Groupon Inc's rapid growth has attracted rivals and regulators, a twin threat to the largest online daily deal company as it gets ready for an initial public offering.

At a daily deals conference in San Francisco this week, executives from AT&T Inc, MasterCard Inc and Facebook described their plans to expand in the industry. Google Inc, which tried to buy Groupon last year, is forging ahead with its own daily discounts on local goods and services.

Groupon has faced big challenges this year, and a lot of those have come from competitors, said Boyan Josic, chief executive officer of daily deal tracker DailyDealMedia. It's a huge new sector that's growing like crazy, and there are no real regulations or industry standards.

Last week, Connecticut's attorney general said Groupon's vouchers might violate state law. And industry regulation will be the topic of a panel discussion at a DailyDealMedia conference in September.

Groupon filed for an initial public offering in June, saying it hoped to raise at least $750 million. The IPO may value Groupon at $20 billion or more, although concern about competition and regulation may limit that.

These problems call into question Groupon's valuation, said Harvard Business School associate professor Ben Edelman. With competitors and regulators nipping at Groupon's heels, the company may be worth less than their prospectus suggests.

A Groupon spokesman said the company is planning on working with regulators to explain our business model and practices, but declined to comment on competition.

DEALING GROWTH

The daily deal industry may generate as much as $6.1 billion in annual gross revenue by 2015, up from $873 million last year, according to BIA/Kelsey, which tracks local advertising.

That growth potential has attracted a lot of new entrants. New York-based Yipit tracks more than 400 U.S. daily deal websites, up from about 20 in early 2010, said data product manager David Sinsky.

In the last 12 months, there's been an explosion in the quantity of competitors, Sinsky said. In the next 12 months, the quality of competition will increase.

AT&T, MasterCard, Google and Facebook will be the biggest threats to Groupon, he said.

Amazon.com started offering daily deals last month through its AmazonLocal service. The Internet retailer sources most of the deals from LivingSocial, Groupon's closest competitor. Amazon bought part of LivingSocial in late 2010.

American Express said on Tuesday that it would offer deals to card members in a partnership with Facebook.

AT&T Interactive, which runs the phone company's yellow pages business, introduced daily deals in Atlanta, Dallas-Fort Worth and Los Angeles on Monday.

To source daily deals, the company is using a fraction of its roughly 5,000-member sales force, which sells yellow pages ads and other marketing services to local merchants, said AT&T Interactive Chief Executive Officer David Krantz. We're able to self-fund and start this thing from existing resources.

By contrast, Groupon has spent heavily to recruit thousands of sales people in the past year.

Groupon is still the clear leader with 48 percent of the daily deal market, according to Yipit data for May, but that is down from 52 percent in April. Meanwhile, LivingSocial's share rose to 24 percent from 20 percent.

Competition has already affected Groupon's operations, Yipit's Sinsky said.

Subscriber acquisition costs jumped roughly fourfold in the first quarter from a year earlier, according to Sinsky's analysis of data in Groupon's IPO filing.

And while the number of vouchers sold rose to about 28 million from 1.76 million, they fell on a per-subscriber basis to 0.42 from 0.67, data from the filing show.

Groupon typically takes 50 percent of revenue generated from deals, while merchants take the rest. But the company's share has started slipping with the entry of rivals like Google, whose commission is only in the mid-30 percent range, Sinsky noted.

REGULATORY SNAG

Regulation may also change the way Groupon operates.

The main question is whether states decide that Groupon's deals are gift certificates, which are subject to expiration rules.

Connecticut Attorney General George Jepsen said last week that Groupon's daily deals could violate a state law that prohibits expiration dates on gift certificates.

California also bans expiration dates on gift certificates. Under Massachusetts law, gift certificates are good for seven years.

Groupon deals usually last a year or less. If the company has to extend expiration dates, merchants may be less willing to sign up for deals, it warned in its IPO filing. Groupon would be on the hook to pay merchants for a longer time, increasing its liabilities.

Some U.S. states and overseas jurisdictions require money on unused gift certificates to go to the government. Groupon said it did not turn those funds over now, but warned that a successful challenge to its position could also increase liabilities.

(Editing by Lisa Von Ahn)

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