Why is Google eyeing Groupon for $6b?

We're all quite taken by Groupon here at Smarta. But we were still surprised at rumours Google is looking to acquire Groupon for a cool $5 - $6bn.

There's no denying Groupon is doing well. Since launching in 2008, it has raised $171m in investment and now numbers 1,000 employees, serving more than 150 cities across the world. Not that big investment and lots of employees are necessarily the benchmark of success (quite the opposite, we actually often find), but that is pretty staggering growth for two years.

The reason we're surprised at the valuation is that Groupon isn't exactly unique in the group buying sector. There are plenty of other discount sites following the same model. LivingSocial is the big rival (and has just gained $175m investment from Amazon), with KeyNoir coming in slightly further down the ranks (a touch more exclusive), and smaller, newer sites like Crowdity rushing in to fight for the remaining crumbs of market share.

The benefits of the acquisition to Groupon are clear - Mashable.com's Lauren Indvik sums them up neatly thus:

According to sources familiar with their respective marketing budgets, Groupon and LivingSocial each spend more than $1 million per month on advertising through Google  alone - a huge share of their overall advertising spend. If Google acquires Groupon, the latter will have search inventory set aside for it in the same way YouTube  does, effectively cutting a substantial share of Groupon's advertising costs and, in theory, making it a more profitable business by lowering its operating costs. Groupon will also likely have more prominent placement on Google's local search product pages, such as those under the Google Places banner.

Another benefit for Groupon is the authority that the Google brand will lend to the (comparatively small and not well-known) startup, especially given the recent stain Groupon has acquired within the small business community.

But why does Google want Groupon? In an interview with the Daily Telegraph, UK managing director Chris Muhr said: "I think the main reason is that we have something that Google does not have and no one else has and that we have really tapped a new market... Think about Google Adwords ... if they had local business for example. Type in a keyword in Google, say 'bar'. You find a bar in your area. Google then puts up this kind of bubble box that says this is the business and here is the address.

"But that is it. It does not have direct contact with the business. The business does not come back and say I want to attract customers via that search. Most of the time the customer does not convert from there into an actual customer." Groupon, of course, enables and encourages that conversion.

But, in our minds, Groupon's model isn't exactly safeguarded by IP. Anyone can copy it - and they have, as the sites listed above demonstrate. With Amazon investing so heavily in LivingSocial, it's not even like Groupon have an undisputed dominance of the market that no other business will be able to touch. LivingSocial is gaining ground, and will do so even more with Amazon and all that Amazon cash on board.

It wouldn't be that difficult for Google to build up a similar service, leapfrog the hurdles of search and PPC most new websites like this would face to try to make a name for themselves (seeing as Google is, well, Google), and create its own rival Groupon site - fully souped up with Google's maps, location-based search and email functionality.

We are a little befuddled. It all seems dramatically inflated to us, this Groupon valuation. Maybe we are being cynical, maybe naive, maybe we've missed the point. Then again, maybe Google management is just getting a little lazy. It's easier to splash a few billion on an existing company, with all the hard work done and everything ready-made, than it is to send off a few of your employees to build something similar from scratch. Such is the nature of big business acquisitions, one might suppose.

But we can't help but worry that such big figures being so casually hurled about, when there is no unique or patented tech in the bundle, might just be a woeful portent of another dotcom bubble.

(All that said - huge congrats to Groupon, because managing all that within two years of starting up is pretty darn incredible!)

What do you think of the Google/Groupon deal? Let us know below

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