2010-12-06 Groupon spurns $6 billion offer from Google
 

Intelligence Report - 12/06/2010
By Mark Glaser & Corbin Hiar

NEWS

RESEARCH

News

Groupon spurns $6 billion offer from Google

While the recession continues to rage in the U.S., there are still some pockets of major frothiness. One is around social coupons and daily deals, with the two-year-old startup Groupon being a possible acquisition target of Google for an eye-popping $6 billion. (The other is the frothy valuations for Twitter and Facebook; see item below.) And even more frothy is the bold move by Groupon actually spurning that massive offer over the weekend, hoping for an even more massive IPO, perhaps. As Fortune's Paul Smalera points out, this is the second time the search giant has been jilted in a big way, after losing out on Yelp last year. So why would Groupon be worth so much? At the Neiman Lab, Ken Doctor suggests that Groupon has cracked the digital code for local advertising the newspapers failed to grasp. “Newspapers were the kings of coupons, the best source for getting the daily deal, on any kind of local product or service you could imagine,” Doctor writes. Now, like Groupon, upstart digital coupon company Coupon.com, which recently passed $1 billion in coupons printed, has separated the deal from the content.

But others doubt it will be so simple. Vinicus Vacanti, the cofounder of daily deal recommendation service Yipit, warns that once they wise up to the digital formula “old media companies with millions of users and strong brands will create real competition for Groupon.” As the hundreds of Groupon clone competitors show, the barriers to entering the deal-a-day market -- finding merchants to agree to an offering up discounted merchandise and a share of the proceeds in exchange for free advertising -- are very low. As Forrester Research’s Sucharita Mulpuru writes on paidContent, “the player that presents the best customers [those willing to pay in excess of the coupon] and gives better margins than Groupon to merchants stands a better chance of getting the best merchants.” And margins will drop as more competitors enter the field. Once introduced to the web, local advertisers could also tire of giving Groupon a cut of their merchandise and instead use the equally robust demographic data available on Facebook at rock bottom CPMs to, say, advertise their own 30% off deal.


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Branson vs. Murdoch in iPad-only publications

Rupert Murdoch’s pioneering plan to launch The Daily, the first tablet-only newspaper, was bound to attract a lot of attention. However, with considerably less fanfare, another billionaire has beaten Murdoch to the digital newsstand. In launching Project, the first magazine to come to the iPad without a print counterpart, publishing neophyte Richard Branson has added another venture to his sprawling Virgin Group empire. At paidContent, digital designer Nic Newman writes that, for these bold ventures to beat out apps from established print publications, they’ll need “an obsession with the user interface, the design and the level of social interaction.” Unfortunately for Murdoch and Branson, both digital publications will likely be missing key components of this recipe for success. “Project is a decent-enough male lifestyle title,” says paidContent’s Robert Andrews. But it is “beset by horrid UI and frustrating Apple delivery" because it requires the latest iPad operating system to run. Mashable’s Lauren Indvik had similar complaints but also lamented its lack of social features. Currently, Project content can only be shared via email and in closed, in-app discussion forums.

Although The Daily has yet to launch, some are raising the same concerns about its construction. In spite of today’s link-driven news ecosystem, the New York Times’ David Carr reports that the tablet-only newspaper will have “no inbound links from other sites, and nothing outbound either.” At least initially, the millions of news consumers who currently lack an iPad (the first tablet the publication will launch on) will be able to view Daily content on a bare-bones mirror site, which Salon founder Scott Rosenberg predicts will eventually “grow to be the ‘real’ Daily.” Rosenberg says people prefer online news because it's timely, convenient and, most importantly, “connected: it’s news that you can respond to, link to, share with friends.” Still, with some $30 million invested in this new venture and perhaps even the backing of Apple’s Steve Jobs, it is too soon to count out The Daily. News Corp. staffers told New York Observer's Nick Summers that there are 150 people working on The Daily, and that the interface is "mind-blowing," embedding film trailers in movie reviews and audio clips in album reviews. When The Daily launches sometime in mid-December or early 2011, consumers will be able to decide whether the bells, whistles and bylines are enough to justify its isolation.

Salon looks for possible buyer

Just as the endless diversity of niche sites on the web has cut into the fortunes of newspapers, so too are general interest websites feeling the pinch. First, the harsh economics of Internet journalism drove Tina Brown back into print. Now, even The Daily Beast’s better trafficked, veteran rival Salon is seeking refuge in the arms of a larger media company. The San Francisco-based online news and culture magazine was founded in 1995 and was traded on the NASDAQ at the height of the dot-com boom. The Bay Citizen’s Elizabeth Stevens reports that today its market capitalization is around $330,000, only some $40,000 less than the annual salary of CEO Richard Gingras. It has flirted with the idea of a merger or sale in the past, but never with the same urgency or seriousness. Debt is seriously weighing down the company’s options. As the Wall Street Journal’s Russell Adams reports, “Salon Media Group Inc. has racked up net losses of more than $15 million in the past five years, with nearly a third of that coming in the fiscal year ended March 31, 2010.” Although its quarterly deficits have shrunk considerably in the past half year, the site is still operating at a loss.

Although Salon remains a well-known, respected Internet property, many other media companies seem hesitant to buy it. “Integrations are always tough,” said Josh Tyrangiel, the editor of Bloomberg Businessweek, in an interview with Talking Biz News. Tyrangiel was brought in to revitalize BusinessWeek after it was bought by Bloomberg a year ago. Despite a relatively smooth transition for the editor and magazine, Bloomberg Businessweek is still losing ad pages. Buzz is hard to recover and that’s what MarketWatch’s Jon Freidman thinks Salon has lost. Jacob Weisberg, the editor of rival site Slate, told Crain’s Mathew Flamm that Salon’s financial problems were a result of it “trying to make it on its own as a small media company.” The Slate Group was bought by the Washington Post Co. in 2004 for $17 million. “For Salon, and others who bring a print-style cost structure to an Internet-style ad revenue stream, disappointment is almost inevitable,” warns Gawker’s Hamilton Nolan. So who would be interested in buying Salon? PaidContent floats the Washington Post Co., the Huffington Post, Newsweek Daily Beast Co., AOL or Yahoo. Sharia Ovide of WSJ’s Deal Journal only agrees on the last two. She also sees Hearst, the New York Times, Time Inc., and NBC Universal as potential saviors.

Digital Innovators Summit: March 14-15, 2011 Berlin, Germany

Be inspired at the Digital Innovators Summit in Berlin!  Hosted by FIPP, VDZ and emediaSF, the international digital media and magazine conference provides a forum to learn from and network with global peers.  Speakers include Stephen Lacy of Meredith, Peter Wuertenberger of Axel Springer, Dharmash Mistry of Balderton Capital and Andrea Mallard of IDEO.  Early bird registration by January 14, 2011; discounted rates for OPA members.  More at www.innovators-summit.com.

Bubble 2.0? Massive valuations for Twitter, Facebook

The initial public offering used to be the mark of a successful dot-com company. The value of businesses would skyrocket with the added capital, even with the scrutiny of SEC filings and quarterly reports. Yet Twitter and Facebook -- the online juggernauts of the social media era -- are flourishing as private, independent companies. Are these titans of social media overvalued? Facebook doesn’t think so. For the second time, the social networking giant is rumored to be interested in buying Twitter, according to AllThingsD's Liz Gannes. Two years ago Twitter turned down a Facebook offer of $500 million, relying instead on venture capital funding. It appears to be following the same strategy again this year, albeit with much larger numbers on the table. TechCrunch’s Michael Arrington reports that financiers at Kleiner Perkins have offered to buy up a share of Twitter that would value the company and its 175 million users at around $4 billion. Although Twitter co-founder Biz Stone has publicly said he wouldn’t sell for less than $5 billion, Arrington points out that “another investor could step up with an even higher valuation, forcing Twitter to make a difficult (even legally difficult) decision to pass on Kleiner.” Google, which made an informal offer for Twitter between $2.5 billion and $4 billion earlier this year, is still rumored to be in the hunt, as are a couple of other prominent tech VC firms. This bidding war is in spite of the fact that executives are still determining what Twitter is, much less how to make it profitable.

Compared to Twitter, Facebook is both larger than the microblogging service, further along the path to profitability, and perhaps even closer to an IPO in the near future. The social media giant already has reached a stratospheric valuation of around $50 billion in the opaque secondary markets. As TechCrunch’s Arrington notes, that figure is “more than one-quarter the market capitalization of Google, and nearly one-quarter the value of Microsoft. It’s worth more than eBay and Yahoo as well, and closing in on Amazon’s $80 billion valuation.” That might seem overstated for a company that has been around for less than a decade, but evidence of how Facebook is remaking the web and consumers’ online experience is easy to find. Fortune’s Kevin Kelleher says Facebook, which will take in $2 billion in ad revenue this year and nearly twice as much in 2011, “has fixed the social advertising problem” (even with its abundance of inventory and low CPMs). Facebook is also proving that it can drive business traffic. The day Apple announced that the Beatles back catalog would be available, Facebook was responsible for twice as many referrals to iTunes in the U.K. as search, according to Hitwise. And in the U.S., Facebook commands a dominant and increasing share of page views: 1 out of every 4, and nearly 10% of all Internet visits.

Research

BIA/Kelsey: Mobile, geo-targeted ads ready to boom

For years, we've been hearing about a mobile ad boom that has repeatedly fizzled out. Finally, they seem ready to catch fire, according to BIA/Kelsey. The firm predicts U.S. mobile ad sales will more than double in the next four years, hitting $2.9 billion by 2014. The dominant ad format is currently old-school SMS ads, which were responsible for $226 million of the $491 million spent on mobile advertising last year. By 2014, they will account for only $562 million of the projected $2.9 billion search market. The future market-leading format will be mobile search ads, which BIA/Kelsey predicts will have a compound annual growth rate of 93 percent. Search only accounts for some $59 million today, but will reach $1.6 billion by 2014, according to BIA/Kelsey. Mobile display advertising will increase at a healthy 31 percent compound annual growth rate from $206 million to $803 million.

So what to make of this rapid growth? TechCrunch’s Leena Rao says the expected growth in mobile search “represents a huge opportunity for Google, who dominates web search advertising.” An opportunity, sure, but hardly a huge one if BIA/Kelsey’s figures bear out. As MediaPost’s Mark Walsh explains, the projected size of the mobile market in 2014 ($2.9 billion) is “less than half the $6 billion Google is said to be bidding for Groupon.” In regards to the declining market share of text messages, his colleague David Goetzl is unsurprised: “Marketers have expressed wariness in wading too deeply in the space, since users consider it so personal.” Another factor Goetzl fails to mention is the increasing sophistication of the phones available on the market. Feature phones are on their way out in America and, as more consumers adopt powerful smartphones, advertisers will likely create more effective mobile ads. Indeed, geo-targeted ads will be key by 2014, BIA/Kelsey suggests. Seventy percent of all ads, regardless of format, will be mobile local ads targeted based on a user’s location.

Gartner: Tablet sales eating into PC sales

Gartner delivered some unwelcome news to the PC industry this holiday season: Your sales are entering a prolonged slump. The research firm revised its estimates downward for 2010, going from a 17.9 percent increase over last year to only a 14.3 percent increase. Similar downward estimates were made for 2011: an 18.1 percent increase will now only be 15.9 percent. So what’s hurting PC sales? "These results reflect...growing user interest in media tablets such as the iPad," Gartner analyst Ranjit Atwal said in a statement. Among the most interested users are pre-teens, among whom the iPad is the most coveted gift of the holiday season according to a Nielsen survey of 6- to 12-year-olds. This likely holiday bump, coupled with a weaker economy that makes tablets more attractive than expensive PCs, will help move 19.5 million units this year, Gartner says. They expect that figure to nearly triple in 2011 to 54.8 million tablets sold and then top 208 million in 2014. As Business Insider’s Matt Rascoff explains, “that means that instead of of buying new PCs every three to seven years to support the latest OS and applications, companies can use inexpensive terminals or stick with old refurbished PCs.” Perhaps HP and Dell should add “making a great tablet computer” to their New Year's resolutions.

Of Note

FTC Wants Do-Not-Track for Online Ads (ClickZ)
Industry was too slow to enact a self-regulation regime, agency says

Barry Diller and John Malone Are Free! (From Each Other) (Deal Journal | WSJ)
Diller buys out Malone's interest in IAC while also stepping down as its CEO

The Incredible Stupidity of Investigating Google For Acting Like A Search Engine (Search Engine Land)
EU's anti-trust investigation of Google fundamentally misunderstands how a search engine operates

Few smartphone owners are loyal to their brand: survey (Reuters)
Apple, with 59 percent of users considering another iPhone, has highest loyalty rate; industry average only 25 percent

Check-In Offers Come To Yelp (MediaPost)
Yelp was slow to integrate geo-location to its app, but it has a broader audience than most check-in services

'Report an Error' Button Should Be Standard on News Sites (MediaShift Idea Lab)
A new alliance is pushing publishers to include a "Report an Error" button on every story, alongside the buttons for printing, sharing or emailing stories

 

openquoteThe CPM game, then, is looking increasingly like a race to the bottom, where publishers desperately try every trick in the book to boost their page views and ad impressions, just to compensate for the fact that their revenues per page are very small.closequote

Reuters blogger Felix Salmon commenting on Gawker's coming redesign

The New Gawker Media (Reuters blog)

 

The OPA Intelligence Report is a bi-weekly email summarizing and commenting on important news and research for the online publishing industry. As always, feedback is welcome at feedback@online-publishers.org.