Daily deal giant Groupon has recently been making news about as often as it has been filling email in-boxes: the spurned $6 billion buyout offer from Google, the controversial Super Bowl ad, talk of an IPO at a valuation of $25 billion, and competitors like LivingSocial stepping up their game by raising $175 million from Amazon.com. Perhaps all the headlines befit a company which has gained the title of “fastest growing company ever”. The latest announcement of a new mobile app, called Groupon Now, allows companies to offer deals based on the time of day to nearby consumers. Groupon has definitely had an impressive run in its short life, but is the reality living up to the hype?

With 70 million subscribers, more than 5,000 employees in hundreds of cities worldwide and being on pace for more than $1 billion in annual revenues, Groupon is the juggernaut of daily deal sites. But the category is facing more and more competition almost daily, as it is a relatively simple business model to copy; hire some salespeople to contact small businesses, and a few copy writers to write up the e-mails. The ‘once-a-day’ e-mail practically invites competitors, as it limits Groupon to 365 partners a year, leaving businesses searching for alternatives like LivingSocial.

Next is the issue of fees. Groupon is known for giving us great deals, but its partners may disagree: Groupon charges businesses about half of the price of their discounted voucher. Eventually, the company will have to cut its share of business generated, as its partners are not only giving consumers a massive discount but also paying Groupon half of that reduced revenue. How can small businesses possibly profit on those sales? While Groupon currently has a waiting list of potential partners, a study by Utpal Dholakia of Rice University showed that 42% of their partners won’t come back for repeat business.

Some justify the daily deals as a promotional expense; the offers bring customers in the door. While great in theory, in practice businesses don’t benefit. It is a temporary influx of price-sensitive consumers, few of whom are likely to become long-term loyal customers willing to pay regular prices. Massive price discounting will only serve to dilute the brand. The Groupon Now business model will suffer from this same problem, as it will train customers to shop around and wait for discounted offers instead of paying the full retail price.

There is evidence that despite the massive discounts, customers themselves aren’t even benefitting from Groupon’s offers. About 40% of vouchers purchased aren’t even redeemed. And even when people are buying and using them, they are fooling themselves into thinking they are saving money. You can’t save money by spending money, and the idea of getting such a great deal fools many of us into buying something we would never otherwise consider. There is a whiff of fad surrounding the daily deal; coupons aren’t a new idea, and just because they’ve moved online doesn’t mean they are a reasonable base for a multi-billion dollar business model.

Groupon is a business that charges high fees, doesn’t benefit its partners or end-consumers as much as they would like to believe, and has no barriers from competition. Is it any wonder that Google’s share price dropped almost 4% the day the rumors about the Groupon offer surfaced? With a market capitalisation of $140 billion, this basically indicated that the $6 billion offer was about $5.5 billion too high. After Groupon killed the proposed deal, Google’s share price increased by 1%.

While we’re not quite in the same dot-com bubble environment as the late 1990’s where companies without viable business models were able to IPO at ridiculous valuations based on the number of ‘eyeballs’ instead of dollars brought in, it does seem like the market is getting frothy. I suspect that investors who buy into Groupon at anything resembling a $25 billion valuation won’t be getting as good a deal as they could just buying one of their daily deals.