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Why Groupon needs to use that $1B to buy tech

Forget clone acquisitions and expansion, Groupon needs to innovate and differentiate

Financial trends and news by Faith Merino
December 29, 2010
Short URL: http://vator.tv/n/1558

The more I read about Groupon, the more I feel like I’ve lost all perspective on how much money is considered “a lot.”  The latest rumor is that Groupon is seeking to raise a monumental $1 billion in financing.  $1 billion sounds like a lot…

Doesn't anyone else think $1 billion sounds like a lot?...

But why, with annual revenues in the $500 million range, would Groupon be looking to raise $1 billion? Its empire now spans 36 countries and more than 300 markets worldwide through acquisitions of major Groupon clones, like CityDeal in Europe.  But its march across the globe continues and it seems likely that the funds would be used to cement Groupon’s hold on the group-buying platform worldwide.

What seems incontrovertible is that Groupon is safeguarding its power-grip on collective buying against the hundreds of Groupon clones that have bubbled up around the world.  That was the beauty of the potential Google/Groupon merger.  Google had the tech power necessary to keep Groupon innovative and differentiate it from its gaggle of progeny.  Google’s neurotic data-driven engineering culture had the power to keep Groupon from stagnating and disappearing into the swarms of lookalikes.

But when Groupon turned down the offer, it was left with no other recourse than to attempt to fend off the clones on its own (this is starting to sound like a Star Wars knock-off).  This may be more difficult than it seems, as its platform is so easily duplicable that there is little to set Groupon apart from its own clones, other than its trademark prankster culture.  Groupon’s platform is so imitable that some have even accused the site of being a Woot-knockoff.  (Check out the outraged comments on my Woot story when I made the mistake of calling Woot a Groupon clone.  Apparently, I need to go put my head in an oven.)

The clones

To give a quick outline of the problem, I’ll use my own shopping over the last couple of weeks as an example.  I did the bulk of my holiday shopping online, and I shopped on a lot of daily deals sites, but nothing really drew me to Groupon.  I found myself using Yipit far more often, as it offered a comprehensive range of different gift ideas to choose from.  Groupon was one among many daily deals sites to choose from, but it was easily lost in the crowd.

Solutions

In peak buying seasons, this is a liability.  Several Groupon clones have already recognized this problem and are working toward a new solution that would provide a Yipit-like platform (lots of deals in one place) without having to create a million new user accounts.  DealOn is one such company, which is developing its OfferEx technology, which would provide a single platform for merchants, daily deals companies, media companies, and consumers.  In essence, it would make it possible for users to select among a wide variety of deals from one platform instead of having to create user accounts among 100+ different websites to keep up with all of the deals out there.

Also recognizing the truth of the old “strength in numbers” adage, Tippr recently proposed its Open Deal Format, which would make it possible for merchants to offer and publishers to promote deals across multiple platforms simultaneously.  Currently, each daily deals site has a different format for submitting deal information, but if all of those sites adopted the Open Deal Format, a local business could submit its deal to any of those sites without having to alter the format in any way, and publishers will be able to slip the deals into their pipeline faster to provide a wider range of deals for their audiences.

“There’s a need for deal exchange standards in order for the group buying industry to continue to grow,” said Jim Pinkenberg, CEO of DailyFlock.com, in a prepared statement. “It’s critical for the industry to drive integration and interoperability, which will result in less confusion, a better customer experience and a more seamless product.”

More deals? Or more tech?

The point being: Groupon needs to focus on the tech angle.  A number of observers are speculating that Groupon will be using the $1 billion to buy up ever more clones, but how long can that last?  Didn’t anyone see Fantasia?!  When Mickey Mouse attempts to chop up all the magic brooms, they just come back to life and multiply!  If Groupon is going to stay on top of the game, it needs to innovate to account for the group buying platform as a whole, which means it doesn’t need to acquire more Groupon clones; it needs to acquire companies that have unique tech angles to offer.

Whether or not Groupon will go this route is another question.  Dartmouth business professor Sydney Finkelstein recently spoke on NPR and shared his belief that Groupon’s rejection of Google was so erroneous that it actually qualifies Andrew Mason as one of the worst CEOs of 2010.   “I think Andrew Mason looked at Mark Zuckerberg as his role model—the founder and CEO of Facebook. And Zuckerberg had many opportunities to sell his business, and he didn't. And you can see how incredibly valuable that company's become,” said Finkelstein. 

But Facebook is a pretty unique example of what can happen when you stick to your guns.  Other tech companies have found themselves in very different situations after turning down buyout offers.  One such example is Yahoo, which turned down Microsoft’s $44.6 billion buyout offer back in 2008.  “If you look at the difference in market value between the Microsoft offer and the actual price that Yahoo ended up being worth afterwards, it was $30 billion. And it's hard to imagine how that could've been a good decision,” said Finkelstein.

The fact is that Groupon is not Facebook.  Facebook has created a self-defining social media ecosystem while Groupon is currently just one competitor among many within the group-buying platform. 

Personally, my prediction for 2011 is that the collective buying platform will evolve to become more open and streamlined, accounting for the myriad of daily deals sites out there.  If Groupon wants to stay in the lead, it will need to be the company that pioneers this movement. 

Image source: acf-fr.org


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