Will Groupon Be Google's Most Expensive Mistake?
Rumors -- and reporting from both All Things Digital and the New York Times -- have Google (GOOG) buying social media coupon site Groupon for upwards of $5 billion to $6 billion. Pundits are going back and forth on whether the deal makes sense, mostly splitting ways over the price tag, even as Groupon's board of directors is supposed to discuss the deal today.
Put me in the not-a-good-idea camp, but not over price. There's a more fundamental issue: a clash of cultures and business models. Groupon operates in a way so foreign to Google that the two will have a difficult time working in sync.
In theory, there's a great strategic fit between the two companies. Google has a strong focus on using locale to deliver better fits on search results, and those drive the critical revenue machine.
Groupon delivers deals from its business clients to 30 million consumers in 500 markets spread across 30 countries. That's a lot of regular customers. The company reportedly hits $50 million a month in sales. Granted that the $600 million annual revenue is on the order of what Google lost from leaving China -- an amount that the search giant considered not significant. But it would be a boost in differentiating Google's revenue away from its customary types of ads.
Even though some say that Google is about to overpay, various analysts think the deal makes sense. Douglas Anmuth of Barclays Capital says that worry about the price is overblown. He thinks that Groupon's revenue could hit $1.5 billion next year, so Google would be paying 3.7 times revenue -- not totally outrageous, and it lets Google freeze out competitors like Yahoo.
However, now comes the problem: the sales model. Groupon has people who actually have to sell the company's services to local businesses. And then the company works with the businesses to develop the offers. Finally, it creates the sales copy to get consumers to actually use the offers. This is a completely hands-on process.
Google is the polar opposite. It does best in sales when it doesn't have to do anything. Much of the advertising is sold through automated processes. In fact, that laissez-faire attitude permeates the company. Its approach to product management is to fling things out and wait to see how people react, rather than actively supporting and selling the concepts. Google's attempt to really sell a product -- the Nexus One smartphone -- was an utter disaster.
Google management will have no idea how to manage the type of sales effort needed to talk local businesses into running promotions, which is more like selling magazine ads or, even more accurately, coupons in a Sunday supplement or direct mail package. That type of selling can be tough, and you can't leave clients to sell themselves.
The two companies are incompatible in how they undertake business, and that's what is likely to kill an acquisition's success. Active selling is an emotional undertaking, and Google has practically no emotional intelligence. The company won't get how Groupon works on a visceral level and will be incapable of proving the support and active management that will be necessary for the venture to continue to grow.
What does Google expect? That Groupon's management team will stay forever? Recent departures from Google suggest the opposite. If an acquisition happens, Google will find that Groupon was an expensive mistake -- not that anyone would ultimately admit it.
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