Angie's List (NASDAQ:ANGI) and Yelp (NYSE:YELP) are largely complementary services. They both provide reviews of local businesses, but Angie's List is focused on contractors, like roofers and plumbers, while Yelp is focused on small businesses, like restaurants and shops. But that could all change soon.
Angie's List is reportedly in talks with bankers to explore its strategic options, including a sale of the company. The news, reported by the Financial Times, sent shares of Angie's List higher after sluggish performance since the company's IPO. Analysts have speculated several companies that could be suitors for Angie's List. They include retailers like Home Depot, Lowe's, and Amazon (NASDAQ:AMZN). Some also believe Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is the most likely to offer Angie's List a buyout offer.
Angie's List becomes a much bigger threat to Yelp in the hands of a bigger company.
What's wrong with Angie?
The biggest thing holding back Angie's List is marketing expenses. Due to its business model, the company is forced to spend marketing dollars on both consumer-facing products and its business-facing products.
Angie's List is a subscription-based service, which means it needs to advertise what it can do for consumers in order to get them to sign up. Comparatively, Yelp is a free service, and the company maintains a much tighter consumer marketing budget.
Angie's List is generating an average of $26.09 per member each year based on its second-quarter run rate. Membership fees amounted to $18.5 million last quarter. It's spending the majority of its marketing dollars on national advertising, though, accounting for more than $17.96 million.
Angie's List and Yelp are both spending heavily on expanding their markets and attracting more businesses to the platforms, as well. But where Angie's List spent 76.4% of revenue on sales and marketing in the first half of 2014, Yelp spent 56.2%. What's more, Angie's List expects its marketing expenses to climb in the second half of the year due to seasonality. Cutting out Angie's List's national advertising campaign puts its sales and marketing expense in line with Yelp's -- 56.8% of revenue.
Why Google, Amazon, or home improvement retailers could help
The big retailers can ease the pain of marketing for Angie's list. First, they already have a national audience coming to their stores and websites. That makes national advertising much less expensive than running television commercials. Additionally, companies like Home Depot and Lowe's already have relationships with contractors, which will significantly reduce marketing costs on the business-facing side of Angie's List.
Amazon has the experience and technology to sell advertising on the platform, and help businesses convert more potential customers. Google, too, has the necessary ad technology to take Angie's List's advertising business up a notch, and make the ad product more attractive to businesses.
The reason all of these companies might be interested in Angie's List is because the company would expand their audience outside of their core users. Home Depot and Lowes are aimed at do-it-yourself homeowners. Amazon and Google are involved with local businesses and search through Amazon Local and Google Plus reviews; but they're mostly involved with restaurants and entertainment venues like Yelp.
Why Yelp hopes Google doesn't buy Angie's List
In the hands of Google, Angie's List will probably start looking a lot more like Yelp -- no membership fees, and more ads. What's more, the service would integrate nicely with Google's current local search products, which is Yelp's biggest competitor. The addition of Angie's List would certainly make Google a more attractive source for all local searches, not just contractors.
Yelp claims it's "the preeminent destination for local search." In order for that to be true, it must fend off Angie's List, and even expand into its market. That becomes much more difficult in the hands of a big acquirer with a larger marketing budget and better infrastructure -- not just Google. Google is just a worst-case scenario.
Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com, Google (A shares), Google (C shares), Home Depot, and Yelp. The Motley Fool owns shares of Amazon.com, Google (A shares), and Google (C shares). 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.