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Last year in February, the Kelsey Group made the eye-catching forecast that the global online local search market is set to explode from $3.4 billion in 2005 to $13 billion in 2010. This put the growth rate at a handsome 30.4% over the next 4-5 years.

Interestingly, the same report was emphatic that the classified advertising revenues, a la Craigslist like free enlisting, would drop a fraction of a percent from $79.5 billion globally in 2005 to $78.5 billion in 2010.

Though Kelsey Group’s figures pale in comparison with Universal McCann’s estimate of $94 billion of the local search market, the point remains that local search is a very high growth area, and one that companies like Google are drooling over.

Against that backdrop, Local.com’s (NASDAQ: LOCM) recent award of a patent for indexing and retrieving web-related information by geographical location assumes serious significance. At least superficially, the patent covers much of what giants like Google, Yahoo, Verizon, Ask and InfoSpace are already offering in the local search area.

Local.com’s patent has therefore set the buzz rolling as to whether the Irvine, California based company is up for acquisition by giants like Google, Yahoo or IAC (see also the rejoinder by Marty Himmelstein).

For the record, LOCM’s indexing of local search in US based on patent-pending Keyword DNA® technology is already deemed “most relevant” for local search by TeleMapics, a search engine technology analyst organization. My question remains: Is this a defensible patent to “own” Local Search as a market segment?

The range of products LOCM offers includes, other than its patented local search, LocalConnect (local search on any website), Local Mobile (local search results on web-enabled mobile devices) and SMS Local (text-based local search and directory assistance services).

LOCM, however, is hardly a successful company. Its Q2-03/07 total revenue stood at $4.88 million even as the net income is still red at $3.09 million, and profit margins horribly negative. This patent may be its only saving grace, since, it makes the company extremely valuable for an acquirer with deep-pocket who can throw the financial muscle behind it to attack infringing entities, and defend its own market position.

In terms of its stock market performance, LOCM hasn’t so far been able to ignite buying frenzy as some analysts might expect. LOCM presently has a market cap of ~$65 million with share price hovering at around sub-$8 level for nearly a month now.

But the question to ask, really, is how much would Google be willing to pay to buy Local.com’s patent if they could block Yahoo, Ask and others out of this multi-billion dollar market? That is the key question that should determine the valuation on this company, and based on that, if the patent is indeed defensible, then I think, the company is grossly undervalued!

[Discerning readers may like to refer to TeleMapics’ schematic of the breakdown of local search market to make a sense of what may likely transpire in coming days. Cal McElroy’s It’s About Place series is also a worthwhile read.]

Source: Local Search Bonanza Stirs Patent Investigation