Local advertising is now a $100 billion annual business in the
U.S. alone with the potential to exponentially grow as targeting
and personalization capabilities improve. This robust growth is in
no small part driven by the fact that Americans spend approximately
80% of their disposable income within a couple miles of their homes
and thus it should be no surprise that advertising services -
Google and Groupon alike - are amping up to grab the biggest shares
possible of this opportunity.
Furthermore, the hardships stemming from the global economic
recession and the pressures placed on American household budgets
have conspired to fuel demand for something like a personalized,
local coupon advertising service like Groupon.
So what led Google to attempt its $6 billion acquisition of
Groupon?
While previously not active in the local deals market, Google
had taken a shotgun approach to building much needed relevancy in
local advertising. Sure, national and regional advertisers have
seen immense success in the growing search market, however, local
businesses have not had it as easy. The challenges of less resonant
local search results (read: Google Maps spam) and difficulty in
reaching prospective customers down the street have set a high
barrier to entry.
In all fairness to Google, it has vastly improved its local
search ad products in recent years to provide local merchants with
more tools. Local businesses now have more ability to place ads
across multiple channels (desktop and mobile search, contextual,
display, comparison shopping, etc) and formats (text, image,
video). Adding some relevance to the local experience are "ad
extensions" to display a map location, relevant products, and even
coupons.
While growth of local search has been formidable, it has been
recently overshadowed by the explosive rise of the local deals
market, as evidenced most prominently by the performance of the
market leader, Groupon.
What the explosive rise of the local deals market - and a leader
like Groupon - translates to is a new, viable expansion opportunity
for merchants. It is an emerging channel that will drive
incremental spend by local advertisers. Bottom line for Google,
Groupon constituted an exponentially valuable opportunity to
capture more local advertising dollars.
Groupon has proven its success in providing a personalized,
relevant experience that connects merchants and consumers and
builds lasting relationships between them, a potent quality that
Google has aspired to achieve in local search advertising.
Accounting for Groupon's critical mass, its business model closely
interweaved communities with its ties in social media, driving
further engagement, ultimately allowing for self-perpetuating viral
growth without an end in sight.
As a local deals service, Groupon boasts an attentive user base
of millions worldwide, providing it with a wealth of information
about its users. As Groupon furthers its investment in
personalization, it will be able to provide smarter technology for
consumers, deepening an already valuable relationship with
merchants. Adding local search and mapping tools would undoubtedly
empower the tool as well. So why did Groupon decide to pass on the
$6 billion offer by Google? The success of Groupon's business model
has driven exponential growth, resulting in its increasing billion
dollar valuations. Give in to a $6 billion offer or see the company
through to greater riches is what it came down to. With strong
homegrown brand recognition, secured VC funding, and demand showing
no signs of subsiding anytime soon, the decision may have well been
based upon price and pride. Not surprisingly, the bid rejection was
embraced by prospective investors salivating at the prospects of a
Groupon IPO, possibly in 2013. On the other hand, some insiders
have raised concern as to whether Groupon's $15 billion dollar
valuation (as of January 13th) is overinflated. Can Groupon uphold
its value? This may be its key challenge in the near future. Or
perhaps Groupon will help drive the next "dot-com" stock boom with
the likes of Skype and Facebook?
In essence, Google needed Groupon more than the reverse. Like
past acquisitions by Google, the bid for Groupon was publicly seen
as nothing more than a money grab. For Groupon, the offer failed to
meet its perceived value and the company's owners decided to
maintain its independence. What is clear is that Google
demonstrated its readiness to assert itself in the online group
buying space at a high cost, likely inspired by the proven success
of Groupon's ever profitable business model. The upcoming launch of
Google Offers - announced January 20th - is proof of Google's
determination. Though, will it catch up with Groupon? Google failed
in competing with Facebook in its Orkut product, and still lacks in
local search. Time will tell whether Google's group buying
initiative may yet again be a bridge too far.
This blog was originally published here
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