Backfence Suspends Operations

Backfence is shutting down it appears. Peter Krasilovsky and PaidContent report on the closure. (There’s also a message on Backfence sites.) And the American Journalism Review has a very long article on Backfence and “hyper-local” sites more generally quoting Mark Potts, one of the founders of Backfence. The conclusion of the piece is that the economics don’t work for “hyper-local” sites.

Potts told me in an email that he and the current investors are looking for additional investors, partners or buyers to enable Backfence to live on in some form. As something of a counterpoint to the post-mortems above, Yelp appears to be doing well. But, its focus and content are quite different from those of Backfence.

The business model (and specifically sales) is the fundamental challenge in local. Judy’s Book shifted its model and InsiderPages sold to IAC partly because of the Herculean effort involved in selling into the small business market. Selling ads to local businesses is extremely difficult. And scaling is difficult because all the momentum and credibility must be recreated in each expansion market, unlike nationally focused sites.

Backfence originally received $3 million in VC funding, made some dubious strategic choices (in retrospect) and simply ran out of cash. But no one should dismiss the underlying phenomenon that Backfence is a part of because it didn’t succeed financially.

User-generated content and community sites are now a permanent fixture of the Internet. Not only do people respond to user-generated content, they especially want it about local markets. But the development of local sites must be subsidized by funding or an existing advertiser base or sales channel before thinking about selling ads to SMBs. Launching a consumer site (or network of sites) and building ad sales at the same time is very difficult — perhaps impossible.

Partly for this reason, newspapers are hypothetically in the best position to execute successfully on the strategy laid out by Backfence. I’ve argued that community features are one of a few “must-haves” for newspapers and their sites going forward. Many of them already do to varying degrees. But they can add the community layer or create new sites that are more community oriented and use existing advertisers and sales channels to monetize those efforts.

There’s the perpetual question, however, about whether newspapers can execute and about their speed in doing so.

Nobody thinking about or currently operating a local consumer site – unless you’ve already done it or have tons of cash – should be building a sales force, although a sales force is what it takes to sell successfully in local. (Telephone sales channels might be something of an exception.) Site owners should think about tapping into existing ad networks or sales channels as part of broader, geotargeted Internet distribution networks.

Indeed, ad networks are the answer to the question of fragmentation in local.

Not to minimize the challenges of building a great consumer destination, but ad sales are much harder. It’s almost impossible to get SMB advertisers to “look up” and buy ads on any particular site with so many publishers coming at them. Google, Yahoo! and Microsoft face similar challenges.

Eventually, assuming a modest cost structure, there will be an ad infrastructure, now starting to emerge, that will allow for monetization of local consumer sites and will remove some of the pain that site owners currently experience on the ad sales side. For example, ad exchanges, if they truly catch on, may eventually offer even the smallest site owner the opportunity to plug-in and receive targeted ad distribution. Today, however, you must pass certain traffic thresholds to gain advertisers and ad revenue. But traffic growth typically will have to be subsidized for some time before monetization can truly kick in.

Alternatively, subscriptions may make a return. Angie’s List, for example, doesn’t have to sell that many ads because it relies on consumer memberships as its primary revenue stream. In a competitive environment of free online information it’s hard to sell subscriptions of course. But the model is worth a second look from some — provided they have something unique and compelling to sell to consumers.

What would be really valuable to others is if Backfence co-founder Mark Potts posted (as Andy Sack generously did when Judy’s Book changed its model) about mistakes and his reflections. I’ll encourage him to do so.

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