Wall Street Doesn't Care About Yelp's Credibility Problem

Yelp IPO Puts Consumer-Review Site up for Review
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Last week should have been a good one for Yelp (YELP). Analysts upgraded shares of the reviews website on Monday, Tuesday, and Wednesday. You don't often see three Wall Street pros praise a stock on three consecutive days. However, perhaps lost amid the flurry of optimism is that there's also growing resentment against Yelp.

A growing number of merchants feel that Yelp doesn't merely help those business owners who pay up for premium services, but that it also mistreats those that do not. They liken the price of those premium services to the protection money a small local business might have to pay to the mob to stay out of harm's way.

Are the accusations fair? Are Yelp's practices legal? Why is Yelp growing more and more popular despite the notoriety and controversy that's been bubbling for years?

Yelp is all about reviews, so let's review the situation before you assign your own star rating to the situation.

Crossing Sour Grapes Off the Menu

You can't please everybody, but there's no shortage of restaurant operators, spa owners, and other consumer-facing businesses who feel as if the only way to suppress unflattering reviews and highlight positive perspectives on Yelp is to pay the website.

The rumbling started shortly after Yelp was launched 10 years ago, but the intensity has been picking up. Earlier this month, the Federal Trade Commission revealed that it has received more than 2,000 complaints from business owners claiming that the popular website featured negative reviews of their companies after they turned down offers to become premium merchants.

%VIRTUAL-WSSCourseInline-956%Five years ago, the Bay Area's East Bay Express wrote about several business owners who claimed to have been approached by Yelp sales reps, offering to move bad reviews if they signed up as advertisers. Some owners suggest that negative critiques seem to bubble up to the top of their business's pages just ahead of the sales calls.

Yelp denies the allegations. It has no problem pointing out that it does offer advertisers a marketing advantage by prominently featuring a merchant's ads across its site. That's no different than Google (GOOG), which lets sponsors bid on keywords to find their way at the top of search results. However, Yelp denies that becoming a premium member allows businesses to manipulate their reviews.

It's Not a Crisis Just Yet

Yelp points out that businesses don't have to pay anything to take advantage of Yelp. Merchants can claim their establishment's listing for free, allowing them to post pictures, track traffic, and respond to reviewers.

As for the rest of the knocks, Yelp has gone as far as to create a page on its site purporting to debunk many of the popular myths that have been circulating for years about it. Yelp notes that premium accounts and sales reps can't manipulate reviews. Salespeople don't have back-end administrative privileges at Yelp, and they're forbidden to write any reviews while employed at the company.

This doesn't mean that all of these thousands of merchant complaints are bogus. It's always possible that a hungry sales rep may make a promise that can't be kept. However, Yelp stands by the fact that advertising and reviews are independent functions.

Consumers don't seem to mind the drama. There are now 53 million reviews on Yelp, a 47 percent surge over the past year. Unique monthly visitors have spiked 39 percent in that time, and the number of active local business accounts have soared by 69 percent. The uptick in merchant unrest and complaints could simply be the result of that uptick in traffic.

However, Yelp needs to be more careful than ever. It went public two years ago, and is now valued at more than $4 billion on Wall Street. Like its own merchant accounts, Yelp can't expected to succeed if it attracts too many negative reviews. Words are influential. Yelp wouldn't be here today if that wasn't the case.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Google (C shares) and Yelp. The Motley Fool owns shares of Google (C shares). Try any of our newsletter services free for 30 days. ​