The Internet search leader wants a bigger slice of local online advertising, a market Google has failed to crack. But Yelp has much more than ads
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Google's low-cost online ads have singlehandedly revolutionized the way big brands spread marketing messages across the Web. But the company has had a harder time luring ad dollars from local businesses and mom-and-pop shops.
The search giant is in talks to pay more than $500 million to buy Yelp, an online community for local business reviews, a person familiar with the matter said on Dec. 18. Google's (GOOG) interest in the five-year-old startup underscores the value of local advertising online, a multibillion-dollar business it has so far struggled to enter. Analysts say acquiring Yelp could step up growth in Google's core search advertising business, which has slowed in recent years, as well as in such other areas as mobile services. Representatives of Google and Yelp declined to comment on the talks.
While they were slow to move ad spending online, local advertisers have stormed the Web in recent years. As a whole, the market for local online advertising is expected to surge to $14.2 billion this year, from $2.1 billion in 2004, according to research firm Borrell Associates. Increasingly, local shops are shifting spending from big phone books such as the Yellow Pages and other print media to the Web sites of local newspapers and such directory sites as Yelp and InterActiveCorp (IACI)-owned CitySearch, says local media analyst Gordon Borrell. With consumers so attuned to the convenience of the Internet, "Why do you need the phone book any more?" he asks.
Google has flirted with local advertisers before. The company works with online directories such as the AT&T (T)-owned YellowPages.com, whose sales people pitch businesses on buying sponsored links in search results. In September, Google invited merchants to add details about their businesses to Google Maps, a tool used by millions each day.
at Yelp, 8 million local reviews
But the Mountain View, Calif., Web pioneer has lacked a direct line of contact with smaller sellers sprinkled throughout the country. "Reaching those small advertisers is very difficult and expensive," says Matt Booth, senior vice-president at the Kelsey Group. "Local could be a big part of their business, but it's not a huge part of their overall business today."
Yelp, on the other hand, is all about local. Started in 2004 with a $1 million investment from PayPal (EBAY) co-founder Max Levchin, the site says that each month it attracts more than 26 million people who collectively have contributed more than 8 million one- to five-star reviews on attractions in their neighborhoods. San Francisco-based Yelp has a sales force of 200 people who sign up local merchants for sponsored listings throughout the site. Ad revenue totaled about $45 million this year, according to analysts' estimates, and Yelp has been expecting to become profitable in 2010.
Google has increased its pace of acquisitions in recent months to beef up its advertising business and to snap up assets devalued amid the recession. Yelp would help Google get smarter about local advertising, says Sandeep Aggarwal, analyst at Collins Stewart. "Yelp has more intelligent information," he says. Instead of just addresses, phone numbers, and other basic data on small businesses, Yelp also boasts extensive knowledge of people's tastes and price preferences. "Often when someone is looking for something, they also want this kind of information," Aggarwal says.
"Yelpers:" local, tight-knit groups
That data would likely prove valuable to Google's mobile efforts, too. This year, a free app preinstalled in the Motorola (MOT) Droid and other phones using Google's Android software let users receive turn-by-turn navigation to their destination. With Yelp's data, the app could suggest restaurants and other services along the way.
Yelp also gives Google entrée to a loyal social community—something it has had difficulty building on its own in the past. Users of Yelp, often calling themselves "Yelpers," have been known to form tight-knit groups that meet at favorite bars and hang-outs. "This is distinct from what Google is about," says Greg Sterling, principle of Sterling Market Intelligence. Yelp's is a fandom that lures a lot of interested advertisers.
Sterling says a Yelp deal might be about more than just ads. "[Google] has ambitions that are broader than simply selling advertising. There's a whole range of stuff they can offer" small businesses, he says. By cozying up to more mom and pops, the company may hope to get the word out about its Google Docs and other online apps. The vast majority of small businesses buy competing software from Microsoft.
Google's negotiations with Yelp are unlikely to conclude before yearend, says the person familiar with the matter. Technology blog TechCrunch first reported on the talks.
Clinching a deal might give Google a leg up on rivals Microsoft (MSFT) and Yahoo! (YHOO), which analysts say were also potential buyers. The talks are most likely to rankle AT&T and other companies that partner with Google to "resell" search ads to local businesses signing up for the Yellow pages. (AT&T did not immediately respond to a request for comment.) Says Borrell: "Those relationships have gotten tenuous because they believe Google is competing with them by providing all this great stuff."
Douglas MacMillan is a staff writer for BusinessWeek in New York.
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