In the Wild West of group-buying and daily-deals sites, there’s about to be a major showdown. Investors have been talking about consolidation in this sector for a while now—and it looks like that’s where things are headed.
But not without a few curveballs first. Last week, Google (NASDAQ: [[ticker:GOOG]]) was widely reported to be pursuing an acquisition of Chicago-based Groupon for a whopping $5-6 billion. Now it looks like the deal is off, with Groupon walking away from the offer on Friday—and perhaps looking to go public in the next year or two. Meanwhile, Amazon.com (NASDAQ: [[ticker:AMZN]]) has invested $175 million in Washington DC-based LivingSocial, which is currently No. 2 in daily deals behind Groupon, and is rumored to be worth around $1 billion.
Investors with skin in the game are keeping a straight face about these valuations. But investors and analysts not involved in group-buying companies have been much more cautious; some I’ve talked to have dismissed the industry as unsustainable (too much money for too small a market long-term) and indefensible (no real barriers to entry for new players). On this latter point, dozens if not hundreds of Groupon clones have sprung up around the world, though none yet has the scale or reach of Groupon.
What’s undeniable is that the big tech companies were caught by surprise when group buying took off—and now they have to do something about it. It’s the latest reminder that just when the Internet landscape looks like it’s settling into a predictable pattern—Google owns search, Amazon owns online retail, Facebook owns social networks—a startup can come out of nowhere and turn the whole thing on its head. (Groupon has gone from zero to $500 million-plus revenue and 3,000 employees in just two years.) It remains to be seen what Facebook, Microsoft (Bing), eBay, Yahoo, and AOL each will pursue in this sector, but it should be interesting.
I reached out to a couple of group-buying startups with strong ties to Xconomy cities to hear their thoughts on the recent developments. One theme that emerged is that the online technology giants really need feet on the street to cash in on local advertising—smaller stores and merchants trying to reach customers in Boston, say—and that they want to get into the game for different reasons. But it won’t be easy, partly because there’s a cultural mismatch between tech companies like Google and consumer-brand companies like Groupon.
The Groupon negotiation “shows Google’s desperation or belief that this daily
