Angie’s List IPO: One Big Red Problem

COMMENTARY | This IPO is written in red ink.

Angie’s List Inc., the Indianapolis -based consumer-review website, posted a loss of $43.2 million in the first nine months of this year compared to an $18.9 million loss in the same period last year. Revenues increased to $62.6 million during the first nine months of 2011 compared to $59 million in all of 2010.

Where’s all that money going?

If you listen to radio, you may have heard Angie’s List ads or one of their sponsorships for NPR. Traditional advertising has brought in new customers, but most are coming from the ever-costly SEM.

SEM is search engine management, which is essentially bidding for certain keywords and keyword phrases. SEM’s counterpart, SEO, is search engine optimization, which drives organic traffic to a website based on the relevant content housed there. Think articles linking to a website. Amid increasing competition, this soon-to-be public company is spending heavily to position their ads higher in rank.

Here’s the rub.

In theory, Angie’s List, with unbiased reviews, is a wonderful idea. The company website boasts “a word-of-mouth network, helping more than 1 million members find the best service companies and health care in their area.”

However, consumers have to pay to read those reviews when there are free equivalent reviews available on competitors’ sites. Angie’s List suffers from the same problem that most SEM driven companies have: Increased competition means increased SEM keyword expense. With hyper-competition, their margins are squeezed as they race to pay even more per click for those golden keywords.

Additionally, as the company expands into other work categories, it will likely see an increase in spending in the new grouping on which it plans to have reviews. This extra expense means that if the company wants to provide reviews for “orthodontists in Seattle,” then it will buy SEM keywords to capture those consumers looking for “orthodontists in Seattle.” If someone else bids for the same keywords, prices will rise.

The cost of converting these new customers is constant, never-ending, and always increasing in price.

When most consumers go to Angie’s List (or any other major site), they typically click through Google or Bing/Yahoo/AOL to arrive at their destination. This natural organic SEO traffic is less expensive if the content is relevant and has “authority.” However, the algorithms that make up page rank are in constant flux.

To make matters worse, Angie’s List is seeing increased competition from IAC’s ServiceMagic. This larger and profitable company has recently hired former CEO, Chris Terrill, as its new head. In comparison, Angie’s List can charge consumers monthly or annually, while the ServiceMagic model has ratings and reviews, and is free to consumers.

For the near future, Angie’s List will be written in red ink.

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