AOL Patch-Amex Deal Takes on Groupon -- and Could Hurt It a Lot [Updates]

AOL Patch just announced that it's fueling its new local deals offering with some heavy e-commerce: American Express's (AXP) Serve digital payment platform. The deal will let readers redeem local merchant promotions online or in person with an appropriate Amex card. Given the amount of negative press Patch's business model tends to draw, it might be tempting to write this off as an act of desperation.

It's not. Patch and Amex have put together a an online deals service variation with the potential to hurt Groupon, LivingSocial, and their clones. It would be more economically attractive for merchants because there's no need for them to share revenue, and more convenient for customers, with a no-coupon form of in-person redemption, as well as online purchasing.

Amex eventually gets an audience that currently is at 9.2 million unique monthly visitors (Patch Deals in only available in 6 communities at the moment). Patch finds another way to tie readers close and to win the hearts -- and, eventually, the wallets -- of local merchants.

For Patch, the arrangement brings the potential for new revenue sources, which was "definitely part of the plan," Patch president Warren Webster said in a phone interview. And the network of hyperlocal news sites is in a prime position to make something like this work:

• According to Webster, early sites from 2009 "quickly" hit 50 percent market penetration and many then grew to between 80 and 90 percent. Patch's local focus should offer the type of demographic concentration that would mean merchants would get traffic from consumers in the general neighborhood, not people flocking in from other locations to cherry pick bargains.
• Patch doesn't charge merchants to list deals and businesses structure the terms of their own deals. Merchants can avoid the high cost of Groupon, LivingSocial, and similar services that take a significant slice of the deal price, making many of the promotions money sinks.

However, a Patch representative just emailed to say, "Merchants will share revenue under the program based on an agreement that will be part of their registration for the program." When I asked how it compared to the 30 percent to 50 percent that LivingSocial or Groupon can charge, the company declined to give the exact amount, instead saying, "It varies by deal, and it's far less than those shares, and with more merchant-favorable terms." When I asked what the amount was, the answer was, "It varies by deal, and it's far less than those shares, and with more merchant-favorable terms." Patch is supposedly updating the page for merchants to indicate that there is a charge.]

• If deals can be profitable for merchants, then the importance of converting customers into long-term patrons lessens. Deals then become a promotional vehicle that at least pays for itself, with the added benefit of some portion of new customers becoming repeat.
• Those who apply for and get a Serve card avoid the mechanics of making sure they have a coupon with them. Although I haven't yet verified this, it seems reasonable to assume that the system could also track whether people had used a given offer, reducing the potential for some to redeem a limited offer more often than the merchants wishes.

Related:

• Groupon Loses So Much Money, It Needs Its Own Daily Deals
• Groupon and LivingSocial: The Next Bubble Waiting to Pop
• Groupon Is Ruining Your Neighborhood: It's the Crack Cocaine of Small Business