In an earlier post, i had discussed, how a $6 billion tag for Groupon appears to be a stretch in Valuation by fair and logical means. However, this is Google we are speaking about. Is their something about Groupon and this deal that we are missing, which is what Google is paying do much for. This post is about Google’s perspectives on the deal.
While Google Adwords has been the cornerstone for building the internet business model, Adwords has not particularly been successful for local advertisers.Treating users and consumers with targeted ads based on their personal and social profiles has been successful on a large global scale, but Adwords has tasted only limited success with local advertisers. That has been the case with Google who had earlier made an unsuccessful attempt at acquiring Yelp. Yelp is a commerce portal which does the rating of local retailers in an area.
Thats just one point made. Google will try and leverage Groupon’s strengths in local advertising in the US and Canada geographies. This would thus be a pre-emptive move against competition expected from Amazon (Is rumoured to be acquiring Living Social) and Facebook (Rumoured to be launching its own Local Ads product).
But isn’t $6 billion an overkill for a 35 million user base (That Groupon has)? Site traffic at Groupon indicates the month traffic to be around 10-15% of the 35 million number.
Given below is a very simplified break even analysis for Google’s investment on Groupon basis number of years and incremental subscriptions. The derivative is the revenue generated per user. Presently Groupon generates $500 million for 35 million subscriptions which translates to $15 revenue per user.
Assuming Google has the ability to ramp up the user base of Groupon to 100 millions in a short period Google will have to generate 3X of present revenue for a short term realization of break even and 2X multiple of revenue for short term realization of break even. In the scenario, where the user base does not increase and is held constant at 35 million, Google will have to generate 8X in short term and 6X in long term for a break even. The median value is 3X-7X increment in revenue per user.
Will Google be able to pull off the ambit?
Considering that Google will have competition from Amazon and Facebook sooner in this space, it is going to be difficult for Google to monetize as much efficiently as its scale in search would allow it to do so.Google would obviously bring synergies with its other shopping based competencies to the table and would also be factoring a scale increase in user base of synergies.
Synergies between Google and Group-on
One thing for sure is that Groupon would have helped Google expand in the $133 billion U.S. local-ad market and lessen its reliance on Internet-search advertising. Google wants to get into the local space and Groupon was one way.Locally focused e-commerce transaction data tied to one’s Google account could be used to improve personalization of other Google features as well as improve ad targeting.Google could also incorporate Groupon coupons into the location-based services of its Android mobile operating system
Even with all the factors considered, Google seems to be over stretching itself on the Groupon Bid. With monetization, purchase and payments building steam, is this Google under a Web 2.0 Bubble pressure or does Google know something that we dont? Google could for instance create its own local ads and commerce portal and blow it to sacle in an year at a much lesser tag. The desperation price of $6 billion only feeds the speculation, that Google may have been paranoid about the local ads opportunity and the fact that many of its worthy competitors are also looking at this space. If that be true then this is nothing but a Web 2.0 bubble that Google is feeding.
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.