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.

Recently Netflix confirmed rumors that the DVD-by-mail company would have the exclusive first-license to air a new drama called House of Cards on its instant streaming platform. This is a departure from Netflix’s normal business of licensing TV shows and movies from TV networks and movie studios after they have aired or been released on DVD. While the strategy of creating ‘must-see’ content to lure in more subscribers may or may not succeed, it’s the reported price-tag that raises eyebrows. The original report from Deadline estimates that at $4-6 million per episode, the 26-episode commitment would cost Netflix more than $100 million. Subsequent reports have called this estimate high; MediaMemo’s Peter Kafka figures a better estimate would be $3 million per episode, or around $78 million total. But that’s just for producing the new show; additional bandwidth and promotional expenses will likely run the number back up to $100 million. Can the company possibly justify such an expense for one show?

In 2010, with revenues of more than $2.1 billion, Netflix earned net income of $161 million for a healthy profit margin of 7.4%. The company is rapidly adding subscribers, with analysts estimating revenues at more than $3.1 billion for this year and $4 billion in 2012. Clearly, the company can afford House of Cards. However, with Netflix’s instant-streaming-only plan available for $7.99 per month, they would need to add more than one million additional subscribers for a year just to break-even on the deal. This would represent an increase of 5% on the company’s 20 million subscriber base.

Is it realistic to expect 1 million households to drop $7.99 per month for access to a new drama series? While the talent on board (which includes director David Fincher, fresh off an Oscar nomination for his work on The Social Network, as well as actor Kevin Spacey) is a positive sign for the quality of House of Cards, there’s no guarantee that the show will prove popular with viewers. Even HBO with its stellar track record including hits like The Sopranos and True Blood occasionally misfires (does anyone remember John From Cincinnati?). The fact that HBO turned down acquiring House of Cards itself because the show’s production company Media Rights Capital wouldn’t agree to produce a pilot episode doesn’t exactly fill me with confidence.

If new subscribers joined Netflix for House of Cards and subsequently stayed on board, the company would obviously profit. However, this is far from a sure thing. Netflix’s subscriber churn will make it unlikely that the company can continue to grow its subscriber base at the rate it has become accustomed to. Jim Pyke points out that new subscribers from 2002 to 2010 come in at over 50 million, or about half of all U.S. households. We don’t know how many of these subscribers are unique, and how many are people who joined Netflix, dropped it temporarily, and subsequently subscribed again, but making some reasonable assumptions about the churn rate and the number of U.S. households shows that Netflix will hit a wall in terms of household penetration within the next three or four years. HBO, the current leader in pay-TV, has topped out with 28 million subscribers.

The biggest obstacles that Netflix faces in the near term are the expiration of its licensing deals. With content owners being squeezed by the drop in DVD sales as more and more consumers eschew buying discs in favor of renting them, studios will be demanding more cash from Netflix for instant streaming rights. Couple that with broadband providers grumbling about the massive bandwidth that the service takes (and worried that more and more cable subscribers will cut the cord in favor of some combination of Netflix, iTunes and Hulu), and the company could be squeezed from both sides. A commitment of hundreds of millions for original content might not turn out to be the best use of shareholders’ cash, when the same money could buy shows with existing fan bases. Recent deals with ABC and CBS are reported to have come in the $150-200 million range.

It will be years before anyone knows whether or not Netflix’s new strategy is successful, and we may never know the truth. With or without original content Netflix will continue to gain subscribers as the value proposition of DVDs-by-mail plus an expanding lineup of instant streaming programming for a few dollars a month is tough to beat. The question is whether or not House of Cards and presumably additional original content will lure in enough subscribers to justify their high development costs. I think it’s likely that most of Netflix’s original content will not carry such a high price tag, because it doesn’t need to. The occasional ‘tentpole’ production like House of Cards will generate buzz, and it can be bolstered by cheaper-to-produce content (like reality shows) to make sure subscribers feel they’re getting their money’s worth from Netflix.

But maybe I’m asking the wrong question. Maybe CEO Reed Hastings first option isn’t becoming another HBO, but rather to keep open that possibility as an alternative to buying the rights to pre-existing content. If studios buy this bluff during the next round of negotiations, the $100 million could pay for itself.