Groupon: Is Google Making a $6 Billion Mistake?(blogs.hbr.org)
blogs.hbr.org
Groupon: Is Google Making a $6 Billion Mistake?
http://blogs.hbr.org/cs/2010/12/groupon_is_google_making_a_6_b.html
43 comments
Is Groupon actually scalable? Their business model depends on being able to drive huge crowds to a merchant. That might work with one deal per day per market, but it might not work if they start pushing more deals.
I don't think that driving huge crowds is actually their business model. The huge crowds overwhelm the merchant and wind up making the promotion a bad deal for the merchant. Groupon would do better to drive reasonably sized crowds, consistently to merchants.
It's the crowds that attract merchants to deal with Groupon. I think they tweak the mental association between bodies through the door and success that many small business owners have. Without the promise of traffic (and hope that some of them will come back) Groupon is just a very expensive way to distribute 50%-off coupons.
This is a fair point. Though ultimately I doubt Groupon and Groupon-clones can expect to continue to strike the kinds of deals they have been with local businesses. So while they might see a cost saving in the vertical integrating groupon as a means of selling more adwords, I doubt the profit margins groupon currently boasts will actually improve or even persists for much longer.
If Google can find five other friends willing to pay $2 Billion each, everyone wins.
Something similar was said when Google bought Youtube. That said, the price does seem steep.
AFAIK any skepticism regarding the purchase of YouTube has been borne out. They have owned it for 4 years and so far it has never been profitable. So far Google has lost billions on YouTube.
Unlike YouTube Groupon is actually profitable. (ergo apparently going for 4x YouTube's price tag) The question with Groupon will be their ability to maintain profits.
Unlike YouTube Groupon is actually profitable. (ergo apparently going for 4x YouTube's price tag) The question with Groupon will be their ability to maintain profits.
Are you serious? I think the whole "profit doesn't matter, only users" mantra is as stupid as anyone else, but you're way off here.
That mantra is asinine not because YouTube (and Twitter, and Facebook a couple years ago) are actually worthless... it's asinine because they are crazy exceptions.
YouTube gets about 2 billion views a day. Assuming each one of those views lasts about a minute, that's 1.4 million people watching at any given moment, 24 hours a day. The major TV networks get in the neighborhood of 6 million viewers during prime time... if they're winning.
So YouTube has roughly the same daily attention on it as NBC does. Why aren't they profitable?
a) They've had skyrocketing costs as they deal with explosive growth
b) They've had to convince the world that this totally weird new thing is a viable advertising platform.
That they've more or less solved those problems in 4 years and are close to profitable is pretty amazing to me, both as a developer and an entrepreneur. And the fact that their costs are going to go down (cost of bandwidth is cut in half every 18 months) while their profits are rising (advertising is advertising, and they're selling more and more), along with their enormous audience, suggests to me that they are, in fact worth a lot of money.
Do you not think that you could easily sell YouTube today for 1.5b? To any of a number of media companies? I think it'd be an easier sell today than it was when Google bought them.
That mantra is asinine not because YouTube (and Twitter, and Facebook a couple years ago) are actually worthless... it's asinine because they are crazy exceptions.
YouTube gets about 2 billion views a day. Assuming each one of those views lasts about a minute, that's 1.4 million people watching at any given moment, 24 hours a day. The major TV networks get in the neighborhood of 6 million viewers during prime time... if they're winning.
So YouTube has roughly the same daily attention on it as NBC does. Why aren't they profitable?
a) They've had skyrocketing costs as they deal with explosive growth
b) They've had to convince the world that this totally weird new thing is a viable advertising platform.
That they've more or less solved those problems in 4 years and are close to profitable is pretty amazing to me, both as a developer and an entrepreneur. And the fact that their costs are going to go down (cost of bandwidth is cut in half every 18 months) while their profits are rising (advertising is advertising, and they're selling more and more), along with their enormous audience, suggests to me that they are, in fact worth a lot of money.
Do you not think that you could easily sell YouTube today for 1.5b? To any of a number of media companies? I think it'd be an easier sell today than it was when Google bought them.
I think that Google bought YouTube for 1.5b. I think they've probably dumped at least another 500 Million into them putting the total price tag at about $2B. Assuming for a minute that YouTube could reach profitability next year, I think it would likely take at least another 5 years for Google to recoup its initial investment.
Thats now a 10 year window before the YouTube investment does anything but drag on Google's bottom line and more importantly $2B dollars that Google can't spend on another, better acquisition.
Yeah I think YouTube was a mistake for Google, its the opportunity cost that kills me. I think that money could have been better spent elsewhere.
Thats now a 10 year window before the YouTube investment does anything but drag on Google's bottom line and more importantly $2B dollars that Google can't spend on another, better acquisition.
Yeah I think YouTube was a mistake for Google, its the opportunity cost that kills me. I think that money could have been better spent elsewhere.
What opportunities did Google miss? They have plenty of cash, so I don't think buying YouTube prevented them from buying anything else they wanted.
The opportunities may not be traditional acquisitions. They could have spent that money buying fiber backbones, 4G Spectrum, clean or solar energy plants.
I would have much rather seen google branch out more into infrastructure then into another consumer facing web play, especially one with such a long window on ROI. Its not necessarily about having the money or not so much as how could that money have been better spent.
A nice counter example, in 2007 MS bought 1.5% of Facebook for 250M at a valuation of 15B. Currently Facebook shares are selling at a valuation between 100B and 200B - split that down the middle and that MS investment is now worth $2.5B, which makes their small investment in FB look a heck of a lot better then Google's Acquisition of YouTube.
EDITS - I keep adding to this point, I apologize. Most of this comes off of realizing that Google didn't even pay cash for YouTube, it was a stock acquisition.
NOTE: I should also say as an armchair analyst I thought Google's purchase of YouTube at the time was pretty good and MS's investment at the time in Facebook was pretty bad. I've now reversed my positions on both, so take that for what its worth.
I would have much rather seen google branch out more into infrastructure then into another consumer facing web play, especially one with such a long window on ROI. Its not necessarily about having the money or not so much as how could that money have been better spent.
A nice counter example, in 2007 MS bought 1.5% of Facebook for 250M at a valuation of 15B. Currently Facebook shares are selling at a valuation between 100B and 200B - split that down the middle and that MS investment is now worth $2.5B, which makes their small investment in FB look a heck of a lot better then Google's Acquisition of YouTube.
EDITS - I keep adding to this point, I apologize. Most of this comes off of realizing that Google didn't even pay cash for YouTube, it was a stock acquisition.
NOTE: I should also say as an armchair analyst I thought Google's purchase of YouTube at the time was pretty good and MS's investment at the time in Facebook was pretty bad. I've now reversed my positions on both, so take that for what its worth.
IIRC Google now values YouTube at ~5Bn, and at that price I feel that there are plenty of companies who would bite Google's hand off.
> and at that price I feel that there are plenty of companies who would bite Google's hand off.
What does this expression mean? Does that mean that companies would think this is too expensive? or companies would jump at the chance to buy YouTube for 5 Billion?
It's not clear at all to me what you mean and I'm a native English speaker:)
What does this expression mean? Does that mean that companies would think this is too expensive? or companies would jump at the chance to buy YouTube for 5 Billion?
It's not clear at all to me what you mean and I'm a native English speaker:)
i think he means any company would jump on it.
it's like giving a hungry dog food. the dog would bite your hand off, along with the food.
it's like giving a hungry dog food. the dog would bite your hand off, along with the food.
One thing you have to understand about Google is that they're a technology company at their core, unlike Microsoft and Apple which have turned into product companies. Google is very much focused on creating the best technology, which they then apply in support of their single source of revenue right now, which is advertising.
So although YouTube does not generate revenue, perhaps that was never the goal. Perhaps YouTube provided them the opportunity to strengthen their technology that supports advertising. This can be said about many Google ventures right now including Android, Google Voice, and more. These other projects are unlikely to generate significant revenue in and of themselves, but so long as they draw people to the Google platform and the technology enhances their ability to generate more revenue for their core advertising, I think the company considers them a win.
So although YouTube does not generate revenue, perhaps that was never the goal. Perhaps YouTube provided them the opportunity to strengthen their technology that supports advertising. This can be said about many Google ventures right now including Android, Google Voice, and more. These other projects are unlikely to generate significant revenue in and of themselves, but so long as they draw people to the Google platform and the technology enhances their ability to generate more revenue for their core advertising, I think the company considers them a win.
The other way to look at it is what if Google HAD NOT bought YouTube. What if it had gone to Microsoft? Or Comcast? Sometimes keeping something away from your competitors is enough of a reason.
Google owns user generated video on the internets via the youtube acquisition. I think they paid a very, very small price for this.
If I started handing out dollar bills on a street corner, I'd have plenty of customers too. Why is YouTube so valuable? If there's a way to make real money on YouTube-style video, Google sure hasn't found it.
This profitless 'strategic' expansion at all costs mentality is exactly the management failure that's leads to stock price stagnation in mature tech companies like Microsoft and Google.
This profitless 'strategic' expansion at all costs mentality is exactly the management failure that's leads to stock price stagnation in mature tech companies like Microsoft and Google.
This is now probably the gazillionth time I've used this old data point, but Amazon was in the hole for 6 years before they even turned out a profit, often losing hundreds of millions in a quarter alone.
The "strategic expansion" can also be spun as "category killer" management. What large business in their right mind would try to compete with YouTube at this point? VCs would scoff at anyone wanting to do a video-sharing startup now. It's a loss leader in the way Bing is to Microsoft or Cyber Monday is to Amazon: It grabs eyeballs.
Case in point, Susan Boyle's debut album was not heavily marketed in the US; and her performances were originally broadcast only in the UK but made famous through YouTube. The album went on to sell more than 6 million copies worldwide. That is reach and marketing (even when it's unintended). YouTube now strikes _actual_ marketing deals for its front page, and has actively stepped up inserted ads in a huge way this year. And, they've been very close to profitability this year.
All in good time, I suppose.
The "strategic expansion" can also be spun as "category killer" management. What large business in their right mind would try to compete with YouTube at this point? VCs would scoff at anyone wanting to do a video-sharing startup now. It's a loss leader in the way Bing is to Microsoft or Cyber Monday is to Amazon: It grabs eyeballs.
Case in point, Susan Boyle's debut album was not heavily marketed in the US; and her performances were originally broadcast only in the UK but made famous through YouTube. The album went on to sell more than 6 million copies worldwide. That is reach and marketing (even when it's unintended). YouTube now strikes _actual_ marketing deals for its front page, and has actively stepped up inserted ads in a huge way this year. And, they've been very close to profitability this year.
All in good time, I suppose.
Dozens of other companies followed Amazon's strategy and went bankrupt. Plus Amazon had an easy way to monetize traffic. Traffic alone isn't worth anything unless you can wring more money out of your visitors than it costs to service their requests.
Google's existing advertising business works despite the low value of traffic because Google is collecting their cut from a huge swath of the Internet, and because the one kind of traffic they own - search - is the most directly linked to actually buying things, and thus the most valuable.
Youtube is almost the opposite - expensive to service and totally unrelated to monetizable actions.
Google's existing advertising business works despite the low value of traffic because Google is collecting their cut from a huge swath of the Internet, and because the one kind of traffic they own - search - is the most directly linked to actually buying things, and thus the most valuable.
Youtube is almost the opposite - expensive to service and totally unrelated to monetizable actions.
Interesting analogy. However, what if you're handing out a dollar bill to everyone as they enter your store, but then they're coming in and buying your product?
That's more how I view the Google situation. They make these profitless attempts at getting people on their sites, which then generates massive amounts of advertising profits for them.
That's more how I view the Google situation. They make these profitless attempts at getting people on their sites, which then generates massive amounts of advertising profits for them.
It's useless being the market leader if you can't make it profitable.
Google is profitable though. Does every property they have need to be profitable? Does every engineer need to directly add at least $250,000 to the bottom line?
If user-generated video is in any way tangentially important to the future of online advertising, then YouTube is worth more than their direct profit to Google.
If user-generated video is in any way tangentially important to the future of online advertising, then YouTube is worth more than their direct profit to Google.
> They have owned it for 4 years and so far it has never been profitable. So far Google has lost billions on YouTube.
Can you cite this? I think you're wrong. I haven't seen any reports of YouTube's profitability since the Google purchase. There has been lots of speculation and discussion, but Google has never disclosed the information.
YouTube was losing tons of money the day Google bought them. But since Google owns much of the fiber used to deliver the videos, they likely pay little to nothing for bandwidth. Also, they have ads now, in videos. Nobody but Google knows how much money those ads bring in.
Can you cite this? I think you're wrong. I haven't seen any reports of YouTube's profitability since the Google purchase. There has been lots of speculation and discussion, but Google has never disclosed the information.
YouTube was losing tons of money the day Google bought them. But since Google owns much of the fiber used to deliver the videos, they likely pay little to nothing for bandwidth. Also, they have ads now, in videos. Nobody but Google knows how much money those ads bring in.
You can Google "YouTube Profitability" and one of the top responses is Eric Schmidt saying YouTube is "close to profitability" from Sept of this year.
Youtube makes Google loads of money. Sure it uses about $500 million worth of bandwidth a year, but Google pays nothing for that bandwidth because of peering agreements -- Google owns lots of fiber, which is a sunk cost. So the $240 million in revenue is pretty much all gravy.
source: http://www.wired.com/epicenter/2009/10/youtube-bandwidth/
source: http://www.wired.com/epicenter/2009/10/youtube-bandwidth/
YouTube, in my opinion, was a big financial mistake, it's never made a profit and was so expensive and has been so unprofitable for so long it's going to take a very long time to make a return on the investment for google.
Greg Linden has another take on this, agreeing: "Groupon is not Googly" http://glinden.blogspot.com/2010/12/groupon-is-not-googly.ht...
I would say strongly, yes, they are making a $6B mistake. I'd say it is tantamount to Yahoo acquiring Geocities in 1999.
Groupon will never become a juggernaut site the size of Facebook or Craigslist. It's niche and a novelty, not any kind paradigm shift in online marketing that so many in SV seem to think it is.
Groupon will never become a juggernaut site the size of Facebook or Craigslist. It's niche and a novelty, not any kind paradigm shift in online marketing that so many in SV seem to think it is.
I disagree - I think Groupon represents a paradigm shift.
Thinking about the problem that the site solves:
1 - It's changing the concept of advertising;
In contrast to traditional advertising, people actually want to receive these deals from unsolicited companies. It's 'solicited spam' - and works because most people love a bargain.
2 - It's changing the concept of sales conversion;
People are parting with some of their cash immediately. Because of this companies are much more likely to achieve conversion to full customers. Even if users don't redeem their deals (which is likely in some circumstances) the client companies are still making money.
3 - It's changing the nature of sales;
Because Groupon offers financial incentives to users to get others to purchase deals. The entire user base of Groupon become a proxy-sales team on behalf of Groupon's client companies.
I think the issue of sustainability / scalability (in terms of companies offering deals through Groupon) is largely moot.
Groupon provides a bump to sales and marketing - and I therefore think Groupon will remain useful in the arsenal of marketing tools available to any company.
Thinking about the problem that the site solves:
1 - It's changing the concept of advertising;
In contrast to traditional advertising, people actually want to receive these deals from unsolicited companies. It's 'solicited spam' - and works because most people love a bargain.
2 - It's changing the concept of sales conversion;
People are parting with some of their cash immediately. Because of this companies are much more likely to achieve conversion to full customers. Even if users don't redeem their deals (which is likely in some circumstances) the client companies are still making money.
3 - It's changing the nature of sales;
Because Groupon offers financial incentives to users to get others to purchase deals. The entire user base of Groupon become a proxy-sales team on behalf of Groupon's client companies.
I think the issue of sustainability / scalability (in terms of companies offering deals through Groupon) is largely moot.
Groupon provides a bump to sales and marketing - and I therefore think Groupon will remain useful in the arsenal of marketing tools available to any company.
Craiglist is perhaps not the first example I would go to if I needed to discount Groupon's hundreds of millions of revenue.
Craigslist's revenue is estimated at >$100m, and is mostly that low out of choice. Also, Google buys reach and influence as much as revenues with their investments (e.g. Android, YouTube)
I would add that the price point of the Groupon is also important.
$20 for $40 worth of good-ass Mediterranean food is a great deal, but every time I've used one of my three groupons, my date and I have managed to spend something like $60 on the night. So what sounds like a huge margin hit is often smaller.
Despite my math background, my behavior is driven by the idea that "I've only used 90% of the groupon amount. Let's have dessert!" So I never spend less than the groupon's value, and instead always spend more.
$20 for $40 worth of good-ass Mediterranean food is a great deal, but every time I've used one of my three groupons, my date and I have managed to spend something like $60 on the night. So what sounds like a huge margin hit is often smaller.
Despite my math background, my behavior is driven by the idea that "I've only used 90% of the groupon amount. Let's have dessert!" So I never spend less than the groupon's value, and instead always spend more.
the article seems to be attacking it from the wrong angle.
It doesn't matter to Google whether Groupon is the best way for businesses to target consumers provided enough business owners see enough results to validate the model and keep trying it. Display advertising has been around for centuries despite it's far-from-universal effectiveness
On the other hand it's a $6 billion mistake if Groupon's main assets (sales team and culture) become the first casualties of acquisition and leave them with the world's most expensive domain name and mailing list, however good the model might be.
I'm guessing somewhere in between - it's not too difficult to conceive GOOG achieving >$6 billion worth of growth in discount-based local ads revenue over the next few years and claiming the acquisition paid for itself in record time, but it'll leave unanswered the question of whether they could have done it perfectly well without buying a 2 year old brand built on Adwords.
It doesn't matter to Google whether Groupon is the best way for businesses to target consumers provided enough business owners see enough results to validate the model and keep trying it. Display advertising has been around for centuries despite it's far-from-universal effectiveness
On the other hand it's a $6 billion mistake if Groupon's main assets (sales team and culture) become the first casualties of acquisition and leave them with the world's most expensive domain name and mailing list, however good the model might be.
I'm guessing somewhere in between - it's not too difficult to conceive GOOG achieving >$6 billion worth of growth in discount-based local ads revenue over the next few years and claiming the acquisition paid for itself in record time, but it'll leave unanswered the question of whether they could have done it perfectly well without buying a 2 year old brand built on Adwords.
No, they're not. Google isn't just buying Groupon; they're buying dominance in assurance contracts -- a Very Big Idea Indeed.
Except: the assurance-contract aspect of Groupon is now just an eccentricity. Every deal is designed to hit its target; maybe the businesses get some small peace of mind knowing that they're sure to get X bodies through the door or pay nothing, but the value is all elsewhere, from promotional acumen.
And, the other idealistic parts of Groupon's groups-reaching-threshold-for-collective-action vision mean very little for their overall success, compared to more conventional ideas like great copywriting, being the first mover, having a large incentive-compensated sales staff, having a great name/brand, and so forth.
And, the other idealistic parts of Groupon's groups-reaching-threshold-for-collective-action vision mean very little for their overall success, compared to more conventional ideas like great copywriting, being the first mover, having a large incentive-compensated sales staff, having a great name/brand, and so forth.
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Groupon:Businesses::Walmart:Suppliers
Yes.
Google already sees how much Groupon spends on Google ads.
From that they realized that they can take that expense out of the equation, and Groupon becomes even more profitable.
The opportunity cost for Google of serving some junk ad vs a targeted Groupon is low. There is some risk involved, but there is a huge potential for reward.