reDesign

April 4, 2012

Are LivingSocial, Google Offers and the rest as bad as Groupon?

Filed under: daily deals, google, groupon, livingsocial — Rakesh Agrawal @ 6:27 am

IMPORTANT: Please see this page to see my current interests in Groupon.

Whenever I get into Groupon mode, people ask me about how LivingSocial and Google Offers are different from Groupon.

In many ways, they are the same. Any model that gives businesses cash early on in exchange for a promise of service to be delivered later is a financing business, not a marketing business. I use the analogy of receivables factoring or payday lending to describe the core U.S. Groupon business model. That also applies to LivingSocial’s and Google Offers’ daily deals product. Whenever you do that, you have a risk management issue. And I believe that no one in the space is handling the risk appropriately.

As a point of comparison, I tried one of my fraud tests against Square. About $11 in transactions that fit a pattern of potential fraud were enough to get my account shut down. Yet Groupon and LivingSocial are writing checks for tens of thousands with very little fraud prevention.

But there are some very significant differences among the players in the space:

  • Scale. Groupon has the most scale by far. On a revenue basis, they are roughly 4x as large as LivingSocial, the #2 player.
  • Management team. Groupon co-founder and executive chairman Eric Lefkofsky has a checkered past with his previous companies. The pattern is the same: he gets rich and investors lose. This CNN article is a must read for anyone interested in Groupon. Lefkofsky and his affiliated entities took nearly $400 million out of Groupon before the company went public. I worked with LivingSocial CEO Tim O’Shaughnessy during my time at Aol (although not closely). There was nothing in my interactions with him that suggested anything sketchy. He just struck me as an ambitious and energetic guy. It’s hard for me to believe that a $10 billion public company has a PR team as grossly incompetent as Groupon’s. LivingSocial’s is among the best I’ve ever worked with. (Disclosure: I worked with LivingSocial’s head of PR at Aol. He was the PR lead on one project I worked on. Groupon refuses to talk to me.)
  • Company structure. Groupon is an independent public company, which means its moves are analyzed differently than LivingSocial’s (which is private) and Google Offers (which is too small to be material in Google’s results). This means they have to act very differently. Even if Andrew Mason agreed 100% with everything I’ve written, he might not be able to take corrective action because most of the necessary steps would require short-term revenue declines. LivingSocial, on the other hand, can do away with underperforming products like LivingSocial Instant. Because Offers is a tiny part of Google’s business, they can afford to build for the long term and do the right thing for small businesses as opposed to trying to extract as much money as possible now to satisfy Wall Street.
  • Innovation. Although LivingSocial essentially ripped off Groupon’s business model, it has been much more innovative since. As a smaller company that is not subject to Wall Street pressures yet, it is able to try a lot of new businesses and see what works. This flexibility may be what saves LivingSocial while Groupon has to double down on a stupid business model to show revenue growth.
  • A different focus. Groupon has set its brand to be all about price, which attracts the wrong set of customers for small businesses. Businesses want high-value customers, not cheapskates who will never return at full price. Just the brand names make a difference: Groupon sounds cheap; LivingSocial almost sounds classy. This may sound like a cheap shot, but I believe it makes a meaningful difference.
  • Risk mitigation. LivingSocial has sales people on the ground in most of its markets. They actually visit the businesses and talk with business owners. Groupon has a lot of people in call centers in Chicago. Although LivingSocial has had its share of deals that go bad, having feet on the street is an important risk mitigation function. In theory, LivingSocial sales people can see if a business is shoddy or has gaping flaws that would turn off customers. I’m sure they’re not trained to evaluate risk as someone who knew they were in the receivables financing business would be, but it’s better than nothing. There are also structural differences: by being in market, LivingSocial salespeople don’t have as much incentive to screw over small businesses because they may have to revisit them. Groupon, with its call centers, creates bad incentives because sales people screw over businesses in smaller markets in order to get promoted into bigger markets where they get promoted.
  • Groupon Promise. The Groupon Promise is the proximate cause of Groupon’s earnings re-statement on Friday. (There are others, but I’m simplifying.) LivingSocial and other players have not had anything like it. This creates a lot of overhang for Groupon in that they’re unconditionally backing the performance of small businesses over whom they have little control. It also opens Groupon up to refund abuse by consumers who just take advantage of the promise. As a consumer value proposition, it sounds great. But it creates a lot of risk for the business financially. It also creates legal and regulatory risk if they don’t live up to that promise.
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January 30, 2012

Facebook has 100 million more U.S. users than Google did at IPO

Filed under: facebook, google — Rakesh Agrawal @ 11:09 am

In December, Facebook had more than 100 million more unique users than Google did when it went public in August 2004. In December 2011, Facebook had 162.5 million unique users in the United States. In August 2004, Google had 61.9 million U.S. unique visitors. It was a distant #4 among Web properties. (Yahoo was #1, with 113.1 million uniques.)

Strong usage can turn into strong demand among retail investors.

But for long-term prospects, it can also indicate saturation. At the time that Google went public, it reached less than 40% of the U.S. Internet audience. Facebook already reaches 73.7% of the U.S. audience.

For some reason, Google Docs charting starts the scale at 40 instead 0, this distorts the size of the difference between Facebook and Google. Facebook at IPO is 2.6x Google at IPO, but the chart makes it look 6x. Stranger still, I couldn’t find a way to get Google Docs to start the chart at 0.

January 23, 2012

Twitter and Google are both responsible for you not being able to search tweets

Filed under: facebook, google, search, twitter — Rakesh Agrawal @ 7:45 pm

Chris Dixon ignited a firestorm on his blog when he said it was Twitter’s fault that Google doesn’t index tweets. It’s the fault of both parties, really. Neither has the moral high ground.

Twitter does not block Google from crawling their site. Google does crawl Twitter and index tweets. You can see this by going to:


https://www.google.com/search?sourceid=chrome&ie=UTF-8&q=site%3Atwitter.com%2Frakeshlobster

You will see some of my tweets in Google’s search index.

Right now, Google does this by crawling Twitter, just like it does for everything else. But crawling takes resources (bandwidth, compute cycles). For a site that is updated as much as Twitter, it would take a lot of resources to keep a reasonably fresh index.

This also has an impact on the crawled site. Twitter has enough stability problems without Google increasing its crawl rate. If Google cranked it up, it would make Twitter less stable.

Another alternative is for Twitter to provide a feed of new tweets to Google. This is what they do for bing and what they previously did for Google, before their agreement ended. This would take less computing power and bandwidth on both sides.

Twitter used to charge Google for this. It was a rare case where Google paid for content. According to Google, Twitter decided to stop licensing this feed to them.

So there are two ways to get more tweets into Google:

  • Twitter could provide a feed (either for free or a mutually agreed upon fee).
  • Google could increase it’s crawl frequency.

A third, more complicated way to solve this is for Twitter to provide Google a real-time query API. This would require that Twitter build a decent search engine first.

There’s a broader question here, that Yelp has raised a few times, including in the senate hearings: should Google be allowed to use its dominance in Web search to make its way into other spaces like local and social?

If  social search was not part of Google’s dominant Web search, no one would care whether it included Twitter or Facebook results because no one would use it. But because Search plus Your World is so prominent in Google search, Twitter and Facebook care.

See my series on Google and antitrust for a deeper exploration of this.

November 22, 2011

Funny juxtaposition of Google Offers ad on anti-Groupon story

Filed under: daily deals, google, groupon — Rakesh Agrawal @ 7:28 pm

Google Offers ad on anti-Groupon story

Original story on Mail Online.

September 23, 2011

Google and antitrust: looking at the good and bad effects of monopolies

Filed under: google, search — Rakesh Agrawal @ 1:15 pm

This is the last in a multi-part series on Google and antitrust.

Part 1: Competing in Web search against Google would be extremely hard

Part 2: How Google favors its own products

Part 3: Looking at the good and bad effects of monopolies

Disclosures: I worked on AOL Search from 2004-2007, where Google was our algorithmic search partner. Any assessments of financial models are based on publicly released information and not any specific information I had access to regarding the terms of the AOL-Google deal or our negotiations with Google and Microsoft. My brother is currently employed by Google and I have many friends there. I went to high school with Google CEO Larry Page.

Benefits of monopoly

I don’t believe Google is an evil company. I use Google products every day, including search, Maps, Places, Gmail, Docs and Android.

Google’s monopoly profits from AdWords support a lot of potential for the improvement of society.

Google is one of the few companies that does active research on things that have no short-term value and that many investors would object to. At a time when “science” and “intellectual” have become dirty words in our political discourse and NASA budgets are being slashed, it’s good to see a company investing in research that will move the human race forward. Google’s research into self-driving cars and alternative energy are risky bets that most publicly traded companies wouldn’t make and few private companies can raise the capital to pursue.

We’ve seen this before. Bell Labs used monopoly profits from the phone system to fundamentally change communications. This video on YouTube chronicles some of the highlights from Bell Labs:

Note how much of that video is in black and white. After AT&T’s breakup, a lot of the monopoly profits went away. I don’t know many people that would consider today’s AT&T innovative. (Bell Labs itself is a shadow of its former self and is now part of the French Alcatel Lucent.)

My first reaction when I saw the video was “What will the Google song include?”

Dangers of monopoly

Google’s monopoly profits also allow it to nurture products and provide them at a loss. From a consumer standpoint, I love Google Maps and the free navigation that I get on an Android phone. But Google has largely destroyed the market for portable navigation devices and paid navigation apps on mobile phones.

The core business of Skyhook Wireless, a company that pioneered WiFi-based geolocation, is drying up because Google and Apple have developed their own mechanisms.

Although the “What if Google gets into your space?” question hasn’t dried up venture capital investment in companies, it does seem that many companies are being built specifically to be sold, not to thrive into large businesses. Better to position yourself as something that plugs nicely into Google and sell early than to take the risk of building something audacious that could be the next Google. (Facebook is the obvious exception here.) In that way, Google’s dominance extends influence beyond its own capital investments.

As innovative as Bell Labs was, we’ve also seen huge innovations in communications from companies after AT&T’s breakup, including Skype, Apple and Google.

Would we be better off if investors were swinging for the fences and solving Really Big Problems rather than funding features disguised as companies that could be sold for $50 million-$200 million to one of the bigger internet players? Probably.

Does antitrust law matter?

As much as some enjoyed seeing Schmidt being called in front of Congress, the Senate hearing was largely for show.

Antitrust law when it comes to technology is largely irrelevant. By the time the wheels of policymakers produce an outcome, it’s too late. (Ask Netscape or Real how their antitrust “victories” worked out for them.)

Even when regulators make changes or stipulate conditions on deals for approval, they can often be worked around. For example, even lthough the agreement with the Justice Department requires Google to continue to license ITA’s travel software to competitors until 2016, it doesn’t require Google to license enhancements that Google makes:

Nothing in this Final Judgment shall require Defendants [Google and ITA] to provide to any third party any product, service, or technology (or feature thereof) that Defendants develop exclusively for use in the Google Services, nor shall any such product, service, or technology, or the relative functionality of one or more Google Services (including, but not limited to, the Google Consumer Flight Search Service) when compared to third-party websites using QPX, be considered in determining Defendants’ compliance with any provision of this Final Judgment.

Google’s new Flights product likely falls into that bucket. And although the initial version is rough around the edges, it’s so blazing fast that it will likely displace my use of Kayak as a flight search tool. Kayak, which depends on ITA for its search engine, likely won’t have access to the enhancements that make the speed possible.

September 22, 2011

Google and antitrust: How Google favors its own products

Filed under: google, search — Rakesh Agrawal @ 7:17 pm

This is the second in a multi-part series on Google and antitrust. Part 1 looked at how difficult it would be for a new player to start in Web search today.

Part 1: Competing in Web search against Google would be extremely hard

Part 2: How Google favors its own products

Part 3: Looking at the good and bad effects of monopolies

Disclosures: I worked on AOL Search from 2004-2007, where Google was our algorithmic search partner. Any assessments of financial models are based on publicly released information and not any specific information I had access to regarding the terms of the AOL-Google deal or our negotiations with Google and Microsoft. My brother is currently employed by Google and I have many friends there. I went to high school with Google CEO Larry Page.

You don’t see algorithmic results

Google likes to say that the algorithmic results are untainted; that they’re based solely on hundreds of signals that mere mortals couldn’t possibly understand. That is true. But it’s also not a meaningful statement, because you often don’t see algorithmic results.

Atop the algorithmic results, you’ll see special content that favors Google products. Queries for stock quotes, maps, products and others highlight this content.

Google also blends in to its algorithmic results content from maps, news and social search. A result from Google Places can take the screen real estate of 6 or 7 algorithmic results. How do you tell other results result from an algorithmic result as a consumer? They’re not labeled. Experts can figure it out. But consumers consider them to be algorithmic results. More accurately, consumers don’t care — they trust Google to be impartial and bring them the best of the Web.

Even when Google presents its own content in the algorithmic order, it can give it special presentation that other sites don’t get. Consider this screenshot:

Comparison of organic results in Google search

Comparison of organic results in Google search

For the sake of argument, assume that YouTube had ranked lower than the original content on Bloomberg. The enhanced presentation of the YouTube video, with a thumbnail, duration and time stamp would drive more traffic.

Tying of other products (like social)

Google also integrates new products into Google’s Web search. If you happen to follow an account on Google+ and that person posts content that matches your search term, it will move up in the rankings for you. In this example, I did a search for “Rick Santorum” and the 10th result is a story by Danny Sullivan. It showed up there because I follow Danny on Google+.

Google+ gets preferential treatment in search results

Google+ gets preferential treatment in search results. Three of the four links in this result go to Google+.

When I do that search while logged out, the same result appears on page 2 in position 16. That’s a significant disadvantage as many searchers don’t go past the first page.

This creates an incentive for a) people to create an account on Google+ and b) people to share articles on Google+. The annotation also increases the likelihood of a click. Three of the four links in that result above go not to Danny’s article on Search Engine Land, but to Google+.

These incentives are especially critical right now when Google+ is struggling to gain meaningful adoption. On its own merits, I would not currently recommend that clients spend time on Google+. But because of the potential effect on Google Web search results, I think it makes sense for many businesses.

Google provides similar treatment for some links shared on Twitter, but this seems to be reduced now that Google is no longer licensing Twitter’s firehose. Even when it does appear, there is one link to Twitter compared with the three links Google gives to Google+.

In addition to the explicit incentives that Google creates, there are the implicit incentives created by Google’s black-box ranking algorithms. Legions of SEOs with no inside knowledge Make Shit Up. They advise clients how they can please Google’s algorithm Gods, often by making more use of other Google properties. (Which, of course, said SEOs can assist them with.)

Advertiser products

Google bundles several discrete ad products together. In some cases, it is impossible for advertisers to opt out of certain properties that they might not want to buy.

In other cases, Google offers a wide range of other ad products that can be easily purchased with the primary Web search advertising buy. Advertisers can easily buy into the contextual ad network, mobile ads, etc. From an efficiency standpoint, this makes things much easier for advertisers. But the net effect is that Google can take more share of limited advertising dollars.

Ben Edelman, an assistant professor at Harvard Business School, wrote a great analysis of how Google’s practices affect advertisers. That was a topic that didn’t get much consideration in the Senate’s hearings.

Next in this series, I’ll look at good and bad aspects of monopolies.

September 21, 2011

Google and antitrust: competing in Web search against Google would be extremely hard

Filed under: google, search — Rakesh Agrawal @ 8:11 pm

This is the first in a multi-part series on Google and antitrust. 

Part 1: Competing in Web search against Google would be extremely hard

Part 2: How Google favors its own products

Part 3: Looking at the good and bad effects of monopolies

Disclosures: I worked on AOL Search from 2004-2007, where Google was our algorithmic search partner. Any assessments of financial models are based on publicly released information and not any specific information I had access to regarding the terms of the AOL-Google deal or our negotiations with Google and Microsoft. My brother is currently employed by Google and I have many friends there. I went to high school with Google CEO Larry Page.

In today’s hearings before the Senate Judiciary Subcommitte on Antitrust, Competition Policy and Consumer Rights, Google tried to dissuade the committee from the notion that Google is a monopolist.

In space after space, Google has used the dominance of its search engine to promote its own products. A few examples: local, finance, product search, images, YouTube, Google Offers. I expect we’ll see tighter integration of Google Offers and Flights into the core search experience within the next year.

Competing against Google in Web search is extremely difficult

Eric Schmidt made the claim several times that competition is one click away. That’s absolutely wrong. Search on the scale of Web search is an incredibly hard problem that requires several thousand engineers, significant capital investment to crawl the entire Web and return results at blazing speed and global reach. You can’t solve Web search today with 2 engineers in a garage.

And that’s just Web search. To have a competitive product, you’d need maps, stock quotes, news, weather and all of the other things that Google has incorporated into its results over the years.

For the sake of argument, let’s say you could. The next step would be getting people to try your search engine. That’s hard for two reasons: brand and distribution.

I’ve done A/B testing with search results. If you took a set of results and changed nothing but the logo, the results with the Google logo were perceived by users to be better. That’s how powerful Google’s brand is.

Google got its initial breaks in terms of distribution when search was a nascent space and companies like AOL and Yahoo! didn’t know how incredibly lucrative the space would turn out to be. With ingredient branding on search on AOL and Yahoo!, Google was able to develop its own brand as the place to go for high quality search. Deliberately or not, Google used the quarterly revenue focus of its distribution partners to its advantage, letting them clutter their own experiences with lots of irrelevant ads while keeping Google.com relatively sparse.

Let’s assume somehow you’ve built the best search engine, solved the brand problem and convinced distribution partners that you had a better product. The next challenge is paying them enough to displace Google.

Search advertising is a network-effects business. Because it relies on an auction model, generally the greater the number of participants, the higher the price. Search advertising is time consuming for the advertiser — many advertisers can accomplish their business needs just using Google AdWords. There’s no need for them to also buy on bing. As a result, Google can afford to offer more revenue to distribution partners. Even if you were willing to take a loss and give distribution partners more money than you take in, Google’s higher take means they would still offer partners more money.

Solved that problem? Next, there’s the challenge that many of your potential distribution partners have lost a lot of their share. Among the distribution partners that helped build Google: AOL is hardly worth talking to as AOL Search traffic continues to plummet. MySpace? Um, OK.

I’ve always viewed Google’s YouTube acquisition as more of an insurance policy on the rest of Google’s search business, not as a video service acquisition. What Google was doing in 2005-2006 with the AOL Search renewal, YouTube acquisition and the $900 million search deal with MySpace was locking up eyeballs. If any of those distribution deals had gone to Microsoft, search might be very different today.

Facebook is the only company I can think of that has a real shot of challenging Google at search.

What consumers want

Schmidt also made the claim that Google is delivering what consumers want. There’s a lot of truth to that. If I enter “HPQ” in the search box, the most likely thing that I’ll want is the stock price for HP. If I enter an address, I probably want a map of it. If I enter “weather,” I probably want the weather where I am right now. It is a benefit to the consumer to have that answer right on the search results page.

Google’s innovation in maps has been phenomenal. I was working at AOL (Mapquest’s parent company) when Google Maps came out. I remember the emails from the head of Mapquest telling AOLers not to worry about Google Maps because no one would ever want such features.

In the case of Maps, Google delivered a much better product than Mapquest. The fact that Mapquest continues to exist at all is a testament to the power of consumer inertia. It’s also a testament to the power of brand.

And Schmidt is right in saying that trying to gather such results in real time from various sites would be technically extremely challenging.

But there are also many cases where what Google delivers is not what consumers want. I recently returned from SMX East, a search engine conference. Every time I searched for it and clicked the agenda link, I got the 2010 agenda, not the 2011 agenda. Searches for my own name return inexplicably return my Google+ profile instead of my blog, Twitter, Quora or many other presences that I actually tend to.

Is it possible to create a search engine that addresses these things? Sure. But these are not easy challenges. And although Google continually evolves its algorithms, it seems that big changes to solve such issues aren’t a priority. The recent big changes in Google’s algorithms to reduce the prominence of low-quality content written primarily to rank on Google, known as Panda, came about only after Google was practically shamed into addressing the content farm issue.

Part 2 will look at how Google favors its own products and ties new products into existing products.

September 18, 2011

Google Offers merchant agreement

Filed under: daily deals, google — Rakesh Agrawal @ 9:00 am

Note: Page 1 is the term sheet. The only substantive item on the term sheet is the revenue share. In this case, the merchant received between 50 and 60 percent.

GOOGLE PREPAID OFFERS BETA PROGRAM ADDENDUM
Google Prepaid Offers Beta Program Addendum Confidential Page 2 of 4
Google Inc. v042611
Terms and Conditions

This Google Prepaid Offers Beta Program Addendum (“Addendum”) is entered into by Google Inc. (“Google”) and the entity executing this Addendum (“Merchant”) and is an addendum to and is governed by the Google Advertising Program Terms previously executed by Merchant and Google or, if not previously executed, as available at http://www.google.com/ads/terms (the “Terms”), which are incorporated here by reference. This Addendum and the Terms govern Merchant’s participation in the Google Prepaid Offers Beta Program (the “Program”). Capitalized terms not defined in this Addendum have the meanings assigned to them in the Terms. The Program is a “Beta Feature” under the Terms and subject to the confidentiality obligations outlined therein. Merchant is a “Customer” under the Terms. This addendum is effective as of the date of Merchant’s signature above (the “Effective Date”).

1. Definitions
 “Brand Features” means trade names, trademarks, service marks, logos, domain names, and other designators of source or origin.
 “Buyer” means a purchaser of a Merchant Offer.
 “Creative Content” means advertising materials and related technology, including without limitation data, APIs, written text, logos, flash, images and computer code (e.g., XML, HTML, JavaScript).
 “Creative Services” means (a) Google’s design, production or development of any creative assets on Merchant’s behalf using Creative Content for use in ad campaigns (“Campaigns”; collectively, the “Creative Work Product”) and (b) Google’s selection and/or placement of any Creative Work Product or Creative Content on Merchant’s behalf for Campaigns (“Creative Placement”).
 “Google Creative Content” means Creative Content created by Google.
 “Merchant Offer” means a gift certificate, discount, coupon and/or voucher offered to Buyers through the Program that the Buyer may redeem for Merchant’s products and/or services. For clarity, Merchant Offers are “ads” under the Terms.
 “Offer Purchase Period” means the period during which a Merchant Offer is available for purchase via the Program.
 “Pending Merchant Offer” means a Merchant Offer that has not yet been released to potential Buyers through this Program.

2. Google’s Role. Merchant authorizes and consents to Google’s selling any Merchant Offer under the terms listed in the IO (“Offer Terms”). Google may, but is not obligated to, sell Merchant Offers to Buyers and act as the merchant of record under the card brands’ rules for the sale of Merchant Offers. Google will remit revenue share (as specified in the IO) from the sales of Merchant Offers to Merchant as specified in Section 8 of this Addendum. Google is not offering or selling Merchant’s products or services listed in the Merchant Offers. Google is not obligated in any manner to (a) honor or redeem a purchased Merchant Offer; (b) provide refunds to Buyers, except as provided herein or otherwise by law; (c) determine, charge, retain or pay sales tax on its sale of any Merchant Offer. Notwithstanding anything to the contrary, modifications to the Offer Terms to any Pending Merchant Offer by Merchant may be provided orally or in writing by Merchant to its sales contact at Google at least 3 business days before the date on which the Pending Merchant Offer is scheduled to run.

3. Merchant Responsibilities. Merchant will: (a) be responsible for ensuring that the Offer Terms are complete, correct and current before it approves Creative Work Product for the Merchant Offer; (b) honor a purchased Merchant Offer under the Offer Terms; (c) not ask a Buyer to provide any personal information in order for Buyer to redeem a purchased Merchant Offer, except for information Merchant legally collects on all of its customers; (d) be responsible for all funds that it receives from the sale of the Merchant Offers and is responsible for maintaining, reporting and using those funds in compliance with any legal requirements; (e) comply with all laws applicable to promoting, honoring and redeeming a Merchant Offer, including, without limitation, any laws relating to (i) required refunds, (ii) disclosures or (iii) expiration dates for gift certificates, coupons, discounts or vouchers, (iv) tax determination, registration, collection and payment and (v) state abandoned property laws; and (f) not permit a Merchant Offer to be used in a manner that would violate any applicable law. Merchant represents and warrants that it has the financial and operational capability and appropriate inventory, staff and the supply of the relevant goods and services to meet Merchant’s obligations to Buyers for the anticipated number of Merchant Offers that may be purchased and subsequently redeemed by Buyers, as described to Google.

4. Merchant Offers. Merchant Offers will satisfy the following requirements: (a) each purchased Merchant Offer may be redeemed only once unless otherwise stated in the Offer Terms; (b) no fee or charge will be imposed by Merchant on Buyer for redemption of the Merchant Offer, other than applicable tax Merchant may charge; (c) the Merchant Offer may only be transferred by the Buyer in accordance with applicable law; (d) subject to restrictions under applicable law, Merchant may determine whether to permit Merchant Offers to be redeemed for products that are subject to purchase or other legal restrictions, such as alcohol and tobacco products; (e) unless expressly permitted by the Offer Terms, Merchant Offers cannot be applied toward the payment of shipping fees, tips or gratuities, taxes, or outstanding balances owed by Buyer to Merchant; (f) unless expressly permitted by the Offer Terms, Merchant Offers cannot be combined with other coupons, special offers or special discounts offered by Merchant or a third party. Google may use Merchant’s Brand Features for marketing or advertising the Program.

5. Content. Subject to the terms and conditions of this Addendum, Google will provide Merchant Creative Services for Campaigns submitted to Google for the Program. Merchant is solely responsible for (a) Creative Content (other than Google Creative Content) and (b) approval of all Creative Work Product. Merchant warrants that it has and will have all necessary rights and authority to use and to have Google use on Merchant’s behalf the Creative Work Product (including without limitation any Creative Content therein) as contemplated by this Addendum (“Merchant’s Warranty”). Google will own any Google Creative Content but will not claim ownership over any other Creative Content. Google will not use the Creative Work Product (except for the Google Creative Content therein) except for purposes of the Campaigns and inclusion in Google’s marketing and promotional materials. For Creative Work Product that uses any Google API (e.g., Google Gadgets API), such Creative Work Product is subject to the policies applicable to that API. For Creative Work Product that uses Google Maps, any such Creative Work Product will be coded in compliance with the Google Maps API Terms of Service available at http://code.google.com/apis/maps/terms.html (“Maps API TOS”). Merchant may not (i) modify such Creative Work Product in any way that impacts the Google Maps API or (ii) use the Maps API for any purpose other than use in the Creative Work Product, unless in each case Merchant has read and consented to the Maps API TOS. For Creative Work Product that use Merchant’s APIs, Merchant is responsible for confirming that the use of Merchant’s API in the Creative Work Product complies with Merchant’s API terms of service. Google may not (i) modify such Creative Work Product in any way that impacts Merchant’s API or (ii) use Merchant’s API for any purpose other than creating the Creative Work Product, unless in each case Merchant’s permission is received. Google is providing the Creative Services at no additional cost to Merchant.

6. Content Liability. Google will perform the Creative Services with reasonable care (“Limited Warranty”). Except for the previous sentence, Google makes no representations, warranties or covenants about the Creative Services, any Creative Work Product (including the Creative Content therein) or any Creative Placements. Without limiting the generality of the foregoing, Google has no liability for any Creative Content, Creative Work Product or Creative Placements. Merchant’s sole remedy for any breach of the Limited Warranty or any of Google’s other obligations in this Section 6 is to require Google to re-perform the applicable Creative Services free of cost. Merchant will indemnify, defend and hold harmless Google, its Partners, agents, affiliates, and licensors from any third party claim or liability arising out of any Creative Work Product, Creative Placement and any breach of Merchant’s Warranty. Partners are deemed third party beneficiaries of the above Partner indemnity.

7. Refund Policy. Google may refund Buyers for purchased Merchant Offers for any reason at any time. Within 90 days after the Offer Purchase Period of a Merchant Offer, any refund by Google to a Buyer for the Merchant Offer will cause Merchant to immediately forfeit or otherwise provide to Google any revenue share it received or would have received for the Merchant Offer.

8. Payment. Google Payment Corporation will act as the paying agent for Google and will transfer funds owed by Google to Merchant via electronic funds transfers to a bank account Merchant registers with the Program. Merchant authorizes and consents to Google’s deducting, from the revenue share from the sale of Merchant Offers, the amount of funds that Google is entitled to hold as reserves and other amounts due and owing to Google or its affiliates. The sales price and the revenue share percentage specified in the IO or through a Google user interface for this Program, as well as any refunds made under Section 7, will determine the amount of payment Merchant will receive for purchases of its Merchant Offers. Google will retain the remainder of the proceeds from the sale of Merchant Offers. Except as stated herein, each party is responsible for its own costs under this Addendum. Google will initiate payment to Merchant representing 80 percent of the amount due to Merchant based on purchased Merchant Offers, adjusted for refunds, reversals, and chargebacks, within 4 business days after the close of the Offer Purchase Period. Google will initiate payment to Merchant for the remaining 20 percent of the amount due to Merchant based on purchased Merchant Offers, adjusted for refunds, reversals, and chargebacks, within 90 days after the close of the Offer Purchase Period. Merchant authorizes and consents to Google holding this remaining 20 percent for 90 days as a reserve for the payment of refunds,reversals, and chargebacks, and any other amounts due and owing to Google or its affiliates. Google reserves the right to withhold any payment to Merchant if Merchant does not comply with the Merchant Offer terms as provided to Google. Google will not be liable for any payment (a) based on any purchase of any Merchant Offer through any fraudulent or invalid means, as determined by Google in its sole and absolute discretion, including but not limited to the fraudulent use of credit cards or other means of payment, (b) based on purchases of Merchant Offers that are refunded or (c) subject to a credit card charge back by a Buyer. Google reserves the right to withhold payment, offset amounts owed to Merchant or debit Merchant’s designated bank account because of any of the foregoing. Merchant agrees to cooperate with Google in its investigation of any of the foregoing. Merchant is responsible for immediately refunding and/or repaying to Google any payment made by Google under this Addendum that is later subject to a return, chargeback, reversal, refund, adjustment or rejection whether by a bank, Buyer action or otherwise, or that was paid in error or paid as a result of miscalculation by either Google or Merchant (“Merchant Repayments”). Merchant authorizes Google to offset and net current amounts owed by Google to Merchant against the amount of any Merchant Repayments owed by Merchant to Google. All payments and refunds contemplated hereunder will be made in U.S. dollars.

9. Term/Termination. This Addendum begins on the Effective Date and continues for a period of 6 months thereafter(the “Initial Term”). After the Initial Term, this Addendum will automatically renew on these same terms and conditions for successive one-year periods (each a “Renewal Term”). The Initial Term and any Renewal Terms are collectively referred to herein as the “Term.” Notwithstanding anything in the Terms to the contrary except for Google’s rights to cancel under the Terms, either party may terminate this Addendum (and the Terms solely as they relate to this Addendum) at any time (a) with 30 days prior written notice with or without cause or (b) with prior notice and the other party’s consent. Sections 3, 4, 6, 7 and, only with respect to revenue received by Google but not distributed to Merchant by the termination date, 8 will survive any expiration or termination of this Addendum. Merchant may cancel a Pending Merchant Offer online if online cancellation functionality is available to Merchant, or, if not available to Merchant, with prior written notice to the Merchant’s Account Manager at Google, including without limitation by electronic mail, at least 3 business days before the date on which the Pending Merchant Offer is scheduled to run. Merchant may not cancel a Merchant Offer thereafter.

September 8, 2011

Why Google’s acquisition of Zagat matters

Filed under: facebook, foursquare, google, groupon, yelp — Rakesh Agrawal @ 6:17 pm

Today, Google announced its acquisition of Zagat, the company that publishes the venerable restaurant and hotel review guides. It’s a terrific acquisition. If Google executes correctly, this deal could be as significant as the YouTube deal has been. (I was also a big fan of that deal.)

Although Zagat is primarily known for its maroon pocket-sized guidebooks, it has long been working with innovators to get its data in the hands of mobile users. I first used Zagat on a mobile device on my Newton MessagePad 110 in the mid-90s. I later used it on a Palm V and Palm VII as part of the Vindigo service. (Vindigo eventually switched to Gayot and other data sources because they didn’t want to pay Zagat’s licensing fees.) There are aspects of those services that still haven’t been replicated by the leading mobile products.

Competition with Yelp

The most direct competitor to be affected by this deal is Yelp.

I love Yelp and use it all the time. But it’s way too much work. Half of each review seems to be about the personal life of the reviewers. Sorry, but I couldn’t care less that your girlfriend dumped you; I just want to know how the food and service was. Yelp has made great strides over the years in making sense of the reviews but its five-point scale that homogenizes food, service, ambiance and cost isn’t very helpful. Add to that the fact that a lot of restaurants are rated 4 stars and quickly discriminating among places is hard.

When it comes to restaurant reviews, comprehensiveness is less important than conciseness. There isn’t a “correct” answer — I’m just looking for a good-enough answer quickly. I don’t want to engage in a 30-minute research project and read 20 reviews to choose where to go to dinner. That’s where Zagat has excelled. Just glancing at the ratings, I can quickly pick a place. (I think my food threshold was 24.)

All that said, I stopped using Zagat when Yelp took off. The primary reason: I didn’t want to pay the fees and Yelp provided a good-enough solution for free. I fully expect that Google will take down the Zagat paywall and offer the ratings for free. (I’m surprised that hasn’t happened already.) I also expect that Zagat ratings will be syndicated across various Google properties, including mobile properties.

Zagat’s team is good at synthesizing information into actionable data. If Google can translate that knowledge into algorithms acting on data collected by Google Places, that could be really powerful.

Mobile

Mobile has been a godsend to companies like Yelp, Fandango and others that have strong brands. Unlike the Web, they’re not held hostage by Google’s search algorithm for traffic. Google has continually expanded the presence of its own local products on the main search results pages to the detriment of sites like Yelp.

The app-centric nature of mobile devices to data means that companies with strong brands can intercept that traffic before Google gets a chance. Zagat is a brand that carries its own affinity and a free Zagat app would instantly become a strong competitor to Yelp.

Brand

One of the biggest assets that Google gets with Zagat is the power of the Zagat brand, which in many circles is synonymous with fine dining.

As powerful as Zagat is with consumers, it’s also incredibly powerful with restaurateurs. Here is my subjective assessment of various local brands, as perceived by restaurateurs:

  • Zagat. Highly positive.
  • Facebook. Positive.
  • Google. Neutral to positive.
  • Groupon. Slightly negative, but heading downhill rapidly.
  • Yelp. Strongly negative.

Where Zagat is viewed as a friend of restaurants, Yelp is often viewed as an enemy. Part of the problem is that Yelp has sold advertising to restaurants and many restaurateurs view Yelp ad sales people as extortionists. (I believe Yelp management’s claims that they separate editorial from advertising, but that doesn’t change the widely held perception.)

If Google can use the Zagat brand as an in-roads to better engage with restaurateurs, that alone would be the price of the acquisition.

Facebook — and why all this might not matter

The biggest problem I have with local reviews as they’ve been done to date is that they largely ignore the social layer that has been built up over the last four years. When it comes to matters of taste, I’d rather get recommendations from people I know than random strangers.

It bugs my friends at Yelp and foursquare that every time I go on a trip, I post a Facebook status message asking for restaurant recommendations. Bill at Yelp will tell me to check Yelp. Tristan will tell me to check out foursquare Explore.

Yelp has its own social layer, but the people in my Yelp friend graph aren’t my real friends. The few that are rarely write reviews. Foursquare has my real friends, but for the most part doesn’t have enough data density to suit my needs. (A recent trip to Chicago was an exception.)

Even without any optimization, Facebook has both. Most of my status updates generate 3-4 restaurants, which is all I need. There’s another important benefit: I know how my tastes compare with the tastes of my friends. There are some friends that I know have a positive affinity with; if Dariusz offers a restaurant recommendation, I’ll go there without thinking about it. There are others with whom I have a negative taste affinity; if they recommend it, I won’t go.

A lot of people have looked at Facebook’s recent public announcements in local — killing its Deals product and removing the Places product from mobile — as a sign that Facebook doesn’t care about local. That couldn’t be further from the truth.

I’ve seen Facebook testing product concepts that point at its future direction in local. One test asks you to compare recent places you’ve visited. Another feature lets users contribute data on restaurants and other venues. Facebook realizes that most average people won’t go to the trouble of writing long reviews like those on Yelp. It’s better to collect small nuggets of data from massive audiences. See my post, Heading toward the Facebook recommendation engine.

Ironically, Ted Zagat, son of Tim and Nina Zagat, works at Facebook. That should make for some interesting dinner conversations. The question is how they’ll decide where to eat.

See also:

August 30, 2011

There are only two deal companies that matter: Facebook and Google

Filed under: facebook, google, groupon — Rakesh Agrawal @ 7:32 am

Much has been made of Facebook’s decision last week to exit the daily deals space. Yesterday, Yelp told Bloomberg’s Doug MacMillan that it is also exiting the daily deals space.

A lot of the analysis has used these examples to illustrate what a great position this puts Groupon and LivingSocial in. That analysis is wrong.

I reached out to Facebook PR for some more detail on their decision. Here is what spokeswoman Annie Ta told me (emphasis added):

After testing Deals for four months, we’ve decided to end our Deals product in the coming weeks. We think there is a lot of power in a social approach to driving people into local businesses.  We remain committed to building products to help local businesses connect with people, like Ads, Pages, Sponsored Stories, and Check-in Deals. We’ve learned a lot from our test and we’ll continue to evaluate how to best serve local businesses.

That reads to me like Facebook is still very committed to local, it’s just that they don’t see the daily deals model as the right path to it. Like Google, I’ve always thought of Facebook as too good a company to be in the space in its current exploitative state and I’m happy that it got out.

Over the last couple of months, I’ve had several conversations with Eric Rosenblum, the head of Google Offers.

Part of the reason I haven’t aggressively beaten up on Google Offers, aside from the initial piece titled Why I Want Google Offers And The Entire Daily Deals Business To Die, is that I really believe that they want to do the right thing. People have pointed to the slow rollout of Google Offers as a sign of weakness and the relative strength of Groupon; I view it as a sign of discipline and wanting to truly learn about what works and what doesn’t for merchants. They view it as a market-entry strategy and a way to educate local merchants about online advertising. (To be fair, I may just be buying their spin. But I don’t think that’s the case. Groupon largely has refused to talk to me, despite numerous requests.)

At the rate that Groupon is growing, it’s hard to learn anything. It’s also impossible to maintain quality talent when you grow headcount 35% in one quarter. In just one quarter, Groupon has added about as many employees as Facebook has in total.

Google and Facebook can afford to take their time. Rosenblum told me that because he’s not on a march to an IPO, he can afford to treat merchants right and build for the long term. That shows in the structure of the deals that Google Offers runs. There are more restrictions that make it a better deal for merchants.

Offers will be just one tool in Google’s toolbox for merchants. It is essentially a cost-per-acquisition model. Small businesses don’t know what an impression or a click is worth, but they have a better sense of what a customer is worth. But many categories haven’t been exposed to online advertising and that’s what Google is trying to change with Offers. Eventually, Rosenblum believes that merchants will use Google’s self-serve tools. The several-thousand strong sales army of Groupon will feel more like an anchor than a moat.

I believe Facebook has a different play. Its entire business is about connecting people and having them share information with each other. If Facebook sells someone an offer and they then connect directly with the business on Facebook, that’s additive to Facebook’s core business.

By contrast, Groupon and LivingSocial have every incentive to keep you from building a relationship with the merchant. They would much rather sell you another deal themselves than have you go back to the merchant directly. Groupon is even running ads telling consumers to stop paying full price — undercutting the value that merchants provide. At every step of the way, their business interests are directly opposed to those of merchants.

They could change that — I wrote a post with more than a dozen ways how the merchant experience could be improved — but they won’t. They’ve sold investors on the story of massive revenue growth and the fastest way to do that is to con merchants into selling big deals that they don’t fully understand. Even if they fully agreed with my analysis of the business, the best path for insiders right now is to continue the march to IPO and cash out as fast as possible.

Both Google and Facebook have enormous amounts of leverage in their business. The number of people each employee at Facebook impacts is unprecedented. Groupon is not a scalable business. In fact, it’s showing declines per employee as it gets larger. Its average sales per sales rep dropped from $172,000 in Q1 to $138,000 in Q2.

In a few years, we’ll look back and see the daily deals business as a fad that delivered untargeted, unsustainable discounts to unprofitable customers. The Groupon and LivingSocial brands may be around, having been sold to some company in a liquidation sale or bankruptcy proceeding. (Though even that may be difficult, as many merchants hate them.) Even if they survive as companies, the product they sell will be very different.

And we’ll see Google and Facebook ruling the much larger, sustainable local advertising market.

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