Both Yelp (NYSE:YELP) and Angie's List (NASDAQ:ANGI) have their strengths and weaknesses, though what they are depends on who you ask. It is similar to the classic expression of whether a glass is half empty or half full. An individual's point of view and personal experience plays a big role in the answer you get.
Google (NASDAQ:GOOGL), eBay (NASDAQ:EBAY), and Facebook (NASDAQ: FB) are popular threats brought up by skeptics who believe that Yelp and Angie's List are doomed. These skeptics have many misconceptions about these two review sites, however, and there is a chance both Yelp and Angie's List can actually coexist.
Roughly 90% of the respondents in a recent Dimensional Research survey claimed that online reviews affected their buying decisions. This is why Yelp and Angie's List are in business. Yelp's main source of income is advertising, while Angie's List generates income from its paying members as well as advertising.
There are two major misconceptions surrounding each company's business model. First, Angie's List is not as consumer-driven as they lead you to believe. Several years ago, it used to be a 50-50 split between membership and service provider revenue. Today, Angie's List makes just 26% of its revenue from paid memberships.
Second, not all of Yelp's advertising revenue is equal. While it does sell brand advertising in the form of random banners on the webpage, most of its revenue is from local businesses that want to be featured on Yelp. This introduces questions as to how much influence higher-paying businesses have on the site and its reviews.
The fact that Angie's List has been cutting prices by as much as 75% to attract new members (and sometimes making even larger cuts for members who want to cancel their current memberships) means that the majority of the company's revenue going forward will come from advertisements. In the end, both business models are drifting to the same point where nearly all revenue is advertisement driven.
Review quality questions and biased conspiracies
Yelp has been accused of filtering its user reviews for business gains. Theories include the filtering out of positive reviews for businesses that don't buy Yelp advertising, filtering out members who give overly positive reviews on their first posts, and the mysterious algorithm that Yelp uses in general but won't release to the public.
In contrast, Angie's List has a built-in filter from the start and admits that its typical member is a homeowner in the 35-64 age range. Those that favor Angie's List state that the company's reviews are more legit because its members pay.
Despite the assumptions over both companies' reviews, both are equally vulnerable to manipulation and deception. Yelp has never released its filtering algorithm to the public, so it would be hard to say if members are "beating" the system. Just because you need to pay to become a member of Angie's List doesn't mean these members are more moral or ethical than Yelp members.
User growth, threat of new entrants, and long-term sustainability
Year-over-year revenue grew 68% and 56% for Yelp and Angie's List, respectively, in the recent third quarter. However, both companies lost more money in the quarter than analysts expected. Yelp had a $2.3 million loss, while Angie's List had a larger $13.5 million loss. Each company's stock has fallen by a double-digit percentage since.
Even though both companies are still growing their memberships each quarter, the threat of a larger company taking over this industry remains.
eBay recently introduced its eBay Hire service, which is designed to put shoppers together with local service providers. While it is currently aimed at Angie's List, it has the potential to move toward the restaurant review space that Yelp is known for as well. On a site where many buyers and sellers still have trouble trusting each other regarding basic product transactions, though, it may be a stretch to ask the same for actual services.
In 2009, both Google and Yahoo! attempted to buy out Yelp before negotiations tanked. Google's version of Yelp would probably have ended up in the infamous Google Graveyard, however, where it would join the likes of products such as Google Reader, Google Video, and Google Desktop.
At one point, Facebook would have been a decent competitor in the user reviews space as well given its 1+ billion users. However, complaints are becoming more common about the site in regard to clutter, ad oversaturation, and the slow departure of its teen user base.
Historically, all companies eventually come to an end due to competition or their own wrongdoings. Given current trends, however, it appears that Yelp and Angie's List are just getting started and still have plenty of time to tweak their business models.
Despite the potential threats of eBay, Google, and even Facebook, it should be noted that change doesn't always happen just because a much larger company enters the picture. Users aren't going to automatically switch review sites any more than Facebook users are going to suddenly switch to Google+.
Sometimes being an early entrant in a sector actually counts.
Michael Carter has no position in any stocks mentioned. The Motley Fool recommends eBay, Facebook, Google, and Yelp. The Motley Fool owns shares of eBay, Facebook, and Google. 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.