First Yelp, now Groupon: Why hot startups -- especially those holding the key to "local" -- keep slipping through the search giant's fingers.
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While the official confirmations have yet to land (and my colleague Dan Primack is following up on Groupon CEO Andrew Mason's hopefully tongue-in-cheek offer to discuss the finer points of his affection for miniature dollhouses), it's looking like talks between Google and Groupon have fallen apart. The situation is eerily reminiscent of Google's (NASDAQ:GOOG) talks with Yelp, just about a year ago. Google, thought to be after Yelp's ground army of local sales teams, now stretching across much of the U.S. and Canada and some European countries, either got cold feet, or got a cold shoulder from CEO Jeremy Stoppelman, and returned him the favor.
Maybe it's something about the holiday season that leaves Eric Schmidt wishing the company had a killer local business offering up its sleeve, but whatever the case, that marks two failed acquisitions of social or local-oriented startups. (His successful 2005 acquisition of Dennis Crowley's Foursquare precursor, Dodgeball, came at a different time in tech, and anyway, Google ended up shutting it down and alienating Crowley.)
It's worth noting that Yelp was, according to reports, in talks to be bought for three quarters of a billion dollars. The bidding for Groupon, a site by all accounts offering far less sophisticated technology, was said to have reached $6 billion, including various retention incentives for Mason and other top executives. Social and local are not getting any less valuable.
Groupon is almost certainly set to clear far more cash in a year than Yelp seems to be, thanks to the fact that Groupon hit upon a real revenue stream and incentive for both users and businesses to pay for its services, it is now being said to have a projected $2 billion revenue run rate for 2011. But Yelp's database and user community would seem to have even greater implicit value to Google, even if that value is currently locked up by the site's emphasis on reviews rather than transactions. (That's fixable, by the way: Isn't Yelp the perfect place for group coupons?)
While the courting continues -- or doesn't -- it's hard not to wonder how Google got itself into this position. Here's the dominant company of the Internet age, the ultimate traffic generator that should cause any of the companies it is talking to to see massive growth and to make the founders wildly rich. But, it seems, the issue now is not what Google's willing to spend, it's about what kind of company it has become -- and whether this founders believe this is the caretaker that will help their babies grow.
While Google Ads revolutionized the way companies of all sizes connect to customers, when you think about the really big companies that rely on Google for traffic, where is the profit? YouTube, which Google acquired in 2006, will finally be profitable on $700 million in revenue this year. (Maybe.) Media organizations, most prominently the New York Times, that rely on Google's search results for their traffic are in the same boat as YouTube: They have experienced huge search-based traffic growth, but poor profitability, especially, as Felix Salmon notes in his dissection of Gawker's new business model, with CPM rates looking like a "race to the bottom."
Now think about the companies that have emerged on the back of Facebook's social discovery platform: Zynga and Groupon, to name the two biggest, are wildly profitable. While those companies were set up to monetize traffic in a way that YouTube and the New York Times (NYSE:NYT) clearly were not, they benefitted from the power of Facebook's social graph and, as Fortune's Kevin Kelleher recently wrote, its evolution of search advertising into targeted and highly effective social advertising. [See: "How Facebook fixed the social advertising problem."]
So why would Groupon choose to align with Google's search-oriented ethos instead of the social one that helped it become a power?
A war is brewing between the open and closed webs, and the poles around which companies are aligning seem to be Google on one side, and Facebook on the other. What few analysts predicted, especially during Facebook's near-disastrous privacy spats over the last year, is how comfortable the web-surfing public would be in the closed web, as long as that web provides everything the average person needs or wants from it. Increasingly, Facebook and its partners are doing just that.
And besides Facebook's guarded principles of data access which Google is happy to complain about, the trick Facebook has pulled is that it doesn't feel like a walled-off world on the web. It just feels like the web: a place where users go to see what their friends are up to, take note of any games they're playing, Groupons they're buying, restaurants they're reviewing on Yelp or checking into on Foursquare. Users are dipping their toes in and out of the stream, and they understand and are tolerant of the fact that the stream is generated only because they've shared so much data with Facebook to begin with. It feels like a huge added value.
Google is increasingly feeling like less of a value add. In its quest to be open, it's stopped feeling like a smart filter that brings the most relevant parts of the web to users of its search, and more like the actual wild, woolly, untameable raw web itself. Most twentysomethings and all teenagers today don't remember the days of trying to bend HotBot, Yahoo (NASDAQ:YHOO) or AltaVista to your whims, and what a massive improvement Google was on that. Instead, Google is their AltaVista, their baseline Internet from which things can (and must) only get better.
It's nothing more than the relentless pace of technology that's made that the case; Google hasn't done much wrong in its decade long run at the top of the tech heap. And their business isn't going away; it has added far too much value to the ecosystem of the Internet for that to happen. But until it proves to the current generation of Andrew Masons that it understand social and the closed web -- not just as a nice bag on the side of their search engine, but as core to the future of the Internet -- it's going to have a hard time getting superstar startups to take their money, at any price.
Though only 30, Mason can surely still remember the bad old days of useless search engines and therefore witnessed how quickly dominant players can be left behind. Why -- given his company's profitability and his personal wealth -- would he subject Groupon to the company that killed Dodgeball, bungled Yelp, and screwed up almost all of its own social efforts, from Buzz to Wave?
Schmidt has been hinting to the press that he knows Google is facing its first serious re-orienting as a company, and like all transformations, it's probably very painful for insiders to consider. Core search will have to be marginalized to make social and local the heart of the operation. (Its mobile and OS efforts essentially amount to parallel operations in the company; neither one is likely to become Google's new core, but more to layer on what that core is.) The entire tech world, from Mark Zuckerberg to Andrew Mason, seems to be watching and waiting to see if Google can figure it out.
Google is the world's search engine...just a better version of Yahoo...Facebook will be a social relic in 5 yrs..Groupon really is a better value to busineeses and customers and truly has a model that can gain and sustain revenue.. Groupon should eventually merge with a new social net ..Soon to be announced..
Google is right to be wary, but social and local become more important than search? No chance. Out of the answers I need each day, almost zero could come from friends or those around me. Not technical queries, not product information, not new trends, not finance data, not books or news or so much else. It's a bit of extra info linked to friends and some shops. So what?
I am not surprised that Groupon has turned down Google's offer. Google has become like the Borg, assimilating things and slapping their Google brand on it.
For many of these entrepreneurs, it's not about the size of the money - they're gonna be set no matter what happens. By remaining independent, they get to call their own shots and be who they want to be.
If they took a buyout, they'd become part of an elitist and arrogant company whose "Do No Evil" mantra is flouted on a regular basis. Or, perhaps Google walked away from Groupon when they found out that the founder got a B in second grade handwriting.
Let me know when Groupon is a verb. i.e. Can you Groupon it. When that day arrives, then and only then will a small fraction of what Google is be at risk. With Android, their search and advertizing will soon be in everyones pocket as well. Google applies to litterally anything. Groupon applies to the a specific form of the sale of something.
To say that because Mason has (according to press rumors) turned down Google's $ 6 billion offer is indicative of Google not being able to acquire social and local media assets is misleading at best. Google has acquired 40 companies this year, many in social. Why not bring that information into your comments to show Google is building a formidable presence in this area, perhaps slower than they might like?
Excellent point on Google being the baseline. In terms of blunders Facebook has more latitude, because people have invested so much they'll scream, but wait for Facebook to fix, rather than just pulling the plug on their accounts.
Groupon is definitely very neat and I do participate in it from time to time.
I personally do not quite get why Groupon refuses to be part of Google given the amount of money offered. That seems pretty extreme, but then again, maybe Groupon as such positive cash flow that they feel they are able to do better.
Seriously, if you were the founder of Groupon, wouldn't you sell it to Google for $6B?
It seems like a broker record, one reporter, story, market maven, etc..proclaiming that Facebook is going to destroy Google with their new search platform (social based search format with Bing), with their new intra social platform email, with more time spent on their direct, indirect or dedicated web pages......blah blah blah. Seriously, where do all these Step-ford Wife clone bloggers, reporters, analysts come from? Did Zucker ...save all their lives in Vietnam or something? Facebook's founder doesnt live in the real world, he never has. He's assembled an over-priced and over-rated management team (that also dont live in the real world). While Zucker has put a new and solid spin on social based web themes and strategy it is far from unique, original or earth shattering. Sure its not going to be easy to displace Facebook, but thats not due to the barriers to entry or that its cornered anything super hi-tech (probably the opposite). Its just that its hard to get people to change. You really think internet users will put all their eggs in one basket? If history has taught us anything people intentionally go the opposite way once they smell monopoly or a monopolizing of a sector or service (probably why Facebook has encroached on some of Google's turfs and monopolies). Just the basic premise of Facebook wont pan out in the long run (after the fad wears thin). Why? People pretend to like or want to do what their "close" friends and family do .....but deep down they despise it. Most people want to carve-out their own niche (the road less traveled)....and would much rather (and value) "expert" (search) opinion and advice (Google search) and not biased/limited advice, which could often have mal-intent or untended consequence(from friends and family via Facebook). In college my friends would drink beer that no one else drank, just to be unique...once everyone else drank it, they would change. People tend to carve or seek out a new "product" identity, from their friends/family, it's the only way they can differentiate themselves from the group. Social search will be just one of many "types" or ways to search, it will never be the primary one. It just stands to reason. Thanks.
This analysis assumes that Google actually offered Groupon anything close to what Groupon self-reported. Smells like InnerWorkings et al all over again.
SocialSpoils.com, a deal aggregator for local city deals is in an enviable position that could dwarf all Local City Deals providers. I have unsubscribed from all emails from all these providers, check SocialSpoils.com daily once, and shop the best deals. That's it. No spam mails, no stupid stuff. All deals at one place.
Eventually the margins for this will be eroded down to 10%. It is simple to come with a competitor who instead of taking 50% cut, could take only 5 to 10% cut and kill Groupon over the time. It's simple. Groupon has made a blunder of magnitude, by not taking the money. Google was desperate to have a story even to make an offering like this. I think Google's growth steam has run out and it is looking desperate quarter after quarter now!
Google is a search engine! While they have YouTube, Android, and some other successes, they are still just a search engine with an advertising revenue stream. The world wildly overestimates what they are! Soon someone will invent something better...
Google made their own problems by creating issues with privacy. The further they try to slip into the "local" adspace the more they are rebuffed by the behavior these startups can't afford to be associated with.
6 billion seems insane but Groupon has made some good moves in expanding and is pulling away from the pack. There are hundreds of smaller competitors and they all operate in pretty much the same manner... but none with the reach and clout that Groupon has. Still, takes some guts to walk away from that kind of money!
If you like daily deal sites (like I do), LocalDealSites.com lists over 130 Groupon-like daily deal websites and lets you filter by city so you can see which sites have offers in your area. http://www.localdealsites.com/
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