Google Buying Groupon is a Flawed Idea

December 1, 2010

continuations:

On one hand I can understand Google’s aggressive interest in Groupon. Groupon appears to be one of the few companies that has cracked the code on making money from local businesses. Groupon’s revenues are rumored to be around $50 million per month, which is impressive. But there are at least two fundamental compatibility problems.

First, Groupon is a feet on the street business employing over 3,000 people globally. So at $600 million in annual revenues, that amounts to only $200,000 of annual revenue per employee. Google on the other hand does about $30B in revenues with around 25,000 employees, which works out to $1.2 million in annual revenue per employee and that’s including all the employees that work in Google businesses that produce no revenues at all. In other words, Google is a technology company and Groupon is a people company. Business Insider made this point when the acquisition rumor first surfaced.

Second, Groupon’s business model does not seem super defensible. People who want deals will generally go look for them. And businesses that want to offer deals will do so on any channel that will let them. This suggests that the price for connecting a deal searching consumer with a deal offering business should get driven down quickly and that ultimately this will be a performance based market. Deal aggregation or search (e.g., Yipit) would seem to be a better model and one that fits more naturally with Google’s DNA.

So if I were on Groupon’s board, I would definitely vote for hitting this bid. Conversely if I were on Google’s board, I would seriously question why management wants to do this. This seems to be a deal driven by the wrong reasons, which makes me even more nervous about who is at the wheel at Google.

Completely agree with your analysis. The only additional thought I have is that Google may have decided that to win in Local, they need to have a highly efficient & effective “feet on the street” sales force that can create direct relationships with merchants. If so, then Groupon makes a nice fit, as that is their core competency.

caterpillarcowboy: There’s a lot of truth to your statement. As early as four years ago, Google was kicking the tires on online white pages companies and they were specifically interested in buying a local sales force. That was after they had dabbled in creating some local search products and the implication was that they felt they needed a sales force to really compete. They obviously never pulled the trigger then but they’ve had a lot of time to cogitate on doing a deal like that.

1:51pm | URL: http://tmblr.co/ZjoIUy1wueWa

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