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updated 8/20/2010 12:13:15 PM ET 2010-08-20T16:13:15

Angie Hicks, co-founder of business review site Angie's List, overheard employees raving in late March about the great deals they got from sites such as Groupon, a startup that sends users daily coupons via e-mail.

Days later, Angie's List followed suit. "I said, 'Let's do it. Let's do it now,' " Hicks says. Angie's List began sending daily coupons offering discounts on such services as carpet cleaning to users in Indianapolis, where Angie's List is based, as well as in Washington, D.C., and Chicago, Groupon's home turf.

Spurred by the success of Groupon, which has amassed a more than $1 billion valuation since it was founded in 2008, phone service provider AT&T is weighing a push into e-mailed daily deals, while newspaper publisher Morris Communications Co. has begun sending coupons over the Internet. Angie's List and other upstarts are targeting the direct-mail market, valued by consulting firm Borrell Associates at $38 billion a year. "It's a very large and quickly growing phenomenon," says Gordon Borrell, chief executive officer of Borrell Associates in Williamsburg, Va. "It's so easy for advertisers to participate, and they get immediate, measurable results. They get a check, and they get customers."

Within six months, Angie's List expects to e-mail coupons for everything from air-conditioner repair to driveway high-pressure water cleaning to several million people in 200 markets, Hicks says. The more companies send coupons over e-mail, the less they will rely on printed materials, Borrell says. "It will be similar to newspaper classified advertising, almost all of which went to the Internet," he says.

Cheaper marketing
Other coupon sites include Washington-based LivingSocial and Mobile Spinach, a San Francisco-based site that sends deals to wireless handsets. Besides threatening direct-mail companies, coupon providers may also crimp demand for services provided by phone book publishers such as AT&T, Dex One Corp., and SuperMedia Inc., according to Borrell. AT&T, based in Dallas, is considering its own coupon site in response. "If it's an area consumers are interested in, we'll launch products in this area," Will Hsu, chief product officer at AT&T Interactive, which owns a yellow-pages business, says in an interview.

Coupon sites help businesses that can ill afford newspaper advertising or direct mail reach a broader audience, says Sucharita Mulpuru, a vice-president at consultant Forrester Research Inc., which is based in Cambridge, Mass. Groupon charges no up-front fees and takes 50 percent of sales it helps generate.

Some businesses opt for coupon sites over traditional avenues, including online ads. Four-month-old Venus Allure Salon & Spa in Portland, Ore., sold 900 gift certificates through Groupon on a single day in late July. "For us, it's 900 potential clients; our books are jam-packed," Jasmine Enciso, manager of the salon, says in an interview. The spa opted for Groupon over radio or online advertising. "People could be clicking on it all day long, and no one would be coming," Enciso says of online ads.

The market for e-mailed coupons is getting crowded. Review site Yelp, which has 35 million unique monthly users, experimented with daily coupons in Sacramento, Calif., in June. "It's something we continue to test," says Stephanie Ichinose, a spokeswoman for San Francisco-based Yelp.

Newspapers seek a boost
Traditional media companies are moving in as well. In June, Morris Communications in Augusta, Ga., began delivering coupons through its site, an e-mail list, and two of its printed papers. Morris shares with merchants part of the revenue generated through the coupons, Everton Weeks, a vice-president at Morris, says in an interview. About 75 percent of businesses that have started to advertise through the effort weren't regular advertisers before, Weeks says. "It's going to help us grow advertising revenue," he says. "This will be a huge factor for our business."

Other newspapers might build their own daily coupon sites. McClatchy Co. in Sacramento, Calif., plans to start posting ads for Groupon deals on Web pages of several newspapers in September or October, says Christian Hendricks, vice-president for interactive media at McClatchy. "If this gains traction, there's no reason we won't launch our own platform," he says.

Direct-mail companies that analysts say may be affected by the coupon frenzy include Valassis (VCI), Money Mailer LLC, and Cox Target Media Inc.-owned Valpak. "I don't see sites like Groupon as being directly competitive," says Deanna Willsey, a spokeswoman for Valpak. "Groupon has a limited inventory of offers, consumers have a limited time to respond, businesses can't advertise [on Groupon] frequently." Still, Valpak is testing text-messaging coupons for mobile phones. John Gramata, vice-president of marketing at Money Mailer, says group buying websites can't offer deals over the long haul. The sites "can provide a useful short-term strategy for companies without a strong customer base," he says. "However, the nature of the required steep discounting is not sustainable for prolonged periods of time, at least for most local advertisers." A representative of Livonia, Mich.-based Valassis didn't return an e-mail or phone call seeking comment.

In the face of increased competition, Groupon may have to offer more features. In July, Groupon began letting users in six cities choose what types of coupons they'd like to receive. It has also made the deals available via apps for the Apple (AAPL) iPhone and smartphones that run Google's Android software. "Competition is healthy," says Groupon President Rob Solomon. "It forces us to constantly improve. While we keep an eye on the competition, we are much more concerned with growth, innovation, delivering millions and millions of new satisfied customers each month to our merchants, and being the iconic Internet company that defines our space."

Would-be investors in Groupon don't betray worry, either. In the second quarter, they were more interested in buying shares of Groupon than of any other company, according to SecondMarket Inc., a marketplace for private company stock. Still, the company can't rest on its laurels, says Tom Taulli, an independent analyst who researches initial public offerings. "It doesn't take a lot to build one of these sites," he says. "The leader today could be a has-been tomorrow."

Copyright © 2012 Bloomberg L.P.All rights reserved.

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