Local Advertising Network Revenues Threatened By Search Industry

by: Douglas Cress

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 (NASDAQ: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 1
search volume is one indicator of a site’s relative importance

search 2
some perspective

search 3
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