This Is How Yelp's CEO Responded To Criticisms

Nov.12.13 | About: Yelp (YELP)

Recently, Yelp's (NYSE:YELP) CEO Jeremy Stoppelman was on, answering questions from investors and consumers of the website. The conversation was very interesting because the users of the website were able to ask questions anonymously (without giving their real names) which means they could ask any question they wanted without fearing repercussions, unlike the analysts who usually have to sugarcoat their questions so that the company's management won't get upset with them (most analysts need company management to feed them with insider information in order to create their models for predicting future price of a company; therefore, they have to have good relations with management of companies, which means they can't ask some difficult questions openly).

So, what did people ask Mr. Stoppelman during his Reddit session? In this article, I will present some of the questions that were directed to Mr. Stoppelman, his answers to those questions and my take on his answers.

One user asked Mr. Stoppelman what he thinks about the "extortion" claims. According to the claims, Yelp filters out positive reviews of small businesses that don't want to buy advertisement from it. In fact, several small business owners chimed in and added their own experiences with Yelp in the discussion, which seemed to support the whole extortion thesis. One individual wrote: "I told the Yelp sales rep to get lost and to stop calling me after about 6 months of hounding. He finally relented... but guess what, ALL of my positive reviews are now filtered. Up until that conversation, only about 25% of my reviews were filtered. Now every single one is filtered. Yelp holds my real clients' reviews hostage because I refuse to pay their extortion fees. It is rather infuriating." Another individual shared the same sentiment: "I sat in on a sales call with a Yelp rep, and after questioning her on the finer details, we decided Yelp wasn't for us and we told her so. She then became noticeably irritated and said "good luck getting any positive reviews in the future." A third commenter also shares her experience: "It's true. My family member owns a business and was approached by Yelp to pay or else only negative reviews would be publicly visible."

Yelp's CEO responded to these claims by saying: "Despite the 'Yelp extorts' conspiracy meme, there's never been a shred of actual 'smoking gun' evidence (phone call recording, email, etc.) to back up the claims." Basically, Mr. Stoppelman claimed that those people were being dishonest. This comment received a total of negative 30 votes from the users, which means that most people didn't find the answer satisfactory.

Mr. Stoppelman also claimed that it was impossible to get Yelp to manipulate reviews. He said: "There has never been any amount of money you could pay us to manipulate reviews. We do have an algorithm that highlights the most useful and reliable reviews on our site which is about 75% of contributed content. I started Yelp to solve my own need of finding a great doctor, obviously we needed to protect consumers against fake reviews and spam to make sure the site is actually helpful (anyone remember CitySearch?). That's why we pioneered the development of a review filter, a technology that other competitors like Google have since tried to mimic." This is interesting because Mr. Stoppelman acknowledged that 25% of Yelp's reviews were filtered by the system as "fake" or "unreliable" which means that Yelp itself doesn't trust every fourth review written on the website. If the number of fake or unreliable reviews on Yelp is so high, how can the algorithm reliably identify the bad reviews from good reviews? If every fourth review is filtered out by the system, there is a lot of room for error where thousands of good reviews would get filtered and thousands of bad reviews would be kept in. There is absolutely no way for an algorithm to tell whether a review is good or not by simply looking at keywords (and Yelp keeps its algorithm as a secret, which raises suspicions even further).

When asked whether Yelp has been audited by a third party, Mr. Stoppelman showed a link of a Google search which demonstrates how a lot of small businesses that advertise on Yelp still receive negative reviews from people, to prove that those companies don't get preferential treatment from Yelp.

Yelp's CEO also shared an academic study titled: "Fake It Till You Make It: Reputation, Competition, and Yelp Review Fraud." This study found that there was no relationship between whether a small business chooses to advertise on Yelp and their average review scores. In other words, whether being a Yelp advertiser or not did not predict whether a small business would receive favorable scores or not. The academicians conducting the study argued that the results should be interpreted with caution because it was only able to look at whether a company was advertising on Yelp at the time of data collection and they didn't have access to historical data, the study was limited to one geographical area (Boston), and the study could only look at the current reviews but not any reviews that might have been deleted by the users.

Later in the discussion, A former sales person at Yelp chimed in the discussion in support of Mr. Stoppelman: "As a former salesperson for Yelp (I don't think this violates my NDA), we were all told repeatedly that we would be fired for that. Really, it just creates a frustrated customer that will cancel on us if we suggested there was something we could do when in fact we could not. The biggest frustration from the sales side was people wanting to pay (or at least offering to pay) to remove negative reviews and us fighting to explain why we couldn't. According to every business owner, all negative reviews are completely unjustified and no one ever has an actual bad experience with them so we shouldn't be giving a platform for complaining about bad service which doesn't exist. Sales pitches can be recorded, though not always. I personally saw someone fired when they were caught getting good reviews onto pages of businesses they signed up. The algorithm was pretty good at detecting aberrant behavior in reviews."

Despite this, a large number of small business owners continued to claim that their positive reviews would disappear and negative reviews would increase in numbers soon after they were approached by a Yelp sales person and refused to buy advertisement spots from the website. Could all these people by lying? Could the company's management be lying? Could both sides be right, or both sides be wrong at the same time? Perhaps, there are some "bad apples" in Yelp's sales department and these people are causing all the trouble while Yelp's management has nothing but good intentions. In fact, this was also asked during the Reddit session. Mr. Stoppelman's response was: ""rogue salespeople" acting in their own interests against Yelp's training and policies could, in theory, promise a potential client anything - but they have no way of fulfilling that promise. We haven't built a product that allows businesses to remove negative reviews and a "duped" advertiser would obviously realize that right away and let us know. We have 57,000 paying advertisers who know what they get and that's not it."

This response got my curious and I decided to check on Yelp's reviews on Glassdoor. For those who don't know, Glassdoor is like Yelp of employment. This is a website where current and former employees rate their places of employment. I was interested to see if there would be some people who claimed that they would be conducting unethical things while making a sales call. I noticed a few reviews saying that Yelp is a high-pressure environment where there is a strong pressure to sell as much as possible as quickly as possible, and those who don't meet the aggressive sales goals are being let go quickly. One review reads (cleaned up for grammar and clarity): "I wasn't given a chance and I was abruptly let go without being able to prove myself. I was given a crappy sales territory, and they had very high expectations for the territory that I don't think anyone could meet. My boss wanted me to do unethical things in order to get sales. There was so much pressure. I was working 12 hour days and I was still let go."

There were several other questions ranging from what Mr. Stoppelman ate for breakfast to what he thinks of sugar. Surprisingly, he answered every one of these questions with one exception: when he was asked about why Yelp's management has been selling their shares without buying, he left that question unanswered. In fact, several people asked the same question but received no response. This was the only topic Mr. Stoppelman didn't want to touch.

Another note, if you search Yelp on Yelp, you surprisingly find a lot of negative reviews, which can't be too good for the company's future growth prospects. Yelp can't afford people leaving its website. Currently, Yelpers rate Yelp as 3 out of 5 and if we sort the reviews by date, we find that 7 out of the last 10 reviews gave the website 1 out of 5, and many of them claimed that their small business was victimized by Yelp.

So what are some take-home lessons from Mr. Stoppelman's Reddit session? First, we found out that there are many people who claim that Yelp is trying to extort money from small businesses and the company seriously needs to do something in order to change such public perception. Second, we found out that there is a study supporting Yelp's claim that there is no relationship between whether a small business advertises on Yelp and whether the small business gets good reviews. Third, we found out that Yelp's management will continue to be quiet about insider stock sales. At least this Reddit session asked a lot of questions that analysts would never consider asking, which provided us with some more insight regarding Yelp.

Currently Yelp is a very expensive stock and it's priced for perfection. Much of Yelp's high valuation stems from high hopes and it is definitely getting supported by the Fed's money-printing appetite. As long as the Fed provides the market with free money to gamble with, hype stocks will continue to be strong. I would be careful in the long term because this stock (along with many other hyped up stocks) could easily crash if the Fed decides to get more conservative with its money policy. As Yelp currently trades for 21 times its book value, 20 times its sales and 294 times its cash value, the company will have to grow by about 2000% just to justify its current price, let alone any future appreciations. At the current price, Yelp is definitely a risky bet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long both calls and puts of YELP.