Are Four Words Worth $25 Billion for Groupon?

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Some local merchants also fear that active discounting could dissuade their customers from ever paying full price. "I don't know if it would be beneficial to have an ongoing deal," says Nick Pinelli, who manages Capri Restaurant in Raleigh, N.C., and recently sent out its first Groupon. "There's no reason for customers to come in all the time if they can always get a discount. That's the reason we like Groupon; it's only a one-time deal."

As for whether Groupon Now is any harder to replicate, that's an open question, too. Groupon Now may be more technically advanced than the daily deals, but that's not stopping other companies from trying to get into real-time bargaineering. LivingSocial recently started a test run of its own real-time project, LivingSocial Instant. Location-based "check-in" startups such as Foursquare and Loopt hope to play in this field as well; Foursquare just announced an agreement with American Express (AXP) that will let users get credit-card rebates when they check in at a store and spend money. And looming on the horizon: Facebook, which announced plans in March to collect daily deals from a variety of Groupon's rivals and present them all in once place.

Groupon is preparing for the onslaught. It's filing a patent around its method for serving up deals based on people's location and time of day. (It's also applied for a patent on its deal-of-the-day service, which has not yet been approved.) Mason believes his army of sales reps and their existing relationships with merchants give his operation an insurmountable advantage. Since stores and restaurants probably won't have the time to administer such deals on more than one or two services, Groupon Now could conceivably yield the kind of merchant lock-in that Groupon 1.0 did not. "You need the two wings of the butterfly," says Weller, the Groupon investor. "You need the users, and you need the merchants. Why do you think we have thousands of salespeople?"

Mason and his team profess a carefree attitude toward the growing competition, but it's clear they resent the rivals more than they let on. On a Monday evening at the recent South by Southwest Interactive festival in Austin, Tex., Mason joined Weller, his investor, onstage at a party hosted by Weller's venture capital firm, NEA. As the crowd swayed and held up glow-sticks, the duo performed a rendition of the Billy Joel ballad Honesty, with Mason on the keyboard and Weller crooning the altered lyrics:

Honesty is such a lonely word,
Everyone is so untrue,
Originality is hardly ever heard
Copycats, I'm crushing you-ooo.

Stone is a senior writer for Bloomberg Businessweek. MacMillan is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.