NEW YORK (AdAge.com) -- Multiple reports have Google buying Groupon for $2.5 billion and change. But why would Google want an email-based startup in the first place? To get at the nearly $14 billion U.S. local online ad purse, that's why. Especially because small and medium businesses are expected to spend 10% less on Google's core paid search in the next five years, according to Borrell Associates.
To build on local ad products outside of search, Google revamped its local business directory into what's now Google Places this spring. It also launched Boost, a tool to make search easier for small businesses, and a display ad on maps that costs as little as $1 per day. Last month, the company moved star exec Marissa Mayer to the helm of local services from search products.
"Google has known for years that local is the major untapped area for online advertising," said David Hallerman, eMarketer principal analyst. "All the local data [from Groupon] would also give them an even further ammunition for that."
In 2010, paid search, which includes Google as well as its competitors, accounted for more than half of local online ad spending among small- and medium-sized businesses, according to Borrell. But traditional search advertising doesn't work for the smallest local businesses, the kind Google needs to grow.
Email spending expected to double
By 2015, paid local-search spending is expected to plummet 22 points from $3.1 billion this year to $2.8 billion. While paid search is projected to take the steepest dive, spending on email -- the format Groupon has pioneered -- is projected to double in the same period.
"There is very high churn among the smaller advertisers; it's generally acknowledged that unless you spend $1,000 or more per month on Google keywords, it's fruitless," said firm CEO Gordon Borrell. "Most [small and medium businesses] can't afford $12,000 per year for keywords because it's pretty much their entire ad budget."
"Groupon would definitely get Google deeper into the SMB [small and medium business] market and it would definitely give Google more currency and news -- by that I mean, what's on sale," he added. The local research firm projects that 18% of Google's ad revenue today comes from small business.
Growth in email spending among small businesses is the third fastest after targeted display and online video -- two formats Google is also building out. Small and medium businesses are expected to spend nearly nine times more on targeted display over the next five years, from $93 million this year to $901 million in 2015; while online video spending will jump $847 million to $2.8 billion.
"Google's interest in Groupon -- assuming [the deal] does go through -- is about four major factors, all separate from search: more connection to local advertising overall, more display, connecting online and offline and data," added eMarketer's Mr. Hallerman. "Google's wealth in advertising terms is data. To have Groupon as part of the company would mean it would have data about pricing information, consumer spending habits, and a huge consumer email list."
Local ad strategy aside, as the digital darling du jour, it's hardly a surprise that Groupon has ended up in Google's crosshairs. However, considering the Chicago-based startup has grown to more than 2,500 staffers worldwide, a half billion in revenue and 25 million subscribers in nearly 30 countries in just two years, it remains to be seen if Groupon even needs Google to sustain its already meteoric growth.