Why Google’s price for Groupon makes sense, but only for Google.

The rumored acquisition of Groupon by Google for 5.3 billion dollars is jaw-dropping. I am on record saying that if I were Andrew Mason I would sell Groupon for anything over 1 billion. 5.3 > 1 Billion, so it looks like I would have left a lot of loot on the table.

There are some new Comscore numbers saying that Groupon gets 80% of the social shopping action while living social gets less then 10%. These numbers are wrong by the way, because they oversimplify markets. Let’s say Groupon sells 800,000 coupons a day in Des Moines and none any where else. Living Social sells 100 coupons in 99 markets. The Comscore numbers would hold up, but which business is more valuable – the one that can grow through market expansion or the one that can grow by adding buyers in existing markets? Well, seeing as how establishing a presence somewhere is harder then simply getting more people to sign up in a market, Living Social would have the quickest path to growth using the example above. As a note, I have it on good authority that Living Social is larger then Groupon in some markets (like Washington D.C.). I digress…

Google buying Groupon for 5 billion makes sense. For Google, it would be a bargin at twice the price. Why? Because Google is an advertising company that happens to sit on the largest dataset of consumer and product information in the history of the known universe. Groupon provides them (1) a direct sales vehicle and (2) increasing depth of their data set. It’s a PERFECT match. In a few years (or sooner) it’s possible that everyone subscribing to Groupon’s daily deal will receive a different discount offer, an offer that more aligns with their interests and spending habits then the current model. I have purchased 1 Groupon in a year and I haven’t yet used it. There hasn’t been anything else offered that compels me to pull the trigger on a buy. But much of that is due to the offers simply not being relevant enough to my life and interests. What do I need with a spa treatment or a photography class voucher?

Interestingly, I think the whole “Daily deal” phenom as it currently exists is a sham. Groupon CEO Andrew Mason talks about how Groupon gets people doing things they would never do otherwise like taking a helicopter ride or trying Indian food. That is, of course, not true. I’d be very interested in seeing Groupon redemption rates and – more importantly – the number of vendors that (1) earn repeat business from Groupon users and (2) choose to advertise on Groupon, Living Social, KGB for a second time. I would imagine the repeat business from both Groupon redeemers and vendors is staggeringly low. And I think on a long enough time line, where there is currently over-demand from vendors that demand will drop off considerably once all the interested vendors cycle through the circuit once.

That’s not to say the model can’t be saved. There are two things necessary for “group buying” to truly be the “future” or consumption: greater buy-thru rates and higher redemption rates. And of all the companies positioned to mine a data set and make that happen, Google is BY FAR the most qualified.

I think Groupon might have been worth a billion to Amazon. It might have been worth a Billion to Yahoo. Maybe the same for AOL or Facebook. But for Google, the price could be infinite – and it would still be worth every penny.

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