What Google knows about Groupon

As speculation mounts about an imminent buyout of daily-deals company Groupon by Google for a rumored price tag of $6 billion, one salient fact is being ignored: The two companies are already in bed with each other.

And this must weigh on the minds of Groupon’s board members, who are reportedly meeting today to decide whether to take Google’s offer.

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How did Groupon get so big? The prevailing theory is that the social features of its deep-discount offers for local merchants — a certain size group had to sign up in order for the deal to be “on” — turbocharged its growth. I’ve long been a skeptic of this argument, which is pleasing to social-media mavens but has untested logic.

You can’t go anywhere online these days without spotting a Groupon ad. The company is clearly spending a lot of money with Google. And as Sency founder Evan Britton recently pointed out, Groupon’s ads are distinctly effective on Google’s AdSense platform, because they are targeted to a specific city, feature a compelling offer to cost-conscious Internet users, and have easily tracked return on investment, allowing Groupon to constantly tweak its ads for the best results.

The result: Runaway growth, with the two-year-old company estimated to have $500 million in revenues.

The problem is that growth is dependent on Google, which is famously opaque about the workings of its ad systems. As much as Groupon may know about what works when placing ads with Google, Google always knows more. And Google could change the rules at any time.

That information advantage may be what lets Google confidently bid $6 billion for Groupon. Google knows exactly what it’s getting and how profitable the company is. Right now, Groupon is arbitraging Google’s AdSense system, aggregating demand from customers and supply from local merchants, and raking in the difference. Google’s just getting its usual cut. Wouldn’t it be nice to own the whole shebang?

One thing to keep in mind, though, is that Groupon’s success has been the human touch — hand-selecting deals, cajoling merchants to offer discounts, and crafting witty, catchy offers. Recent moves to offer self-service deals and expand into Asia won’t change that appealingly soulful core of Groupon’s business. Perhaps Google’s geeky hackerocracy should simply aspire to own Groupon, not run it.