Dear Andrew,

I must admit I was surprised to read your email to employees yesterday. I say this because I’ve reached out to your PR team in the course of covering Groupon and they’ve often used the excuse that you’re in a quiet period to refuse to comment to me. So, clearly, Groupon knows what a quiet period is.

Which is why I found your email surprising. I would have thought the big op-ed in the Journal by Groupon investor Marc Andreessen would have made regulators squeamish given that you’re in your quiet period. But your email seems like a blatant violation of quiet period rules to tout your company to investors. Releasing (likely unaudited) partial quarter results is also something the SEC should look into. I know it was framed as a letter to employees, but it was clearly written with the investor community in mind. You know as well as I do that in a company as large as Groupon, any such letter will make it to the press and will get widespread attention.

Let’s move on from the basic legality of your email, which is for the SEC to investigate, to the substance of your letter. Many of your points are dead wrong. Andrew, if you truly believe everything you’ve written, that’s reason enough in my mind to short Groupon. Most of the serious investors I talk to are already planning to do that. I even had one short ask me to stop writing about Groupon because he wants to maximize his return when he shorts you.

Adjusted CSOI

It’s amazing to me that after getting beaten up by just about everybody who covers Groupon for making up a fictional metric to show what a great company Groupon is that you continue to tout this metric. After all, you removed this from your S-1 because it was giving the SEC a lot of concern. So why bring it up again? Do you think that just because it’s not in an official filing that that’s OK?

You make the argument that once you acquire a customer you never have to spend marketing dollars on that customer again. That is utterly ridiculous. Your business is essentially a subscription business. Ask other subscription businesses if they retain customers for life. Ask magazines and newspapers. They would love it if that were true. Too old school? Ask Netflix. They’re among the best acquisition marketing and retention companies in the business. They still spend a lot of money on marketing.

All of these companies report another metric in addition to subscribers: churn. These are the people who stop subscribing. In your case, most of them don’t unsubscribe, they just stop opening emails. The trend on email open rates is a critical number that is conspicuously absent from your S-1. I bet I can guess what that trend line looks like.

If I weren’t covering Groupon, I would have stopped opening the emails a long time ago. The deal quality continues to decline as merchants become wiser and realize that in most cases running a Groupon is a terrible business decision that doesn’t result in high quality, repeat customers. You have another problem: in many cases, the merchants you do get don’t generate high frequency purchases. I’ve had readers send me actual Groupon deals for cars, enemas and boob jobs. I can eat at a restaurant 3 times a day 365 times a year. But how many boob jobs can a person get?

Your own numbers — pulled straight from the S-1 — belie the claim that you’ll never again have to spend marketing dollars on Groupon subscribers. The median number of Groupons purchased by a list subscriber is: zero! The median number of Groupons purchased by a Groupon customer is: 1! More than half of people who have purchased a Groupon have never purchased another one.

I’ve seen you run winback campaigns to get people who have stopped buying Groupons to start buying again. You give away Groupon dollars for that. Isn’t that a marketing expense?

Ponzi scheme

This is an area where you and I have some common ground.

As people colloquially refer to Ponzi schemes, Groupon is absolutely a Ponzi scheme. However, the SEC lays out on its Web site a very clear definition of a Ponzi scheme. (I looked.) By that definition, I don’t consider Groupon to technically be a Ponzi scheme.

It has many of the characteristics and will likely collapse for the same reasons Ponzi schemes collapses, but I don’t think you or your co-founder Eric will join Bernie Madoff in jail. It’s more like the subprime mortgage crisis. A lot of bad things were done, executives got rich, but no one went to jail. In Groupon’s case, consumers, merchants and credit card companies will feel the biggest impact if Groupon collapses.

I think the house of cards analogy I used in my post “Why Groupon Is Poised For Collapse” is most apt. I can think of numerous — and likely — scenarios in which the Groupon house of cards will come tumbling down.

I spent a lot of time studying economics when I was (like you) at Northwestern. I sent my economic analysis of Groupon to a respected economics professor there and his response was “Wow, that’s the most brilliant analysis of Groupon I’ve ever seen.”

The broader point here is that in the last few weeks, some of the smartest analysts I know have described Groupon as “doomed,” “trainwreck,” “Ponzi scheme,” “low on dough,” “insolvent” and close to “going bankrupt.” (I didn’t write any of those.) The only people who have had positive things to say are Groupon insiders, including your co-founder Eric who violated SEC quiet period rules by telling Bloomberg West that Groupon would be “wildly profitable.”

I’ve never seen a company about to go public where a founder has to publicly defend the basic legality of its business. What’s next, releasing a video of Eric saying “I’m not a crook”?

Your new businesses suck

You tout Groupon Getaways and Groupon Now! as the future of Groupon and huge opportunities. These are both going to be terrible businesses in the short- to medium-term.

I’m not just saying that because Groupon Getaways burned me out of $500 this week. After being told that I could use my Groupon Getaway “tomorrow”, I called to reserve a room for a trip I’m taking to Santa Monica this weekend. I was told that the voucher was not valid until early September. (This information is cleverly hidden away on a separate tab; other sites display the restrictions more prominently.)  Even on dates when it is valid, the rooms that are available to Groupon customers are limited. There were dates where I could buy a room, but I couldn’t use my Groupon.

Diane in customer service tells me Groupon will refund my money. That’s great. But until then you have free use of my money. (Well, as of this moment, it’s Discover’s money.) But Groupon Getaways is a business where you’re selling vouchers that customers may never be able to redeem. People who book air travel or make other arrangements expecting to use a deal will be scrambling at the last minute to make other plans when they’re told the Groupon won’t be honored.

There are many other problems with the Groupon Getaways business, including profitability to hotels, registered seller of travel laws, taxation, etc. But they’ll have to wait for a future post. In the meantime, it looks like you’re using large amounts of revenue generated from these deals to help cover your cash flow issues. (A $500 travel deal is much more revenue in one shot than your typical laser hair removal deal.)

Groupon Now! has a lot of issues itself. The two biggest: merchants today aren’t ready for self serve and you’re taking too big a cut. For a restaurant, my advice after doing a deep analysis of Groupon Now!, is that they’re better off leaving a table empty than serving a Groupon Now! customer.

We don’t suck as much as LivingSocial is not a winning argument

You allude to LivingSocial’s tactic of selling $20 Amazon gift cards for $10 and eating the loss. You say that buying revenue is a terrible idea. This is another area where I’m in complete agreement with you. This is also why I’ve advocated that Groupon book net revenue and not gross revenue. Booking gross revenue is a recipe for game playing of this sort.

LivingSocial shouldn’t buy revenue, even if it does generate a lot of press.

But I believe you’re guilty of doing the same. You have frequently sold movie tickets below what they should cost you. As far as I’ve been able to determine, you’re using this to get a credit card on file.  And every one of those customers who bought the movie ticket deal counts as a customer in your S-1. (Keep in mind that most people buy only one Groupon.)

There are other reasons why LivingSocial’s model may be more unstable than Groupon’s. But that doesn’t make Groupon itself more stable.

Rocky’s daily deal

Your business is incredibly complex. I frequently talk to investors about Groupon and explain the model to them. Just yesterday, I was talking to a top-tier VC about Groupon. His jaw kept dropping as I explained the multiple levels of risk inherent in Groupon’s current model.

No one who understood risk would ever design a model that was as prone to failure as Groupon is. It’s so complex and there are so many holes that I’m confident many people who work at Groupon don’t understand it.

I usually charge $900 an hour for my consulting services. But I’ll make you a deal, valid September 1 through 6, when I’m in Chicago: buy me lunch and I’ll be happy to share more of my insights. You can even use a Groupon to buy lunch.

Note to current and former Groupon employees who may be reading this: if you’d like to get together, please see the details of my trip to Chicago.

See also:

• The terrible numbers that Groupon doesn’t want you to focus on
• Groupon’s new S-1 shows even more cause for worry
• Groupon’s other funny numbers