Getting Down and Dirty in the Local Ecosystem

Both John Battelle and Michael Arrington covered Yahoo!'s new Featured Listings offering. These guys are very, very smart but generally have a 30,000 foot view of the local space. However, the real action (and complexity) is down in the dirt, under the weeds. So here’s a glimpse, from my vantage point, of what’s going on "down here."

For a long time Yahoo! and Google have been focused on the small business market — as are lots of folks (verticals, web hosts, directories, newspapers). They would like to more directly and deeply penetrate that "market." (Effectively there is no small business market; there are only millions of small businesses that share certain characteristics.) They know that without a local channel — or surrogates (more on that below) — and product/pricing simplification, they’ll have limited success. So that’s what they’re working on (Google's analyst day presentation contains such an allusion regarding simplified bidding/pricing).

The “local opportunity” is very large, but:

  • For national advertisers who geotarget buying local is inefficient and cumbersome beyond search engines and a few sites/networks
  • The small business segment is diverse and hard to reach efficiently
  • Small businesses know the Internet is an important marketing vehicle but are confused and tied to existing marketing methods
  • Small businesses need education, help, simplification
  • Consumer local search traffic is fragmented across hundreds of sites today, making it hard for any single player (other than Google or Yahoo!) to get the volume/reach necessary to make it really pay

As a consequence and of necessity a “Local Search Ecosystem” has organically emerged to address the fragmentation and inefficiencies in the market. Yellow pages publishers, which have “owned” small business advertisers for generations (and until recently have taken them for grated) have all started to offer click packages that extend local advertiser reach into the broader Internet, typically via search.

Here’s a (non exhaustive) list of intermediaries/“enablers” that work with YP publishers (and now newspapers and other local media) to offer that service:

  • Local Launch
  • WebVisible
  • Reach Local
  • Leads.com (now owned by WebSitePros)
  • LocalLead
  • Matchcraft
  • ClickForward (now owned by YellowBook)
  • Inceptor
  • Marchex/Traffic Leader
  • Verizon SuperPages (w/Quigo, performs this function in addition to being a publisher)

These companies generally sit between the publisher/aggregator and search distribution (paid and/or SEO). And while they don’t offer identical services or pricing, at a conceptual level they make it possible to translate an auction-based product (AdWords, YSM) into a fixed-fee, simplified product that doesn’t require the small business to learn about – let alone master – search engine marketing.

Yahoo! has done this directly with its Featured Listings product, bringing predictability and pricing simplification to a highly desirable ad placement. All this fulfills the expectations and needs of small businesses and makes it easy for them to buy the placement. Over time, Yahoo! will probably sell some number of these local advertisers into YSM geotargeted products.

All the major yellow pages publishers have these “simplified search” programs in place in an effort to generate new revenues and maintain their advertiser relationships. Some of these are based on an arbitrage model and some simply add a margin or service fee on top of the ad buy (e.g., SuperPages).

Most of these products started out as “guaranteed clicks" packages, but they’re rapidly moving to a budget-based model: “for $X per month, you’ll get Y clicks.” That budget based model accounts for price variability by category and geography. Otherwise, margins get squeezed quickly. Almost all of them have call tracking or PPCall as part of the product suite.

In addition to YP publishers, verticals (e.g., lawyers.com, HomeGain) have similar marketing programs for their advertisers. Also, web hosts (e.g., Affinity, Web.com, Vista, eBay’s ProStores, etc.) do too. And now newspapers have begun to offer the same products.

Hearst’s Houston Chronicle was the first to do so in a deal with Marchex. Now McClatchy has done a partnership deal with WebVisible to use the local newspaper sales force to offer simplified paid search (and calls) to local businesses. More newspapers will soon be doing this.

Google and Yahoo! indirectly benefit from these channels and in some cases they have direct relationships with publishers (Google- SuperPages, Yahoo!-YellowPages.com).

I spoke a long time ago with Inceptor’s EVP Mick Sack who said that he worries about a time when you have several channels in a market selling essentially the same product, maybe from the same vendor-supplier. All these offerings are still in their early stages (and there will be acquisitions and consolidation). But we’re starting to get a glimpse of what Sack suggested, especially when you consider that local TV affiliates and radio, as well as local cable companies will all be selling a simplified online/search marketing product in addition to most metro dailies and YP publishers.

YP publishers and newspapers have historically been competitors, and newspapers see these new online ad products as a way to capture some of the YP ad revenues coming from local SMEs. For their part, YP publishers are starting to fold classifieds listings into their directory offerings.

In the near term (think three to five years) some small percentage of these local SMEs — there are more than 20 million in the US, with an “addressable” market of perhaps 10 million – will move from simplified search programs to have direct relationships with Google and Yahoo! But the bulk of the market will not. The majority of SMEs will be happy to have someone else deal with the complexity and simply pay for the service (provided it’s working for them). Indications are that churn rates are fairly low and less than 20% or 25%

In addition to traditional media, there are also local “pure plays” such as InsiderPages and Judysbook, which are selling calls/PPCall directly to the market through a telephone sales channel.

As you can see this ecosystem is complex, with perhaps more than 200 companies in Local in one way or another. This “web” (so to speak) of channel and value-chain relationships will be the way that most SMEs will get into search and online marketing generally. Typically that will be through traditional publisher relationships and product extensions. This is also the way that Google, Yahoo! and MSN will capture some portion of the billions local SMEs spend on local advertising.

Ten years from now all bets are off. But the immediate future of the local market is not a direct substitution of online for traditional ad products and it’s not a “disintermediation” (on the advertiser side) of traditional publishers by Google and Yahoo! Where that danger exists is on the consumer-usage side.

The search engines have more consumer traction than traditional media sites; however, YP and other local sites tend to deliver better leads than search. Eventually, however, if the consumer usage of traditional media drops away then advertisers will abandon ship.

The point I’m trying to make is that down here in the dirt and the weeds the Local Search Ecosystem — just like real biological ecosystems — is messy and complex and competitive. And a nervous and awkward symbiosis is definitely the order of the day.

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7 Responses to “Getting Down and Dirty in the Local Ecosystem”

  1. Ben Says:

    Greg,

    I look at the ecosystem as having 3 elements:

    1) Those who are building the Local Internet. This ranges from Google and Yahoo who are helping by creating the ability to point and ad locallying to those companies like InsiderPages, Yelp, Topix, etc. who are building new local inventory.

    2) Those who are trying to solve the product complexity issue. Stated simply a local merchants are not going to spend time figuring out when to buy Google ads and how much to pay for a bid. Even it makes ROI sense to spend hours in front of a computer, they won’t they are not in the business to sit in front of a computer, they are in it to spend time with customers. ReachLocal, LocalLaunch, WebVisible, etc are all on top of this.

    3) Then there is the “sales complexity” issue, how do you sell to millions of small businesses at a cost of advertiser acquisetion that does not require a $1B invesment to build a channel. This is where we have a decades old set of businesses owned by private equity firms who are looking to milking the businesses for cash before the Yellow Pages game crashes into 10% of the market size that it is today.

    While the ecosystem is betting on the Yellow Pages to solve the “sales complexity” issue of building the advertising market for the “Local Internet”, they have only delivered a miniscule amount of local businesses, estimated at 300,000 by people from the Yellow Pages themselves at the recent Kelsey conference.

    If we are going to get to real penetration of Local merchants to 10M and even openning this up to the 20M who do some form of Local advertising but don’t deal with the Yellow Pages fear based sales programs….there has to be a new and effective sales channel for selling advertising to local businesses.

  2. Anonymous Says:
  3. Screenwerk » Blog Archive » ‘Let Your Fingers Do the Surfing’ Says:

    [...] You can read the full post at the SEW blog and my earlier post on the local search ecosystem. [...]

  4. Newspapers Becoming Local SEMs « Screenwerk Says:

    [...] As I said in a previous post: [...]

  5. Who Will Solve the Local Mess? « Screenwerk Says:

    [...] I don’t agree with the user-uptake time frame and I would frame the problem in a slightly different way. The issue is critical mass. Marketers want reach or critical mass; publishers want audience critical mass. (That definition may depend on your cost structure.) But that’s what they’ve always received from traditional local media such as YP, radio and newspapers. The challenge online is all the local fragmentation – both for marketers and publishers. There are various efforts underway on the publisher/advertiser side to address that problem, with syndication/distribution, simplified search, do-it-yourself ad networks (e.g., Adify) and emerging exchanges (e.g., RightMedia). [...]

  6. paulwicker Says:

    Greg, time to do the 5-year retrospective.

    Have any clear leaders emerged?
    Has the industry become any less complex?
    Churn rates (certainly higher than 20%) should have made ReachLocal unsustainable…how are they doing it? Or are they doomed?
    Rumors are that “bucket of clicks” still get’s a large percentage of SEM spend. Supermedia is selling it DIY on their website. Is the SMB market ever going to adapt to budget based buying?
    Transparency is the new buzz word. Is anyone in the mass-market SMB sales game truly transparent? Do SMB’s really care or is it an an ivory tower look at the SMB community?

    Curious to know your thoughts now that we’re in 2010 and planning for 2011.

  7. Greg Sterling Says:

    OK Paul, perhaps I’ll take a crack at these.

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