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LivingSocial: Another daily deal meltdown

(MoneyWatch) Daily deals company LivingSocial is getting more antisocial by the day. The Groupon (GRPN) competitor on Thursday said it was laying off 400 people, or almost 9 percent of its staff, probably because of falling demand for its services. The company lost $565 million on revenue of $124 million in the third quarter.

LivingSocial isn't the only one in its nascent industry to face pressure. Groupon's board of directors is reportedly considering whether to fire CEO Andrew Mason, who effectively admitted this week that his performance merits scrutiny. The company's directors appear to have decided to let him stay, at least for now.

Indeed, only a few years into its existence, the entire online coupon business is struggling, with top players still trying to learn how to grow quickly and profitably enough to satisfy investors. The question is not how much more consolidation can go on so much as how many companies might be left to consolidate. According to trade publisher Daily Deal Media, in the last six months of 2011 alone nearly 800 daily deal companies closed their doors.

As a privately held company, LivingSocial does not disclose financial information. But what is known is that investors in the firm have a lot riding on its success. Last year it raised a massive $176 million as part of a $400 million private placement that valued Living Social at $5 billion to $6 billion.

Last quarter, LivingSocial had revenue of $124 million, down 10 percent from the previous year. Clearly whatever money it raised was not enough to keep the bad times away indefinitely. And those bad times got spread around. One of its biggest investors, (AMZN), recently had to take a $169 million charge related to the $175 million it put into LivingSocial in 2010.

A fundamental problem for daily deal companies is that their identity as businesses reflects the temporary and fickle nature of, well, daily deals. After all, such firms do not simply advertise a special offer on some good or service -- they ARE the offer. And in marketing, no type of offer lasts forever.

That is why companies must keep testing new ways of getting the attention of buyers. But as the novelty of daily deals wear off, the reason for a deal company's existence comes into question. Companies like LivingSocial and Groupon are not only trying to sell their services, but also the very idea of the service, as the fledgling niche continues to evolve. Whatever their size, reputation or level of venture capital funding, such firms are only as good as their last deal.

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