Google Beware: Groupon Is No YouTube


First YouTube, now Groupon — Google seems intent on buying up some of the web’s most lucrative social-media sites. But a closer look shows that Google may be targeting a much less attractive business this time around.

The key issues: Groupon’s business model is less appealing to its key constituents than YouTube’s, and the resilience of Groupon’s future pool of potential revenue-generating partners seems in doubt.

So it may be misleading to compare the two companies’ current revenue, as certain analysts have done in evaluating the Groupon-Google deal (Google spent $1.65 billion to buy YouTube when the site was making less than $11 million a year, so a $6 billion price for Groupon, which is projected to earn $1.5 billion next year, seems to some like a downright bargain).

Let’s look at the details: Although it is extremely attractive to more than 35 million users, Groupon earns its revenue from the small businesses that run price promotions through the site. In a recent study, I found that Groupon promotions, as they are currently structured, end up being unprofitable for close to one-third of the small businesses that run them.

In my study sample of 150 businesses that ran Groupon promotions between June 2009 and August 2010, 42% said they would not run a Groupon promotion again. Their main reasons were that a significant proportion of Groupon redeemers are extremely price sensitive, barely spending beyond a discounted product’s face value. Not surprisingly, repeat-purchase rates at full price were also low — just 13% — for these businesses.

My findings are consistent with abundant academic research showing that price promotions erode brand value and have few, if any, beneficial long-term impacts for businesses. YouTube did not face these problems: Not only can users place videos on the site for free, but users enjoy the attention, and any money earned is icing on the cake for most members.

Moreover, the universe of viable small businesses that are willing and able to run promotions through Groupon on a scale that will earn sufficient revenue may be more limited than many experts believe. A widely cited statistic that Groupon rejects seven willing businesses for every one it accepts is promising, but will there still be a glut of interested partners in a year or two when the sheen of novelty has worn off?

The dozens of me-too social promotion sites that have cropped up virtually overnight might quickly shrink this pool of interested businesses just in time for Groupon to take a hit from the unprofitable promotions of many businesses trying social promotions for the first time. Again, YouTube did not face these constraints. Its potential participant base was virtually limitless, bound only by the number of internet users in the world.

The social-promotion space has been on a tear this year, stirring memories of the dot-com boom. Like many acquirers in that era, Google may be guilty of undue optimism.

Utpal M. Dholakia is the William S. Mackey, Jr. and Verne F. Simons Distinguished Associate Professor of Management at Rice University in Houston.


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