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Friday, January 21, 2011

Groupon, Google, and The Future

In early December, I was surprised that on-line and media giant Google had made a $6 billion bid for Groupon. The daily deal site, Groupon, struck a lot of us as an excellent coupon site but not something that was or could be transformational such as Google itself, Netflix, You Tube, or Facebook.

A few days after the big bid, Groupon turned it down. The chatter was widely scattered—1) they should have taken the money and run, 2) they will soon be making $1 billion per year so why sell out for six times earnings?, 3)Google was crazy to offer way too much for it, to 4) this is nothing but an on-line version of Valpak and is not worth much.

In recent days, Goldman Sachs has announced that they would like to handle an Initial Public Offering (IPO) for Groupon.

Facts are fragmentary as Groupon is private but let us look at this as dispassionately as possible.

The companies like Google and Facebook really changed things in our lives. They are revolutionary. Their technologies are unique and not easy to replicate although many will try. Also, they grew almost on their own after the initial set up. Interestingly, it is the users who now do the heavy lifting for Google and Facebook. For example, a few thousand of you will read this blog this week. Google gave us the framework and you and I do the rest.

Don’t get me wrong. Groupon is every inch a real company. Their localized daily deals are tapping into the more than $130 billion per year in LOCAL advertising which has been a bit of an Achilles heel for Google to crack among others. Groupon, however, is very labor intensive. Today, Facebook has a half billion users and just under two thousand employees at last count. Now that is incredible scale! Groupon, with over 40 million subscribers has some three thousand employees. And, if they want to keep growing, they will have to add many more. To me, what separates them from other coupon options is that they have professional copywriters putting together their offers. They will need far more if they want to maintain high quality and add many more markets with DAILY offers. So, as they grow, they will have to add a lot more people, get bureaucratic and margins could stay flat.

Competitive threats abound. Living Social is an on-line alternative to Groupon that is getting some traction and more are starting or waiting in the wings. Because Groupon is not unique, they have no “moat around the franchise” as Warren Buffett likes to describe his favorite businesses.

To me, Groupon is also different. Thousands of on-line businesses were started a dozen years ago, and most failed quickly and miserably. Others like Google, EBay, Facebook have been huge successes. Groupon is somewhere in the middle. They use the new technology to deliver a homely and old service but they do it very, very well. They can be solidly profitable for sure but they do not strike me as being the next Google, Amazon, or Facebook.

One thing nags at me. Is this a mini-bubble all over again? In late 1999 and early 2000, dozens of internet companies had IPO’s and were pursued recklessly by many retail investors. The high water mark came in the 2000 Super Bowl where several new companies without any sales (!) advertised on the top rated broadcast at over $2 million for 30 seconds. Many were out of business within the year. With Goldman Sachs helping Facebook with a private placement and now Groupon possibly doing their own IPO, things may be getting a bit frothy again. Maybe we have a social media bubble developing.

Groupon is a solid operation but will face serious competition in the future. They are not the silver bullet that Google wants or needs to put a new spike in their growth beyond search. And, they will not be a transformational company that changes our lives in a big way.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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