Local Advertising Network Revenues Threatened By Search Industry

Local advertising networks will continue to lose relevance as search engines become the first stop for consumers. To date they have prospered as the “middlemen of paid search". Will savvy advertisers cut them out of the loop?

Before Google (GOOG), sites like Superpages and Citysearch established themselves as the leaders of local search. Superpages migrated its cumbersome yellow book to the online arena in 1996. When Citysearch was founded in 1995 there was still a monopoly on local business data. A user could quickly find local businesses by category, location or name- a vast improvement over 411 or the yellow pages.

Compared to the print publishers of old, these local guides offered outstanding value to advertisers. Using a performance-based model, a business paid for results in the form of a click or a call. Advertisers had the ability to better gauge spending and ad performance.

And then came Google. When looking for local business information, search engines - not local guides - became the first stop for most consumers. Search engines provided a breadth of high quality results not possible in a site-wide search.

With AdWords, Google forever changed the nature of advertising on the internet. They applied the same performance based model to the entire web. The search behemoth now controls close to 50% of online ad dollars. Google’s ad distribution far exceeds that of its closest competitors.

The value proposition of Citysearch and Superpages, a featured listing in a site-wide search, became irrelevant. Yet these sites have not only survived, they have prospered - even as their user base has languished.

In the fourth quarter of 2006, Superpages’ revenue increased 26% to $63 million. They even managed to increase their advertiser base 20% year-over-year. Citysearch generates huge profits with their network of 50,000 advertisers charged, on average, $500 per month. These companies have managed to succeed in the face of stagnating consumer interest in their brands.

search volume is one indicator of a site’s relative importance

some perspective

Alexa data, though tenuous, shows a decline in reach

The Middlemen of Paid Search

Citysearch and Superpages rely on human relationships to drive sales, something Google and other big Internet companies have yet to execute on a large scale. “The small-business market relies on sales representatives to call them or visit…these businesses would not go on their own to Google or Yahoo (YHOO)," says Greg Sterling, former managing editor at The Kelsey Group, an internet firm that provides strategic research and analysis of the Yellow Pages.

Citysearch has begun bolstering its sales force in what it sees as a very competitive local arena. IAC, Citysearch’s parent company, opened up a new sales office in Atlanta this past January and intends to nearly double its sales force there. Travis Fore, VP of local sales at Citysearch, suggests the biggest driver will be Citysearch's approach to advertisers, who “don’t react well to Internet ad jargon like SEM and SEO.”

In spite of the fact that they are no longer the first stop for the majority of Internet users, Citysearch and Superpages continue to dominate local business spending. To compensate for their inability to compete with search engines, they have created advertising networks and transformed themselves from pure content providers to middlemen of paid search.

According to Superpages:

You create ads that appear at the top of listings at Superpages.com and our network sites” Citysearch also mentions a network, “Describe your business and how you want to be listed on the Citysearch network, including Ask.com, Google, Yahoo!, and MSN.

It’s hard to estimate what percentage of users are coming from this 'network’. Citysearch reports twenty million unique visits per month. If, as some figures claim, they’re spending $100 million annually on AdWords (one-third of their purported revenues), the amount of traffic driven by AdWords would make the company’s internal database driven search inconsequential. Superpages partnered with Google AdWords in March 2006. If recent revenue increases are any indication, the practice is already paying off.

Citysearch and Superpages have been extremely successful in monetizing this ‘network’ traffic. It’s ironic that their greatest competitors, search engi! nes, have become their best earners. When a consumer clicks on an affiliate ad it drives traffic directly to a local advertiser’s profile. Citysearch and Superpages not only underwrite the cost of a click, they potentially earn a profit. This 'arbitrage’ takes advantage of the price differential of a paid-for-click and the money tendered by the local advertiser.

In many cases the practice goes counter to an advertiser’s best interests. AdWords clicks tend to be less targeted than site wide search. Citysearch has created AdWord specific landing pages that increase the likelihood that a visitor will navigate away from a landing page to other sponsored listings. I explore the topic in a rantish indictment of search arbitrage.

Will advertisers better manage online spending?

As business owners become more web savvy, large local advertising networks may see drastic cutbacks in their advertiser base. Local advertisers have! all the tools at their disposal to advertise online – the registration process at Google’s AdWords and Yahoo’s Overture are essentially identical to those of Citysearch and Superpages. By cutting out the middleman, local businesses could garner many more impressions with the same advertising budget.

Google may help speed the shift along. The search behemoth has announced a plan to pay a commission to people who are willing to photograph local businesses and gather information about the company to post on Google Maps. These self-appointed local “contractors" would not only gather local information and photos, but also promote the AdWords program to local advertisers.

It also seems likely that marketing firms may begin better targeting businesses. In exchange for a fee, these firms might create online campaigns on behalf of local businesses. While loc!al networks like Citysearch may remain a tool in their arsenal! it is unlikely, given their limited reach and high expense, that they’ll be utilized extensively.

Disclosure: none

Comments

[George R:]

Hi Douglas,

Google is doing everyhing it can to turnthe world of advertiing into a science. After all, most of the rocket scientists now coming out of engineering schools want to join the free lunch program in Mountain View.

But effective advertising strikes a delicate balance between "science" and "art". Salespeople on the street can provide a degree of the "art" if they truly understand their clients needs.

Many advertisers don't have a clue what Google is actually doing with their money. If they did, we'd see some very big changes in this industry in short order.


Advertising's new world order

I read somewhere recently that it's a battle between Google and Microsoft to determine who will be the next great advertising company in this country. Get serious ... who is buying this garbage?

I have been in and around the advertising business for my entire life. In fact, I am a third generation graphic arts designer ... only my specialty is digital. My grandfather started making a living in the ad industry in 1918, at the age of 19. His son followed. Both of my brothers and my sister have spent most of their life in advertising as well. My nephew is now attending one of the most prestigious advertising graduate degree programs in the world ... and is knocking them dead. Even my 16-year-old daughter has the knack.

The advertising industry demands perfection ... and vision. It tries to strike the perfect balance between super creative people, media experts, business people and account executives. While it sometimes stretches the norm and produces an ad like the infamous Apple attack on IBM, or the sexy new GoDaddy models trying to host your web site accounts, it always plays within the rules. If it doesn't, you, the consumers, will let them know. You don't see laws being violated every single day by these agencies ... whether they relate to smoking prohibitions, pornography, blatant racial prejudice, or generally offensive materials of any sort. You make a mistake like Don Imus and "pow", you're taken off the air. Your advertisers dump you. And you certainly don't steal other people's work. Words ... images ... music. The industry has for the most part learned how to protect its own. The ad industry respects copyrights.

Social responsibility, respect for individual creative skills, and copyright protection have become a way of life in this industry. And now targeted advertising can be delivered to us on the device of our choice (mobile or static) and exactly when we might want to see, or hear, it. How exciting?

But it's not all about the bucks, folks. Advertising requires a degree of class ... sophistication ... social responsibility ... and an understanding of what is visually appealing and what is not. How many flashing, hopping, beeping, or honking pop up ads, or scrolls, can someone watch before the device ends up in the bottom of the lake in a fit of rage, anyway?

What advertisers in their right mind are looking to recruit Michael Vick these days ... and we won't know the certainty of that case for many months to come. Even the slightest hint of cruelty, or lawlessness, can set a concerned advertiser, and its clients, into an uproar. The established rule has always been to avoid controversy at all costs. Let the journalists do their job on that front ... not the ad agencies.

The technology industry is entirely different. It thrives on controversy. Whether it's Microsoft stealing its ideas for Windows from Apple, or Apple stealing its interfaces and designs from HP, they are all roughly the same. It's always been that way. Try to get away with anything you can until the government authorities threaten to shut you down ... or, worst yet, put you behind bars. And if you accumulate enough cash money in the process, you can even fend off the government if you choose.

I know. I went to work for IBM in the mid-70's. Almost got disinherited by my "advertising" family in the process, but there I went anyway. We weren't taught creativity much at all in those days. It was more FUD than anything else. For those of you new to the industry, that's Fear, Uncertainty, and Doubt. "If you don't pay three times as much for this IBM system you are likely to lose all of your data ... and then your wife ... and eventually all of your children." IBM finally met its match in the 80's and took a dive from grace. They fell asleep at the wheel. I call it "we're #1 syndrome".

Then Microsoft took over. Predatory business practices ruled the roost. "Bundle this or we'll squash you. License us your ideas for pennies or we'll steal them anyway. Antitrust issues be damned. We are much better pitch men then you folks will ever be." Never had a company made so much money so quickly. "Hey, this controversy stuff isn't all that bad, now, is it?"

Then came the 90's. The decade started off with a strong rumor that a guy named McAfee had invented a cure for the computer virus (Michelangelo) that many thought he invented in the first place. And both the disease and cure spread like wildfire. When I saw him being interviewed by Bryant Gumbel on the Today Show I knew we were in for big trouble. The technology industry has never been the same. These software engineers are sure smart, but should they really be allowed to operate outside the law of the land? I don't think so.

By the end of the 90's, the Internet had taken hold. And every two-bit pirate want-a-be in the world was now an official publisher. You could go public by selling air, but stealing other people's property, selling polluted air, and then recruiting an audience to your party, or new community as they called it, was much more exciting. Business ethics be damned. The advertising industry was supposed to attend and sponsor the feast as well, but few quality firms participated at this early stage. Something didn't smell right. Tell me again why "eyeballs" are more important than "profits"?, a few from the old school would quietly whisper to each other their concerns for fear of being heard and considered to be behind the times. No riches were reserved for dinosaurs in this new game.

I found it almost too sad to watch as many of our modern day business "heroes", like GE Chairman, Jack Welch, and NBC Chairman and CEO, Bob Wright, got snookered by some of these new Internet visionaries, and convinced their advertisers to tag along. They weren't about to miss out on this new "zero gravity" wave ... whatever the heck that meant anyway.

So now the dust is finally settling and Web 2.0 has brought about a new world order. Power to the people. Controversy brings eyeballs and is sought after now, not avoided. Social networking is hot, buying goods via auctions over the Internet is in vogue, and user supplied content is virtually uncensored ... all of our norms are starting to change. And the software engineers and scientists out at Google have finally figured out how to dupe Madison Avenue, not just Wall Street, out of its money ... let alone the poor small business out there on Main Street!

Google refuses to follow the standards of objective and straightforward journalism and guess what ... journalism has started to die. Google unilaterally decides to digitize every single book they can get their hands on around the world without the copyright owners' permission ... and guess what ... the book publishing industry turns into a steep downward cycle ... if not a tail spin. Newspapers are all selling out, if not giving up. Google pays $1.65 billion for a start up company called YouTube, that, by and large, uses stolen property to attract its customers. Technology companies agree to censor content in China while the Chinese government applauds the fact that its piracy rate is now only slightly above the 80% level. Kids get thrown out of fraternities, or social clubs, if they are found actually paying for music or movies they download online ... let alone using e-mail. These are no longer socially acceptable practices ... or hip. Obnoxious and intrusive advertising smears all of our online lives. Who produces these pop-up and banner ads anyway? The whole advertising industry has caved into the "science" of it all ... and it's supposed to strike a delicate balance between both science and art. Always has.

Hey, I'm not against progress. I love these search engines and what they can do. Used fairly, they can really enhance our lives. But I don't want to be exposed to stolen property every time I turn around. Are there really 147,645 companies out there giving away original graphic arts content that is part of the "public domain" as Google claims? I don't think so. I'm aware that I, too, have potential liability even as an innocent user of this digital "stuff" I download online when the property is stolen. I just want to hear the truth. Who owns the content on your website anyway? Never had to worry about his sort of thing before. Responsible advertisers would provide me with a shield. I just like being told when I'm about to get hoodwinked. "Bend over ... we realize that there's no water in the shower, but our engineers are working on that one as well." Semantic water.

Go ahead, technology companies. Take all of the money. You might as well before another country like Brazil, Russia, India or China (the so-called emerging BRICs) starts to dominate the game.

But please don't call yourself an advertising company. You're a delivery medium. Stick to your knitting. We've had to solve enough problems over the years ... dealing with our own unique blend of greenhairs and greenbacks ... on our own!

Long live the power of the honest pitch! Wake up advertising companies ... we need you!

George P. Riddick, III
Chairman/CEO
Imageline, Inc.

[e-mail]

2007 Aug 24 11:17 AM

[oldcurmudgeon2:]

Perhaps you've heard of Craig's List, the real giant of local advertising?

2007 Aug 24 01:30 PM