Daily Deal Summit: Are Deals Becoming Bubblicious?

As it turns out, the daily deals landscape is more sophisticated than many first thought. New contours are emerging, each replete with opportunity and threat. Bluntly branding the space as “the next big thing” or a “can’t-miss opportunity” lacks the necessary strategic discernment in an industry replete with competitors and fortressed with high barriers to scale. Similarly, the question of whether the deals explosion is leading Silicon Valley toward the brink of tech bubble 2.0 requires more than a “yes” or “no” answer. “It depends” is more like it.

A stage-full of bankers and investors debated this topic at the recent Daily Deal Summit in New York without reaching much consensus.

On the one hand, leading group buying brands such as Groupon and LivingSocial are radically altering local advertising and marketing by touching local merchants with a direct, trackable customer acquisition tool that verifies ROI … all without the burden of upfront costs. There are merchants aplenty yearning to draw new business without the traditional media headaches of lofty price points and fuzzy metrics.

BIA/Kelsey approximates that there are at least 10 million SMBs in the addressable advertising pool. James Min, head of media banking at Montgomery & Co., noted that even if Groupon and LivingSocial are building sales armies, that still leaves “a lot of greenfield opportunity” for other originators and media companies to participate.

Then there are the actual revenues that these still relatively young market leaders are already driving. Groupon’s 2011 revenues could reach $3 billion to $4 billion, prompting reports of a desired IPO at a $25 billion valuation. The business models and sudden returns weren’t as evident a decade ago. Real money is changing hands … quickly and compellingly. Instant, personalized and geotargeted deals surface more inventory to meet crushing demand. New revenue streams are continually opening.

On the other hand, what’s good for a few isn’t necessarily good for all. The network effects that early movers create can become bubble effects for clones and stragglers. As the market fragments and verticalizes, Ben Choi of Maveron sees entrants that want to specialize as, say, “the Groupon for yogurt.” Only a couple, however, get the requisite funding to grow at scale.

Meanwhile, Battery Ventures associate Blake Bartlett asks if targeted niches such as Groupon for yogurt create “a truly different e-commerce experience, or are simply saying ‘let’s create a better Groupon?’ ” If the latter is true, can new incremental value be generated?

Groupon and LivingSocial topple scale barriers with sales heft. For other players, partnerships are the vehicle. But two essential questions remain: What is the critical mass necessary to claim effective scale, and how many can actually get there? These questions are particularly pointed seeing as Groupon hires new sales force every day. Sales scale would multiply even more if, as Min volunteered, they acquire a Yellow Pages company out of bankruptcy after filing their IPO. “Someone’s going to buy one of them, and it’s going to be an Internet company.”

Where do you fall on the deals market: frothy, robust or somewhere in-between?