Yelp Inc Spent $12.7 Million Just to Give This Away Free

Yelp  (NYSE: YELP  ) announced earlier this week that it will allow restaurants to take online reservations through its website. The new service, dubbed Yelp Reservations, is comparable to OpenTable  (UNKNOWN: OPEN.DL  ) or SeatMe, which Yelp spent $12.7 million to acquire last year. Now, the company is giving away almost that exact service to any business that's willing to "claim" its Yelp page.

The move comes just one week after Google (NASDAQ: GOOGL  ) announced its acquisition of Appetas, a website building platform for restaurants. As Google beefs up its food-related and local search businesses, Yelp may be feeling the pressure.

But is this a smart move by Yelp?

Maybe you forgot how much $12.7 million is
These days when billion-dollar acquisitions seem to happen every month, we forget just how much money that is. For Google, spending $3.2 billion on Nest isn't too much when you've got over $60 billion in the bank.

Yelp currently has nearly $400 million (with an M) in cash on its balance sheet. When it agreed to buy SeatMe, it had closer to $100 million. Strong cash flows in recent quarters have led to significantly more spending money for Yelp, but the company has still only generated $5.9 million in free cash flow, or fcf, over the last 12 months. Comparatively, Google's fcf for the trailing 12 months is $10.92 billion.

Of course, when your competition is one of the biggest companies in the world, you've got to stretch your budget a bit.

Cannibalizing, but not replacing
Since the acquisition of SeatMe, Yelp has kept it as a stand-alone product (now Yelp SeatMe) and charges $99 per month for the service. Yelp mentioned in the blog post announcing Yelp Reservations that the service "is a great option for businesses that aren't big or busy enough yet to need the robust functionality of Yelp SeatMe."

In other words, Yelp Reservations is just a basic version of SeatMe. Still, it could easily cannibalize a large chunk of SeatMe users. Perhaps Yelp believes offering a basic version of the service for free will attract more users to the premium SeatMe service.

Either way, it's bad news for OpenTable, which gets 5% to 10% of its business from Yelp. The two companies established a partnership in 2010, but last year's SeatMe acquisition threw a bit of a wrench in an otherwise mutually beneficial relationship. The Yelp Reservations move is the next step for Yelp to move further away from OpenTable.

If Yelp doesn't do it, someone else will
Perhaps the biggest factor playing into Yelp's decision to offer a free reservation service is that if it doesn't do it, someone else probably will.

A company like Google could easily integrate a reservation platform for restaurants and local businesses and offer it for free. It could be a means for Google to attract more local advertising dollars, a market Google's been going after more aggressively recently.

That would be bad news for Yelp. Yelp derives a huge amount of its traffic through search engines, and often that means Google. If Google continues to push its own products over Yelp's it will hurt Yelp's page views and advertising revenue.

By offering consumers the information and features unparalleled by competitors, including Google, Yelp will be able to attract more visitors. Rolling out Yelp Reservations is an attempt to get more businesses to offer online reservations while improving the accuracy of their pages on Yelp. This is great for the consumer, and offers value to businesses.

A long-run play
Yelp may be able to capitalize in the long-run by selling more advertising to companies after showing them the value of their Yelp pages using online reservations. It could also result in more sales of the premium SeatMe service in the long run after restaurants learn the value of online reservations.

Overall, Yelp's management believes it has a huge market to address, and this is just one step to make sure that it's able to win the advertising business of the restaurants, bars, and other local businesses.

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