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Greasing the Brave New Market's Skids

NEW YORK – Internet firms are supposed to be all about the cutting edge, but reality and buzz sometimes conflict. Consider Groupon: its focus is the power of groups, but its actual business is the old standby of direct-mail marketing and coupons. But Groupon is spreading that model to a much wider audience – not so much to coupon users, but instead to merchants offering coupons. In fact, Groupon is doing for e-mail marketing what other Internet companies are doing for the Yellow Pages or classified ads: encouraging merchants to use modern technology to reach their customers.

The model clearly makes sense for a lot of customers: Groupon now has more than 50 million subscribers and aims for 150 million by year-end. Its revenues – about half the value of total transactions – were an estimated $760 million last year, and should hit $2 billion or more this year. Unlike most Internet companies, it has a lot of employees relative to its revenues – about 5,000.

Thousands of companies have used Groupon to sell their wares, though Groupon does not disclose its rate of repeat sellers.

In theory, Groupon’s business model is “group coupons”: if enough people sign up, the deal “tips” into action (though now that Groupon is so large, few deals don’t tip). In practice, Groupon’s original idea – to encourage users to form groups to negotiate with merchants – seems to have disappeared. The notion of user empowerment has likewise vanished amid intense competition for the direct-to-consumer e-mail marketing business.