With its current features, the Graph Search by Facebook (NASDAQ:FB) is really no match for online recommendations provider Yelp (NYSE:YELP), but it can potentially disrupt its business in the long run. Using Graph Search, a Facebook users can make queries about their friends’ locations and interests, to generate a much smaller pool of recommendations compared to the hundreds posted on Yelp. Facebook users can ask for restaurants their friends visited recently and see reviews, but considering the fact that each user has only a limited number of friends, this query is likely to generate very few answers. We think that the market may have oversold the news of Facebook’s launch of Graph Search against Yelp, causing Yelp’s stock to fall 6% on 15 January.
Yelp generates revenue mainly from local business advertising, display advertising and from additional services like Yelp deals, and deals with reservation services like OpenTable (NASDAQ:OPEN). The site features services such as business search, reviews and recommendations on local businesses and enables customers to access ratings and read reviews about local hotels, restaurants, dentists and mechanics, etc.
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Yelp’s Open Model Is An Edge Facebook May Never Have
The biggest disadvantage for Facebook’s Graph Search is that it is governed by privacy rules and not all users may be willing to reveal their activities, which significantly reduces its information potential. The search query is also restricted to mining data from friends and open profiles on Facebook, and this is a much smaller pool compared to Yelp. Yelp’s biggest advantage is the fact that these reviews and recommendations are voluntary and open for any user to read. Even professional restaurant critics tend to provide feedback on Yelp and these recommendations are more likely to be taken seriously than what Graph Search is likely to provide.
Large User Base May Provide Facebook An Edge In The Long Run
Facebook has a gold mine of data with more than a billion profiles. On the other hand, Yelp has a user base of only 100 million and this is a big disadvantage for Yelp. The fact that Facebook can launch this feature across all its markets soon, means that Facebook can enter the recommendation business in countries where Yelp has no presence, giving former an advantage. But in the 20 odd countries that Yelp has established itself, it may be hard to displace its top position as a recommendation site. The key for Facebook is to get a foothold in countries that don’t have Yelp and need a recommendation service. Once Facebook establishes itself as a social network recommendation tool, it will be much harder for Yelp to displace Facebook, and the Graph Search feature may hinder Yelp’s geographic expansion in the long term.
We currently have a $15 Trefis price estimate for Yelp, which is nearly 25% below its current market price.