Is LivingSocial Preparing to Eat Groupon's Lunch?

By now, just about everyone knows that Groupon is the Godzilla of thedailydeals business and the latestGoliathof the online world. Or is it?

A report from Mashable.com says that LivingSocial is on track to surpass Groupon in market share by Jan. 2012. The estimate is based on revenue figures for both companies, garnered from a leaked Groupon internal memo.

Currently, says Mashable, for every $10 of deals sold on either site, $4 is sold at LivingSocial andit saysLivingSocial's share of the market is growing faster than Groupon's.

While Groupon's revenue is somewhat staggering – $760 million last year – LivingSocial is signing up new subscribers faster than Groupon, whose subscriber growth may be plateauing, at least in the United States.

Think back a few years to 2008, when Groupon burst onto the scene. It had 100% of the market then. LivingSocial got into the game later and had 10 million subscribers last December. Today it has 24 million.

Not that either company should worry. It's estimated that the entire market – which they still have pretty much to themselves – is forecast to grow 138% to $2.7 billion in 2011.

Or will it?

On the other hand, small businesses are the lifeblood of the deals networks and they are becoming a bit wiser and warier as they gain experience with the deal-a-day phenomenon.

The Wall Street Journal recently surveyed small merchants and found that they're negotiating better revenue splits and generally tweaking the deals they make, which is likely to tighten the margins for the deals sites.

One local businessman cited by the Journal, Dani Zoldan of the New York comedy club, Stand UP NY, said he used to “do a deal with just about everyone that approached us” but now has become more sopisticated in how to structure the deal.

Initially, merchants were overjoyed to see the traffic the daily deals created. But when they did the math, they often found that they had absorbed as much as 75% of the deal's cost without seeing much in the way of repeat business.

Consumers are also becoming more careful.

A Northern Virginia couple recently bought a 50% off Groupon deal for the Wine House in Fairfax, where they had eaten several times before. Though bustling during the day with traffic from the nearby courthouse, the restaurant is normally relatively placid in the evenings.

But this particular Sunday night found the place stacked to the rafters with patrons.

“It's Groupon,” said the waiter. “We're never busy on Sunday nights unless there's a Groupon deal.”

Nor was the place likely to run through its food budget this particular Groupon night. Unlike previous visits, it was difficult to tell which was the salad and which was the entree, the evening's repast seeming to consist mostly of lettuce, with just a hint of lamb, sea bass or whatever supposedly constituted the entree.