The Fake Review Problem

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Paid Amazon (NASDAQ: AMZN) reviews got attention recently after New York Times reporter David Streitfeld wrote about a fake book review provider. Although fake reviews aren't new, the flurry of news stories that followed showed web users just how widespread fake reviews were, and angry authors' complaints heated up the topic further.

The problem isn't limited to books, as fake reviews could damage the reputations of social media companies like Yelp (NYSE: YELP), travel sites like Priceline (NASDAQ: PCLN), and hotel chains like Starwood (NYSE: HOT).

Although even Amazon can't weed out every fake book review, Amazon does offer a book preview service that helps readers double check on what they're buying. Author Robert Chazz Chute encourages his readers to use Amazon's book previews instead of relying on reviews alone, since book previews also help readers confirm that they're getting a book from a genre they enjoy.

Video game players can also try before they buy on Amazon, since developers frequently create game demos, and Amazon hosts many of these demos on its site. Amazon's 0.69 percent profit margin doesn't leave much room to pay for more fake review screening, but Amazon's 29.5 percent quarterly revenue growth seems like it satisfies shareholders.

Yelp reviews often cover restaurants and hotels where a free trial isn't an option, so Yelp screens reviews aggressively to guard its brand, which results in some complaints. Luther, a Yelp staffer, explained that the Yelp filter can prevent both good and bad reviews from showing up, but Yelp won't explain exactly how the filter works because someone who knew how the filter worked could manipulate it.

Yelp has been on a tear lately, as the stock didn't tank after the lockup period ended like the shorts expected. A broader market rally combined with some short covering sent Yelp back up to $25 a share, although Yahoo Finance states that 21.8 percent of Yelp's float is still short, so the shorts haven't all given up yet. Yelp did report 66.8 percent revenue growth for the quarter.

An airline might not let a traveler cancel or modify a cheap ticket, so Priceline also needs to aggressively weed out fake reviews. Telegraph writer Bev Farris reported that Priceline modified its review policies in 2007, limiting hotel review privileges to guests who used Priceline to make their reservations.

Amazon Verified Purchase reviews also prove that a reviewer paid Amazon for the product, but Amazon also lets unverified users leave reviews, explaining that an unverified reviewer could have bought the product somewhere else. Priceline demonstrates that a merchant can limit reviews to confirmed buyers and keep its revenue growing, with 20.3 percent quarterly revenue growth.

Starwood Hotels started displaying its own guests' reviews last year, according to Dennis Schaal at Tnooz. Starwood hosts the reviews itself, but the hotel chain does leave negative reviews up on its sites, which demonstrates Starwood's credibility. The Starwood Westin St. John hotel page currently shows a 3.1 out of 5 rating. Starwood reported 13.5 percent revenue growth for the quarter, so Starwood seems like it's attracting more guests these days.

Priceline's review verification policy appears effective, since my web search for fake Priceline reviews mostly turned up articles that were several years old. Starwood doesn't seem to have a problem with fake reviews either, and the bad reviews on Starwood's own web sites give this hotel chain some additional points for honesty. In July 2012, Los Angeles Times writers Jessica Guynn and Andrea Cheng reported that Yelp detected a group of fake review posters, which shows that Yelp dedicates resources to preventing fake reviews. Ending all unverified reviews might be farther than Amazon wants to go right now, but Amazon does need to address its fake review problem, so a decision like removing some suspect accounts wouldn't be too surprising. 

Want More Analysis?

If you’re an investor in retail stocks, you have to look at Amazon.com, the company intent on disrupting the entire sector. Whether you’re researching Amazon itself or one of the companies it's taking sales from, you need to understand the company and its prospects. That's why the Fool has created a new premium report on Amazon, sharing everything investors must know. The report also has you covered with a full year of updates, so click here now to get started.



enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Priceline.com. Motley Fool newsletter services recommend Amazon.com and Priceline.com. 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. If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure