Behind the Groupon-Google Deal

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Well, it's safe to say that Groupon is hot. The local coupon site, founded just two years ago in Chicago, appears poised to accept a $6 billion acquisition offer from Google, according to Kara Swisher:

Sources said the deal for the Chicago-based social buying site seems likely to be struck, even as early as tomorrow, although it certainly could fall apart right up to the end. But, 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.

I suspect that Swisher means this, but it should be said explicitly: This is about local advertising dollars, not online shopping. Groupon is the first credible, mass-market competitor to Google for small businesses who want to find customers online. (Yelp, which Google tried to buy last year, is arguably another candidate for that title, but the site's contentious relationship with small businesses has probably hindered its growth.)

For years, if a small company wanted to attract new customers it had two options: The Yellow Pages and Google. Advertising in the Yellow Pages is expensive and, given that computers have replaced the phone book for many people, of questionable value. Essentially, Google was the only game in town for a lot of businesses.

But Groupon changed that. Inc.'s Jason Del Rey nailed this earlier this year in a story about how to use Groupon to boost sales:

Groupon ended up selling 617 of the packages. The response prompted Henderson to begin directing customers to her online reservation system and to decrease her Google AdWords budget for fear of drumming up more business than the studio could handle. Like Pfahler, she expects to break even on the deal itself, but she says many of the new customers have since signed up for more classes. "It was great for awareness," Henderson says, noting that she would probably partner with Groupon again.

I don't know if Google's M&A team read Jason's story, but they surely must have noticed the phenomenon he described: Businesses are fleeing (or at least partially fleeing) Google for Groupon. Six billion dollars for a coupon site may sound like a lot of money, but I don't think the deal is about the value of Groupon itself. It's about eliminating a dangerous competitor.

Senior contributing writer Max Chafkin has profiled companies such as Yelp, Zappos, Twitter, Threadless, and Tesla for the magazine. He lives in Brooklyn, New York. @chafkin