Running head: YELP AND THE RISE OF USER-GENERATED CONTENT
Yelp and the Rise of User-Generated Content
Theo Prineas
Boston University
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YELP AND THE RISE OF USER-GENERATED CONTENT
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Table of Contents
Abstract ............................................................................................................................... 3
Yelp and the Rise of User-Generated Content .................................................................... 4
About Yelp .......................................................................................................................... 5
Yelp’s Two Customers .................................................................................................... 8
Derived Customer Value ................................................................................................. 9
Yelp’s Value Proposition ............................................................................................... 10
Business Environment (SWOT Analysis) ......................................................................11
Strengths ....................................................................................................................11
Opportunities............................................................................................................. 13
Threats....................................................................................................................... 13
Strategic Management Factors .......................................................................................... 14
Solutions Through E-commerce ....................................................................................... 15
Conclusion ........................................................................................................................ 16
References ......................................................................................................................... 17
YELP AND THE RISE OF USER-GENERATED CONTENT
Abstract
This paper explores the evolution of e-commerce, the increasing use of internet-based usergenerated content (UGC), and the prominence of Yelp.com, a website that publishes usergenerated reviews about local businesses.
Keywords: e-commerce, social media
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Yelp and the Rise of User-Generated Content
Rudimentary exchanges of electronic data evolved from military necessity in 1948, which
eventually lead to the formation of Electronic Data Interchange standards in 1968. These
standards helped to form the foundation upon which the Internet was built. In 1989, Tim
Berners-Lee, a computer scientist working at the European Organization for Nuclear Research
(known as CERN1), developed the first client and server to communicate over the Internet using
Unique Resource Identifiers (URI), HyperText Markup Language (HTTP), and a browser called
“WorldWideWeb” to retrieve and present data. In short, Tim Berners-Lee created the World
Wide Web as it is known today, achieving many awards and honors in recognition of his
achievements. However, it was only until the National Science Foundation lifted the ban on the
commercial use of the Internet in 1991, that electronic commerce (e-commerce2) became the
leading means of conducting business, predominantly in economically developed countries. The
act of exchanging information, products, services etc. is nothing new; what is new is the means,
the reach and the speed at which they occur.
This trifecta of improved data management is integral to the growth of e-commerce, as is
the ability for customers to evaluate products and services before committing to a purchase. This
degree of transparency empowers the consumer. Introduced and popularized by leading ecommerce companies such as Amazon.com and eBay since their inception, purchasing decisions
are, for the most part, increasingly determined by peer review and not by the advertiser’s budget.
Online rating services are becoming increasingly popular, however in 2013, Consumer Reports3
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From the French title “Conseil Européen pour la Recherche Nucléaire”
For the purposes of this paper, e-commerce will represent e-commerce and e-business
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An expert, independent, non-profit organization, working for a just marketplace and committed to empowering consumers
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released a survey that questioned the validity of customer reviews across a selection of leading
ratings service providers – Yelp.com (Yelp) was one such provider.
About Yelp
Yelp is a free service that allows consumers to read and write reviews on local businesses
with which they have engaged. It is one of the more popular websites to offer this service. The
company also attracts paid advertising by the same businesses its customers review, prompting
Terry Thomas from The Seattle Times to question whether Yelp is “an impartial review site or an
aggressive ad company?”
Yelp was founded in 2004 by Jeremy
Stoppelman and Russel Simmons, two “early
software engineers at PayPal” who left the
company after it was acquired by eBay “to
brainstorm new Internet startup ideas at a
business incubator” (Wauters, 2010). Simmons
left the company in 2010. In a 2012 Inc.com
Yelp founders Russel Simmons (left), Jeremy-Stoppelman
(right)
video interview, Stoppelman described the
motivation for Yelp:
What we realized was word-of-mouth is the way we wanna find great local business.
That's what we all naturally do. And if we could create something online that could
capture word-of-mouth, that would create an amazing resource to find only the best local
businesses.
YELP AND THE RISE OF USER-GENERATED CONTENT
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Stoppelman (Yelp’s CEO) described his company’s mission as “connecting people with great
local businesses” (Chafkin, 2013). The consistent popularity and growth of Yelp is largely due to
its early access to funding from PayPal founders and to the evolution of its services. “Along the
way, Yelp has dodged extortion allegations, walked away from a half-billion purchase offer from
Google, and gone public” (Dixler, 2014). According to Sheryl Sandberg, COO of Facebook,
"Local is the holy grail of the Internet," and Yelp is well on the way to acquiring it. With its
latest acquisition of “Eat24,” a food delivery network valued at $124 million, Yelp aims to
become further entrenched in food-related services.
However, recent reports show Yelp is losing ground to its main competitors, namely:
1. Google Maps - recently updated its mapping service application to include “Local Guides,”
which is described on Google as “a global community of the top reviewers on Google. As
you write more reviews, you enjoy more benefits.” This in direct competition with Yelp’s
Elite program, which offers local users and frequent reviewers to “gain the status of
tastemaker and get invited to special events and parties” (Perez, 2015)
2. Facebook “Place Tips” – described by Facebook as showing users more information about
the places they visit, including friends’ photos, experiences and moments from that place.
Other competitors include Angie’s List, OpenTable, Seamless.com, Porch, Foursquare, all
offering similar services. Additionally, from the end of January to the beginning of February
2015, Yelp’s share price slipped 22% to $45.11 representing the largest decline since the
company’s initial public offering (IPO) in March 2012, although the shares gained 7% after the
acquisition of Eat24. According to Darren Aftahi, a financial analyst at Northland Securities, this
loss in value is attributed to increasing competition from Google, and the decreased use of
YELP AND THE RISE OF USER-GENERATED CONTENT
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Yelp, Inc. stock price current as at February 12, 2015
desktop searches (where Google reigns supreme). This is in addition to the negative publicity
surrounding the validity of some reviews on Yelp’s site and others. In 2013, The Sydney
Morning Herald – an Australian newspaper – published an article entitled “Bad reputation:
blackmail, corruption plague online reviews,” which highlighted the turmoil that ensues from
bad publicity. Additionally, according to “Fake It Till You Make It: Reputation, Competition,
and Yelp Review Fraud,” a 2014 report by Michael Luca (from the Harvard Business School),
and Georgios Zervas (from the Boston University School of Management) reveled almost 20%
of Yelp’s reviews are considered fake. Google reviews are generally more trusted, especially if
generated through the Google+ network, which is supported by friends’ circles, and other Google
products which track the behavior of its users, e.g. Google Mail, Search, Maps, Groups,
YouTube, Docs, Wallet, Hangouts, etc. This does not mean Google is immune, as Daniel Dimov
explained in his 2013 article entitled, “The new Google Maps: a perfect place for review fraud.”
In addition, Google controls the largest search engine in the world, and consequently it is able to
YELP AND THE RISE OF USER-GENERATED CONTENT
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aggregate and promote reviews from its own products. This reduces the appearance of search
results (reviews) from competitor sites like Yelp. To make matters worse (for the competition),
Yelp is aware that “Google has also implemented algorithm changes, resulting in fewer visits to
Yelp from search engines” (Callan, 2015).
Yelp’s Two Customers
Yelp is the dominant local guide for real word-of-mouth reviews, with a monthly average of 135
million unique visitors in Q4 2014, with more than 71 million local reviews written by “Yelpers”
on everything from boutiques and mechanics to restaurants and dentists by the end of Q4 2014,
according to the Yelp Factsheet. However, there is one salient concept that review services like
Yelp help to emphasize –businesses cannot please everyone. Yelp provides an avenue for
visitors to find local businesses. Equally, it provides an avenue for those local businesses to
create a profile and claim their business that typically will already appear on the site. Yelp needs
both parties to succeed – the users/reviewers that increase the demand and popularity of the
service, and the business owners who develop the supply-side content (along with Yelp) and who
can (and ideally “should”) substantiate any claims made by reviewers and actively engage
directly with their customers – ultimately endeavoring to ensure a rich balance of UGC. Yelp’s
typical business owner is independent, and to help these businesses, Yelp’s Business Owners
webpage explains how to establish an identity and maximize the benefits that can be derived
from the service. It is worth noting however that part of the negative publicity surrounding the
company’s service stems from biased reviews from keyboard warriors operating under full or
partial anonymity, or from review “manipulation” from Yelp.
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Derived Customer Value
Customers are increasingly using UGC (social media) to influence their purchase
decisions. According to The Sydney Moring Herald article referenced earlier, “Nielsen Research
has estimated that 71 per cent of Australians base their purchasing decisions on UGC reviews
that appear on sites such as TripAdvisor and Yelp (local businesses), Amazon (books and other
consumer goods) and Urbanspoon (reviews restaurants and cafes, and recently acquired by
Zomato).” Yelp and other social media sites are reputation-makers, a title previously reserved
from mass-media outlets. In a research paper entitled “Why people use Yelp.com: An
exploration of uses and gratifications,” the authors surveyed male and female Yelp users 18
years’ old and over. Their results of the study indicated:
…individuals overwhelmingly use Yelp.com for information-seeking purposes, followed
by entertainment, convenience, interpersonal utility, and pass time. Further, there was an
overall higher usage of each need for the readers and writers of restaurant reviews
compared with readers only, suggesting more involvement for the reader and writer
group.
Yelp further provides an avenue for individuals to express themselves to an unconnected
audience, when compared to Facebook, where opinions are constrained to associated networks.
The site offers viewers impartial reviews (ignoring the fraudulent cases), which in turn offers
businesses insight into what their customers really think about their product. UGC sites have
tipped the balance of consumer information in favor of the consumer, and away from centralized,
reputation-buying proprietors.
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Yelp’s Value Proposition
A 2012 entry in The Economic Journal entitled, “Learning from the Crowd: Regression
Discontinuity Estimates of the Effects of an Online Review Database,” authors Anderson and
Magruder highlight the known ability of computers to enable large-scale distribution of
consumer evaluations.
By reducing the cost of gathering and distributing information, the Internet facilitates
social learning among a much broader peer group than has traditionally been possible. It
enables lay reviewers to reach large audiences, a capability formerly restricted to
professional reviewers.
Consumer-generated reviews now appear in a wide range of markets – Yelp publishes customer
reviews of local businesses, TripAdvisor publishes traveler reviews of hotels, Amazon.com
publishes consumer reviews of products and Netflix.com displays viewer ratings of movies.
Yelp is well-placed to connect millions of web-savvy users in cities across the United States and
ultimately all over the world. It value exists in its ability to increase consumer traffic to local
businesses that otherwise would not advertise but rely on “real” word-of-mouth publicity. Yelp
provides a low-cost and effective advertising solution to local businesses, which in turn attracts
more consumers. This is referred to as the “network effect,” a “phenomenon whereby a good or
service becomes more valuable when more people use it” (Investopedia, 2015).
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Business Environment (SWOT Analysis)
To date, Yelp has achieved moderate success in implementing its business model.
Strengths
1. Yelp is easy to use.
2. Yelp provides user-enrichment at zero (free to browse/review) to low cost (paid
advertising) to the worldwide4 Yelp community.
3. It experiences very high traffic and user engagement - 135 million unique visitors in
Q4 2014 + 71 million local reviews.
4. Increasing UGC market share and increasing popularity, “61% of searches come from
mobile devices, servicing 27 countries, through the acquisition of restaurant
reservation service SeatMe, Yelp challenges market leader OpenTable” (Evangelista,
2014). Other services, Eat24.
5. In turn, Yelps builds a stronger community (network effect), and ideally it becomes
more trustworthy.
6. Greater site engagement improves revenue. Net income was $2.7 million in Q3 2014,
its first profit since the company’s inception.
7. Credible threat to Google (rejected Google acquisition for $500 million), supported
by Apple through map integration, and high exposure to all iPhone and iPad users by
default.
8. Frequent reviewers incentivized by Elite status and associated perks.
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Yelp serves customers in Australia, Austria, Belgium, Brazil, Canada, the Czech Republic, Denmark, Finland, France, Germany,
Ireland, Italy, the Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, the United
Kingdom, and the United States.
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Weaknesses
1. Monetization of UGC is proving difficult. Advertising revenue is declining.
2. Limited profitability - as above Q3 2014 net income was only $2.7 million, the
company’s first profit since its inception 10 years ago, albeit losses were decreasing
over past consecutive years, $16.2 million in 2011, $9.5 million 2012.
3. The company has no clear path to profitability. “Quarterly local advertising revenue
per active local business account has fluctuated wildly and appears to actually be
trending downward over time” (Cocotas, 2012).
4. Uncertainty towards the success of expansion to foreign markets. Recent market
entries include Singapore (2012) and Japan (2014) where the company faces with
local competition.
5. Strong competition from Google, Foursquare, and other UGC sites, but less from
Facebook, without a proven "moat or a truly unique comparative advantage in the
market” (Cocotas, 2012).
6. Fraudulent reviews by users and business owners.
7. Minimal membership hurdle and competing service providers could create a lack of
customer loyalty.
8. Lack of trust in the quality of the reviews and reports of extortion from business
owners create bad publicity. Without credibility, the network is worthless.
9. No indication of innovative features, research and development etc. Technology
companies must innovate (not through acquisition) to stay ahead of competition.
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Opportunities
1. As a publically listed company, Yelp has won the confidence of Wall Street. The
company can call on the capital markets to fund expansion.
2. Emerging markets and overseas expansion.
3. Additional services and technology including Eat24 (acquired February 2015), and
SeatMe (acquired 2013) supports Yelp’s market position.
4. Yelp is the market leader in customer review services for local businesses (despite
questionable quality). It possesses the potential to innovate and capitalize on its core
product.
5. Change the negative reputation it currently possesses by working with individuals and
business to remove fraudulent reviews, and to improve the technology to detect
similar activity.
Threats
1. Increasing competition from tech-industry heavy-weights such as Google and
Facebook.
2. Limited exposure only to tech-savvy users, and those who do not care about review
biasness.
3. Legal challenges and Government regulation of business model (seeking
compensation to remove unfavorable business reviews).
4. Large brands have established relationships with other platforms to engage with their
customers.
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5. To achieve greater advertising revenue, Yelp may need to increase its sales
organization. Yelp is supplementing its income through the acquisition of
complementary services but they are also small revenue generators. Google has deep
pockets which it could use to expand into Yelp’s market, decimating its prospects.
Strategic Management Factors
Yelp is a pure-play e-commerce company. Yet it was removed from the local business
(restaurant) transaction until it purchased Eat24. With Eat24, Yelp used the e-commerce model
to strengthen its core directory/review service, and it acquired 20,000 restaurants (data points)
along the West Coast, where Eat24 is one of the leading operators in that region’s food delivery
sector. The acquisition also provided Yelp with the ability to own the full transaction – from the
user to the business owner and on to the deliveries from the (restaurant) business – and improve
the transaction experience for its users. The end-to-end management of the transaction adds to
the value proposition of the company, supplementing revenue streams and enhancing the
platform.
Yelp executed a similar strategic move in 2011, when it sought an additional revenue
stream through Yelp Deals, a deal/coupon service created in direct competition to Groupon.
Around the same time Facebook created their own version, call Facebook Deals. After four
months of testing in five cities5, Facebook cancelled the service (Pepitone, 2011). At the time,
Groupon was not profitable and it became obvious that “deals” required context to succeed.
Successful competitors to Groupon include AmazonLocal (Amazon.com) and Google Offers. In
support of the new endeavor, Google purchased Dealmap, “an application for people to find and
5
Atlanta, Dallas, Austin, San Diego and San Francisco
YELP AND THE RISE OF USER-GENERATED CONTENT
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share offers on national brands, websites and local businesses.” Although Yelp did not cancel
Deals – they still appear on Yelp.com – after just 12 months of operation it scaled back the
resources committed to the program (Pepitone, 2011).
Solutions Through E-commerce
Undoubtable, the poor quality reviews written on Yelp are detrimental to the company’s
longevity. Paid advertisers typically top the list of search results whilst fraudulent or embittered
reviews can be removed at a cost to the reviewee. As described in the SWOT “Weakness #9,”
successful technology companies innovate to remain at the forefront of the industry. There is no
better example than Apple Inc., which was recently touted as the first company that could soon
reach (breach) a valuation of $1 trillion. Amazon.com is another shining example of a company
that continuously innovates (in their case it’s the shopping experience) and investors and
customers reward it accordingly.
Yelp needs to develop a more effective rating system, rich query identifiers and fraud
prevention technology. Collectively, these three innovations will improve the quality of the
search results, increase the trust that existing users have for the site and invite new users to use
the service. For the not-so tech-savvy user, distrust for the content and the poor quality reviews
would be enough to dissuade them for life. It is within Yelp’s power to salvage its reputation by
improving the quality and simplicity with which reviews are recorded, and improving its revenue
streams through higher business attraction and retention rates.
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Conclusion
Undoubtedly, Yelp possess the potential to increase its market share of directory listings
with reviews. Google dominates the listings market (search) by an order of magnitude, so Yelp
needs to compete with Google on the quality of its listings, with GrubHub and other online food
ordering companies, with OpenTable (owned by Priceline) and other online reservations
applications, with Facebook with any number of competing apps, with Groupon, AmazonLocal
and Google on local deals, and the list goes on.
Yelp needs to defend against possible incursions of its revenue stream, which for the
moment seems unsustainable. The share price is suffering as a reflection of decreasing quarterly
revenue and the long term outlook is pessimistic, especially if they do not innovate.
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