Groupon: Magic Ingredient for Google Growth?

The hottest company of the moment in the tech and ad worlds sits between the coastal centers of power. Google’s $6 billion offer to buy Groupon is remarkable not just because it comes only two years into the daily-deals service’s existence but because it reveals how the Chicago-based Groupon built an online local marketing juggernaut under the noses of the titans on both coasts.

Its runaway success exposes blind spots to the East and the West. In platform-obsessed Silicon Valley, Groupon is a strange creature, a “crass marketing company” in the words of Facebook biographer David Kirkpatrick. On the East Coast, Groupon’s focus is far from the glamour of Madison Avenue, focused on the lowest of below-the-line spending, coupons. At a time when traditional media businesses were grasping for new business models, they failed to see the power of Groupon’s seemingly simple approach.

“Groupon was never on peoples’ radar,” said Rich LeFurgy, founder of Silicon Valley advisory firm Archer. “It was looked at as a low-margin, not-scalable model that was taking the printed entertainment books and putting them online.”

Groupon wasn’t founded by a Stanford computer scientist, but a Northwestern music major, Andrew Mason. The service grew out of a platform Mason started in November 2007 called The Point, built as a way for like-minded people to come together to address problems they can’t solve on their own. It was only when the recession hit and times were tough that Mason narrowed the model to tackle group buying with discounts. Now Groupon is on track to book $500 million in revenue this year and has the reputed title of the fastest growing company in U.S. history, built on coupons for leg waxing and go-kart rides.

Google’s bid is an admission that its future will be determined as much by business model innovation as tech innovation. Many Silicon Valley hands have dismissed Groupon for its low-end technology—it delivers its deals via e-mail—but its key innovation lies elsewhere. It has developed a model that solves a basic problem for small businesses—how do I get customers in the door—and does it at scale. The secret to its success isn’t an algorithm but a quirky brand backed by a 3,000-person sales force.

“We view the idea of self-service with the same skepticism as someone from Google probably views hiring a sales person,” Mason said recently.

The distinction was echoed recently by Chris Tolles, CEO of news aggregator Topix. “Building a product is hard enough, but building a sales force to sell it is massively difficult,” he said.

The traditional media world of the East Coast missed an even greater opportunity. Former local heavyweights, newspapers and directory companies, have spent the better part of a decade managing the decline of their core businesses. They sat on a few critical assets: large local sales forces, deep local knowledge and distribution. Yet none were able to see what was in front of them when it came to the daily deals space.

“They don’t get a hall pass on this one,” said Dave Morgan, CEO of TV ad-targeting firm Simulmedia and former new media director for the Pennsylvania Newspaper Association. The problem was an inability to try new ventures that might cannibalize their existing traditional businesses. Instead, newspapers were built around their local distribution monopolies that were obliterated by the Internet.

“They’ve fallen into this malaise that they’ll never be Silicon Valley, so why keep trying,” Morgan said. “What Groupon shows is that you don’t have to be Silicon Valley to build a better mousetrap for marketers.”

Groupon’s seemingly unique mousetrap, of course, is anything but. It has dozens of imitators that have failed to slow its growth. The market for local is massive, with the U.S. alone having 27.5 million small businesses. Tech companies have a spotty record in the area, however. Back in 1997, Microsoft took a traditional publishing model approach with That fizzled. Google has banked on self-service ad systems, only to find the complexities of AdWords too much for business owners focused squarely on running their businesses. According to eMarketer, just 8 percent of small businesses advertise with Google.