Google Wants Groupon Because Social Ads Are the Future

After a week of on-and-off rumors about Google making an offer for Groupon, there are now multiple reports that the web giant is close to paying as much as $6 billion for the social-shopping service, which has been growing faster than just about any tech-related company in recent memory — including Google (s goog). If true, the deal would be almost twice the size of the search company’s largest acquisition ever (the $3.1-billion purchase of DoubleClick in 2007), and would be a gigantic bet on two trends that Google has so far failed to really take advantage of: namely, the movement of local advertising onto the web, and the rise of social behavior online.

Google’s $1.65-billion acquisition of YouTube in 2006 makes a good comparison for its apparent interest in Groupon: At the time, online video — and just as important, the sharing and embedding of that video — was clearly the future of the web, but Google was a tiny player in that market and wanted to get big quickly. So it paid what seemed like a massive amount of money at the time for the startup, and has spent the past few years trying to figure out how to monetize that content.

The nice part about Groupon is, while YouTube was located more towards the social end of the spectrum and less the monetization end, the group-buying service is a monetization machine — although one that is also socially oriented, since it takes advantage of consumers’ desire to trigger discounts by forming a group. Clearly one of the big attractions for any acquirer is the fact that Groupon is bringing in an estimated $50 million in revenue a month, and expects to close the year with more than half a billion dollars in sales. That’s after less than two years in existence.

Why has Groupon been able to grow so quickly? As I outline in my latest GigaOM Pro report (subscription required), the startup’s rapid success is a sign of how explosive the power of social media can be when applied to a revenue-generating idea like coupons. As co-founder and angel investor Eric Lefkofsky described in a recent interview about Groupon, the company (which was originally called The Point, and focused on connecting people around social issues and activism) didn’t really take off as a business until it married the viral nature of a group-buying offer with the desire by local retailers to reach out to potential customers. Email is the company’s primary method, but it’s also fueled by social networks like Twitter and Facebook.

More than anything, Groupon has been riding the social-advertising wave, which is something Google desperately wants to own. In many ways, it’s the next step beyond AdWords and AdSense: While those products involve advertising keywords that sit next to searches and capture surfers who are looking for information about specific topics, Groupon reaches out to people who may not even know they want the item yet. The company’s DoubleClick acquisition gave it control of banner advertising, but banners are the past; social advertising is the future. As Macquarie Research analyst Ben Schachter said in a research note this morning, the purchase “is about much more than Google generating revenue from emailed coupons — it’s about Google’s ability to potentially access and utilize the social graph for eCommerce.”

The other important aspect of the deal is that it is primarily focused on local or regional businesses. Groupon has also started promoting national deals of the kind it did with The Gap (s gps), but the company’s real power is in helping small and medium-sized retailers, restaurants and other merchants connect with customers directly, and boost demand for their services and products. That’s a market Google hasn’t been able to really capitalize on, despite attempts to do so through its Places feature. That was the rationale behind the web giant’s reported interest in buying Yelp — a deal which didn’t go forward, for unknown reasons — and it is driving its interest in Groupon as well.

What would web advertising look like if Google were to acquire Groupon? Instead of just keyword ads targeted to what you searched for, you could start to see offers directed specifically at your location, or based on things you have searched for in Google Places, or places you have checked in at through Google Latitude, or services you have rated via the web giant’s new and somewhat underwhelming Hotpot recommendation service. Google’s knowledge of algorithms could provide better matching and sorting of those deals, and the search company could also use the knowledge that it gains from Groupon’s millions of users and advertisers to fine-tune some of its other locally focused services.

In a recent interview, Don Rainey of Grotech Ventures — an investor in Groupon’s largest competitor, LivingSocial — talked about a future in which consumers and local businesses could participate in a kind of real-time auction-style marketplace for deals on products and services, so people looking for deals on dinner tonight could survey the offers from local restaurants and pick the ones they wanted, and merchants could fine-tune their offers based on real-time demand. That is one future that Google desperately wants to be part of, and $6 billion probably seems like a small price to pay for a seat at that table. For more on Groupon, please see my GigaOM Pro report.

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Post and thumbnail photos courtesy of Flickr users Groupon and TechCrunch