What Google Knows About Groupon

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As speculation mounts about an imminent buyout of daily-deals company Groupon by Google (Nasdaq: GOOG  ) for a rumored price tag of $6 billion, one salient fact is being ignored: The two companies are already in bed with each other.

And this must weigh on the minds of Groupon's board members, who are reportedly meeting today to decide whether to take Google's offer.

How did Groupon get so big? The prevailing theory is that the social features of its deep-discount offers for local merchants -- a certain size group had to sign up in order for the deal to be "on" -- turbocharged its growth. I've long been a skeptic of this argument, which is pleasing to social-media mavens but has untested logic.

You can't go anywhere online these days without spotting a Groupon ad. The company is clearly spending a lot of money with Google. And as Sency founder Evan Britton recently pointed out, Groupon's ads are distinctly effective on Google's AdSense platform, because they are targeted to a specific city, feature a compelling offer to cost-conscious Internet users, and have easily tracked return on investment, allowing Groupon to constantly tweak its ads for the best results.

The result: Runaway growth, with the two-year-old company estimated to have $500 million in revenues.

The problem is that growth is dependent on Google, which is famously opaque about the workings of its ad systems. As much as Groupon may know about what works when placing ads with Google, Google always knows more. And Google could change the rules at any time.

That information advantage may be what lets Google confidently bid $6 billion for Groupon. Google knows exactly what it's getting and how profitable the company is. Right now, Groupon is arbitraging Google's AdSense system, aggregating demand from customers and supply from local merchants, and raking in the difference. Google's just getting its usual cut. Wouldn't it be nice to own the whole shebang?

One thing to keep in mind, though, is that Groupon's success has been the human touch -- hand-selecting deals, cajoling merchants to offer discounts, and crafting witty, catchy offers. Recent moves to offer self-service deals and expand into Asia won't change that appealingly soulful core of Groupon's business. Perhaps Google's geeky hackerocracy should simply aspire to own Groupon, not run it.

Google is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On March 02, 2011, at 5:38 AM, jeff432 wrote:

    Have you guys heard of the new Groupon like site?

    It's the same thing as Groupon except when someone signs up through your referral link, if they or anyone they sign up ever buys a coupon from this site (which you get in a daily e-mail), you earn 5% commission of the coupon purchase price! You earn 5% commission up to 5 levels deep!

    Also, if you sign up a business and they ever offer a coupon, you get 2% of all of their coupon sales!

    About 1000 members are joining everyday now.

    It is 100% free to join.

    There are no coupons yet since the company is in pre-launch.

    It is launching around March 2011 though!

    Check it out:

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