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.
Michael Kujanek is Group Search Director at MediaCom Interaction. He can be reached at Michael.email@example.com.
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