NEW YORK ( TheStreet) -- A shakeout in the saturated daily deals market has already begun, with competitors Facebook and Yelp recently announcing that they're backing out of the space. While more than 300 start-ups have emerged in the online coupon market in an attempt to capture some of the success of industry leader Groupon, consumers have become tired of these deals while merchants have questioned their economics, say industry watchers.
"You'd see one deals e-mail and that's intriguing, but if you're getting 10 to 20 a day, that's another story," said Carl Howe, an analyst with the Yankee Group. "This is the tragedy of the commons -- its a great business for one company, but not when there are tons of different players in the space." The market overload in July forced more than 38 deals sites to close, as the industry's revenue fell 7% in North America, according to deal aggregator Yipit. Yelp, which launched its deals feature in last September, is paring down the number of salespeople working on its platform to 15 from 30. In June, the company integrated its service -- active in 20 cities -- into its app for Apple's ( AAPL) iPhone and Google's ( GOOG) Android OS. While Yelp was generating as much as $30,000 per offer at the beginning of the year, revenue came down to $10,000 per offer in recent months as it started to expand more rapidly and offer a greater number of deals, Yipit said. The company still plans to offer online coupons, but is focused on fewer, more high-quality deals, CEO Jeremy Stoppelman wrote in a blog post. Facebook, in turn, is pulling the plug on its deal service entirely just four months after its launch. The social networking giant, however, said it is preserving its mobile check-in service, which allows users to score free deals while at local venues using their smartphones -- as compared to its traditional deals service, which requires users to buy deals in advance. Facebook may have struggled with deals because the business is outside its core competency, said Dan Hess, CEO of Local Offer Network, a provider of daily deals services and technology.
"It takes specialization and a load of market data and insight to build a quality ... product that consumers seek out," he said. "It takes a lot of focus." But does the closures of these services as well as intense investor scrutiny around Groupon mean the daily deals craze is officially over? Ben Jabbawy, founder of Boston-based Privy, which helps businesses offer deals through their own Web sites, says no way. "We're going to begin to see the space change ... when someone like Facebook is running its deals program the same way that Groupon did two years ago, it's probably not the right approach," he said. Jabbawy envisions merchants as having more control over the way discounts are distributed -- like having them go out through their own sites and applications, rather than through third-party e-mail blasts favored by firms like Groupon. Deals will also be more economically friendly towards merchants, who will retain a greater portion of sales from offers rather than forking over, say, 50% to deals companies. "Deals are here to stay, they just need to evolve," he said. --Written by Olivia Oran in New York. >To follow the writer on Twitter, go to http://twitter.com/Ozoran. >To submit a news tip, send an email to: firstname.lastname@example.org.