
Google's Current Bid for Groupon: $5 Billion. - timr
https://www.nytimes.com/2010/11/30/technology/30google.html?_r=1&hp
======
gfunk911
The value of an acquisition is (simplifying) a product of how easy it would be
to replicate the target without buying it, that is itself a combination of
(again simplifying) how big a first/early mover advantage they have, and the
technical lead they have, in terms of software, data, infrastructure, etc.

Groupon obviously has an early-mover advantage, although it doesn't seem
insurmountable, but their technical advantage doesn't seem enormous. I don't
mean to undersell what they've done and fall into the "I could build X in a
weekend" trap, but what they've accomplished technically seems easily
repeatable in a year by a company of Google's talent, if not less.

Their early-mover advantage has established them as the definite leader in the
area, but again, it does not seems insurmountable. There isn't significant
vendor lockin (the vendors are constantly changing), nor customer lockin,
(other than having to sign up for a new site). There is a clear avenue for
competitors to break in, by offering better terms.

Basically, they are printing money by being a middleman. Funny, i thought the
internet was supposed to eliminate that kind of business. They are certainly
worth billions, as they are enormously profitable, but 6 billion seems
excessive. What this says to me is that Google sees locally-based commerce
that occurs online (bad phrasing by me) as a critical space in the coming
years, and they would rather significantly overpay and jump ahead rather than
risk being lapped.

~~~
fookyong
If you've had no experience in E-commerce it's often overlooked just _how
hard_ it is to get people to come to your site and open their wallets. This is
part analytical, part marketing and part secret sauce.

Groupon has figured it out and they are scaling it up. This is not something
that anyone can replicate.

Anyone can build a group-buying site and hire a sales force to do deals.
Acquiring the members and getting them to buy stuff to the point where you are
doing $50MM in sales p/m is a _vastly_ different set of challenges that I
think most of their competitors are incapable of.

~~~
enjo
I wonder what Living Social is doing these days in revenue? It may be
difficult, but you can't convince me it can't be replicated for far under $5
Billion. In my small sample Groupon hardly has a ton of brand loyalty and they
certainly haven't penetrated the larger mindshare in the same way companies
like Google or Facebook have.

Google surely knows something that I don't... but I just can't imagine them
shelling this type of money out for something like this.

~~~
vladd
Google could build it for sure, but they can't have any guarantees that it
won't turn into a failed Wave or Lively. They already have coupons for local
listings ( <http://www.google.com/local/add/coupons> , Google sign in
required) and I don't see that anywhere near as popular as Groupon.

On the other hand, their ad business could benefit greatly from a
coupon/promotion system that actually works. They already have advertisers
pouring in billions of dollars, just imagine the leverage of owning the
world's leading coupon platform as well --they just need to improve revenue by
10% or so and you have 0.5 billions more each year, which is enough to justify
the 5 billion price tag.

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gamble
I get shivers imagining a single company that combines the integrity of
Groupon with the customer service of Google.

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davi
On the face of it this is hard for me to understand.

Here's the way I can rationalize it: imagine Google spends $20 million (or
whatever) to build underlying technology. Then spends $2 billion to roll out a
nationwide sales force sufficient to saturate all cities of some threshold
size, and another $1 billion for a nationwide marketing campaign to introduce
the project to consumers, all over the course of 1 year.

On the surface this is a better deal. But does it remind you of anyone?
Microsoft. This is what Microsoft does when they try to do something new. And
all too often, they fail. One reason they fail is that it's hard to
effectively mobilize thousands of people and spend gobs of money in a short
amount of time. The effort is so big it threatens to crush itself under its
own weight if it is not properly managed. And management is hard.

Google is essentially sidestepping this management risk by spending a ton of
money. They get something that is in a working state, rather than trying to
quickly deploy something huge and new. Money is (relatively) cheap to Google,
but opportunities for low risk, significant growth into a complementary space
are rare. So this makes sense for them.

Here endeth the half-baked disquisition.

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falsestprophet
Would this mean their army of Ruby on Rails developers being laid off and
replaced with a team of many fewer Google engineers?

edit: sure it is a bit offensive, but it is a serious question

~~~
mkramlich
from what I've seen of their UI and feature breadth, a site like Groupon
should not require many web developers. It's so limited and "canned" in it's
look. Now having several smart engineers to help make it highly performant and
scale up -- that would be useful, and would be something Google could
obviously help with.

~~~
jaredmck
Groupon doesn't have that many developers- it's sales in which they have an
army of employees. The most recent number I've heard is 2,500. Groupon is not
a tech company, it's a sales company. Lefkofsky and Keywell (the original
investors who often are referred to as "founders") continually bring a slight
bit of tech into old industries and then throw tons of salespeople into them.
Highly doubt the profits will last.

~~~
mkramlich
sounds like that aspect is a good fit for Google then, since Google is strong
in tech but weak in sales and customer service.

I think $5b is overpaying. But at a much lower price point I can see how
acquiring them would make sense, because of this tech-needs-sales&service fit.

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wooster
Difference between Google and Apple: Steve Jobs would commit seppuku before
spending $5 billion on something he could remake, better, in a couple of
months with a handful of dedicated engineers and a barn full of even more
dedicated marketeers.

~~~
drivebyacct2
And he'd continue to enjoy his niche.

~~~
wooster
Niche? Apple is the second largest company in the world. It's long past being
'niche'.

For perspective: when I started there, the market cap was less than the amount
of cash we had in the bank.

~~~
pyre
They are still a minority in some of their markets, even if they are a highly
profitable minority. This is where people get 'niche' from.

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erikpukinskis
I was curious how this compared to other acquisitions in terms of ROI for the
investors. Here are a few I drummed up (from Crunchbase):

    
    
      Groupon:   171m  => 5b    = 30x
      YouTube:   11.5m => 1.65b = 145x
      MySpace:   21m   => 580m  = 27x
      AdMob:     47m   => 750m  = 16x
      GeoCities: 40m   => 2.87b = 71x

~~~
andrew1
Maybe I don't understand these investments but I don't think that makes any
sense. Presumably the 171m that's been invested in Groupon hasn't bought the
whole company, only a proportion of it, so the investors only get that same
proportion of the 5bn. For example if that 171m represents only 10% of
Groupon's shares then the investors only get 500m back; a 3x return rather
than a 30x return.

~~~
redthrowaway
While true, I doubt investors own only 10% of Groupon, especially not at a
$171M stake. Groupon had (at least) two cash injections, one for $1M in seed
money, the other for $135M. The last round was for 10%, which gave them a
$1.35B valuation in April.

Some reading: [http://www.forbes.com/forbes/2010/0830/entrepreneurs-
groupon...](http://www.forbes.com/forbes/2010/0830/entrepreneurs-groupon-
facebook-twitter-next-web-phenom.html)

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moon_of_moon
Where does all that revenue come from? (I'm not in the US so I don't use the
site). Forbes is reporting $500mm annual sales.

Boston, for example, has a deal today for 150 * $15 meals at a
restaurant.That's $2250 revenue for a day or about $800k for the year.
Assuming there are about 30 large cities in the US thats $24mm annual
revenues.

Even if the average deal size (item price * count) is FIVE times that its
about $110mm annually.

Also kind of tough to scale when the USP is ONE deal a day right? I mean will
this work with two deals a day?

What am i missing?

Thanks.

~~~
inthewoods
Multiple cities, and you're looking at a small deal. For instance, the recent
GAP deal for $25 - sold 20,000. At $12.50 (50% margin), that's over $200k for
one day.

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csmeder
Why didn't Google move quickly to make a competitor to Groupon? I feel like
this would have given them much more leverage to offer a lower price.

With google's reach and talent, I feel like they could have made groupon
sweat. And then bought groupon for a more reasonable amount of money.

5 billion seems like a lot for a company that has such a low barrier to entry
for competitors.

~~~
erikpukinskis
Probably because they didn't want someone else to buy it?

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gojomo
And if they buy in the next 17 hours, 23 minutes, and 15 seconds, they can
have $6 billion worth of Groupon for only $3 billion.

~~~
chunkbot
What Groupon deal tips after only _one_ acquirer?

~~~
wmf
This one: <http://www.grouponforgroupon.com/>

~~~
tapp
heh - looks like an IC startup ( <http://incubatorincubator.com> )

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kennethh
Google bought youtube for 1.65$ billion and is now paying 3 times as much for
something which is basicly an email marketing list and who get all their
customers from aggressivly marketing on adwords? They have an good idea but
the price is pretty steep. On the other hand they have been good at buying up
local companies doing the same (they bought mycitydeal which operated in
scandinavia/germany)

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InclinedPlane
I can't help but remember Geocities, which sold for $3.5 billion way back
when. Sometimes you buy a company on the cusp of rapid exponential growth,
other times it's merely on the cusp of rapid obsolescence by a flurry of
superior competitors.

I have a hard time buying the idea that groupon is actually worth $5 billion.

~~~
erikpukinskis
The major difference is that Groupon has revenue estimated around $350m, and
is profitable ($50m/year).

As far as I can tell, GeoCities never turned a profit and only had something
like $30m in revenue their last year.

That said, buying a company for 100x its annual profit still seems pretty
steep.

~~~
InclinedPlane
In hindsight, sure. At the time of its acquisition by yahoo geocities was the
3rd most visited site on the web, and was publicly traded with a market cap
very near what yahoo paid. At the time it looked like a sure bet to snag
geocities, bring it under the Yahoo ad network umbrella and simply wait for
the inevitable windfall from ad revenue tied to continued exponential traffic
growth.

Unfortunately, Yahoo screwed up, they killed a lot of traffic by driving away
users through unpopular terms of service changes and other silly changes.
Meanwhile, the web was growing up and sprouting innumerable new free content
hosting sites that were far better than geocities (blog hosting sites like
blogspot being the prime example) while the cost of full service paid web-
hosting was falling through the floor. At the same time the dot-com bubble
burst and internet ad revenue dried up. Geocities found itself obsolete,
unliked, and decidedly unprofitable.

In comparison, groupon looks positively questionable. It needs to grow not
merely 100x but more like 1,000x in order to justify the huge investment that
google will put into it.

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siegler
Hard to believe the company is so young.

Founded only two years ago by Andrew Mason. Built on collective buying
technology that he built for a site, The Point, that he started only a year
before in 2007.

<http://www.groupon.com/about>

~~~
antidaily
And Jason Fried is on the board of directors??

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dstein
For the same price they should be buying Twitter.

~~~
oscardelben
I suspect at this time Groupon would be a better business model.

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asmosoinio
Is Groupon really that big?

~~~
varjag
Dunno how big is it, but the whole internet advertisement business lately
seems just about groupon promotions.

(yes I surf without adblock)

~~~
bl4k
ever googled for 'pizza delivery near me'? (where 'me' is suburb)

------
Tichy
I can't believe it :-( I am not sure if Groupon is not actually evil by nature
(manipulating consumers).

------
spektom
"We buy companies to get excellent people" @ Mark Zuckerberg

May be the same holds true for Google & Groupon?

~~~
kees
Maybe Google wants to buy a highly salesforce, capable of luring small
business owners in very risky deals. They definitely could increase the amount
of adwords customers as well.

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gojomo
Groupon: great name, great consumer awareness, an existing salesforce hitting
on all cycles, a growing database of what works and what doesn't -- but fairly
easy to copy the basic formula.

Also notable: some of Google's profits come from unsophisticated operators
often overbidding for Google ad placement, the "winner's curse" of auctions.
Some of Groupon's profits similarly come from unsophisticated small businesses
overpaying for a new kind of promotion, in order to be a featured daily deal.
Neither company wants this tendency for overpaying to go _too_ crazy, burning
out their customer base. But each likes the way these market dynamics drive
even savvy operators towards paying more than half of the 'gains from trade'
to the promotion-provider.

~~~
zzleeper
Doesn't Google uses Vickrey auctions
(<http://en.wikipedia.org/wiki/Vickrey_auction>) just to avoid this? I recall
an article by Hal Varian some time ago about this..

~~~
gojomo
The Vickrey/second-price auction helps a sealed bid auction behave more like
an iterative escalating bid auction, and helps encourage bidders to reveal
their true reserve value.

But, it does _not_ directly address the "winner's curse", which is that
whatever the auction mechanism, the winning bidder(s) are especially likely to
be those who have overestimated the value of the item at auction (even if
paying the next-highest-overestimator's bid).

~~~
zzleeper
That makes sense.. however winner's curse is more relevant when you have
common value auctions (eg: bidding for something with an unknown value that is
the same for everyone).

However, in advertisement everyone has a different value derived from the ads,
and also since you advertise every day, winner's curse is less likely (you
learn).

=)

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vchien
Wow...better work hard....

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mkramlich
I'm a bit amazed that something that seems lame and is useless to me
personally as a potential enduser is worth $5 billion to Google. Goes to show
how "scratching your own itch" is not the only way to build a profitable new
business.

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InfinityX0
One billion? You know what's cool? One trillion.

