In the Wild West of group-buying and daily deals sites, there's about to be a major showdown. Investors have been talking about consolidation in this sector for a while now -- and it looks like that's where things are headed.

But not without a few curveballs first. Last week, Google (Nasdaq: GOOG) was widely reported to be pursuing an acquisition of Chicago-based Groupon for a whopping $5-6 billion. Now it looks like the deal is off, with Groupon walking away from the offer on Friday -- and perhaps looking to go public in the next year or two. Meanwhile, Amazon.com (Nasdaq: AMZN) has invested $175 million in Washington DC-based LivingSocial, which is currently No. 2 in daily deals behind Groupon, and is rumored to be worth around $1 billion.

Investors with skin in the game are keeping a straight face about these valuations. But investors and analysts not involved in group-buying companies have been much more cautious; some I've talked to have dismissed the industry as unsustainable (too much money for too small a market long-term) and indefensible (no real barriers to entry for new players). On this latter point, dozens if not hundreds of Groupon clones have sprung up around the world, though none yet has the scale or reach of Groupon.

What's undeniable is that the big tech companies were caught by surprise when group buying took off -- and now they have to do something about it. It's the latest reminder that just when the Internet landscape looks like it's settling into a predictable pattern -- Google owns search, Amazon owns online retail, Facebook owns social networks -- a start-up can come out of nowhere and turn the whole thing on its head. (Groupon has gone from zero to $500 million-plus revenue and 3,000 employees in just two years.) It remains to be seen what Facebook, Microsoft (Bing), eBay, Yahoo!, and AOL each will pursue in this sector, but it should be interesting.

I reached out to a couple of group-buying startups with strong ties to Xconomy cities to hear their thoughts on the recent developments. One theme that emerged is that the online technology giants really need feet on the street to cash in on local advertising -- smaller stores and merchants trying to reach customers in Boston, say -- and that they want to get into the game for different reasons. But it won't be easy, partly because there's a cultural mismatch between tech companies like Google and consumer-brand companies like Groupon.

The Groupon negotiation "shows Google's desperation or belief that this daily deal [sector] is incredibly strategic to the future of local," says Martin Tobias, founder and CEO of Seattle-based Tippr, which makes a group-buying software platform for publishers and websites, as well as running its own branded daily deals site. "This is the next generation of marketing -- basically no-cost, no-risk marketing." (As opposed to advertising on local TV, radio, or print publications.)

"Google is looking at this as the next generation of ads," Tobias says. "Amazon looks at it as another inventory item for e-commerce." (One reason why Amazon might want to form a partnership with LivingSocial instead of acquiring it is to avoid paying taxes on its operations in different states, he adds.)

Tippr, for its part, is positioning itself as complementary to the big consumer brands in group buying. The company, which started in early 2010, wants to own the technology platform that Web publishers and media sites will use to install their own daily deals widgets or sites and connect local advertisers with consumers. The idea is that this could lead to a greater reach than any one consumer brand. Tippr now has about 50 employees around the U.S. (40 in Seattle), and last month, its revenues were split roughly 50-50 between its own branded deals site and its platform for publishers, Tobias says. (That's up from a 95-5 split in favor of the branded site just a few months ago.)

Although it seems like anyone could start one of these deals sites, Tobias sees intellectual property as key to the sector's future. He has been touting Tippr's patents for a year now, and last week the start-up announced it is offering patent protection separately from its software. "Anyone providing group buying is going to need patent protection," he says. "Everybody should be worried." What's more, he thinks there is room for only two national brands in each city, and one tech platform -- Tippr, of course.

Andrew Moss would beg to differ. The founder of BuyWithMe, a New York-based company that started in Boston last year, has been busy building his own group-buying consumer brand -- and he thinks there's plenty of room to grow.

"It's a very large market, it's not winner take all," says Moss, who has a strategic role with BuyWithMe as a director. "People realized this is an international phenomenon. It's not just a hundred billion dollar local space. There are applications in every country. There's a lot of room for multiple players."

BuyWithMe has positioned itself as sort of a thinking person's Groupon -- instead of daily deals, BuyWithMe runs its promotions for a full week. "The deals space is really about matchmaking and customer acquisition," Moss says. "It's not just the deal that matters, but the relationship you form between the customer and the merchant."

To that end, the company is "clearly co-existing with Groupon" and is "very profitable in Boston," Moss says, where some of its deals include vouchers to top gyms, spas, restaurants, and Duck Tours. The key to the success of BuyWithMe -- and really the whole deals sector -- is whether it will continue to pay off for local merchants.

That's where the company's focus on establishing stickier connections between retailers and customers (not just one-off deals) comes into play. So far, so good, says Moss, who says most of BuyWithMe's promotions are profitable for merchants and should keep bringing in more long-term paying customers.

Whether the consumer brand or the technology platform is the right strategy to pursue, both Moss and Tobias agree that group buying is not a fad. And they dispute the idea that there are no barriers to entry. To Moss, the main barriers are scale and relationships with merchants and consumers. For Tobias, it's the group-buying technology itself, plus the expertise in running the deals.

"This marketing tool is here to stay," he says. "This is not a flash in the pan."

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Gregory T. Huang is Xconomy's National IT Editor and the Editor of Xconomy Boston. You can email him at gthuang@xconomy.com, call him at 617-252-7323, or follow him at twitter.com/gthuang.

Google and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Amazon.com and eBay are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on eBay. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft. 

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