Unlimited Disk Space, Unlimited Bandwidth, Unlimited Websites but Really?

How unlimited is "unlimited"? Remember "If it sounds too good to be true, then it probably is!" It's all about enticing one to use a product or service. Food and cosmetic companies give out free samples in hopes that you're going to enjoy the sample and buy the product. Automobile companies offer free test drives betting that you are going to enjoy the car and make a purchase. Other companies are much more creative and perhaps a little sneaky about how they entice you to use their products or services. German born physicist Albert Einstein said, "If the facts don't fit the theory, change the facts." How can a company afford to offer unlimited disk space, bandwidth or websites?  In truth, they can't.  Instead they change the facts by changing what the limits are based on. Instead of limited disk space, they limit:

• the number of files one account can store,
• the number of databases,
• data transfers.

All of these solutions will have the same effect of limiting resources. Don't forget about those legal notices that we so often ignore. I mean who wants to spend a half an hour reading some long winded legal mumbo jumbo when all you want to do is lock in this great deal you're getting before it goes away.

Ever wonder why legal policies and disclaimers are so lengthy and redundant. The answer is in the details. Omit one seemingly insignificant requirement and what you have is one enormous loophole. One missed detail could mean the difference between a good deal and a rip off. I woke this morning to a brilliant example of the consequences of my inattention to detail. Last night, I beamed with joy at my daughters Facebook status update exclaiming her happiness. The second child of three she never tried to compete with her older sister, the athletic and scholastic genius. Instead, she took on a common role for middle children, affectionate rebel and drama queen. She longed to look the part of her rebel role complete with body piercing and tattoos. As any parent will tell you, bribery and negotiation are the best way to handle a rebellious child.  Worn down from years of constant nagging, I finally resorted to bribery, giving her permission to pierce her nose when she made the schools honor roll.

Leave it to my little rebel to find the loophole in our arrangement. Summer school, where all you need to do is show up, flash that dazzling smile and bat your eyelashes at the young teacher fresh from college to be the best student in the class. Yes, she made the honor roll in summer school and yesterday claimed her prize. A sparkling new piece of jewelry stuck through my baby girl’s perfect little nose! While I meticulously detail the agreement for my eleven-year-old stunner, master manipulator and cunning negotiator, I have a newfound respect for the long, seemingly superfluous legal policies and disclaimers once loathed. Let this be a warning to parents everywhere to close those loopholes!

Now getting back to the topic at hand, the unbelievable deal you are being offered with "UNLIMITED" this and that.  Loopholes work both ways.  A loophole can offer a way around an agreement like my nose piercing rebel, or it can be the way around the offer entirely.  By putting thousands and thousands of websites on a single server, sharing a single IP address you are in effect limiting the resources you are providing.  Your website will run slow, hang and fail to connect sending potential customers to your competitor that didn't take advantage of the same unlimited offer. Ready, here's the kicker...the loophole buried deep in legal jargon.  "In the event the bandwidth or disk space usage presents a risk to the stability, performance or uptime of our servers, data storage, networking or other infrastructure, you may be required to UPGRADE or we may take action to restrict the resources you are utilizing." That's right RESTRICT resources, right there in print. There goes your great deal and after you have put in hours and hours of time and money moving everything over to utilize this deal that was just too good to be true.

Yelp Advertising Rip-off Small Advertisers?

Yelp!

That word could be coming out of the mouths of small-business owners when they hear how much the online reviews site is overcharging them for advertising. At a time when much online advertising is being sold for 60 cents per thousand impressions (CPMs), Yelp is charging some local advertisers $600 per 1,000 impressions.

That’s not a typo. Yelp is charging small businesses 1,000-times the standard online CPM rates for local ads that appear on Yelp. Even when compared to its own ads for national advertisers, the company is charging a 100x premium.

This is the type of ad a national advertiser would buy: According to a source who has purchased this type of ad on Yelp, the rate is about $6 per CPM. This ad unit works like most online ads: when someone clicks on it they are taken directly to the advertiser’s site or a specialized landing page.

Now consider the types of local Yelp ads that small businesses buy:


In this scenario, the ad goes to the advertiser’s Yelp review page. That’s a page where users are free to leave any kind of review for the business, including ones that trash it. That ad runs about a $600 CPM. Yelp is currently in its quiet period while it is preparing for its initial public offering and did not comment for this story.

According to a rate card forwarded by a business solicited by Yelp, this is what the company is charging. Note that these are general rates for Yelp, not specific CPMs for the advertisers shown:

    $300/mo – includes 500 targeted ads per month
    $540/mo – includes 1200 targeted ads per month
    $825/mo – includes 2100 targeted ads per month
    $1100/mo – includes 3000 targeted ads per month

It’s common for more targeted inventory, such as the type that Yelp provides, to command higher CPMs. But triple-digit CPMs are extremely unusual. (Yelp’s rates vary based on category and demand.)

At the high end, it’s a $600 CPM. At the low end, that’s a still eye-popping $367 CPM — more than 10-times the rate of a Super Bowl ad.

To make matters worse, Yelp requires a 12-month commitment for these rates. (The representative offered this business higher rates for a six-month commitment. Yelp also offers 3-month agreements.) Even if Yelp doesn’t deliver your business a single customer, you’re on the hook for $3,600.

For comparison, Facebook only requires that you set your budget to $1 a day and does not have a commitment. A business could try it for a week, see if it performs and then decide.

Even as Groupon’s toughest critic, I can list scenarios in which it makes sense to run a Groupon. I cannot think of any scenarios where I would advise businesses to advertise on Yelp at these rates.

For online advertising, I strongly recommend against commitments and impression-based advertising. For a restaurant, a service like GrubHub makes more sense. You only pay if someone uses the service to order and there’s no commitment. Such services typically charge restaurants 10-20 percent of the value of orders they send.

Despite ostensibly being an Internet company, Yelp’s business model is closer to that of yellow pages companies: sell a questionable value proposition to many who don’t understand what they’re buying. While it may work in the short term, as the stocks of yellow pages companies show, it’s not a long term proposition. SuperMedia is down 92 percent since it debuted. Dex One is down 94 percent.

Combined, those companies have a valuation of $145 million. Yelp is reportly seeking to raise $100 million at a valuation of $1 billion to $2 billion. (Not that I would advise investing in SuperMedia or Dex One.)

Yelp’s rates for national advertisers aren’t way out of line. Unfortunately for Yelp, local advertisers account for 70 percent of its revenue.

In its latest S-1, Yelp reported strong revenue growth that earnings increased 74.5 percent year over year and 11.7 percent from the previous quarter.

But given the flaws in Yelp’s core business model, it won’t be long before investors and advertisers are leaving one-star reviews.

February 6, 2012 1:22 PM
Rakesh Agrawal
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Rocky Agrawal is an analyst focused on the intersection of local, social, and mobile. He is a principal analyst at reDesign mobile. Previously, he launched local and mobile products for Microsoft and AOL. He blogs at http://blog.agrawals.org and tweets at @rakeshlobster.