

Groupon: Is Google Making a $6 Billion Mistake? - percept
http://blogs.hbr.org/cs/2010/12/groupon_is_google_making_a_6_b.html

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ziadbc
People are missing the point of this deal. Groupon is a scalable way to market
Google ads to local business.

Google already sees how much Groupon spends on Google ads.

From that they realized that they can take that expense out of the equation,
and Groupon becomes even more profitable.

The opportunity cost for Google of serving some junk ad vs a targeted Groupon
is low. There is some risk involved, but there is a huge potential for reward.

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gamble
Is Groupon actually scalable? Their business model depends on being able to
drive huge crowds to a merchant. That might work with one deal per day per
market, but it might not work if they start pushing more deals.

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spinlock
I don't think that driving huge crowds is actually their business model. The
huge crowds overwhelm the merchant and wind up making the promotion a bad deal
for the merchant. Groupon would do better to drive reasonably sized crowds,
consistently to merchants.

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gamble
It's the crowds that attract merchants to deal with Groupon. I think they
tweak the mental association between bodies through the door and success that
many small business owners have. Without the promise of traffic (and hope that
some of them will come back) Groupon is just a very expensive way to
distribute 50%-off coupons.

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JacobAldridge
If Google can find five other friends willing to pay $2 Billion each, everyone
wins.

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cvg
Something similar was said when Google bought Youtube. That said, the price
does seem steep.

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mikeryan
AFAIK any skepticism regarding the purchase of YouTube has been borne out.
They have owned it for 4 years and so far it has _never_ been profitable. So
far Google has lost billions on YouTube.

Unlike YouTube Groupon is actually profitable. (ergo apparently going for 4x
YouTube's price tag) The question with Groupon will be their ability to
maintain profits.

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erikpukinskis
Are you serious? I think the whole "profit doesn't matter, only users" mantra
is as stupid as anyone else, but you're way off here.

That mantra is asinine not because YouTube (and Twitter, and Facebook a couple
years ago) are actually worthless... it's asinine because they are crazy
exceptions.

YouTube gets about 2 billion views a day. Assuming each one of those views
lasts about a minute, that's 1.4 million people watching _at any given moment,
24 hours a day_. The major TV networks get in the neighborhood of 6 million
viewers _during prime time_... if they're winning.

So YouTube has roughly the same daily attention on it as NBC does. Why aren't
they profitable?

a) They've had skyrocketing costs as they deal with explosive growth

b) They've had to convince the world that this totally weird new thing is a
viable advertising platform.

That they've more or less solved those problems in 4 years and are close to
profitable is pretty amazing to me, both as a developer and an entrepreneur.
And the fact that their costs are going to go down (cost of bandwidth is cut
in half every 18 months) while their profits are rising (advertising is
advertising, and they're selling more and more), along with their enormous
audience, suggests to me that they are, in fact worth a lot of money.

Do you not think that you could easily sell YouTube today for 1.5b? To any of
a number of media companies? I think it'd be an easier sell today than it was
when Google bought them.

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mikeryan
I think that Google bought YouTube for 1.5b. I think they've probably dumped
at least another 500 Million into them putting the total price tag at about
$2B. Assuming for a minute that YouTube could reach profitability next year, I
think it would likely take at least another 5 years for Google to recoup its
initial investment.

Thats now a 10 year window before the YouTube investment does anything but
drag on Google's bottom line and more importantly $2B dollars that Google
can't spend on another, better acquisition.

Yeah I think YouTube was a mistake for Google, its the opportunity cost that
kills me. I think that money could have been better spent elsewhere.

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rbarooah
What opportunities did Google miss? They have plenty of cash, so I don't think
buying YouTube prevented them from buying anything else they wanted.

~~~
mikeryan
The opportunities may not be traditional acquisitions. They could have spent
that money buying fiber backbones, 4G Spectrum, clean or solar energy plants.

I would have much rather seen google branch out more into infrastructure then
into another consumer facing web play, especially one with such a long window
on ROI. Its not necessarily about having the money or not so much as how could
that money have been better spent.

A nice counter example, in 2007 MS bought 1.5% of Facebook for 250M at a
valuation of 15B. Currently Facebook shares are selling at a valuation between
100B and 200B - split that down the middle and that MS investment is now worth
$2.5B, which makes their small investment in FB look a heck of a lot better
then Google's Acquisition of YouTube.

EDITS - I keep adding to this point, I apologize. Most of this comes off of
realizing that Google didn't even pay cash for YouTube, it was a stock
acquisition.

NOTE: I should also say as an armchair analyst I thought Google's purchase of
YouTube at the time was pretty good and MS's investment at the time in
Facebook was pretty bad. I've now reversed my positions on both, so take that
for what its worth.

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strlen
Greg Linden has another take on this, agreeing: "Groupon is not Googly"
[http://glinden.blogspot.com/2010/12/groupon-is-not-
googly.ht...](http://glinden.blogspot.com/2010/12/groupon-is-not-googly.html)

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puredemo
I would say strongly, yes, they are making a $6B mistake. I'd say it is
tantamount to Yahoo acquiring Geocities in 1999.

Groupon will never become a juggernaut site the size of Facebook or
Craigslist. It's niche and a novelty, not any kind paradigm shift in online
marketing that so many in SV seem to think it is.

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patio11
Craiglist is perhaps not the first example I would go to if I needed to
discount Groupon's hundreds of millions of revenue.

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rbarooah
Craigslist's revenue is estimated at >$100m, and is mostly that low out of
choice. Also, Google buys reach and influence as much as revenues with their
investments (e.g. Android, YouTube)

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dorkitude
I would add that the price point of the Groupon is also important.

$20 for $40 worth of good-ass Mediterranean food is a great deal, but every
time I've used one of my three groupons, my date and I have managed to spend
something like $60 on the night. So what sounds like a huge margin hit is
often smaller.

Despite my math background, my behavior is driven by the idea that "I've only
used 90% of the groupon amount. Let's have dessert!" So I never spend _less_
than the groupon's value, and instead always spend more.

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notahacker
the article seems to be attacking it from the wrong angle.

It doesn't matter to Google whether Groupon is the best way for businesses to
target consumers provided enough business owners see enough results to
validate the model and keep trying it. Display advertising has been around for
centuries despite it's far-from-universal effectiveness

On the other hand it's a $6 billion mistake if Groupon's main assets (sales
team and culture) become the first casualties of acquisition and leave them
with the world's most expensive domain name and mailing list, however good the
model might be.

I'm guessing somewhere in between - it's not too difficult to conceive GOOG
achieving >$6 billion worth of growth in discount-based local ads revenue over
the next few years and claiming the acquisition paid for itself in record
time, but it'll leave unanswered the question of whether they could have done
it perfectly well without buying a 2 year old brand built on Adwords.

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thunk
No, they're not. Google isn't just buying Groupon; they're buying dominance in
assurance contracts -- a Very Big Idea Indeed.

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gojomo
Except: the assurance-contract aspect of Groupon is now just an eccentricity.
Every deal is designed to hit its target; maybe the businesses get some small
peace of mind knowing that they're sure to get X bodies through the door or
pay nothing, but the value is all elsewhere, from promotional acumen.

And, the other idealistic parts of Groupon's groups-reaching-threshold-for-
collective-action vision mean very little for their overall success, compared
to more conventional ideas like great copywriting, being the first mover,
having a large incentive-compensated sales staff, having a great name/brand,
and so forth.

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RyanMcGreal
Groupon:Businesses::Walmart:Suppliers

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gdltec
Yes.

