What Angie's List, Pandora and IAC's Match.com have in common

SAN FRANCISCO — Pandora’s acquisition of the assets of Internet-radio rival Rdio, like the rejected offers by IAC/Interactive Corp. to acquire Angie’s List, a provider of reviews on local businesses, point to the same trend.

Both provide fresh evidence that multiple markets within the Internet consumer-services sector have begun consolidating.

Consolidation means less growth but more profits as the market separates winners from losers.

And the pursuit of Angie’s List by one IAC company at the same time its parent company is selling shares in a slew of dating sites should provide investors with a clue as to where IAC Chairman Barry Diller thinks the future value here is.

With Google and Facebook gobbling up dominant shares of the digital ad market and Twitter garnering its own growing share, it’s worth asking just how realistic all those Wall Street ad- and subscription-revenue forecasts are for second-tier Internet companies.

Judging by the stock-market performance of some, the answer is: Not very.

Pandora shares are down 30% this year, and buying Rdio assets and talent won’t soon change one fundamental financial fact about the company.

In its most recent quarter, Pandora’s content-acquisition costs rose 90% year-over-year, or three times its revenue growth of 30%.

Clues to that trend could be found all the way back in the company’s IPO documents four-and-a-half years ago.

Pandora's box of rising music costs

The bottom-line result: Pandora’s net loss exploded to $85.9 million, or 40 cents a share, from just $2 million, or 1 cent, a year earlier.

Angie’s List, Pandora and IAC all have something in common: Their businesses consist of digital subscriptions, online ad revenue or some combination of both.

So what happens to the valuation of second-tier Internet firms if the sector can’t sustain the growth rates that Wall Street once promised IPO investors?

It’s worth asking as Match.com gets ready to price an offering in the wake of money-losing consumer-Internet IPOs from Groupon, Zynga, Twitter, Pandora and Angie’s List.

As of Tuesday’s close, all were trading below their respective IPO prices.

IAC’s new stock issue, which will include results for Match.com, Chemistry.com and OKCupid, posted 15% sales growth in the first half of this year, compared to a year earlier.

Yet the company’s operating income fell 31% during that time to $67.6 million, as its operating margin shrunk to 14% of revenue from 23%.

Wall Street expects revenue growth at parent company IAC to shrink from 4.4% this year to an even more-meager 2.5% in 2016.

Even so, its net income is expected to rise by double-digit percentages this year and next.

Expectations for Angie’s List are similar. Its revenue is expected to rise by high single-digits in 2015 and 2016, while it’s also expected to swing to an annual profit this year.

Remember that consolidation separates winners from losers, while growth begins to slow.

In this environment, Diller — a shrewd, veteran Internet investor — wants to buy some Angie’s List and sell some Match.com.

Angie's List rejects IAC deal; shares plummet

Meanwhile, money-losing Pandora is gobbling up a former competitor on the cheap after huge rivals Apple and Google have entered its market.

The Internet services sector sure looks like a consolidating market, which means retail investors should either pay attention to what insiders are doing or leave the stock-picking here to the pros.

Follow USA TODAY technology columnist John Shinal @johnshinal.