Why Angie's List Beats Yelp

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Indianapolis based Angie’s List (NASDAQ: ANGI) has been lifted to a buy rating. The stock's price target was lifted from $29 to $31 per share by the Midwestern firm Stifel Nicolaus. Northland Capital Partners previously (Spring of 2013) raised its price target for Angie’s List shares from $24 to $30. Angie’s List, the consumer-based referral membership for local service providers and professionals is slowly but surely surpassing Yelp in the local recommendation space. Angie’s List has morphed into a premium Internet platform with brand awareness and lots of momentum. With word of mouth and more importantly, lots of paid advertising, Angie's List has become mainstream. It took Angie's List 16 years to get 1 million members. It took it 18 months to get 2 million users. This type of growth in paid membership is very impressive. Yelp (NYSE: YELP) had better take note — Angie don't play.

Yelp me, I can't get up

Yelp has users — lots of users. Yelp had more than 100 million unique visitors in January of 2013. Massive growth — but that growth is uneven. Yelp, like Angie's List, has yet to turn a profit. What makes Yelp's situation more precarious is that it does not have paying users, Angie's List does — 2 million of them. Yelp is betting on mobile, but who isn't these days? Yelp is also having the same review quality "issues" that Angie’s List has. Bogus reviews, overly picky customers, poor vendor control, etc... The local recommendation space is riddled with pitfalls — legitimate and potentially off-putting that could sink any well-meaning brand. While both Angie's List and Yelp have issues, Angie's List has a clear advantage because from the onset, it charged for its "special sauce." Long ago Angie’s List knew the value of local recommendations and does not have to figure out how to squeeze profit from its brand.

Another major concern is Yelp's reliance on Google (NASDAQ: GOOG) for traffic. Relying on Google is not a business strategy — it's dangerous. Another issue is the 700 complaints against Yelp filled with the FTC. Yelp must get a handle on these types of issues before users decide to move on to using just Facebook or (gasp) Angie's List for their local recommendations. On a good note, Boston Consulting Group showed that a local business saw an average sales boost of roughly $8,000 by using a free Yelp business account — Yelp must do more to capitalize on this (vendor paid memberships anyone?) in the near future.

All is not well

Angie's List is not perfect — it has some significant quality assurance (QA) issues. Angie's List has also alienated many vendors by not addressing unfair ratings. Vendors don't like the scarred reputations caused by sometimes vindictive members. Some Angie's List business practices have raised eyebrows. CEO Bill Oesterle has been collecting rent from Angie's List by renting his Indianapolis property to the company. Oesterle recently sold that property to Angie's List. Needless to say, that property was sold "well above" assessed value — Angie must not use her own service. Transparency is a major issue that Angie's List must deal with appropriately. Also, contrary to its  advertising — local companies do pay to get on Angie's List.

Only $14.6 million of the company's $52 million in revenue was from paid subscribers. Most of the revenue is from vendors — they pay quite a bit to get on Angie's good side. Right now, Angie's List is playing both sides of the fence. It takes money from vendors, and puts them on Angie's List — while charging members to have access to Angie's List. Based on member and vendor comments from a 2012 New York Times review this "double dip" approach does not pass the "smell test" with many once-satisfied customers.  Angie will have to find a way to make this work or users will leave Angie's List faster than you can say "MySpace."

Both Angie's List and Yelp need to hire more talent and personnel to keep pace with this space. Both firms combined employ less than 2,000 (Yelp - 1,479, Angie's List - 349) employees. These is no way you can manage real growth, quality growth in the local recommendation space  – without people. People are the core of this business and both Yelp and Angie's need to remember this important fact to gain and hold an advantage. More employees monitoring content could have avoided the most recent Yelp "bad review" issue that's gone micro-viral.

The $800 GOOGrilla

Google is a real threat to Yelp and Angie's List. A growing number of consumers are turning to Google Maps instead of Yelp or Angie's List to get local business information. Consumers using smartphones to find addresses and maps using Google tend to stay within Google's applications and services — consumers simply bypass Yelp or Angie's List altogether. As Google creates better mapping, geo-targeted apps and mobile ad synergy, Yelp and Angie's List may be seen as less relevant in the SoLoMo (social-local-mobile) space. Google beating out Facebook to purchase the Israeli mapping application Waze for $1 billion shows how aggressive Google is about SoLoMo.

Google has benefited from Google Maps being pre-loaded on Apple iPhones since 2007. Apple Maps became the "preferred" map app on the iOS platform. This was good for Yelp since Apple Maps currently uses some Yelp data to make the maps more relevant to iPhone users. While Yelp and Angie's List are far more focused in the local recommendation space, Google has the technical skill, money, and breadth and depth in maps and data coverage to take market share and become dominant as SoLoMo grows. This is more of an issue for Yelp. Angie's Midwestern roots gives this company a major "human" advantage that pure play technology firms like Google and Yelp will never be able to match — Angie just has to remember to keep users happy.

Advantage: Angie

Angie's List has easier steps to take to become dominant in the local recommendation space. Expand the Super Service Award — make it a really big deal. Have an awards ceremony. Have a convention that enthuses members and vendors alike, while growing the brand. Add relevant functionality to Angie's List — create a real local recommendation engine for members and vendors. These are just some of the things Angie's List must do to become the de facto standard in the local recommendation space. If it can do half of these things, it will be far superior to anything Yelp or even Google can offer. Angie's List memberships have grown 60% while revenue rose 68% to $52 million. The company lost almost $8 million, mostly due to high advertising costs to grow the brand — but overall revenue was up 78%. Angie's List — right now — is the stock to beat in local recommendation.

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