Tech Minnows Yelp, GrubHub Team Up Against Amazon, Google Sharks

(Bloomberg Gadfly) -- It's tough to live in the shadow of technology giants. The best way to survive may be to collaborate. 

Tech companies like GoPro, Fitbit, Groupon, Yelp and GrubHub live in a constant swirl of volatility. Their shares tend to rocket up and down -- or down and more down, for most of this list -- on fears they will get squished by bigger competitors such as Google or Amazon, or simply go poof after people tire of their products and services. 

Yelp and GrubHub struck a deal late Thursday that showed teaming up can be a smart survival strategy, as is getting wise about business areas that aren't worth the headaches.

Yelp Inc. said it planned to sell its restaurant food-ordering business, Eat24, to GrubHub Inc. for $287.5 million in cash. The key is the two companies struck a partnership so that people scrolling Yelp for reviews of sushi restaurants will also be able to place a takeout or delivery order through GrubHub without surfing away from Yelp. GrubHub also made a similar arrangement earlier this week with Groupon Inc. and its food-order app OrderUp. 

Both Yelp and GrubHub are facing fundamental questions about the strengths of their business models and their viability. These are smart collaborations and could be a model for other less-than-titanic internet companies. 

The partnership also highlights how difficult it is to be anyone but the biggest tech companies in the land. GrubHub has been growing quickly, it is nicely cash flow positive and shares have nearly doubled since its 2014 initial public offering. But food-ordering and delivery is a tough business, and there are constant fears that GrubHub will get run over by rivals including Uber or Amazon, both of which have food-delivery operations in some cities.

Yelp makes most of its revenue from selling ads to restaurants and other local businesses that want to pitch themselves to people using Yelp. And like all companies dependent on advertising revenue, the worry is Yelp will get choked to death by Google, which has its own big ambitions in local advertising. Executives at parent company Alphabet Inc. uttered the word "local" eight times on the company's earnings call last week. Yelp shares peaked a couple of years after its 2012 IPO and have been sliding ever since. (Shares rose about 18 percent in after-hours trading on Thursday.) 

GrubHub will pay a referral fee for restaurant orders that come from the people surfing Yelp, although the companies didn't detail the size of those fees. The San Francisco company's decision to sell Eat24 after less than three years is also a pragmatic recognition that Yelp needs to focus on its own local business listings and advertising sales. Smaller tech companies can't afford to have the breadth of ambitions of Amazon or Google.

There's no guarantee that the closer ties between GrubHub and Yelp will make a big difference. The companies will still need to scrap for every diner and every restaurant against a growing number of options. But like fish that swim together so they're less likely to be eaten by sharks, tech companies with iffy business models are smart to team up so they are bigger and badder than they are on their own. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

To contact the author of this story: Shira Ovide in New York at sovide@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.