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Dec. 2, 2010, 10 a.m.

The Newsonomics of Google Grouponomics

[Each week, our friend Ken Doctor — author of Newsonomics and longtime watcher of the business side of digital news — writes about the economics of the news business for the Lab.]

It wasn’t supposed to be this way. Newspapers were the kings of coupons, the best source for getting the daily deal, on any kind of local product or service you could imagine. Over the years, direct (mailed) competition came along, taking business from newspapers. Now, it, has been further eclipsed by the sheer cost savings of digital coupons, which rose 60 percent within the last year.

In that context, Groupon was an idea just waiting to come along; and the remorse being expressed in newspaper buildings across America this week is the same: Why didn’t we come up with that idea? The remorse should go deeper; check out the Groupon Merchant Services page, and try to find a similar one, with similar marketing support, offered by a newspaper company online. In fact, Groupon’s whole pitch to merchants, cheerfully animated in its Grouponomics section, is a textbook lesson in selling local.

Now, if gobbled by Google today, or as the company moves into play, Groupon is set to become a big local ad play. In the Google portfolio, it could be the on-ramp to an eight-lane gateway, as Google widens its reach into local business marketing and local merchants get introduced to Google, through Groupon’s simple couponing pitch. As I noted last week (“The newsonomics of eight-percent reach“), Google’s reach into the small- and medium-sized business community in the US is about 8 percent, leaving more than 23 million businesses as potential clients. Get a bigger piece of that growing digital marketing play — estimated to be $16.1 billion by Borrell Associates — and you’ve got a big growth engine to add.

In fact, think of Groupon as Google’s new gateway drug. The Groupon inventors did the R & D, and now Big Search (aka Big Ads) is coming along to greatly expand its market reach and penetration. Groupon makes entry to local merchant markets simpler, and that’s the key to the $5 billion or so purchase price (“The newsonomics of simplicity“).

Certainly, we can tick off the reasons why the Google/Groupon deal makes sense for Google:

  • It’s a growth strategy. As paid search inevitably matures, Google needs to stoke several new engines of growth to keep the topline growing. Groupon has scaled to $400 million in sales in two years, and clearly has lots of potential.
  • It’s a search strategy. What could be better to add to keyword results than a single, relevant deal of the day? You want relevant ads? Nothing’s better than a relevant, geo-targeted coupon on something you just searched for.
  • It’s a social strategy. The deal is an in-your-face move directed at Facebook, as it connects up the web of relationships to buying.
  • It’s a mobile strategy. As the world moves mobile, tablets proliferate, and Google’s newly federally approved AdMob ad network looks to 2011, a simple daily deal can make the most of location-aware shopping.

All those are true. Yet Google has made more than 40 acquisitions this year, and none has approached this purchase price. So the gateway factor here, I believe, is the big difference-maker. In 2010, the power of a simple, great daily deal, well-delivered, breaks through the digital clutter — and provides the way into the wallets (and hearts) of local merchants.

Talk to those selling digital products to local merchants, and they’ll tell you it’s a slog. Yes, it’s working. All those 25 million merchants are experiencing the angst of marketing transition. They know they need to be in digital, but how do you work this search engine marketing, appear in the right places on the smart phone, play Facebook? It’s a slow go. Some merchants are digitally savvy, but most need the fundamentals explained, packaged, and demonstrated. That takes time. It’s not only newspaper sales managers that tell you this; it’s also what Google sales managers have said as they’ve tried to figure out the quickest way into local.

There may be nothing quicker than saying: How ’bout we do a coupon? Those six words could open the door wider and more quickly. Once through the door, Google, of course, can offer its growing array of paid search (Ad Words), display (Double Click) and mobile (Ad Mob) products, and ease businesses into the wonders of Google Analytics.

Figure that $5 billion price is worth it, if it ignites the local market sales more quickly, and acts as a gateway drug. Therein we can see the newsonomics of Google Grouponomics. How quickly can Google double its, maybe, 1.5 million merchants? Let’s say those additional 1.5 million merchants spend only 25 percent annually of what the first 1.5 million spend, which is about $27 billion a year, at the 2010 run rate. (A quarter as much might make sense, because many of the first set of advertisers are big, national ones.) If it could double its merchant base two years earlier (than it could if it didn’t buy Groupon), that might mean an additional $13.5 billion in revenue ($6.75 billion a year from the second 1.5 million advertisers). Suddenly, the $5 billion price is understandable.

The big question: What’s it likely to mean in local newspaper markets? How will it change an emerging balance of sales power?

Already, newspaper companies have taken a more catholic approach to local ad sales. Much of the Yahoo-related money they’ve taken in comes from selling Yahoo.com ads in their area, in addition to their own site inventory. A number of companies are reselling Google ads in their own markets, trying to leverage the power of their feet-on-the-street sales force and their well-known community brands.

Consequently, in addition to the why-didn’t-we-do-that remorse they’re feeling, they’re wondering how the Groupon deal will change the local sales landscape over the next couple of years.

A few scenarios:

  • Doomsday: Google’s use of Groupon as its new stalking horse lets it dominate local online spending as it has with national paid search. Newspaper online ad growth — newspapers’ only growth engine — slows against the competition. Newspapers’ Sunday circulars — based on price/item sales — become more obsolescent, as they are replaced by niched and customized deals of the day, not just a single day of the deal available to everyone.
  • Google replaces Yahoo as the partner of choice: The Yahoo consortium looks fairly mature these days, bringing in some good revenue for several top sellers. Yet it’s plagued by Yahoo’s ongoing identity crisis and Carol Bartz’ less-than-full backing. So Google could become the new best friend of newspapers (and broadcasters and Yellow Pages companies), enabling them to sell Groupon-led digital deals, and supplant Yahoo (which itself tried to buy Groupon earlier this year for a reported $2-3 billion) out of the local game. There’s precedent, with some of those newspapers already reselling Google paid search, and the higher sellers getting monetary incentives to do it. So Google could take a largely go-it-alone strategy, selling coupons-plus itself; or fully partner with local salesforces — or, third and probable choice, pursue a hybrid strategy for now, as it increases local penetration.

Among the big questions here: How would Google value the power of local feet-on-the-street, compared to cheaper telesales and self-service? Local sales forces have been vital to the newspaper/Yahoo initiative, and to Groupon’s own growth. Check out Groupon’s employment page (especially “Sales and Business Development — Outside,” to use industry vernacular), and you can see the value it places on feet-on-the-street. And yet Google has built its empire largely on self-service, and would like to do that into the future, increasing margin. Who else wants to turn coupons into self-service? Well, Groupon. Within a week, it will unveil its own Groupon self-service offering.

So, much of this deal, its value to Google, and its threat or promise to newspaper companies may come down to simple question: What do you need to sell a digital coupon to a local merchant?

POSTED     Dec. 2, 2010, 10 a.m.
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