When you're in a new city or just looking for something new in your hometown, there are plenty of options for finding a good place to eat or a great venue for entertainment. About 135 million people use Yelp (NYSE:YELP) to find out information about local businesses every month.
While Yelp has built a strong presence in the local search market, it faces strong competition from companies both large and small. Chief among them are Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB). Both of these Web giants, with significant presence on mobile devices, have increased efforts to improve their local business recommendations.
Yelp's latest acquisition, an online food ordering service called Eat24, is just as much about adding a new revenue stream as it is about creating new relationships with local businesses to stay ahead of Google and Facebook. Eat24 covers about 20,000 restaurants now and Yelp says it aims to increase Eat24's reach to 1 million U.S. restaurants.
Buying more business
As of the end of 2014, Yelp had 2 million claimed local businesses, that is businesses that have confirmed their presence on Yelp and are able to fill in details on their Yelp page. Those 2 million are a 36% increase over 2013, but that number is still dwarfed by the over 30 million active small business pages on Facebook (although not all of them are local businesses).
As more businesses flock to Facebook and Google+ to increase their presence on the Web, Yelp is forced to work harder to gain and retain customers. Meanwhile, Facebook and Google have taken measures to make their platforms more attractive than ever, which I'll detail later.
Eat24 already has about 20,000 restaurants on its platform across 1,500 cities. Considering Yelp has just 93,700 active advertising accounts on its platform, those customers are pretty significant as a revenue stream and provide excellent leads for advertising sales. Eat24's relationships with those 20,000 restaurants should help Yelp to rapidly increase its active advertising base.
Last quarter, the number of advertisers on Yelp grew by 54% excluding its acquisition of European competitor Qype. That's only a slight slowdown from last year, when the company reported 64% growth in advertisers. Yelp's acquisitions -- such as SeatMe -- and partnerships almost certainly helped attract more businesses to its advertising platform. Eat24 should do the same.
Defending its territory
As mentioned, Facebook and Google are swiftly moving in on Yelp's territory.
At the end of last month, Facebook introduced Place Tips in users' News Feeds. The feature displays relevant information about local businesses based on a person's location. While it doesn't have the depth of information included on Yelp, Facebook can show users what their friends had to say about a place and provide menu information.
Considering Facebook accounts for 20% of time spent on mobile devices in the United States, the social media leader's move into local business recommendations is a threat to Yelp. Nearly two-third's of Yelp's search queries came from mobile last quarter.
Meanwhile, Google has sought to leverage its position in desktop Web search into a platform for local businesses to establish a presence and -- more importantly -- spend their ad dollars.
Google's Google+ social network serves as the backbone for its local ad business, attracting businesses with the potential to improve presence on its search engine results pages. Google added a carousel of businesses on Google+ to the top of certain results pages, complete with user and Zagat ratings.
More recently, Google relaunched its City Experts program as Local Guides, which is aimed at getting users to review local businesses on Google+. It's very similar to Yelp's Elite Squad incentives, which encourage more useful reviews.
Google's relative control over the popular Android operating system ensures the company will always have a strong presence in mobile. The default maps app for Android, Google Maps, is the ultimate local search tool, which provides Google with a solid base to display its local business results. Yelp countered that by partnering with Apple for Apple Maps and Siri search results. Yelp also has partnered with Microsoft's Bing.
Not to be outdone
While the Web giants are battling for local ad dollars, Yelp is focused on doing more -- what it calls "closing the loop." Acquisitions such as SeatMe and Eat24 make Yelp an all-in-one solution for Web users looking to get something to eat or make reservations at some other local establishment. These features provide Yelp with separate revenue streams from local ad dollars, but also bring more businesses to its platform, which ultimately increases its potential for advertising revenue.
Eat24 might only add a few percentage points to Yelp's revenue growth in the near term, but it provides excellent synergies in the long run.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), and Yelp. The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). 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.