Critics of the model argue that many new and social media outlets produce nothing of value, therefore they look to stay alive by selling ads against free or run-of-the-mill content. Often, these bears simply do not understand the business model and the value inherent in the product or service (see, for example, Pandora (P)). When assessing Yelp, however, they do not.
Yelp offers very little that is a) novel and b) exclusive. While I appreciate the concept of peers helping peers make consumption-related decisions, I need more. Advertisers probably do as well. Heck, forget the advertisers, Yelp needs more.
Amazon.com (AMZN) provides the supreme word-of-mouth, peer-to-peer review and recommendation engine. It blows Yelp away. If it did restaurants, Yelp probably would not exist.
The platform at Amazon adds value. It does not exist to make money directly. Instead, it's there to drive purchases of the myriad things Amazon sells. Unless you can provide the advertiser (and, really, before that, the user) with something beyond a list of often mindless and endless reviews, you're unlikely to grow like the weed you need to grow like.Yelp made a grave error when it refused to accept a $500 million takeover bid from Google (GOOG - Get Report). Now, after acquiring well-respected Zagat, Google makes it free from various parts of its site. If Google ever gets its act together, it could put Yelp, as well as OpenTable (OPEN), out of business in a Silicon Valley minute. While I would not call myself an ardent GOOG bull, I would buy the stock over Yelp (and OPEN) any minute of the trading day. Plus there's really no barrier to enter Yelp's business. Often the "no moat" argument fails to understand and appreciate the complexity of a company's business (see, again, Pandora). That's not the case with Yelp, nor is it was Groupon (GRPN - Get Report). All the proof you need for this argument sits right at your fingertips. From Amazon-supported Living Social to the slew of companies (including Yelp and Facebook) that have dabbled in Groupon's space, there's nothing stopping an existing powerhouse or your next-door neighbor from doing what Groupon does. The company needs to differentiate itself fast or die a not-so-slow death.