Google Gaga for Groupon’s Growth

The rumors started Sunday night with a note from Vator News that Google acquired Groupon for $2.5 billion. Now Kara Swisher over at BoomTown puts the number of the Groupon Google Deal at $5-6 billion. Whatever the number, the reasoning behind it is clear. Google is in a desperate hunt for revenue growth. Groupon is the fastest growing business on record. Google wants to finally crack the local nut after years of battling for SMB dollars with yellow page directories, Groupon is a sensation among small business owners. Those two factors make Groupon a must win for Google, and they’re willing to pay a premium for it.

Image representing Google as depicted in Crunc...

Image via CrunchBase

Google needs Groupon for growth. Google has no doubt been on a tear, but in 2009 they slowed, dramatically. Google advertising revenues grew 59% YOY in 2007, 29% in 2008, and just 8% in an admittedly tough economy in 2009. And in 2010, it looks as if advertising revenue will grow somewhere in the neighborhood of 15% if Q4 revenues are in the ballpark of the rest of the year. And while most companies would love to see this track record of growth, it can’t be satisfying to Google execs who have seen companies like Apple see their revenues and market caps up big. And even private companies like Facebook and Twitter are reporting big gains in users, big gains in advertising revenue (with Facebook’s purported $1 billion in revenue this year) and getting impressive private valuations.

It’s clear. The battle for web dollars is on. Google is turning more into a utility with good but not great growth while the aforementioned high fliers are getting the growth, the spotlight and the valuation. For Google, Groupon is the perfect antidote. An infusion of growth for a company that really has no other answers.

Think about it for a minute. Google’s big acquisitions YouTube and DoubleClick are not growth centers. Heck, YouTube is specutively a break even business unit at best. Their enterprise apps, mail, and other products are seeing user growth; but not revenue growth. And Google’s recent spate of product launches (refinements to search, HotPot, etc.) don’t point to any new revenue champs coming from internal teams. All this leads to Google looking for growth, and there is no better growth story on the Web right now than Groupon.

Groupon is enjoying 50% margins and an estimated $50 million per month in revenue. That’s a shot in the arm for Google’s bottom line. And Groupon isn’t even operating at scale yet. They’re still rolling up knock-offs, hiring sales and copywriting staff like crazy, and innovating on the product side to bring Groupon to everyone. And even if small businesses lament Groupon and even if Groupon’s not a great marketing strategy for business, it’s popular, it’s easy and it works to drive numbers to local businesses. And Google, for all it’s done on AdWords and Places has not been able to capture the imagination of small business like Groupon has.

For small business owners Google is hard and confusing. AdWords is competitive, expensive, requires keen oversight and intensive setup to get right. And even after doing all of that, the search query volume for “Pomona pet store” just isn’t high enough to drive real traffic and business to small business. And as anyone in the directory business can tell you, it’s not about branding, it’s not about being findable, it’s all (and I mean all) about making the register ring. Yellow page companies have been chasing this grail for years, with click to call technology and in-depth customer reporting, all in a desperate effort to tie results back to spend. And while Google has a much clearer ROI path and performance model, they can’t drive foot traffic, phone calls and new customers like Groupon can (and like the Yellow pages used to.)

But the yellow pages are expensive with high monthly minimums, and even with the advent of new performance plans on things like search and click to call, the industry doesn’t have a strong way to drive new business in waves (like Groupon) or have clear ROI reporting in line with Google’s.

Which gets us back to Groupon, because Groupon solves the two problems that Google and the yellow pages don’t solve. They get awareness, and lots of it. The Groupon rushes are famous by now. Google can’t generate demand like that, they can only help to harness existing demand and drive it in your direction. They can’t make more people search for teeth whitening; but Groupon can set off a wave of people who suddenly realize they need to brighten up their incisors. Groupon also has the low cost and the yellow pages can’t compete with that; their monthly minimums come and go every month for the entire year. Groupon, in contrast is pay for performance. You only pay for each person that buys, although, you pay out the nose.

When you put it all together, Groupon is a sexy, sexy target for Google. For all of Groupon’s misgivings, it’s a hot company; a big growth opportunity and a model that small businesses get and like, for the most part. So if Groupon is the right play for the company that wants to be the yellow pages of the Internet, the next question becomes the price tag. At $5 billion, this is no small potatoes, and represents Google’s biggest M&A deal ever. The questions are numerous – will Groupon be able to maintain margins in the face of stiff competition (currently at %50, the answer is NO,) will Groupon be able to scale efficiently, will Groupon be able to continue it’s growth? Not likely and not likely. There are only a handful of companies that have successfully cracked the local nut, their names are AT&T, SuperPages, Local Insight Media, Dex and a handful of others; all have large sales forces, and all have low margin, low growth businesses. Interestingly, most have had to reorganize via some form of bankruptcy or acquisition. Can Groupon buck that trend? Questionable. But they do have things going for them that yellow page companies don’t, like no cost of goods and production of books as massive cost centers.

So is $5-6 billion worth it to Google? Buying growth is expensive and companies will pay a premium for it. Just look at Disney’s acquisition of Marvel for $4 billion, all in the name of growth among tween and teenage boys. For Google and Groupon, time will tell; but I think the answer is yes, because Google needs growth, Google has the resources to scale Groupon and Google can leverage the wonderful world of advertiser bundles to sell things like places, tags, and AdWords to advertisers who make Groupon just part of their advertising/marketing mix. I argued that Groupon is not a marketing strategy; but Groupon, combined with thoughtful search, and other localized online marketing can be a part of a coherent small business marketing strategy. Google has all the pieces to deliver that value.

Let me know what you think.

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