FORTUNE -- The days when Groupon was a poster child, when founder and ex-CEO Andrew Mason graced magazine covers propagating the pros of the daily deal -- for deeply discounted massages, dinners, trips, and the like -- probably seem like a distant memory to Mason and his one-time employees.
Four-and-a-half years after Mason founded the company, Groupon (GRPN) is a cautionary tale of a hyped-up Internet darling that expanded too quickly atop an opaque business model with low-to-nonexistent profit margins -- not to mention unhappy partners who complained there was little upside for them. Just as bad were the countless competitors like LivingSocial, which popped up, seemingly overnight, offering similar deals at similarly cutthroat prices. (Indeed, as early as 2011, Forrester Research deemed Groupon an unqualified disaster, "a shill that's going to be exposed pretty soon.")
Gene Alvarez, a Gartner Research analyst, was never bullish on Groupon to begin with. Sure, customers got great deals, and merchants saw more customers come in during off-hours, but there remained little incentive for buyers to come back to the same merchant for a second or third time and pay full price for a service they previously paid 50% less for. "If I'm a merchant, and I know how already to run a 50% what's to stop me from sticking a sale in the window?" asks Alvarez. For many merchants, doing just that may be equally effective (or ineffective).
So it shouldn't have come as a complete surprise when Groupon reported annual revenues of $2.33 billion but a net loss of $67.4 million for 2012. Last February, when the company reported fourth-quarter financials that missed analysts' estimates -- sending Groupon's stock down 20% initially -- Mason was finally fired. By some accounts, it was a move investors had clamored for since late last year. "I'm OK with having failed at this part of the journey ... My biggest regrets are the moments that I let a lack of data override my intuition on what's best for our customers," Mason confessed in a company-wide letter.
Groupon co-founder and chairman Eric Lefkofsky, who had since distanced himself from the company, was brought back as co-CEO, alongside Ted Leonsis. Lefkofsky had some stern words for his co-founder and predecessor. "You could say, 'Well everyone was here, and everyone's to blame including the senior manager, the board, whatever,' he told Fast Company recently. "But at the end of the day, the CEO is the CEO. And he makes those tough calls. If they go well, you're a hero, and if they don't go well, you're accountable."
Mason's ousting has since helped propel shares up over 39%. But while Wall Street may have some renewed confidence in a Mason-free Groupon, the company's future remains unclear. Sucharita Mulpuru, a Forrester Research analyst, has been critical of Groupon in the past, but ultimately believes it has a sustainable model, albeit a smaller one compared to the company's peak.
Alvarez suggests Groupon could take better advantage of its strength -- its list of 200 million-plus deals subscribers -- who, at their core, are value shoppers searching for the next deal. Groupon might not be a great tool for creating customer loyalty for a merchant, but by expanding into new deal categories, it can cross-promote different kinds of deals to the same hardcore list of subscribers, who might be willing to buy a discounted dinner one day, then spring for a four-night getaway to Costa Rica the next.
Groupon might also do well to explore more merchant products and services like Breadcrumb, its point-of-sales system and app launched last year that lets merchants accept payments via iPad. With companies like Square and PayPal (EBAY) also gunning for a market Forrester estimates will reach $90 billion by 2017, there's still room for a company like Groupon, which can make money by charging a small fee off each transaction. Merchant-friendly products like Breadcrumb could prove to be solid revenue streams for the company in the long run.
Which is all to say, Groupon clearly has opportunities to explore without the wayward Mason in charge.
Like Google and Groupon, Facebook's letter expressed a defiant idealism that -- eventually -- must confront the realities of business.
By Kevin Kelleher, contributors
FORTUNE – For Internet companies going public, the founder's letter is becoming a ritual with a purely symbolic value, a rite of passage into the adulthood of public markets. Larry Page and Sergey Brin started it when Google (GOOG) went public in 2004. Andrew Mason raised it to MOREFeb 3, 2012 12:16 PM ET
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