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Yelp’s advertiser agreement combines some of the worst elements of Yellow Pages, Aol and cell phone agreements. As with many such agreements, it’s very lopsided in Yelp’s favor. (See my analysis of the similarly lopsided Groupon merchant agreement.)
Yelp charges merchants who buy advertising for impressions, much like Yellow Pages companies. Like cell phone agreements, there is a minimum term with a hefty early termination fee. And like Aol, the service continues indefinitely.
The local-reviews company is on the road to an initial public offering; the IPO is scheduled to price on or about March 1, 2012. Yelp is in its quiet period and did not respond to a request for comment on this story.
Here’s my analysis of the key points in the merchant agreement. I am not a lawyer, but I’ve negotiated many agreements in my product management and business development roles.
No impact on Yelp’s organic results. Although a common perception among merchants is that Yelp runs an extortion racket, Yelp makes it very clear in its advertiser agreement that buying advertising doesn’t affect its organic listings or order of reviews:
The Site allows consumers to post reviews about businesses like Client’s. The Site employs automated software to help it showcase the most relevant and reliable reviews while suppressing others. Client’s purchase of Yelp Ads will not influence the automated software, or otherwise allow or enable Client, directly or indirectly, to remove, alter or reorder the reviews on the Site.
I haven’t been able to find any credible evidence of Yelp salespeople claiming that buying advertising would improve a business’s ranking or delete bad reviews.
The only quibble I have with this section is that it’s not in all caps like other important sections of the agreement. It’s in Yelp’s best long-term interests to be clear as possible about this.
No guarantee of the quality of impressions. Yelp doesn’t promise anything about where your ads will run:
YELP SPECIFICALLY DISCLAIMS ALL WARRANTIES AND GUARANTEES REGARDING (I) THE PERFORMANCE, QUALITY AND RESULTS FOR THE SERVICE, (II) CLICK RATES, CONVERSIONS OR OTHER PERFORMANCE OR RESULTS FOR THE SERVICE, (III) THE ACCURACY OF THE INFORMATION THAT YELP PROVIDES IN CONNECTION WITH THE SITE OR YELP ADS (E.G. REACH, SIZE OF AUDIENCE, DEMOGRAPHICS OR OTHER PURPORTED CHARACTERISTICS OF AUDIENCE), (IV) YELP’S ABILITY TO TARGET ADS TO OR IN CONNECTION WITH SPECIFIC USERS, TYPES OF USERS, USER QUERIES, OR OTHER USER BEHAVIORS, (V) THE ADJACENCY OR PLACEMENT LOCATION OF YELP ADS, AND (VI) AN AD IMPRESSION’S QUALITY, TIMING OR THE NUMBER OF AD IMPRESSIONS DELIVERED.
Even with a Yellow Pages buy, you know what category you’ll run in and in what city your ad will appear. Based on this agreement, if you’re a plumber in Chicago, Yelp could run your ad for someone looking for a dentist in Seattle.
I haven’t seen anything that egregious in practice, but I’ve seen plenty of impressions that are completely useless and not worth buying.
Automatic renewal. It’s the “forget about it” business model. After the initial term, the Yelp advertising renews on a month-to-month basis. Because of the sizable termination fee, merchants are unlikely to cancel shortly after the agreement begins. (When they are most attuned to how ineffective Yelp advertising is.) By the time renewal rolls around, the cost will be built into the cost of running the business and forgotten about. Yelp can terminate the agreement whenever it wants.
Changes to the product. “As it develops new advertising features, Yelp may from time to time replace any of the foregoing features with features of substantially similar value.” Yelp can change the product you bought — after you bought it and during the contract term. Even in cell phone agreements, if there is a material change, that gives you the option to terminate your agreement without penalty.
Indemnification. Like Groupon, Yelp requires the small business to indemnify it in certain scenarios. This is ridiculous.
Such terms are common among large companies. Let’s say Apple is licensing software from Acme Corp. Apple would want to protect itself in case Acme was violating someone else’s patents. Acme would cover any liability and lawyer’s fees related to intellectual property claims on its software.
But when the power relationships are so skewed, it doesn’t make sense. In practice, I don’t expect this clause to ever come into play in the types of relationships Yelp has with local advertisers. But it’s another sign of how skewed the agreement is. Small businesses buy products and services more like consumers than big corporations; it’s likely that very few of them will even read the agreement.
Overall, the agreement reinforces my view that Yelp is running on an old-line business model as advertising is rapidly moving toward having accountability and being sold based on performance.
To be fair, it’s extremely unlikely that running an ad on Yelp will bankrupt your business or cost you tens of thousands (which can happen with Groupon or LivingSocial). But it’s also not going to help it.
The only scenario I could think of where I would recommend Yelp advertising at its current rates is if it were running an extortion racket.
Rocky Agrawal is an analyst focused on the intersection of local, social, and mobile. He is a principal analyst at reDesign mobile. Previously, he launched local and mobile products for Microsoft and AOL. He blogs at http://blog.agrawals.org and tweets at @rakeshlobster.
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