All Things Google: Beyond the Search Engine

Stephen DeAngelis

December 2, 2010

Search engine giant Google has recently been in the news for past, present, and future actions. Company executives continually strive to keep the entrepreneurial spirit alive at Google and, therefore, they are always on the lookout for new ways to reinvent the company. Douglas MacMillan reports that Google has “$33.4 billion in cash and a willingness to spend it” [“So Google’s Buying Your Startup. Now What?,” Bloomberg BusinessWeek, 24 November 2010]. As proof of the company’s willingness to spend money, MacMillan notes that “Google has stepped up its dealmaking this year, spending $1.6 billion on more than 20 companies through September.” The ever-expanding Google empire has generated concern among some critics that it is getting too large and too powerful (i.e., becoming the Walmart of cyberspace). Not only are Google’s competitors concerned, so are some government officials. As a result, “European antitrust authorities have opened a full investigation into Google after allegations from smaller online search service providers that the US company had abused its dominant market position.” One company that lodged a complaint against Google was the U.K.-based price-comparison site Foundem. In an interview with NPR, the founder of the Foundem indicated that for a long time Google searches for the company resulted in zero hits. Basically, she argued, Google had made the company disappear in cyberspace. In a video about the investigation, Mary Watkins, the Financial Times‘ technology correspondent, talks to Daniel Garrahan about whether Google is now too powerful [“Is Google too powerful?,” Financial Times, 30 November 2010].

 

A companion article about the investigation states: “The investigation, which follows eight months of more informal inquiries by competition officials, will centre on claims that the US search company gave preferential treatment to its own services when ranking search results, and discriminated against competitors. It will also probe the contractual relationship which Google has with advertisers. In particular, it will explore allegations that Google imposes exclusivity obligations and restricts advertisers from moving their data to competing platforms” [“Brussels launches formal Google probe,” by Nikki Tait, Mary Watkins, and Richard Waters, Financial Times, 30 November 2010]. Tait, Watkins, and Waters note that the investigation could take years; especially since “there is no time limit for European Commission inquiries of this type.” They continue:

“Google said it had ‘worked hard to do the right thing by our users and our industry’. It said it had tried to ensure that adverts were ‘always clearly marked, making it easy for users and advertisers to take their data with them when they switched services, and investing heavily in open-source projects’. The US company also challenged the claim that it was dominant in the online search market in spite of its very high market share, pointing out that users do go to more specialised search sites directly. Lawyers believe that allegations related to Google’s search system are potentially the most damaging. ‘This strikes at the heart of how internet search is conducted. Google’s natural search results are based on its proprietary algorithms,’ said Kenneth Mullen, technology specialist at the Withers law firm. ‘These are Google’s crown jewels and how its search ranking works is still largely a secret.'”

Obviously Google will fight the charges vigorously because billions of dollars of business and fines are at stake. So much for news involving Google’s past — on to the present and future. Google is looking to go beyond being one of the world’s leading search engines to becoming one of the world’s largest on-line sellers of advertising as well [“Google Plots Move From Search to Sales,” by Amir Efrati and Geoffrey A. Fowler, Wall Street Journal, 1 December 2010]. Most of the buzz has been about Google’s rumored acquisition of Groupon Inc., a Chicago-based social buying company. The story was first broken by Wall Street Journal reporter Kara Swisher in her Boom Town blog [“Google Turns Its Local Eyes to Groupon–But Who Else Could Enter Bidding?,” 19 November 2010]. In a follow-up post [“Google’s Groupon Offer: $5.3 Billion, With $700 Million Earnout,” 29 November 2010], Swisher wrote:

“According to sources close to the situation, Google has offered $5.3 billion for Groupon, in what would be its largest acquisition yet, if completed. … If done, it will move the search giant instantly to the top spot in local commerce online and give it huge troves of data about consumer buying habits and merchant information across the globe.”

Swisher assumes that along with other big plans being hatched by Google, like “its pending $700 million acquisition of ITA Software, the travel data firm,” the acquisition of Groupon will force regulators worldwide to take an even closer look at the company. Anti-trust lawyers should be happy, muses Swisher, because Google is providing them employment for years. Despite the possible legal backlash, Swisher calls Google’s acquisition of Groupon “a killer move for Google.” The reason, she claims, is that “Groupon, founded in 2008, has taken off like a Roman candle and dominates the huge market for social shopping and discounting.” She continues:

“While the $6 billion Google is considering paying seems high, Groupon’s fast-growing revenue and profitability make its multiples less daunting, said those familiar with the matter. It will certainly be a big payoff for Groupon’s investors, including Silicon Valley’s Accel Partners, as well as Battery Ventures, New Enterprise Associates and Russia’s DST Global. Groupon has gleaned about $170 million in venture funding from them, most of which it has not needed. That’s because it has reportedly attracted upward of $50 million in monthly revenue. It has done this by offering ‘daily deals’ –- getting a massive discount from local retailers in return for delivering customers via marketing via email and on social networks, especially Facebook and Twitter.”

Swisher notes that one of the ironies of the deal is that “Google could own a start-up that is largely powered by rival Facebook’s massive skein of social networking connections.” Swisher’s scoop has been picked up by other reporters, like Efrati and Fowler in an article cited above. Other reporters, like Joseph Menn and Richard Waters, question whether the Google deal is the “killer move” claimed by Swisher [“Google in advanced talks with Groupon,” Financial Times, 30 November 2010]. They write:

“Internet analysts were sharply divided on Tuesday over whether a deal would represent a coup for Google, or amount to an overpriced acquisition of a start-up with an unproved business model. … Sucharita Mulpuru, an analyst at Forrester, questioned how many retailers and consumers had found Groupon’s service useful enough to become repeat users, and said its rapid growth appeared to point to widespread trialling of the service. She predicted that it would be hard for Google to extend Groupon’s service successfully to a bigger group of retailers through its existing automated search advertising system, since this would leave it little control over the quality of deals being offered. “

Groupon is apparently aware that a new business model might be necessary for it to maintain its momentum. Efrati and Fowler report:

“The acquisition talks come as Groupon is launching a new version of its website to help it move away from its current model of offering one deal a day for a particular city. … Groupon’s model has caught on because it improved on the idea of local online advertising, where a business pays money up front for exposure that will hopefully translate into sales. With Groupon, merchants don’t pay for marketing until they get a customer in the door. So far, only a fraction of local businesses advertise online. BIA/Kelsey, a local-media advisory firm, estimates that local businesses will spend about $20 billion online this year, a figure that will reach more than $35 billion by 2014. [Groupon founder and Chief Executive Andrew Mason] said the company plans to introduce a new version of its site … that would ‘dramatically increase’ the number of businesses offering deals on the site and give customers new tools to use Groupon multiple times per day. As part of that, Mr. Mason said he plans to this week to launch a self-service ‘Groupon store’ platform for local merchants, through which they can sell deals targeted to users who have expressed interest in that kind of business. Groupon will charge these businesses a 10% commission on sales of these deals, as opposed to the 50% the company usually charges for its ‘deal of the day’ service. ‘We want to do for buying at local businesses what Amazon did for buying online,” said Mr. Mason.”

In a follow-on blog post, Geoffrey Fowler describes, in a little more detail, how the Groupon business model is changing [“Groupon Grows Beyond One Deal Per Day,” Digits, 30 November 2010]. He writes:

“The first component is a self-service ‘Groupon store’ platform for local merchants, where they can set up Groupons for themselves without going through a Groupon salesperson or waiting for an opening to become a city’s deal of the day. Up until now, one of Groupon’s biggest problems has been a large backlog of merchants that want to be featured as a deal of the day; in some markets, the wait to get on the site takes months. For every business the site features today, the company’s old model forced it to pass on seven potential deals for lack of space. This was fueling copycat sites to service those other deals, Mason said.”

As of this posting, it remains unclear whether Groupon’s Board of Directors will accept the offer. In a video interview with CNNMoney.com, Andrew Mason stated that his preference would be to have someone off the wall (like MacDonald’s or Exxon) to acquire the company [“Sorry, Google — Groupon would rather sell to Exxon,” 1 December 2010].

 

Google isn’t stopping at selling advertising and data, it is also going to challenge Amazon and other e-book sellers by launching an e-book retailing venture [“Google Set to Launch E-Book Venture,” by Jeffrey A. Trachtenberg, Jessica E. Vascellaro, and Amir Efrati, Wall Street Journal, 1 December 2010]. Trachtenberg, Vascellaro, and Efrati report:

“Google Inc. is in the final stages of launching its long-awaited e-book retailing venture, Google Editions, a move that could shake up the way digital books are sold. The long-delayed venture—Google executives had said they hoped to launch this summer—recently has cleared several technical and legal hurdles, people close to the company say. It is set to debut in the U.S. by the end of the year and internationally in the first quarter of next year, said Scott Dougall, a Google product management director.”

Google understands that in the increasingly crowded e-book retailing space, it will need to differentiate itself from its competitors. Trachtenberg, Vascellaro, and Efrati explain how Google plans to do that:

“Google Editions hopes to upend the existing e-book market by offering an open, ‘read anywhere’ model that is different from many competitors. Users will be able to buy books directly from Google or from multiple online retailers—including independent bookstores—and add them to an online library tied to a Google account. They will be able to access their Google accounts on most devices with a Web browser, including personal computers, smartphones and tablets. That’s a different approach from Amazon.com Inc., which is estimated to have as much as 65% of the market. Users of its proprietary Kindle device can purchase books only from an Amazon store, although they can read them on dozens of different devices that run Kindle software and can access free books from other sources. … ‘The Google model is going to drive a lot of sales,’ [says Dominique Raccah, publisher and owner of Sourcebooks Inc., an independent publisher based in Naperville, Ill.] ‘We think they could get 20% of the e-book market very fast.’ The strategy of not having its own e-reader device could actually give Google a competitive advantage, says Brian Murray, CEO of News Corp.’s HarperCollins Publishers Inc. As the number of mobile reading devices—including tablets and smartphones—proliferates, Google Editions will benefit ‘because their technology may be the least dependent on specific devices,’ he says.”

For the time being, it looks like Google pursuing business opportunities in cyberspace (i.e., they are selling only internet-based products). I suspect, however, that on-line retailers are watching warily as Google continues to expand its on-line presence.