Yelp and the New New World of Feedback

If you read Live 2.0 at all, you know I’m a big supporter of open feedback.

And I’m a fan of what Yelp has achieved.  They’ve built a valuable business on nothing but feedback.  Users love them and for the most part, I suspect businesses appreciate the attention that Yelp brings to them, especially if they do well with Yelp fans.

That being the case, it’s interesting to see what is now a non-stop trickle of small businesses who have really come to despise Yelp.  Initially, it was clearly just those who didn’t get it, hated the idea of being reviewed at all, probably weren’t crazy about the First Amendment if truth be told, and, not coincidentally, had lousy reviews.

Then we moved to the phase where people were accusing Yelp of extortion.  This was a different kettle of fish altogether, because we’re not just talking about freedom of speech; we’re talking about manipulation in a way that has serious commercial impact on businesses.

I can’t take a position on whether Yelp is or isn’t “extorting” businesses in this way because the facts just aren’t in evidence, but I can say this: there is an inherent conflict at the heart of the Yelp business that is exposed by this problem.  That is, the people (small businesses) who they expect to fund their venture don’t entirely like or trust them.  That’s a generalization of course, and many businesses love Yelp, and rightly so.

But the problem is that if you have good reviews on Yelp, paying them for ads doesn’t benefit you all that much.  And buying ads to show off bad reviews doesn’t make sense.

Which leads me to my point about this new new world of feedback.  The old new world of feedback was Amazon: people can say what they want about your product and you can’t control it.  The new new world of feedback is people can say what they want about your product, you can’t control it, and we’d really like to sell you some ads because that’s our business model.   Merchant-funded feedback communities are troublesome.  The inherent conflict of interest for all parties is significant.  Even users realize they can get in on the action.  Yelp claims, and I have no reason to disbelieve them, that they simply don’t connect the editorial content to the advertising side and don’t intervene for financial reasons on reviews, but the moral hazard is there and it’s very real.  If the temptation to cheat that a system like this creates metastasizes, it can eventually kill a community.

So what’s the way out for Yelp?  It’s the way that I think they’re actually taking, which is that they’re not REALLY about local advertising.  They’re about national brand advertising.  Sure, there are some products local advertisers can buy, but my totally uninformed guess is that this makes up a relatively small percentage of revenues, compared to the bigger brand campaigns they do with Dr. Pepper and others.

Since Dr. Pepper has no dog in the fight over whether your local bagel place gets favored over the local croissant bakery, their advertising is just advertising.  There’s no way to extort Dr. Pepper because, well, nobody reviews Dr. Pepper on Yelp.  If Dr. Pepper advertises with Yelp, it’s because they think it’s a good value in reaching Yelp’s audience, not because they feel they have to.

And in case you’re curious, Goldstar gets good reviews on Yelp.  Pretty much all 4s and 5s, but we haven’t advertised.  Our casual observation is that from time to time, all or some of the reviews on our Yelp listings seem to disappear and then slowly re-populate. For the record, we currently have 27 reviews (25 5s and 2 4s) on our San Fran profile and 13 reviews (11 5s, 2 3s and a 1 from some guy who thinks we’re in a different business from the one we’re in…alas, it happens to us all) on our LA profile, neither of which we created, for the record.

We’ve only been contacted to buy advertising from them once, and we decided against it for reasons unrelated to anything but budget and media mix.

So while I can’t pronounce merchant-funded feedback sites dead (because they’re not), I can say there is a clock running on the corruption of those sites.  Remember that a review site has no asset other than the trust and value that people place in the reviews that are there.  If that goes away, there’s nothing left of value.  Yelp is working hard to protect that value, and I applaud that effort.  Still, because of the nature of its business model, Yelp is Sisyphus pushing the rock up the hill to keep the credibility of its marketplace intact.  There’s nothing wrong with that.  It’s part of keeping an online community alive.  Investors and users should only worry about it if it looks like they’ve begun to take their eye off the rock.