Can Yelp Stand Up To Google’s Wrath?

One of the key trends of the previous decade has been that of local search and classifieds. Yelp is a leading player in the segment that leverages user-generated content in the form of local business reviews and ratings. By drawing on the concept of niche community, Yelp has been able to greatly expand the functions of the traditional Yellow Pages. This week, Yelp is in the news again as it tries to deal with Google’s ultimatum on free content or no search indexing.
Yelp’s Story
Yelp was founded in San Francisco in July 2004 by Jeremy Stoppelman and Russel Simmons, both formerly of Paypal. The company recorded 1 million monthly unique visitors in the two years following its inception. Today, it has over 45 million unique monthly visitors with a database of over 16 million local reviews. The site generated 6 million reviews in 2010 alone.

Many know of Yelp as the restaurant review and rating site. However, while the restaurant rating category is the company’s largest and makes up 26% of total reviews, Yelp also deals with other categories. Shopping reviews are the second-largest category, accounting for 24% of total reviews, and include services such as local flower shops. Other services reviewed on the site include spas, boutiques, mechanics, and dentists, to name a few.

Yelp’s Financials
Yelp earns revenues through three key sources: local subscriptions, international advertising product, and daily deals. Local subscriptions are sold to local business owners for sponsored advertising and certain added features such as photo slide shows for $300–$1,000 per business per month. Yelp’s international revenues come from its presence in seven more countries: Austria, Canada, France, Germany, Ireland, the Netherlands, and the United Kingdom. Yelp is available in four languages including French, Dutch, and German, to serve these markets.

Earlier last year, Yelp also ventured into the local daily deal segment and is already giving players like Groupon a run for their money. Unlike Groupon, Yelp’s Daily Deal is offered in only a few locations, including New York, San Diego, San Francisco, and Chicago. The company’s first San Francisco Daily Deal managed to surpass Groupon’s deal for the day. Business Insider estimates that Yelp’s first deal in the region recorded sales of $79,184 by selling 1,616 coupons for $49 each. The same day, Groupon sold $67,398 worth of deals through three offers it ran in the city. Since the local business’s review is listed alongside the Daily Deal, Yelp’s offer makes a good proposition. Further, Yelp is estimated to charge 30% of the deal sale to the local business as its fee, compared with Groupon’s 30%–50% charge.

Analysts at Next Up Research estimate Yelp’s 2010 revenues to be $57 million, recording 90% growth over the previous year. Next Up estimates that Yelp’s revenues will increase to $100 million by 2012 and pegs Yelp’s valuation at $510 million–$530 million. Yelp’s profits are still unknown. According to reports published earlier last year, Yelp was profitable for part of 2009 and decided to reinvest the earnings in the business. But, despite the absent profits, the company hasn’t had much difficulty in attracting investors. Last year, it managed to get $100 million in funding from Elevation Partners to expand operations and buy back equity from employees.

Yelp’s Mobile Foray
Yelp has also made a successful foray into the smart phone segment and launched its iPhone App in 2008. Recently, Time magazine ranked Yelp’s iPhone app among the top 50 apps in 2011. In January, Yelp’s mobile stats revealed that it has 3.2 million unique monthly visitors. Over a third of all searches on Yelp.com come from mobile phones. Also, according to Yelp data, every 30 seconds a photo is uploaded from a Yelp app.

Yelp’s Competition
Yelp’s success has ruffled others’ feathers. Last month, restaurant reviewer Zagat relaunched its website, moving away from a pay wall to provide some free content to users. Earlier, most of Zagat’s content was accessible only to paid subscribers. Some of the new features on the site are enhanced search tools for finding restaurants based on neighborhoods and landmarks, more recognition for active reviewers, and third-party reviews from other publications. Zagat has retained the $24.95 annual subscription charge for users wishing to get full access to ratings and reviews.

Competition from bigger players is getting fiercer, too. After rejecting Google’s $500 million buy-out bid in 2009, Yelp now faces competition from Google’s Hotpot. Competition will be stiff given that Hotpot is available in 38 different languages, appears on Google’s search results, and also has seamless integration with Android-based devices. It is not only Hotpot but Google Places that Yelp should be worried about.

Google Places aggregates reviews from other sites, including Yelp, and runs them. For in-depth analysis, users will still need to go to the Yelp site, but Yelp is concerned that Google is not compensating it for the reviews. Stoppleman says that “Google’s position is that we can take ourselves out of its search index if we don’t want them to use our reviews on Places.” A solution like that may not be acceptable to Yelp. Yelp maintains that it gets “a large volume” of traffic from Google. Its mobile app is another source of traffic. The app generates 35% of Yelp’s traffic, reduces dependency on Google, and has become an alternate channel for users. Despite that, Yelp can’t do without Google.

Over the past few years Yelp has managed to establish itself as a leading player by addressing the trend of niche community. Next Up’s report predicts that the local search and review market will grow to $459 million in 2015 from $98 million in 2009. I believe that Yelp has potential and will play a big role in this market once it figures out a way around Google. As Stoppelman says, “The app is a big focus for product development.” But it remains to be seen if it is big enough for Yelp to materially challenge Google’s threat.