The Good, the Bad, and the Ugly
David Glenn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When America first became electrified there were myths and misconceptions about the new technology. Vendors sold the unsuspecting, plugs for their wall outlets, lest the electricity leak out on to the floor. Electricity was new and exciting, of course, its old hat to us now, but to our ancestors it held a magic allure. Salesman sold quack electrical medical instruments, designed more specifically, to make the patient's release their hard-earned cash, than to ease any suffering.
This is human nature and this is Capitalism, any new technology which springs forth, is likely to have opportunists following closely on the heals of innovation. In the Internet age, we've seen this process again and again. A major part of the problem is the Internet is so irascible and inscrutable, it's murky and indistinguishable. One guy selling diapers on the Internet, eventually sells out to Amazon and earns a cool $125 million. So that no idea appears, too crazy, in light of the other crazy ideas which have built fortunes.
YouTube was only founded seven years ago, and already, it is hard to imagine what life was like before its creation. I needed to know if the clutch bearing could be replaced on a 2000, Jeep air conditioning compressor. A YouTube video gave me a full breakdown on the repair. YouTube has become a part of American life and will be with us always. Google purchased YouTube in 2006 making it the jewel in the crown of their Internet Empire.
Other online enterprises sound promising enough, even logical and yet, success somehow eludes them. Groupon began life as The Point.com in November of 2008, offering a pizza coupon for another business in their building. It all seems so logical, doesn't it? An online coupon delivery business, a local Karate Studio through Groupon offers $100 in Karate lessons for half price. The Karate studio and Groupon split the remaining $50.00, meaning the Karate studio's half price offer is really 75% off with the promise the retailer can make up the difference on volume. Only, there's a flaw in the slaw.
75% off is at or below cost for many businesses, if someone shows up with ten kids, there's little chance to recoup. Many retailers add strings to prevent being swamped with Groupon Coupons, such as before six or after six. It is a business model which seems straight forward, but the risks are heavily weighted toward the vendor. It all sounds reasonable enough, if consumers are willing to drive across town for discount Thai food or willing to go out of their way for discount Bowling Lanes.
In November of 2011, Groupon went public and its stock price skyrocketed 31% on the first day. Market valuations of $15 and $ 20 Billion, put Groupon in the same league with Adobe and Yahoo, only Groupon had never made one dime of profit. Then the allegations of management and accounting practices arose as the Groupon stock price began to slide. On the day of the IPO, four mutual funds made out like Roscoe, having invested $450 million in Groupon when the company was worth far less than $5 billion in assets.
Why does Groupon need $5 billion? The stock price has since plummeted from the opening day price of $26.11 and is now trading in the $5 range. There is a saturation point, all the glitters is not gold, those profiting from Groupon stocks were the early buyers, who got in cheap and got out fast. Groupon is more hype than heat, more heat than light and someday a Groupon coupon will remind you of that place where you once rented video cassettes, in that building where they used to have the slot car track.
Some Internet companies are great ideas whose time has come, or who should come, or which might come. Some ideas are just new variations on a very old theme. Yelp is a local directory service with social networking user reviews. Yelp generates revenue by selling ad space on its own webpage. Users of the site, place reviews of local businesses, garnered from their own experiences. Merchants are first offered a free site, then, if they so choose, they can move up to a paid package.
After Yelp's IPO in March of last year, the company netted nearly $100 million dollars, after not earning a profit since 2004. To be successful, Yelp needs those paid packages sold, but how do you sell in a down economy? Yelp's been accused of deceptive practices and of out-and-out extortion. Small businesses complain, if they don't accept the higher priced packages negative ratings of their businesses appear on their Yelp page. Good ratings were being filtered out and discounted, while nod and wink salespeople, make promises of all will be made good, if the merchant simply writes a check.
The following is from SaveusfromYelp.com and there is also Yelp –Sucks.com and Yelpscam.com.
Yelp Hurts Small Businesses;
"We are a small new business. We had lots of great reviews that yelp filtered after I declined advertising with them. Then a person from a competing shop in town left a negative and untrue review for us and they left it up, even after we explained it was a complete fabrication and we could prove it. They told me to leave a negative review on the other shops yelp. When I explained I was not a liar and to please take my account down, they refused." ~ Jan 24, 2013 Dina Verplank, firefly Tattoo
Another reviewer explained it like this: "Yelp only preys on the very small business as they know they have no money to lawyer up as doctors do or pay the hush money for all the bad reviews they hide for them. Yelp is a protection racket and if you have the cash they will protect your reputation, if not, well kids its feeding time at the zoo!" ~ Jan 24, 2013 Name withheld.
In Al Capone's day, gangsters offered ramp insurance and other protection rackets. They were never called gangsters by their employers. My own personal experience comes into play, as I read the Craigslist writing job ads nationwide. Write Yelp Reviews - $30 are as common as flies in summertime. That much, I know is true, which only adds credibility to the consumer complaints. It means a saturation point will someday be reached, when the lines of unreliable reviews will intersect the public's knowledge of paid reviews. It means Internet electrical gimmicks will always be with us, as long wallets are too thick and dreams are too large.
Daveparts has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!