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.
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.
Ya, scale can be a powerful competitive advantage.
"The social proof phenomenon which comes right out of psychology gives huge advantages to scale—for example, with very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it's available almost everywhere in the world.
Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup—which is slowly won by a big enterprise—gets to be a huge advantage.... And if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you."
On a somewhat related note, if there's anybody out there that wants to build a Groupon clone, or sell excess inventory of some product, or provide daily deals for anything, and you don't want to build the tech, check out http://cajoots.com (a project of mine).
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.
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.
Does Google have the technical skills? Of course- after all, Groupon started out as a mere blog.
That being said, imagine a Google-made version of Groupon. It would be horrible. Google may not get it when it comes to making products similar to this- but at least it seems to know it doesn't. Google isn't in it for the technology. They'd be buying it for the community and the atmosphere- something they can't reproduce.
After all, nobody will care about "Google Coupons", the minimalistic Groupon knockoff with that big blue "Buy now!" Google Checkout button.
What you say eerily reminds me of the argument Ballmer made to not buy Google in 2003 (the amount being spoken of was 10 billion - not too far there either).
My hypothesis is this: mind-share and network-effects are hard/impossible to value.
There's also the factor of brand recognition - "Groupon" is becoming the "Kleenex" of daily deals. Having worked for another deal site which had an entirely different model, every time I explained it to people, I had to make clear the differences between it and Groupon. Any new player, besides the technical and sales aspects, would be saddled wtih the burden of differentiation.
This is not about the technical aspect at all or about being an early mover. Great companies solve the technical problem and the distribution problem. Groupon's value is in its distribution and its ability to scale that to the moon. Don't think just any company could replicate that.
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.
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.
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.
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.
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.
Isn't the difference just that Apple excels at marketing while Google sucks at it and know it ?
Google would be acquiring a great marketing team by buying GroupOn.
We'll see what Apple is going to spend its cash on, but it could be something that Google already has or could replicate easily but Apple can't generate on its own.
Compare the number of Android handsets selling versus iPhones. Compare the number of users of Ping and Last.FM. I'm not saying they're not good at what they do, or that they're not profitable at all.
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.
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.
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?
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.
Go back and look at recent deals, 150x$15 is quite small. In my city there was one for 1189x$110 this month. That's $130,000 in one day in just one of 250+ markets.
Google bought youtube for 1.65$ 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)
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.
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.
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.
it's a little easier to grow when you have an existing company to piggy back on, since you get a large customer base right away. That's pretty much the #1 reason they became #1 in the space...otherwise they would have been matched by competitors at this point, and Google would be buying living social for a few hundred mil
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.
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.
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).
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).
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.
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.