David Mihm has an excellent piece (that I happen to agree with) on why Groupon in a broad sense is synergistic for Google. I think coupons and the new twist that Groupon brings to them will be a successful  and profitable advertising medium. John Battelle thinks it worth significantly more than $2.5 billion. Greg Sterling though argues that it isn’t worth $5 billion and that very well could be true. But Google may be the only company for which the purchase makes sense at these levels.

I would like to add the following thoughts to the discussion. Greg has estimated  to me that only 25% of all SMBs will ever be willing to participate in self serve internet advertising. The leaves the vast majority of local businesses not participating in and unaffected by most of what Google offers (Tags, Boost, Adwords) today.

I have estimated that Boost with a 10% adoption rate and an average $100/mo spend would generate $500 million a year in income. If it approached the 25% cap it would reach $1.2 billion with current adoption levels of 2 million claimed businesses. I have estimated that Tags, at a fixed spend of $25/mo and the same 10% has a much more limited short term potential of  $60 million. Even as claimed listings grow, there is a very real top side expectation for both products in a self serve world.

Enter Groupon. It is a product that is already generating $500,000,000 in annual income. If Google did nothing else but add the revenue stream to Tags and Boost when it rolls out nationally, they would be at a $1 billion dollar in local ad revenue.

But Groupon also has staff on the ground trained in selling new media. The portfolio for these sales people would immediately increase with a buyout. And an impressive portfolio it would be. These folks could lead with a Groupon deal and then lock in a monthly recurring revenue source with Boost or Adwords. If their selling efforts for Groupon were a bust initially, they could still start folks with Tags and demonstrate the significant benefits of local internet advertising and of claiming their listing in Places and move on to Boost and Groupon down the road.

This purchase would not just give Google a successful, easy to explain coupon product for SMBs (and national players to add to the Adwords revenue stream) but it would give them an on the ground sales force with an actual foot in the door of the other 75% of businesses that would never self serve. It is conceivable to me that just by adding these products to the portfolio and pitching them in person Tags and Boost sales would skyrocket immediately.

Google would have in place Free (Places, Offers), Good (Tags, Tagged Offers), Better (Boost, *?) and Best (Adwords, Groupon) product offerings in both a self serve and full service model that could scale from the single shop to the national retail chain, nationally and internationally. It would cover 100% of the opportunity, have huge upside potential and start out of the gate with a roughly $1 billion highly profitable, income stream and a defensible position …

Investors may not like the economics and analyzed singly Groupon might not in fact make sense. But if Google could use the purchase to jumpstart and grow Boost, Tags and Adwords for local in the rest of the world, the potential of Groupon to them at least, is big.

Here is a chart of Google’s free and paid products for Local that shows how Groupon would fit in the mix…
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*? one possible area of Groupon expansion for google would be downstream to an automated group coupon product that would work in those areas that Google doesn’t have a sales force. This would play to Google’s automation strengths and further leverage Groupon across broader markets.