Online user-generated review site Yelp Inc. (YELP) has been a darling of the tech world and Wall Street this year, notching gains of well over 200 percent. However, that upward trajectory was significantly curtailed on Nov. 25, when the company saw its shares plummet nearly 9 percent by midday.
By getting all of their content for free in the form of voluntarily submitted reviews, Yelp has become a quite profitable entity. However, what attracts users to Yelp – the ability to anonymously (and thus honestly) publish an appraisal of a business – has also become its Achilles heel, as the lack of accountability has greatly undermined the credibility of the site’s reviews.
There is little Yelp can do to stop businesses from contracting others to populate the site with ghostwritten glowing reviews of their own business, or scathing reviews of competitors. Some reports have suggested as much as 25 percent of the reviews submitted to the site are written by paid shills.
Yelp also faces the possibility that that free content won’t stay free for long. Portland lawyer Daniel Bernath launched a class-action lawsuit seeking fair market payment for the reviews submitted by “Yelpers.” Though the suit can be charitably characterized as a longshot, it does highlight the fact that Yelp’s free content business model could face serious legal challenges down the road.
Up until Nov. 25 Yelp was on an absolute tear, pushing out its tech world competitors with its sizable user base and comprehensive reach. The tech company has done a fine job making narrow niche sites OpenTable (OPEN) and Angie’s List (ANGI) seem thoroughly obsolete. Yelp’s numbers have been steadily been increasing all year, with the third quarter’s earnings report showing revenue was up a whopping 68 percent year-over-year.
But the stock drop on Monday revealed that increasing revenue might not be able to make up for a company largely built on the backs of anonymous volunteers.
Though down as much as 9 percent at one point, Yelp regained slightly, and was down 7.04 percent to hit $58 a share at midday.
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