Have I been taking crazy pills? I know this is old news, but it’s been bothering me for a long time. Google offers Groupon 6 billion dollars and they turn it down?!?
Here is why Groupon should have taken the money and ran. Even though they currently have roughly $1billion in yearly revenue and $200million or so in yearly profit, it’s not realistic to think this is sustainable. Why isn’t it sustainable? First off, the business model is very easily replicated. Anyone that has local contacts can copy the concept in that local market. Why is that important? Many people that aren’t as technologically savvy aren’t going to trust a site they don’t know (ala groupon), so who might they trust for local deals? Maybe local newspapers? or local radio stations? Both of which are pushing their own brands of hyper-local deals.
The reason the competition is so important is that companies can still make a lot of money off of this concept while undercutting groupon’s rates. Whenever you buy a groupon, half of that money goes directly to groupon….HALF! So you buy a $100 massage for $50, the massage parlor only gets $25. How hard would it be for the local newspaper to come in and say give us the same deal and we’ll let you keep $40. And it’s not like the newspaper would need a lot more sales staff to make these phone calls. You take the sales staff that can’t make sales for physical papers anymore and put them on finding local deals as well as the physical ad sales. Overall, I just think this is a business model that is easily replicated and it’s entirely built on having local contacts. There isn’t really a lot of economies of scale as long as you already have contacts in the local community (for example a newspaper or radio station).
So the next obvious question(to me anyway) is if this is such an easily replicated business model, why would Google offer $6 billion for it. I think it was simply for the local sales contacts. I don’t think they were overly interested in the actual local deals, even if it would have provided an extra short-term profit. Long term it gets them personal contacts into local markets. This is important for a couple reasons. First, so much of Google’s profits come from advertisements that the next logical step is to try to get into local advertisements. On top of that, I think the next big growth area is going to be localized, personalized messages. So if I’m close to a pizza joint I can get a message on my phone telling me about some special or new place that has opened. All of this is why I think Google was interested in overpaying(in my opinion) for Groupon, much like they did for YouTube.
Only time will tell if Groupon loses market-share like I’m predicting, but you can already see the new competition that is erupting. Just in Omaha, there is now also livingsocial, the Omaha World Herald, and I’m sure others available as well. It’s only a matter until profits start to erode and companies have to get more lean. Once that happens, I think Groupon will start to regret their decision to not sell to Google. Maybe they should think about having their IPO now, before profits start to erode and people notice that their business model may not be a very solid long-term investment.
