Monday, December 6, 2010

The Battle between local and "global" advertising: back story of Google & Groupon

There is has been a challenge since the beginning of the advertising industry - how to enable small, local businesses to advertise to its potential customers in a focused and cost effective way. With traditional advertising media - TV, radio & billboard - the media creation and "real estate" costs combine to a prohibitive expense for local businesses, where potential sales are a fraction of products that sell on a larger scale. Take for example a local restaurant versus a restaurant chain. A local restaurant can only rely on word of mouth and repeat customers for marketing; perhaps some flyers or cheap, local newspaper ads. But TV, radio & billboard is out of the question. The ROI is never feasible.

Not only is cost a key concern on successful local advertising, but business model as well. I remember in my former position, I was with a venture fund that invested in a digital signage company that developed a unique technology that was suitable for the digital billboard market, during the time when large format LED signs were about $1m a piece. One of the main ideas was to enable changing static images - so the billboard owner could sell time slots like TV & radio into the billboard market. It was a difficult implementation, mainly due to business model. And today, local businesses still do not have a cost effective billboard media solution. In theory, digital signage could provide a billboard solution to local businesses, but in practice it has yet to be implemented, largely due to a lack of an acceptable business model of the billboard owners.

Enter the internet. As with a number of industries, the Internet turned advertising on its head. Already during 2005 and 2006, when local internet advertising on the web was strong, many industry experts realized a unique trend - local internet advertising was dramatically more valuable and thus more expensive for the advertiser. A cost per click (CPC) for a local business was (and is) significantly higher than for a Coca Cola ad, for example, on CNN. Of course, a key issue is the number of potential clicks and the Web sites that are relevant for the local advertisers. So CNN is a large publisher with millions of unique visitors. Therefore, statistically, the site will experience a significant amount of clicks - more than a local city newspaper Web site, for example. So Coca Cola will pay a lot more on the advertising in absolute terms, but a lot less on the CPC. Additionally, the Internet can track real performance and ROI, as opposed to TV, radio and billboard.

Web sites like Yelp provide local search for specific city markets. They provide an optimal platform for local businesses to address their core audience – the local consumers. The site adds in social tools, consumer reviews, and walla – a super valuable search and CPC for businesses that have historically had difficulty advertising. The irony is that the local businesses cannot afford high quality advertising...but on the internet they pay much more than the big advertisers per click.

Google actually tried to buy Yelp a year ago for about $500m and failed. Since Google is mainly in the business of broad, global advertising, Yelp is quite complementary. And since they are still a separate company from Google, Yelp, without a doubt takes away business from Google. And the business model is the same. Local businesses buy attractive, performance tracking CPCs.

Most recently, Google tried to get into local business thinking once again via the attempt to acquire Groupon for a whopping $6 BILLION. Google failed on this acquisition as well. Groupon has a very cool business for locals. It offers on Groupon (coupon) per day per local market in which it operates. Deep discounts have always been a successful advertising approach. And this is exactly what Groupon is doing. Groupon is essentially offering local businesses the ability to drive consumers to buy their products; initially for cheap. There are already an estimated 500 Groupon like services on the web across the globe, since it is naturally a local service. Groupon is 4 to 5 times the size of the next competitor, so Google wants the market leader.

It seems that Google was late twice on the local ad front and missed out on both Yelp and Groupon.

The bottom line on the analysis here is that the internet can provide measurable performance driven advertising. Coupled with contextual tools – where the site understands the users’ location and current interests – local advertisers have a very valuable medium. And what Groupon has proven, is that local advertisers need a local, ROI driven audience coupled with a creative business model.

As a final comment / question, I view Yelp as a super valuable asset and the property should essentially be one large, global internet property. Groupon, on the other hand, can easily be a service offered by hundreds of local web properties across the globe. I am not sure if there is an intrinsic value in having one large global Groupon. So if Groupon goes on the M&A hunt, I don’t believe that the company’s value will increase more than any acquisition price. So I think that it may be good for Google that Groupon turned them down. If I was Google, I would go after Yelp once again. What do you think?


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