If Google Buys Groupon, It's Doing So to Fend Off Facebook

Last Updated Nov 30, 2010 1:39 PM EST

Google (GOOG)'s reported acquisition of Groupon for $2.5 billion gives the search giant a weapon with which to bash Facebook's nascent "Deals" function for advertisers. Google and Facebook are increasingly circling each other like giants for control of the web. (Groupon would also give Google a foothold inside eBay.)
Here are the economics of the alleged deal: Groupon's revenues are said to be $50 million a month plus. The company also took in $170.8 million in venture funding. So Google has acquired Groupon for a sum that's roughly four times revenues. Seems reasonable until you look at Groupon's two major problems:
  1. Groupon lacks the ability to innovate because it is dependent not on proprietary technology but a sales force of thousands of people brokering deals on the phone with local businesses.
  2. Google's entire business revolves around automating the kind of jobs human salespersons used to do.
In tech marketing, proprietary technology is a must because once you have gathered a base of users you can continually "upgrade" your platform and abandon the older models, forcing your loyal customers -- who are only "loyal" in the sense that all their personal stuff is locked in to your service -- to repeatedly buy the new product over and over again. (Hello iPod Mini users!)

One assumes Google has a plan to fix this flaw with Groupon, and to then link its services into its Android/Admob ad serving technology. That prospect would put Google and Groupon streets ahead of Facebook's Deals function, which is kinda like Groupon only on Facebook, and is not yet widely used. There is no reason that Groupon and Deals can't both exist, of course, except that Google's vast size will allow it to chisel down Facebook's profit margins (and those of competing firms such as LivingSocial).

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