Groupon's model is only broken in the context of billions or trillions. At smaller scale, which sounds like what your friend is thinking, there is still lots of opportunity to innovate and profit.
Groupon model requires scale much bigger than "small" to work.
The cost of acquiring merchant is high even if you do have lots of potential customers.
If you don't have lots of potential customers, a merchant will not take you seriously regardless of how much you spend trying to woo him.
You can't wish away those inherent scaling problems with "opportunity to innovate". There is a reason why the only companies entering this business are well capitalized with lots of existing eyeballs and existing strengths they can leverage (i.e Google, Amazon, Facebook).
The cost of acquiring merchant is high even if you do have lots of potential customers.
If you don't have lots of potential customers, a merchant will not take you seriously regardless of how much you spend trying to woo him.
You can't wish away those inherent scaling problems with "opportunity to innovate". There is a reason why the only companies entering this business are well capitalized with lots of existing eyeballs and existing strengths they can leverage (i.e Google, Amazon, Facebook).