LivingSocial does another deal with Amazon.com

Since VentureBeat first reported that Amazon.com was jumping into the group-buying frenzy with its $175 million investment in LivingSocial, we’ve been wondering how the companies will collaborate. Wonder no more: LivingSocial is offering $20 Amazon.com gift certificates for $10.

On the surface, this deal looks stupid. And stupid popular: More than 430,000 people have signed up for what’s essentially $10 in free money. The economics are even worse than they might seem: If you get three friends to sign up for $10 in free money, you get your $20 gift certificate for free.

What makes the daily-deal business work is that a lot of small, local businesses have inventory they can afford to give away, whether it’s empty seats at a restaurant or space in a yoga class. With relatively low cost of goods, they can offer heavily discounted fare to people who subscribe to email newsletters from the likes of Groupon, the dominant player in this business, or LivingSocial, the perennial runner-up. Sure, they might lose money. But they’re betting they’ll make money from the new customers they attract.

As Bradford Cross, the CEO of Woven, pointed out, it’s not that different from the small businesses who bid for keywords on Google: They’re paying a market rate to sign up new customers.

Those economics, however, don’t seem to apply here. Amazon.com gift certificates might as well be cash. It’s not like Amazon needs to increase awareness: It’s the dominant player in e-commerce and the default choice when you go online to buy nearly anything.

LivingSocial, on the other hand, desperately needs to add customers to catch up with Groupon. Typically, LivingSocial and Groupon don’t pay for the inventory they sell. They keep 50 percent or more of the price customers pay and hand what’s left to the business.

A LivingSocial PR representative didn’t immediately respond to questions about the deal’s financial aspects. But I strongly doubt that this giveaway is structured like a typical offer. Is it possible that Amazon made part of its investment in LivingSocial in kind, and this deal is working through that gift-certificate inventory? Perhaps. In a post on his blog, Jeremy Liew of Lightspeed Venture Partners, a LivingSocial investor, described it as the “first step of operational integration” between the companies.

I’d bet that one way or another, Amazon and LivingSocial are splitting the cost. LivingSocial gets new customers. And Amazon.com gets something potentially more valuable: When those customers come to Amazon.com to redeem their certificates, Amazon will be able to track what they buy and potentially correlate that with future LivingSocial purchases.

LivingSocial all but promises to do exactly that in its privacy policy, after all:

We may provide your Personal Information to third-party service providers who work on behalf of or with us to provide some of the services and features of LivingSocial and to help us communicate with you. Examples of such services include sending email, analyzing data, providing marketing assistance, processing payments (including credit card payments), and providing customer service. We require our third-party service providers to promise not to use such information except as necessary to provide the relevant services to us. We may share some or all of your Personal Information (other than credit card information) with Merchants whose Deals you have purchased for their commercial purposes and to provision the Deal… If you do not want us to use or disclose Personal Information collected about you in the manner identified in this Privacy Policy, you may not use LivingSocial.

A gift certificate is valuable. But data? That’s golden. And that’s what I suspect Amazon.com was really after when it first plunked money into LivingSocial.