Google’s growth model is broken: Tony Faure

Groupon’s apparent decision to rebuff a $6 billion takeover from Google begs many interesting questions, the answers to which will determine how the digital landscape looks a few years from now. If Google cannot acquire the companies that will fuel ‘hyper’ growth over the next few years, it will have to rely on growth in its maturing search business, which will inevitably slow over time.

Groupon is a phenomenon. Consumers sign up for a ‘deal of the day’ which is activated only when a minimum number of people agree to buy it. The deals are almost always for discretionary products and services (beauty related seems to be the category that appears most frequently). The consumer wins by getting a service or product at a steep discount – normally 50 per cent or more. The seller wins by offloading inventory they would not otherwise have sold, presumably at a reduced profit – and gaining new customers who can become regulars over time. Groupon and the seller share the revenue from the coupons sold.

Reportedly Groupon’s gross revenue run rate (the value of all coupons sold) is around $2 billion, and the net revenue (Groupon’s share of this) between $500 million and $800 million. The company is barely two years old.

Because Groupon’s deals are socially activated (by being bought collectively) much of their customer acquisition is through social media products like Facebook and Twitter. This is effectively free. So Groupon is using search and social marketing products to fuel a transactional vouchering business.

It is already spawning many competitors who see value in the model but also the low barriers to entry. In Australia there are several including JumpOnIt, Spreets, Cudo, OurDeal, GrabOne and others. They all appear to be growing very quickly as well.

What’s interesting is what this tells us about Google. For all its huge economic power (it is apparently sitting on $33 billion of cash), and the phenomenal continued success of its core search business, Google still has the look of the engineering company it is at heart. Where the business model depends on this (core search, maps, mobile) Google does well. Where it doesn’t, it doesn’t.

That’s why its strategy in the past few years has been to buy the competitors who can do something it can’t. It bought YouTube for video, DoubleClick for display advertising, and AdMob for mobile advertising. But its attempts to buy social or transactional businesses have not yet been successful – it failed to buy local advertising and recommendation business Yelp a year ago, and has now apparently failed to buy Groupon. In the meantime it has been relatively unsuccessful in launching social products to compete with Facebook, such as Buzz.

The short history of the internet has seen many companies rise on the back of excellence in a category. Yahoo! dominated online media in the late 1990s; eBay dominated auctions; Amazon dominated retail; AOL dominated access. In the last decade Google has dominated search; MySpace and then Facebook have dominated social. But it is hard to dominate beyond the category you first become famous for. It requires new and different skill-sets to co-exist with the core ones that got you where you are. This is organisationally very tough to execute.

So although each of the biggest companies from the early days of the web still exist, and mostly are still profitable, the rate of change in the networked world makes it hard for them to adapt fast enough to capture the next big thing. In the end the huge growth they have become accustomed to eventually levels off, and – if there is nothing to replace it – so does market cap.

If Google’s strategy to solve this problem by buying ‘next big things’ stops working, it will need to show that it has the internal disciplines in place to solve these growth questions organically. That, history suggests, is a big ask.

Tony Faure is a director of Australian Independent Business Media Pty Ltd, which owns Business Spectator, and is former CEO of ninemsn.

This article first appeared on Business Spectator.

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