Google buying Groupon is not a flawed strategy.
Google buying Groupon is not a flawed strategy.
This post is pretty much a response to this one by USV
Albert Wenger’s “Google Buying Groupon is a Flawed Strategy.”
tl;dr —
Two problems Albert discusses: Low $/employee, No Barrier to Entry, I present counters to those arguments. However, I also state Albert ignores the tremendous strategic “social,” and “mobile/location” value that Groupon can offer Google by encouraging users via game mechanics (similar to Zynga, but both biz and customers) to promote deals via streams on their social graph. Essentially Groupon helps Google solve an internal problem with social and local businesses and puts up a substantial near-term roadblock to Facebook’s local initiatives.
In another post later today, I’ll do a tear-down of Groupon and highlight why I think Groupon @ 6 Billion is a great deal for Google given the social aspect of the business.
sorry for any spelling / grammar errors.
Albert:
1.) “Low” $ per employee.
“feet on the street business employing over 3,000 people globally”
“$200,000 of annual revenue per employee.”
v. Google @ “$30B in revenues with around 25,000 employees, which works out to $1.2 million in annual revenue per employee”
Absolutely Groupon is a “feet on the street” business, but that maybe an attribute of successful local sales to businesses.
1.) There has to be a reason why Craigslist has not been able to dominate the local deals market/yellow pages (non-real estate), even though businesses can advertise free. I think the sales process is probably part of the necessary cost of “local” business.
2.) Sales is part of local in the medium term— yellow pages, newspaper sales, tv and radio — remember Google has had very little success automating both TV, Radio and Magazine sales.
Albert:
2.) “Groupon’s business model does not seem super defensible.”
“People who want deals will generally go look for them. And businesses that want to offer deals will do so on any channel that will let them.”
1.) Absolutely businesses and consumers will hunt for deals. Also, it is clear that it doesn’t _seem_ like Groupon’s business is super defensiable at first; however, I’d argue it is not the Groupon technology or Groupon sales force individually serves as a barrier, rather it is the scale of Groupon’s business that serves as a substantial barrier in the near-term.
Unfortunately, barriers don’t seem to be that great for considering corner cases.
a.) Technology is really not always a clear barrier to entry.
Think Google entering search (AltaVista.com) and Youtube entering video (Google Video — and lots of smaller competitors like Break.com / Big-Boys.com ).
b.) A “network effect” is always a barrier if other areas of an Internet business are not properly run. In a “social” dominated business
Think Myspace.
Groupon is pretty much a corner case — how much money and time would it take to get to Groupon’s size? If you had lots of money, then the time that it would take to attack the barrier means an awful lot.
The near-term is really all that matters for Google right now, given their much hyped much failed social (Internal: Buzz and Wave, M&A: Dodgeball and Jaiku) and local commerce initiatives (Internal: Base).
Social, location, flash-sales and mobile market are the trends that Google is examining (remember the $900 MM MySpace ad deal?) and desperately needs to enter effectively given the growth of Twitter and Facebook.
Although Twitter really has not yet found a substantial revenue model, they appear to have plenty of time from their investors. The same time - to - revenue model is there for Facebook; however, Facebook appears to have two clear areas to generate revenue right now:
1.) Facebook Games
Facebook credits will become the only currency on facebook , and likely take 30% of the purchase.
2.) Facebook Ads
On facebook ads I’d say there are several maor categories:
a.) Games (Zynga dominates on FB)
b.) Flash Sales (Living social, groupon, gilt, etc.)
c.) Branding (P&G, J&J, etc…)
d.) Local biz
Given that Facebook relies on a strong social graph, has an upcoming local product _and_ has two clear revenue models that Google both understands and has also analyzed (through discussions with Zynga and the failed Myspace experiment), its clear that Facebook is more of a threat then twitter.
Understanding the customer acquisition and monetization of both Zynga and Groupon, though is the real key for Google in the near term.
The nature of the Groupon deals encourages interaction with the users’ social graphs. via the mechanics of the “group” deal, this is extraordinarily similar to the game mechanics that have facilitated Zynga’s growth on Facebook (although it is interesting Zynga doesn’t seem to have the same interaction on Twitter — I imagine Groupon will likely be the opposite).
Although we think of Zynga as a “social gaming” company, that’s largely b/c Zynga games live inside social networks (of course, the best facebook). But Zynga is really very similar to Groupon in that it advertises heavily on Facebook and encourages referrals/interactions via user streams. The streams are an important source of lower cost advertising for Zynga, and I’d say are the primary social interaction, as users don’t really play the games against their friends in a traditional sense.
Zynga’s games though are asynchronous — you just get points/rewards for referrals by your friends. You need your friends to participate with the Zynga game in order to get points and achieve levels, I think Groupon’s game mechanics use the same sort of “get in on this deal” to get interaction and involvement using the users social graph, in a way over time deals can be catered to users to actually encourage interaction — for example how often do people engage in a $100 dinner alone?
Additionally businesses will use their social graphs on facebook and twitter to push their Groupon deals at little cost to Groupon.
Thus, I beleive the structure of Groupon takes some of the pressure off Goog in the near term to get social and mobile/local right.
Groupon + Goog places is a pretty strong pre-emptive strike against Facebook’s places effort and Facebook’s local advertising efforts and it is also a fairly interesting way to counter the success of local check-in companies such as foursquare and shopkick. Interestingly, Groupon’s extension in the mobile commerce space can serve as a hedge to Apple’s iAds / local mobile advertising efforts.
Thus Google buying Groupon is a great strategy, in many ways far better then buying an actual social network given the complete implosions of friendster, bebo and myspace. A worse-case Groupon failure isn’t nearly as bad as those three zombie companies.
Further, I think groupon’s new “deal follow” is a way of supplanting biz twitter accts with users directly registering to a commercial designed platform — Given groupon has its own 33MM users and even better $$ data on users I think most local businesses will instantly see the value — and biz will do the same as users — push deals via their streams on fb and twit.
Let me know what you think…
