Google (Nasdaq: GOOG), the world's largest Web company, is trying to buy Groupon, the fastest-growing one.

Groupon was only launched in November 2008, yet it's thought that Google is offering more than $5 billion. Groupon broke through the $1 billion valuation barrier in less than 18 months when it raised $135 million dollars in funding in April, valuing it at $1.35 billion.

Not bad for what's basically just a mash-up of Pricedrop TV and Woot's Deal of the Day.

Discounting in droves
Of course, Groupon is a lot cleverer and more compelling than my slightly envious elevator pitch suggests.

Every day, it emails 35 million members a special deal on some product -- usually something female-friendly like a pedicure or a cult brand of make-up, but occasionally something unexpected, like an offbeat service from a new company.

Today's Groupon deal in London is for indoor skydiving, for example; at 59 pounds, it's at a 65% discount to the usual list price.

Members have just 24 hours to make a purchase, which adds a bit of excitement, with the crucial twist that the deal only stands if a minimum number of members commit to it. This gives buyers an incentive to spread the word about a deal they like through social networks such as Facebook and Twitter, extending Groupon's reach far beyond its website and email.

Groupon makes money by taking a cut from the revenue taken by the retailers whose products it promotes. The goods and services are targeted to local populations in the 200-odd cities around the world where it operates.

As for those retailers, the attraction isn't so much about making money directly, but rather the free advertising -- not only to Groupon's members, but also to the far wider audience reached through their promotion of the deals.

New retailers use Groupon to introduce themselves to a local market, while big chains like Gap can exploit the service to put new store openings on the map.

Google's grab strategy
Some pundits struggle to see why Google wants to own Groupon. They concede it's a money-making venture -- its annual turnover is estimated to be more than $1 billion a year -- and it's also the biggest site in the space. But they point out it's far from unique.

The Groupon model is very easily copied, and several hundred rivals have sprung up. Only this week Groupon acquired three in Southeast Asia. One, a Taiwanese outfit called Atlaspost, boasts over 1 million members.

However, at least sometimes, the so-called first-mover advantage that Groupon enjoys can be critical to Web ventures, as Google conceded when it bought YouTube after failing to unseat it with Google Video.

Moreover, as the Internet's dominant advertising handler, Google will want a toehold in this newly emerging medium, which, as I mentioned, is more about marketing than selling surplus goods cheap to click-happy office workers. Three years ago, it spent $3.1 billion on DoubleClick, a display advertising network that is the antithesis of Google's search-based Adsense platform, for similar reasons.

I believe, though, that the missing piece of the jigsaw is Groupon's value as a stealthy intelligence tool.

Groupon members pass information freely through the very social networks that Google would dearly love to know more about -- the "walled garden" of Facebook being the biggest prize. Assuming Groupon's expansion continues, it could become a sort of shadow social network within the existing ones, giving Google stacks of new data to mine and profit from.

Good company
Then again, Groupon might run out of steam -- analysts note that its traffic peaked this summer.

Maybe Google believes it can give Groupon fresh legs, but there will be limits to how much it can nudge more traffic along. Putting Groupon offers at the top of every Google Search result simply isn't going to happen.

In fact, an obstacle to any deal will be a potential antitrust investigation in the U.S. The more that $140-billion Google extends its tentacles, the more it will face regulatory probes like Microsoft, Intel, and Apple before it.

But Google's rivals aren't banking on the deal being blocked.

  • Amazon (Nasdaq: AMZN) has reportedly explored a strategic deal with LivingSocial, the No. 2 to Groupon. And in June it picked up Woot, the original "deal of the day" website, for a rumored $110 million.
  • Facebook isn't sitting still, either, recently adding Deals to its Places service, enabling U.S. members to check out special offers at nearby retailers via their mobile phones.
  • Twitter is also exploring a group-buying business model. With close to 200 million registered users, it might just be the sleeping giant in the space.

It's a busy, busy business. Perhaps $5 billion is the least Google should offer to get in on it.

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This article has been adapted from our sister site across the pond,  Fool U.K.