Protection Rackets

Much of what is called the “new economy” is just an updated version of the old economy. Netflix, for example, transfers their infrastructure costs onto you, even if you don’t use their service. Their streaming service relies on the Internet and the cost of growing bandwidth is in your cable bill. Facebook exists because they don’t have to pay to put their site on your PC. You pay for it. Cost shifting is a big part of the new economy and in some cases it is outright extortion.

First the chefs of a small Italian restaurant got mad at online review site Yelp. Instead of trying to get better reviews, they decided to take a different approach: get terrible ones.

The campaign helped Botte Bistro get a rating of one out of five stars, as more than 1,000 reviewers left hundreds of tongue-in-cheek reviews panning the Richmond, California, eatery, said chef Michele Massimo, adding that it boosted business.

It was the latest protest among businesses who for years have complained that Yelp was extorting them by raising or dropping ratings depending on whether they advertised with the Internet’s most popular review site.

Yelp has persistently denied those claims on its website, in court and at every opportunity when the question is put publicly to the company.

“It wouldn’t pass the straight face test,” Yelp spokesman Vince Sullitto said of the extortion claims.

Sullitto said Yelp attracts millions of viewers and sells advertising to 80,000 businesses because of the site’s credibility with consumers. Sullitto said many of the company’s critics are businesses that have received bad reviews.

Last month, the 9th U.S. Circuit Court of Appeals tossed out a lawsuit filed by several businesses claiming Yelp extorted them by removing positive reviews after advertising sales pitches were turned down.

The court is one rung below the U.S. Supreme Court and the ruling could have been a definitive one for Yelp.

Instead, it served to fuel the company’s critics because the court said that, even if Yelp did manipulate reviews to penalize businesses, the practice would not constitute extortion.

The court said it found no evidence of manipulation and that it was ruling narrowly only on the question of extortion. Nonetheless, the company’s critics said the ruling supported their claims.

Even before the 9th Circuit ruling, Yelp was battling two lawsuits filed by company investors who make similar extortion claims.

The suits, filed in San Francisco federal court over the summer, allege that the company’s stock traded at artificially inflated prices because the “company tried to sell services designed to suppress negative reviews or make them go away” and then lied about it.

The company has yet to formally respond to the lawsuits in court, but says it will fight these legal actions as well.

Last year, a lawyer serving as a small-claims judge in San Diego likened Yelp to a “modern-day version of the Mafia going to stores and saying, ‘You want to not be bothered? You want to not have incidents in your store? Pay us protection money.'”

This is not a new thing. Trade magazines have played the same game for years. Good reviews could make or break a product and the way to ensure it was to buy ads in the trade magazines. At the same time, writers would know they better play ball and say nice things about the products from their advertisers. It was not a formal arrangement, just a natural one. Everyone had an interest in promoting the product.

Yelp and other review sites have simply expanded the model to the Internet and every consumer business. Proving they are manipulating their rankings is never going to be easy, but it is hard to imagine they are not doing it. The bias will always be in favor of their customers who are the people sending them money, not the dingbats writing reviews. That’s what “new economy” types often forget. The customer is the guy writing the checks and he always comes first. In this case, the review site will look out for those businesses that pay for ads.