Google's Current Bid for Groupon: $5 Billion.
nytimes.com
nytimes.com
Groupon obviously has an early-mover advantage, although it doesn't seem insurmountable, but their technical advantage doesn't seem enormous. I don't mean to undersell what they've done and fall into the "I could build X in a weekend" trap, but what they've accomplished technically seems easily repeatable in a year by a company of Google's talent, if not less.
Their early-mover advantage has established them as the definite leader in the area, but again, it does not seems insurmountable. There isn't significant vendor lockin (the vendors are constantly changing), nor customer lockin, (other than having to sign up for a new site). There is a clear avenue for competitors to break in, by offering better terms.
Basically, they are printing money by being a middleman. Funny, i thought the internet was supposed to eliminate that kind of business. They are certainly worth billions, as they are enormously profitable, but 6 billion seems excessive. What this says to me is that Google sees locally-based commerce that occurs online (bad phrasing by me) as a critical space in the coming years, and they would rather significantly overpay and jump ahead rather than risk being lapped.
That being said, imagine a Google-made version of Groupon. It would be horrible. Google may not get it when it comes to making products similar to this- but at least it seems to know it doesn't. Google isn't in it for the technology. They'd be buying it for the community and the atmosphere- something they can't reproduce.
After all, nobody will care about "Google Coupons", the minimalistic Groupon knockoff with that big blue "Buy now!" Google Checkout button.
Groupon has figured it out and they are scaling it up. This is not something that anyone can replicate.
Anyone can build a group-buying site and hire a sales force to do deals. Acquiring the members and getting them to buy stuff to the point where you are doing $50MM in sales p/m is a vastly different set of challenges that I think most of their competitors are incapable of.
Google surely knows something that I don't... but I just can't imagine them shelling this type of money out for something like this.
On the other hand, their ad business could benefit greatly from a coupon/promotion system that actually works. They already have advertisers pouring in billions of dollars, just imagine the leverage of owning the world's leading coupon platform as well --they just need to improve revenue by 10% or so and you have 0.5 billions more each year, which is enough to justify the 5 billion price tag.
"The social proof phenomenon which comes right out of psychology gives huge advantages to scale—for example, with very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it's available almost everywhere in the world.
Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup—which is slowly won by a big enterprise—gets to be a huge advantage.... And if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you."
-Charlie Munger [1]
[1] http://ycombinator.com/munger.html
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On a somewhat related note, if there's anybody out there that wants to build a Groupon clone, or sell excess inventory of some product, or provide daily deals for anything, and you don't want to build the tech, check out http://cajoots.com (a project of mine).
My hypothesis is this: mind-share and network-effects are hard/impossible to value.
Have you MET the internet? It's one huge lead gen contraption (ads, groupon, kayak, google, the app store, itunes, etc). One of my all time favorite blog posts on the topic here: http://blog.redfin.com/blog/2007/08/the_web_is_becoming_a_gi...
local ad spend: $170B (US only)
/thread
Here's the way I can rationalize it: imagine Google spends $20 million (or whatever) to build underlying technology. Then spends $2 billion to roll out a nationwide sales force sufficient to saturate all cities of some threshold size, and another $1 billion for a nationwide marketing campaign to introduce the project to consumers, all over the course of 1 year.
On the surface this is a better deal. But does it remind you of anyone? Microsoft. This is what Microsoft does when they try to do something new. And all too often, they fail. One reason they fail is that it's hard to effectively mobilize thousands of people and spend gobs of money in a short amount of time. The effort is so big it threatens to crush itself under its own weight if it is not properly managed. And management is hard.
Google is essentially sidestepping this management risk by spending a ton of money. They get something that is in a working state, rather than trying to quickly deploy something huge and new. Money is (relatively) cheap to Google, but opportunities for low risk, significant growth into a complementary space are rare. So this makes sense for them.
Here endeth the half-baked disquisition.
edit: sure it is a bit offensive, but it is a serious question
I think $5b is overpaying. But at a much lower price point I can see how acquiring them would make sense, because of this tech-needs-sales&service fit.
For perspective: when I started there, the market cap was less than the amount of cash we had in the bank.
Google would be acquiring a great marketing team by buying GroupOn. We'll see what Apple is going to spend its cash on, but it could be something that Google already has or could replicate easily but Apple can't generate on its own.
Groupon: 171m => 5b = 30x
YouTube: 11.5m => 1.65b = 145x
MySpace: 21m => 580m = 27x
AdMob: 47m => 750m = 16x
GeoCities: 40m => 2.87b = 71xSome reading: http://www.forbes.com/forbes/2010/0830/entrepreneurs-groupon...
Boston, for example, has a deal today for 150 * $15 meals at a restaurant.That's $2250 revenue for a day or about $800k for the year. Assuming there are about 30 large cities in the US thats $24mm annual revenues.
Even if the average deal size (item price * count) is FIVE times that its about $110mm annually.
Also kind of tough to scale when the USP is ONE deal a day right? I mean will this work with two deals a day?
What am i missing?
Thanks.
With google's reach and talent, I feel like they could have made groupon sweat. And then bought groupon for a more reasonable amount of money.
5 billion seems like a lot for a company that has such a low barrier to entry for competitors.
I have a hard time buying the idea that groupon is actually worth $5 billion.
As far as I can tell, GeoCities never turned a profit and only had something like $30m in revenue their last year.
That said, buying a company for 100x its annual profit still seems pretty steep.
Unfortunately, Yahoo screwed up, they killed a lot of traffic by driving away users through unpopular terms of service changes and other silly changes. Meanwhile, the web was growing up and sprouting innumerable new free content hosting sites that were far better than geocities (blog hosting sites like blogspot being the prime example) while the cost of full service paid web-hosting was falling through the floor. At the same time the dot-com bubble burst and internet ad revenue dried up. Geocities found itself obsolete, unliked, and decidedly unprofitable.
In comparison, groupon looks positively questionable. It needs to grow not merely 100x but more like 1,000x in order to justify the huge investment that google will put into it.
Founded only two years ago by Andrew Mason. Built on collective buying technology that he built for a site, The Point, that he started only a year before in 2007.
(yes I surf without adblock)
May be the same holds true for Google & Groupon?
Also notable: some of Google's profits come from unsophisticated operators often overbidding for Google ad placement, the "winner's curse" of auctions. Some of Groupon's profits similarly come from unsophisticated small businesses overpaying for a new kind of promotion, in order to be a featured daily deal. Neither company wants this tendency for overpaying to go too crazy, burning out their customer base. But each likes the way these market dynamics drive even savvy operators towards paying more than half of the 'gains from trade' to the promotion-provider.
But, it does not directly address the "winner's curse", which is that whatever the auction mechanism, the winning bidder(s) are especially likely to be those who have overestimated the value of the item at auction (even if paying the next-highest-overestimator's bid).
However, in advertisement everyone has a different value derived from the ads, and also since you advertise every day, winner's curse is less likely (you learn).
=)