Why Google Dropped Groupon and Local Just Doesn't Scale

Ad Age Talks to Infectious Greed Blogger and Tech Investor Paul Kedrosky

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SAN FRANCISCO (AdAge.com) -- Prolific tech business analyst Paul Kedrosky made a name for himself as the founder of longtime blog Infectious Greed, one of the first editorial sites to cover internet investments and companies. He writes a column for Bloomberg and appears often on CNBC to talk about the venture world and his analysis of investments and technology companies. He can perhaps talk so easily about the tech stuff because he can actually build it -- back in 1999, his Groksoup was one of the first blog-hosting sites available on the internet -- back before "blog" had even been coined as a word.

Paul Kedrosky
Paul Kedrosky
We asked him if he thinks the startup world is overheated and what he thinks Groupon should do.

Ad Age: You are an expert in the venture capital world and investing. Are there too many cutesy companies?

Mr. Kedrosky: Yes.

Ad Age: Is that because there is too much money going around and no where to invest it?

Mr. Kedrosky: There isn't too much money. We don't have five times too much money, it's just that we don't know what to do with the money we do have. What's happening are a bunch of experiments -- incubators, accelerators, micro VCs, super-angels. In the past, venture capitalism was a mono culture -- everyone's fund looked like everyone else's fund. It's not like that anymore, so this is good.

Ad Age: Are there too many "me too" companies?

Mr. Kedrosky: The "me too" companies are a huge problem. It's easy to create companies, but after you create a company, how do you scale it?

Ad Age: On the heels of that question and recent events, what should Groupon do?

Mr. Kedrosky: Sell sell sell!!! The actual problem with the transaction came down to the break fee. Groupon got very worried that this deal would fall apart due to anti-trust regulations (Google has had problems with this before). Groupon wanted to sell, but in case the deal fell apart, they wanted to get paid anyway, and that's the purpose of a break fee. At the end of the day, since Google couldn't come up with a a large enough break fee, it means there was a real likelihood that the deal could have fallen apart and they had something to worry about.

Ad Age: Why is local so hot and why hasn't anyone been able to consolidate the billions spent in local advertising?

Mr. Kedrosky: Well, Groupon sales per employee number are half or less of typical sales numbers, making it a body shop of sorts. The reason hyper-local stuff breaks all the time is because you have to have so many people on the ground. No one's wanted to do that before, having all those people wandering around selling. You have to have all these extra people signing deals.

Ad Age: Are you saying local just doesn't scale?

Mr. Kedrosky: I don't care about specials in a three-block area of Brooklyn. I just don't care. So yes, there's definitely a billion-dollar hyper-local ad market but the right way to see it is there's a $15,000 local ad market. There's a whole bunch of many, many small markets. The whole idea of many companies or people is to get 1% of a giant number, but local doesn't work that way. It's 100 markets of all varying sizes. Given that you don't have Facebook's traffic on your site nor do you have salespeople in all those regions, how are you going to do it? And the answer I get from all the people who pitch me is "I'll just build a fantastic platform and they'll all come to me." Which won't happen.

Ad Age: What do you see happening that is interesting in the marketing world?

Mr. Kedrosky: Mobile is the new online, online is the new offline! That means mobile is the new ad network, the new data substrate, the new product screen, the new shopping list. It's rapidly become the currency as well, with people more at peace with turning your mobile phone into your wallet. It allows more freedom, while helping tie offers to location -- like with one of my favorite services, Jetsetter, which provides deals on skiing hotels and vacations. I want that information even more when I'm traveling than when I'm at home or in the office, and I'm expecting those transactional, location-based offers to be everywhere in 2011/12.

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