Will Yahoo Buy Groupon?


A rumor that Yahoo (YHOO) is working on a deal for Groupon has been burning up the wires in Silicon Valley this weekend. Tech wags suggest that the struggling portal has offered between $1.5 billion and $3 billion for the red-hot social shopping company, which was valued at $1.35 billion at its most recent funding valuation.

There's little doubt that Yahoo is interested in nailing down a big acquisition after efforts to acquire local ratings site Yelp and mobile social network and check-in giant Foursquare failed to come to fruition. TechCrunch opined the if Groupon goes for $2 billion or less, then it has serious doubts about its business model and future. Groupon's CEO, Andrew Mason, has repeatedly said that price competition from the hordes of Groupon clones has not hurt demand and that his company was maintaining its extremely lucrative 50% split on gross revenues with advertisers using the Groupon service.

My two cents? Yahoo could easily pick-up LivingSocial or another of the clones for far less money and push a similar product though its existing sales force to achieve similar results. Groupon's dominance, in my mind, is clearly waning. Here are three reasons why.

  • The arrival of group buying deal aggregators like YipIt makes it possible for consumers to easily track multiple group buying sites including Groupon, LivingSocial and dozens of others. Aggregators, by definition, detract value from the original suppliers of a good or service because they strip out a bit of the value and make substitution easier. As someone who has purchased deals on four or five networks (including Groupon), I have noticed little difference and I see no reason why others would either -- or would express loyalty to Groupon above all others.

  • Competitors with better local sales teams and even bigger distribution channels have already joined the party. Yelp previewed a group buying application a few months ago. As a featured destination for local content with a developed local sales force and huge local followings, Yelp is Groupon's worst nightmare. Likewise, restaurant reservations and services giant OpenTable (OPEN) has been running its own group buying product and is doing quite well. OpenTable has feet on the street in dozens of U.S. cities, already has massive buy-in among foodies, and has a reliable distribution pipeline via the millions of people who use OpenTable to make restaurant reservations. Aol is also launching a Groupon-clone, to be sold both nationally by its main sales teams and locally by the fast-growing Patch.com local journalism startup. (I actually called this one a few days before the service was announced -- thought I got no leaks from Tim Armstrong, CEO of Aol (AOL) , which owns DailyFinance.)

  • Merchants are getting more savvy about group buying offers, making them far less attractive to users. I have watched this first-hand, seeing restaurant deals that used to be $50 for $100 of food have decline to $10 gets you $20 of food or, even worse, $30 gets you three $15 coupons to be used on three separate occasions. Spa treatment ads have started to stipulate that the offer was good only for first-time customers. And several local merchants that have used the service have said they do still get a positive return on their investment but paying Groupon a 50% stake is increasingly less palatable when they can get a sufficient lift from providers taking only 20% or 30%. Even more ominous for Groupon, two merchants told me that they took the extra step of requesting email addresses from Groupon buyers and adding them to newsletters, a move that allows a merchant to make similarly good offers but cut Groupon out of the second take. He who owns the list owns all the value in the land of group buying or discounting.

The bottom line is that group buying is here to stay, it's social and it's powerful. But the barriers to entry are ridiculously low and the big guys are jumping into the pool. Yahoo will definitely get into the game and it should. Whether they should be paying north of $2 billion is an entirely different question. Is Groupon worth real money? For sure. The real question is what will be it worth in a year or two.