Is Groupon a Ponzi Scheme?

http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/

This is an interesting article for two reasons: it gives a good explanation of Groupon's business model...Which up until this point I didn't quite understand.  Secondly, it gives a little clearer picture of why Groupon could be a big bust.

So if I understand this correctly...a business bids on doing a deal with Groupon and if they win the bid the offer is made.  So if a business has a product or service worth $100, Groupon offers the deal at $50.  A certain number of purchases have to be made in order for the deal to open up to all Groupon users...Some sort of minimum threshold agreed upon by Groupon and the business.  So, for every $50 dollar deal that is purchased by the customer, Groupon gets %50 and the business gets %50.  So a product or service that a business charges $100 for, they will get $25 back from Groupon for each customer.  Groupon pays out percentages of the money over a 2 month span.  The payoff for Groupon? They are making a %50 commission on every sale.  The payoff for the business is the potential of thousands of new and instant customers.  According to their public filings, Groupon appears to be under water in the hundreds of millions of dollars at they float this money back and forth between the customers and the businesses.  The logical conclusion would be that Groupon is using money from current deals to pay off businesses for past deals.  That is where the whole thing begins to sound like a Ponzi.  Groupon has to continue rapid expansion just to keep up with current and past offerings.  

I just finished reading "The Big Short" by Michael Lewis.  It is all about the subprime mortgage industry and how it crashed the housing market and the economy.  An interesting analogy used in the book is that of a balloon.  The subprime market was a balloon and all of these banks and brokerage houses were holding on to the balloon while at the same time trying to make it go higher and higher.  I think the same analogy could be applied to Groupon.  The value of it is being pushed higher and higher and yet nobody seems to be thinking about how it will ever be able to sustain the amount of growth needed to keep the insane amounts of money flowing.  

-- Sent from my Palm Pre