Thursday, March 1, 2012

Will Yelp’s IPO Put More Pressure on Small Businesses?

by Kathleen Richards
Thu, Mar 1, 2012 at 3:27 PM

Yelp is set to go public tomorrow, and while the San Francisco-based user-review website is hoping to raise about $100 million in its initial public offering, analysts are skeptical of the company’s outlook.

Yelp plans to sell 7.1 million shares at a price between $12 and $14, yet the seven-and-a-half-year-old company has yet to make a profit and, according to its SEC filing, posted a net loss last year of $16.7 million (up from $9.56 million in 2010). All of Yelp’s revenue last year was generated by advertising, both from “brand” ads and ads sold to local businesses — the latter making up the majority. Still, only a small fraction of businesses on Yelp choose to advertise — 24,000 of the approximately 20 million US businesses, or .12 percent.

Which raises the question: With the pressure on Yelp to attract investors and increase its revenue, will its sales tactics get more aggressive? According to Yelp’s SEC filing, the company relies “heavily on advertising spent by small and medium-sized local businesses.” Its growth strategy includes expanding in existing and new markets (including overseas), enhancing its mobile site and other platforms, and growing its sales force “in order to reach more businesses and increase the amount they spend on our advertising products.”

yelp.jpg

As we reported in 2009, many local business owners complained that Yelp sales reps had offered to move or remove their negative reviews if they advertised for $300 a month or more (a large expense for a small business), while positive reviews of their businesses would be removed if they declined. (Yelp CEO Jeremy Stoppelman has always denied the claims.) A class-action lawsuit alleging these extortion tactics followed, but was ultimately thrown out last year.

With all the negative attention, Yelp eventually changed its policies to become more transparent: It allowed users to see all filtered reviews, and allowed business owners to directly respond to reviewers (if they sign up for a free business owners account).

However, complaints against Yelp persist, as the company acknowledged in its SEC filing:

“… some consumers and businesses have expressed concern that our technology inappropriately filters legitimate reviews, which may cause them to stop or reduce their use of our platform or our advertising solutions. …consumers may believe that the reviews, photos and other content contributed by our Community Managers or other employees are influenced by our advertising relationships or are otherwise biased.... our reputation and brand, the traffic to our website and mobile app and our business may suffer if negative publicity about our company persists or if users otherwise perceive that content on our website and mobile app is manipulated or biased. ”

As a public company, Yelp’s priorities will be to its investors. Its service has proven enormously popular among reviewers, but is still a thorny issue for many small business owners. Let's hope Yelp's decision to go public doesn't mean local businesses will suffer as a result.

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