For two years of work, $6 billion isn't a bad pay day. According to the All Things Digital blog, that is what Google may pay for Groupon, a couponing website launched in 2008. To justify the steep price may require a fundamental shift in how Google does business.
Groupon is on track to generate $600 million of revenue in 2010, estimates Barclays analyst Doug Anmuth, growing to perhaps $1.5 billion next year. Four times 2011 revenue doesn't seem an outlandish multiple to pay, considering its rapid growth and strategic value to Google. One qualification: It isn't clear how profitable Groupon is.
An Internet coupon business offering daily deals to users, Groupon provides a powerful marketing opportunity to small local businesses that have thus far been resistant to advertising online. Historically, these businesses have advertised in the yellow pages, on the radio, on TV and by direct mail. Even though consumers are increasingly on the Internet, small businesses still spend just 10% of advertising dollars online, according to Gordon Borrell of research firm Borrell Associates, well below the average that large advertisers spend online.
Google has tried to capture a bigger share of local advertising dollars, but its primary product—paid links next to search results—is ineffective for the vast majority of small businesses, says Mr. Borrell. Few sell products or services online, so paid search doesn't pay. Groupon has proved more effective, sending customers through the front door. Buying Groupon could thus give Google a more successful way to engage with local merchants.
Google would also get email addresses and other personal information from Groupon users, which would enable it to provide more targeted, more lucrative advertising to them. Not to mention that Google might market Groupon deals to folks carrying cellphones powered by its Android operating system.
Part of the rationale of the deal has to be using Google's immense scale to expand Groupon's business, but that is easier said than done. Groupon's business is driven by people, who talk to merchants directly to arrange deals. Google's business is all about technology, which provides merchants a self-service online advertising tool. Individual contacts have long been the dominant way local advertising is sold, a fact supported by Groupon's success. To build on it, Google will likely have to make significant investments in people.
Moreover, if an automated solution were easy, it would make little sense for Google to pay billions for Groupon when it could launch its own coupon product for a fraction of that.
With $33 billion of cash on its balance sheet, Google has plenty of dry powder to invest in growth. Tuesday's 4.5% drop in its stock on the deal rumors, however, suggests shareholders are skeptical that Groupon's feet on the street really are worth such lofty numbers.