Google's Next Mistake

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My sister tipped me off early this morning.

Her birthday is coming up, and today's Groupon deal is a $50 voucher to Nordstrom's (NYSE: JWN  ) Rack chain for just $25. She wants. I know.

It's a great deal, especially as we head into the holiday shopping season. Unfortunately, the same can't be said if Google (Nasdaq: GOOG  ) is serious about paying more than $3 billion for Groupon, as All Things D's Kara Swisher is hearing this morning.

I'm sorry, Google. I have to be fair. I blasted Yahoo! (Nasdaq: YHOO  ) for reportedly considering ponying up $3 billion to $4 billion for Groupon earlier this month. I have to be consistent.

The reason why an upstart like Groupon has exploded to the point where it's worth billions is the same reason why this niche is about to get very crowded.

Groupon offers city-specific deals -- with the occasional national blowout like this morning's Nordstrom Rack offer -- and makes a killing. A retailer, restaurant, spa operator, or leisure provider agrees to offer a marked down deal, splitting the voucher price evenly with Groupon.

In other words, Groupon is likely to be making $12.50 off every $50 Nordstrom Rack voucher it sells for $25 today. Consumers love it, especially if it's an advertiser that they are interested in checking out. The sponsor wins business and mindshare, despite the steep discount. Groupon makes a mint.

Unfortunately, the moat is as weak as you probably think. Any company with a thick enough Rolodex of local connections can pull this off. Google doesn't need to buy Groupon to launch a Groupon-esque service. Heck, even AOL (NYSE: AOL  ) is diving in by repositioning its domain into a daily deals site.

Anyone can do it. Big G swallowing down Groupon doesn't mean that rivals can't turn around and snap up similar sites including Living Social and BuyWithMe if they don't want to roll their own.

OpenTable (Nasdaq: OPEN  ) , Yelp, and Travelzoo (Nasdaq: TZOO  ) have all nabbed bullish buzz since announcing Groupon-esque initiatives this summer. They didn't have to buy a new site to do it.

If Google does go through with the rumored purchase, it will have to make sure that it doesn't confuse the advertisers of its market-leading AdWords contextual marketing program. If Google begins actively promoting Groupon, it may scare away keyword bidders who feel that they're competing against hungry rivals willing to take $0.25 on the dollar for new leads.

The only way this makes sense -- at such a lofty price -- is if Google fears that Groupon-esque sites are on the verge of disrupting its bread-and-butter paid search business. If that's the case, Google investors may as well sell the moment that Big G buys.

Should Google buy Groupon? Share your thoughts in the comment box below.

Google is a Motley Fool Inside Value recommendation. Google and OpenTable are Motley Fool Rule Breakers selections. 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.

Longtime Fool contributor Rick Munarriz wonders if he would be willing to sell himself for a quarter on the dollar. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2010, at 9:28 PM, prginww wrote:

    Groupon is supposedly generating $50M a month right now, and growing fast. As a Google shareholder, I'd be excited if Google purchased the company for $3B. If they can just grow the business even modestly, they'll be set to earn the entire purchase back within 5 - 7 years. Not bad at all. If they can grow the business significantly, it could be more like 3 - 4 years.

    Groupon for $3B would make me much happier than Twitter for the same price.

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