You get what you pay for. Or you used to, before the modern Internet business model took hold. Today, there are any number of consumer-focused websites where you get quite a bit and pay little or no money for the privilege.
So it's interesting to see two companies that specialize in consumer guidance take a decidedly different approach to what, if anything, users should pay for content.
Yelp, which offers free reviews, plans to price its initial public offering Thursday to begin trading Friday. Angie's List , which charges its users for the privilege of reading and writing reviews of service and health professionals, has been public since November.
Is either a good bet for investors?
Yelp offers consumer-generated reviews of a wide range of businesses, although restaurant commentary continues to dominate the site, with about 42 per cent of its 25 million reviews dedicated to eating out. It generates the vast majority of its revenue through charging for advertising.
Anyone can read Yelp reviews, but contributors need to register and post a public profile (first names and last initial only). The company says the credibility of Yelp reviews "is a critical component of our value proposition and brand," and it uses "proprietary, automated filtering software" to weed out less-reliable submissions.
Despite these efforts, Yelp continues to battle perceptions that its site is a bouillabaisse of untrustworthy content. A "myths about Yelp" page on its website includes "Yelp was created to allow whining and complaining about businesses" and "Yelp salespeople manipulate reviews for prospective advertisers." (Both are untrue, the company says.)
While traditional media companies pay contributors for their content, and Yelp and its peers outfox them by getting theirs for free, Angie's List has turned the neat trick of making its contributors pay for the privilege of providing reviews. Subscriptions run a few dollars per month, with discounts for paying for a full year or more.
The premise? While the downside of picking the wrong restaurant is a case of indigestion and a wasted $100 or so, picking the wrong plumber, roofer or other contractor can cost thousands of dollars. Paying $50 per year or less to read reviews by others in Angie's club is a pittance in comparison.
Yet subscription revenue actually makes up less than half of sales at Angie's List. The site also relies on advertising, albeit with a patina of exclusivity: A business must have at least two reviews and a "B" average or higher before it is allowed to purchase an ad.
So, which is the best choice for investors? Alas, either business is an expensive bet. At this point, neither Yelp nor Angie's List has net income.
In the absence of profits, investors must base valuations on some sort of price-to-sales measure, or, as Oppenheimer & Co. Inc. analyst Jason Helfstein had to do with Angie's List, take a 2018 – 2018! – EBITDA estimate, assign a 10 multiple to it, and discount it back to present value. (Which, I should point out, yielded a $16 U.S. price target, about where Angie's List trades today.)
The investment case for both companies relies on the idea that they are at the very beginning of penetrating a very large market. Analyst Jordan Rohan of Stifel Nicolaus believes Angie's List, which has tripled its membership in the last three years to one million, can triple it again in the next four. With average revenue of more than $100 per user per year and consistently high renewal rates, Mr. Rohan estimates the lifetime value of a member in 2015 will be $691 to Angie's List. He uses that number to value the company today at $21 per share.
However, it's unclear how many millions more people will buy in to the idea of paying for reviews. But at least the business is becoming difficult to replicate, and generates significant revenue per user.
Yelp, by contrast, had 66 million monthly unique visitors in 2011's fourth quarter, but generated just $83.3-million in revenue for the year, illustrating just how much less valuable all those free viewers are.
And let's let Yelp tell you directly about Google, which provided more than half of Yelp's traffic last year: "Our success depends on our ability to maintain a prominent presence in search results for queries regarding local businesses on Google. Google has removed links to our website from portions of its web search product, and has promoted its own competing products, including Google's local products."
If Yelp comes to market Friday at $14 per share, as is planned, it'll trade at 10 times sales, which is high even by hyper-valued Internet-stock valuations. Angie's List is no bargain, but Yelp seems particularly overpriced.
Maybe you do get what you pay for.
David Milstead