Google Buying Groupon Is A Flawed Idea

Groupon Tour

Photo: Dan Frommer, Business Insider

On one hand I can understand Google’s aggressive interest in Groupon.  Groupon appears to be one of the few companies that has cracked the code on making money from local businesses.  Groupon’s revenues are rumoured to be around $50 million per month, which is impressive.   But there are at least two fundamental compatibility problems. 

First, Groupon is a feet on the street business employing over 3,000 people globally.   So at $600 million in annual revenues, that amounts to only $200,000 of annual revenue per employee.  Google on the other hand does about $30B in revenues with around 25,000 employees, which works out to $1.2 million in annual revenue per employee and that’s including all the employees that work in Google businesses that produce no revenues at all.  In other words, Google is a technology company and Groupon is a people company.  Business Insider made this point when the acquisition rumour first surfaced.

Second, Groupon’s business model does not seem super defensible.  People who want deals will generally go look for them.  And businesses that want to offer deals will do so on any channel that will let them.  This suggests that the price for connecting a deal searching consumer with a deal offering business should get driven down quickly and that ultimately this will be a performance based market.  Deal aggregation or search (e.g., Yipit) would seem to be a better model and one that fits more naturally with Google’s DNA.

So if I were on Groupon’s board, I would definitely vote for hitting this bid.  Conversely if I were on Google’s board, I would seriously question why management wants to do this.  This seems to be a deal driven by the wrong reasons, which makes me even more nervous about who is at the wheel at Google.  

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