Why Angie’s List is getting a rash of bad reviews

Angie’s List (ANGI) seems like a great idea -- get a bunch of consumers to give honest reviews of local businesses, helping people to weed out the bad seeds. So why is Angie’s List getting a failing grade from investors? 

The company, which charges consumers to access its ratings, has seen its stock plunge nearly 50 percent from its July high of $28 per share. 

Its woes read like a litany of problems suffered by one of its low-rated businesses: disappointing earnings; executive departures; lawsuits alleging misleading practices; and younger, hipper competitors offering similar information for free. 

Why is that a problem? For Angie’s List, growth is a necessity given its massive spending on marketing. In 2012 alone, the company shelled out $80.2 million in marketing to convince people to sign up for the subscription-based service. Total operating expenses that year far outpaced its $155.8 million in sales. The result was a $52.9 million loss. 

Losing money isn’t new for Angie’s List. The company has been in the red for each of the past five years, according to its 2012 annual report. The company hasn’t yet reported its 2013 financial results. 

In order for Angie’s List to grow, consumers need to feel they are receiving unbiased, honest reports in exchange for shelling out fees that can be as high as $40 a year. But the site is increasingly coming under criticism for failing to prominently disclose its biggest revenue source: advertising fees from the service providers who are rated by consumers. 

Businesses that pay Angie’s List are pushed to the top of search results, Consumer Reports senior editor Jeff Blyskal told CBS MoneyWatch. That isn't evident to users of the site. Consumer Reports, which competes with Angie’s List, reviewed the site along with Yelp and other rivals last fall. 

“When you are paying for something, you expect to get what you pay for,” Blyskal said. “There’s a contract or bargain there -- I'll give you my dollars and you’ll be honest with me.”

In the case of Angie’s List, “they should be more upfront about their advertising.”

Following Blyskal's assessment of the company in Consumer Reports, Angie’s List promoted itself by noting, “Businesses don’t pay,” a claim it appears to have since taken off the site.

But businesses do pay — and quite a bit. For the first nine months of 2013, businesses provided a whopping 73 percent of the company’s revenue, or about $129.3 million. Subscriber fees, at $47.6 million, comprised the remaining 27 percent of sales. 

“None of the actions taken by Angie’s List to date has been in response to Consumer Reports’ assertions or litigation, both of which are baseless," an Angie's List spokeswoman wrote in an email. "The company’s public filings contain robust disclosures regarding its operations and the manner in which it generates revenue.”

That's not stopping critics from questioning Angie’s List’s business model. One lawsuit filed in December alleges that, “contrary to Angie’s List’s repeated Class Period statements that the online reviews providing the membership fees side of its business were unbiased …, the Company was consistently deriving more than half its revenues from the service provider side of the business.”

Angie’s List believes the allegations are without merit, the spokeswoman wrote. “We will vigorously defend against them,” she said. 

Angie’s List has another headache to cope with: competition from free review services. Aside from Yelp, which focuses on restaurant and entertainment reviews, there’s Porch.com, a “home improvement network,” and Google Local.

As Angie’s List ramps up marketing to fend off competitors and woo new customers, it’s pulling in less per customer. Per-member annual revenue for Angie’s List’s pre-2003 markets is $43. That’s plunged to just $13 per year per customer for markets Angie’s List expanded to after 2010, according to its annual report. 

Still, Houston of Barrington Research said he is optimistic about the company’s prospects. 

“I’m extremely comfortable with the business model,” Houston noted. But he said he wants to see better sales force productivity and financial results that beat analyst forecasts before raising his rating. 

The question for Angie’s List will be whether that will be enough to convince investors to once again rate it an “A.”