Google has offered $6 billion to acquire Groupon, a 2 year old e-commerce portal. Opinions around this effort is vastly divided. The exorbitant $6 billion cost of acquisition would make this the second most expensive sale in history, only exceeded by sale of Cerent to Cisco in 1999 for $7billion in the thick of the Dot Com bubble. Google will be acquiring Groupon at almost double the price that it paid for DoubleClick. Groupon is expected to report $500 revenue for the year.Groupon was last evaluated at $1.35 billion 7 months back and the $6 billion price tag implies a 500% increase for Groupon valuation.
What is Groupon?
Groupon is a e-commerce portal which works on direct discount deals to consumers by local advertisers through eMail. It has about 35 million subscribers who receive email based ads and discount offers from local advertisers and uses the user base as a sales channel to generate bulk order deals. To that extent, the 35 million subscribers are also the distribution nodes for Groupon.
With $500 million revenues in 2 years, the distribution and discount model is fairly working for Groupon. However, given the fast and brilliant developments in the Web 2.0 domain, one is tempted to think if e-mail is really the best way to generate leads and revenue and the sustainability of the business.
Ironically, Groupon’s viral design (Subscribers getting bulk buying from their own social networks) is more closer to the Facebook P2P references and likes. To that extent, Groupon has a threat from Facebook which is also developing a product which will help merchants present discounts and offers to its 600 million users. If Facebook were to launch that service today, subscription could quickly ramp up to 35 million! Amazon is also looking to buy out Living Social. Living Social is a clone of Groupon in terms of e-commerce business models.
Thus Groupon’s only barrier to entry for other competition is only its first mover advantage which translates into critical mass. Facebook or Amazon could easily surmount this entry barrier with their huge subscription bases.
Thirdly, Groupon is waning in terms of influence and usage. Traffic has dropped by 33% in the last 4 months as reported by Quantcast. Refer to the chart below:
Given these facts, it certainly looks that Google is over-enthusiastic and overpaying for Groupon. Unless Google is seeing some other synergistic elements that we are blind about.
Part II: Google’s (possible) motives behind Groupon acquisition.