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MIHMORANDUM
No. 727
November 30th, 2010


Check Out My New Company
You Know You Want To


 

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

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 typicallyinsightful 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.