customer loyalty programs via the Groupon platform, encouraging more continual engagements by Groupon subscribers–which has seemed to be the most common complaint among merchants–that subscribers are actually “one and done” customers.

Unlike the Adwords auction, Groupon deals may not be subject to the same inevitable “pricing out” phenomenon that will occur as more and more business owners come online.  Long-tail deals will always have a place as long as the demographic targeting of Groupon continues to scale to more and more granular levels.

And if Google gets an additional 35 million subscribers Checking Out on Groupon, the 3% processing fees alone are probably worth tens of millions of dollars a year.

These checkins, reviews, and real-live transactions also give Google a whole new set of algorithmic signals they can use to judge the Buy Offline popularity of a business–a major advantage over every other Local portal at the moment.

Risks of Buying Groupon

The potential for a cultural clash of a Silicon Valley technology company and a Chicago-based merchant-service company are pretty obvious.  But if Google essentially lets Groupon function as an independent business unit, while layering in its own Places/Hotpot/Checkout technology over time, I don’t see this creating too much friction.

There’s also the possibility of both merchant and consumer fatigue in the Local Deals space, but again because group buying is such an easy concept to grasp for both parties, and the results so easily trackable all the way to the bottom line, it seems like the risk of this is lower than, say, Adwords- or display-ad-burnout.  As long as Groupon continues to attract more and more merchants in more and more diverse niches, subscribers are going to continue to flock for deals.

Greg doesn’t think there are any anti-trust implications at the moment, but I think down the road this deal could create some headaches for Google.  Although the group-buying space is very crowded right now, with the technological implications I pointed out above, I think the advantage this would give Google in other facets of online advertising might raise a few eyebrows and make even more enemies among its competitors.  Then again, if the print Yellow Pages weren’t busted for their ability to extort business owners back in their heyday, perhaps Google can lobby enough congresspeople to avoid that fate as well.

Conclusion

Obviously, I made a huge mis-step in excluding Groupon from the game of Local Search RISK a couple of months ago.  Group buying just never struck me as being fundamentally related to Local Search…and I’m still not sure it is.  The possibilities for what Google can do with Groupon, though, seem so much more dramatic than what a company like Yahoo or even Facebook could do with it.

In a way, this deal kind of reminds me of an NBA owner getting irrationally infatuated with a particular nondescript free agent and completely overpaying despite squeals of protest from the General Manager. But Groupon is a young, healthy, proven all-star.  And it could make the other players around it a whole lot better, too.

Extending the analogy, perhaps Groupon is a young star at the end of its rookie salary and ready to sign a max contract.  A once-in-a-generation type of player to whom it might just be worth tossing a couple extra billion.

10 Responses to “GOOG-pon: A Facebook-, Foursquare-, Yelp-, CityGrid- and-Everything-Else-Killer”

  1. Mike Ramsey says at

    Nice Post David.

    The thing that really stood out to me today as I was thinking about Grouple was how Google could tie the checkout process to a google account, getting a huge number to feel more comfortable purchasing through google checkout, which would translate to revenue from…

    1.Google Shopping
    2. Future Mirco payment system.
    3. Gmail accounts with clickable ads

    I agree with your statement that “Groupon is a young, healthy, proven all-star. And it could make the other players around it a whole lot better, too.” Consumers would spend more as they have an account set up with a card attached. Businesses would be solicited for adwords, tags, and every other future google product after a run with groupon, and the potential to make a load outside the Groupon for google just gets easier and easier.

    It is something I hadn’t thought much about, but Groupon is localish search, especially when the deals are going to be tied to a listing like a tag. (imagine that CTR)

  2. Frank Reed says at

    David – Great analysis. I really echo this whole disconnect between the genius of Google’s ability to deliver great products and the inability to make it make sense. Groupon could truly bridge the gap and with customer savvy sales people like Mike Blumenthal has mentioned.

    While $5.3 billion is a ridiculous amount of money the one thing that Google would be buying that is could ultimately serve as a bridge between a company of engineers to a world of marketers is just the one word: Groupon. Like you said, everyone gets the idea pretty quickly and that might be enough to help the SMB dig a little deeper into the Google toolset to see what they could be doing. Groupon’s brand recognition has been meteoric and reaches well beyond the ‘live and breathe’ the Internet set. That could have huge upside for Google.

    Should be interesting (if it happens). Thanks for the analysis.

  3. Stever says at

    My 2 cents as requested from our email conversation yesterday;

    I’m a firm believer that Groupon’s current business model is just not sustainable. Now if Goog buys them and then slashes the cost from 50% to 25% or 30%, then maybe it will be more sustainable in the long run.

    But that 50% Groupon takes out of the deal is not set in stone. According to this cafe in Portland, if the deal price is less than $10, Groupon wants 100%!

    Also their 6 month exclusive contract is a bit dirty too. A client who checked them and a competitor out told me that you’re not allowed to participate in another group deal website if you run one at Groupon. Not sure how they enforce that.

    And, they supposedly withhold payment back to the SMB for up to 3 months. Ouch.

    They are the big boy in that space and their scale allows them to get away with that crap. But the high price, exclusive contract, and withholding of funds are all reasons for a business to think twice and try a competitor instead. Or at the very least, try once, get burned and never use it again.

    Goog could still keep all those negatives in place, keep it as a flash in the pan business, but their scale means they build a bigger pan and juice as much revenue out of it as they can, till it’s dead. Risky at a $5 to $6 big B cost. So I think they’ll wise up, make the service more friendly, cheaper, and sustainable. That if they are actually buying them, and at those crazy bubble prices.

  4. Gareth Rees says at

    We were just talking about this exact subject in the office earlier after looking at the power of Groupon locally. Google may well be paying over the odds, but considering the recent changes in Local and the shift of Places in Google’s priorities, Groupon could fit in very nicely with these plans, be it a new local advertising program or something else, it’s quite exciting. I’m not familiar with Groupons payment issues, but if thats sorted, the potential could be huge.

  5. Garry says at

    David I liked this post. I do think the price of the deal everyone is talking about is way up in the sky but I do not think google offers this price estimate just because of the hype but because they do see a way to monetize it nicely.

    OR I might be wrong because they still do not succeed monetizing youtube..

  6. Gyi Tsakalakis says at

    Great insights.

    “Groupon offers a very strong non-search revenue model for Google and corresponding advertising package to present SMB’s with.”

    Yep. And you can bet that Google will find a way to make it “searchy”.

  7. earlpearl says at

    Nice write up, David.

    I had an interesting interaction with an SMB owner the other day. This small business operates across the street from my office. The operator had used Groupon once, had contractor Photographers from Google inside his store to take pictures a while back while that process was going on….has been intimately aware of his reviews and had never claimed his Google Places listing…even while he is very aware of the process.

    I just asked him about his Groupon experience. His wasn’t good. They made a mistake on his offer. It went too long. It cut into his margins. I suspect he didn’t think it out beforehand, didn’t know what to expect, etc. Not all small business operators are as aware of that issue as I think they should be. Certainly Groupon Sales people aren’t going to educate the owner on that issue.

    He is aware of Groupon alternatives. The deal terms are better. He noticed where a business competitor ran a Groupon special wherein the offer price and then the savings included a large mark up before the Groupon offer. That business didn’t lose anything on margins.

    I asked him why he had never claimed his Google listing. I didn’t go into a long discussion but I referenced how I had noticed the category on his business had changed for a while and that while the change was in effect his maps rankings suffered. He totally understood that. He fully understands that one HUGE benefit on claiming a listing would be that he controlled the record and nobody could change it/damage it/etc. He was extremely aware of that possibility.

    I reference this background information to refer to one point that has been made above and elsewhere, David. A “feet on the street” presence can improve Google’s overall sales penetration into the SMB market. Now in the case of the merchant referenced above if a salesperson identifying themselves as from Groupon approached this merchant that wouldn’t work. He already doesn’t like them. But the merchants with a positive experience with Groupon would be happy to have them come in and discuss both Groupon and potentially the other opportunities with Google.

    Sales people bridge the gap between an unknown electronic presence and a real person. They can improve sales. They better. They are expensive….and buying Groupon at a price of billions is UBER expensive.

    As far as we last knew about 1 in 7 smb’s had claimed their google places record. We don’t know how much growth there has been. Only Google knows what percentage of merchants use Adwords and newer sales tools such as Tags or Boost.

    I’m not going to comment on the price. I sold investment buildings in the past. Every buyer looks at things differently. What may be valuable to Google at a high price may be out of the price range for others. Who knows?

    I do think Google can improve its penetration into the smb market with “feet on the street” and lots of different ways to sell. On that basis its an interesting scenario.

    Dave

  8. Wyn says at

    I think WOM will play a big role & factor to help local searching relevant.

    Q&A will be a good model for WOM!

    Google never knows how to “SERVICE”?
    Groupon doesn’t have strong social community support.

    Goog + Groupon = ?

  9. Jeff Sauer says at

    Thanks for posting something rational on the topic… after seeing so many negative opinions of Google overpaying for Groupon, I appreciate your perspective. Local is where things are heading and this is a good move from Google.

  10. Pascal says at

    I think Groupon will be the eBay of local search. The first great/fastest web only scalable business model in this industry.
    But consumers will mature, the market will mature, and it becomes hard to figure out for large Companies. eBay is worth 30B today, so I am not doing any offense to Groupon by saying this. But if the market dynamics change that forces the business model to change dramatically, what will the 2,000+ sales people say?

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