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PayPal poses new threat to Groupon

The much-hyped November IPO of the daily-deals company isn't looking so good in retrospect. Now, with its 103 million users, PayPal could be the latest to cause conniptions for Groupon's investors.

As more and more companies get into the daily-deals game, the bankers behind Groupon's IPO must be banging their heads against the wall. And now, there's one more formidable entrant to give them headaches: PayPal.

The eBay-owned payments company says it is planning on offering deals as soon as the first quarter of 2012. And, according to Bloomberg News, it is taking what could be a smart approach to the ever-popular deal genre: location- and user-habit-based offers.

PayPal has more than 100 million users, and it thinks that it can leverage what it knows about those customers to target them with coupons that are more relevant than the ones people are getting every day from Groupon, LivingSocial, and many other deals sites. At the same time, Bloomberg reported, PayPal plans to send its targeted deal offers to users' smartphones as they near the very merchants that will accept the coupons.

This, of course, is exactly the decade-old promise of location-based services. Until now, no one has ever really delivered on that promise, despite an explosion in users with smartphones and ever more sophisticated ways for merchants, mobile carriers, and others embedded in the mobile infrastructure both to know what users like and to give them real-time deals on things they're likely to want.

All of this is very bad news for Groupon and its investors. While PayPal's entry into the field may not by itself harm the leading daily-deals company, it certainly won't help. Groupon's early November IPO was initially a hit--shares jumped 31 percent on opening day to close at more than $26, up from its initial price of $20. But since then, Wall Street has cooled on the Chicago company.

Though its shares have rebounded a bit after tumbling as low as $17 in late November, as of this writing, they can be had for $21.81, down nearly 7 percent today alone. Whether news of PayPal deals is responsible for that decline is unclear. But it certainly can't Groupon's stock price.

The problem for Groupon is that while it once dominated the deals arena--and seemed like it could be bringing in the lion's share of what is estimated by research firm BIA/Kelsey to be a $4 billion-plus market by 2015--it faces competition from a wide variety of players, including big-timers like Google, Amazon, and now, PayPal. As a result, Groupon is going to have to step up its game dramatically if it wants to continue to be seen as the king of the deals hill.

Of course, Groupon and its biggest rival, LivingSocial, are not going to give up their leadership in the offers space easily. Yipit, a deals aggregator, suggested recently that together, the two companies control 73 percent of the market in October, Bloomberg reported.

For PayPal, the challenge is clearly whether it can deliver true benefit to its massive user base with what it knows about them and their buying habits. "The [PayPal deals] experience is going to be completely different than anyone else's through and through," Bloomberg quoted PayPal president Scott Thompson as saying. "We'll only give you something that we think fits the category of unique and relevant. Everyone else is going to bombard you."

If it succeeds, those who enjoy buying daily deals are going to find it hard to resist. After all, a targeted offer that matches someone's actual interests--and which arrives just as they're out shopping--is certainly going to be at least as attractive as a random offer.

Then again, this kind of deal has been one of the mobile industry's biggest unfulfilled promises for a decade. If PayPal can make it work, there will be a lot of happy customers, as well as executives at companies like Verizon, AT&T, and Sprint. But on Wall Street, those who banked the Groupon IPO may very well find themselves wishing they'd never heard of daily deals.