Tuesday, November 30, 2010

Will Groupon become Googlepon?

The online coupon company, Groupon, won't likely change its name, but an article in my news feed caught my eye today -- Google Said to Near Agreement to Buy Groupon for $6 Billion. The article paints the acquisition in a sour light, suggesting that Google will be overpaying for Groupon:

Google would use the purchase to benefit from surging demand for coupons, sent via the Web, that offer discounts on everything from dinner cruises to dental exams. Groupon’s strategy is easy to copy, fueling concern that Google wouldn’t be able to wring a high enough return on its most expensive acquisition, said Colin Gillis, an analyst at BGC Partners.

“If you overpay for anything, it will be a controversial buy,” said Gillis, who has a “hold” rating on Google and does not own its shares. “Groupon’s business is subject to mimicry.”

The concern that Groupon can be easily mimicked has been out there for a while. Mimicry has been tried, yet no company has done it successfully. My friend, Evan Miller, was so impressed with Groupon's business potential earlier this year (April 15) that he wrote that Groupon's valuation was in excess of a billion dollars, "Call me crazy, but I think a billion is too low."

Evan's piece is great if you want to understand why Google is interested in buying Groupon. The best thing about it is that he wrote these words more than 7 months in advance of public talk of an acquisition of Groupon by Google:

So despite the fact that the world’s largest search engine and a popular coupon mailing list appear to be as closely related as Barack Obama and Dick Cheney, the core business model is essentially the same. I imagine the market potential for Groupon must be comparable to the market that Google has discovered for its search ads, but of course the two companies are not in competition. Google helps people find businesses they know must be out there, whereas Groupon helps people discover businesses they never knew existed. The two companies are complementary.

Seems like a winner to me. For more of Evan's writing on Groupon, check out his guest post and his more economics-laden analysis of the economics of Groupon. Enjoy the reading. As Evan is an excellent writer, I have a hunch you will.

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