Local Ad Revenues: Google Delivers Pizza

Just about every two years or so in the short happy life of the Web, we get word that the local online ad market is about to take off…no, really this time. As offline newspapers, TV affiliates, yellow page directories, and even free community weeklies well know, much of advertising is local—the small merchants and nearby services that spent $22 billion in 2003 on marketing. In order to cash in on all of those nail salons and car dealers, most newspapers went online in the mid 90s, followed later in the decade by the "city site" and "local portal" phenomenon, and then by online yellow pages and business directories. While each of these projects has experienced some success online—and larger metropolitan areas do have regional online hubs that people frequently use—it is still safe to say that most users and small business advertisers do not regard the Web as a local medium, and, as such, few small local businesses advertise on local online venues.

That is about to change. Put "pizza" followed by your zip code into a Google search and you will see the future of local advertising. You should get several featured links to local restaurants at the top of your results and a link to a local page of even more links. Click on any one listing and you should get detailed phone info, address, and even a map to the shop's front door. Yahoo! renders similar results under the "Yellow Pages" tab on its search results page. The Web is, in fact, local. And, once both users and advertisers recognize this, a new and powerful revenue stream will finally start flowing from the Web.

Because the model of selling sponsored text links is so successful and well-known and because so many of us are habituated to search being our primary tool for finding information online, both Yahoo! and Google are laser-focused on bringing all of those reticent local advertisers to the Web within their engines. Eventually, pizza and a zip code entered in a search engine will not only bring up local pizza listings but also larger text ads for which the businesses pay a premium. And, of course, search advertising is pay-per-click; advertisers only pay for people who show an active interest.

"All of this could spell disaster for newspapers and local media," warns Peter Zollman, president of Advanced Interactive Media Group and co-author with The Neil Budde Group of the 2004 Local Search Report. He says, "Newspapers may find that local search, along with the migration of audience and advertisers to interactive media, disrupts everything they know about advertising."

I think that the search phenomenon will succeed where previous local plays failed in finally igniting local advertiser interest both in the Web and in performance-based advertising. Who ultimately gets that money remains an open question. Other companies are not going to willingly cede this ground to Google, Yahoo!, and eventually MSN. Local newspapers, online yellow pages, and vertical directories (for real estate, finance, etc.) are all gearing up to fight against big search for these billions in local ad budgets.

Local ad revenues will inevitably come to online search because the case studies are already building for its effectiveness. ReachLocal (www.reachlocal.com) is developing tools that allow advertisers to buy local keyword combinations (i.e. "pizza + zip code") on multiple search engines. One client, an auto glass repair shop in Mesa, Arizona, invested $500 in text-ad buys on major engines and received 170 phone calls, 200 sales leads, and $4,000 in sales in two months, according to Rob Wright, founder and VP of ReachLocal. He points to a Los Angeles BMW dealership that doubled its search engine investment from $1,000 one month to $2,000 the next because it received over 200 phone calls from the placement. Even with relatively few users and advertisers currently invested in local search, "based on our ROI tracking, there is plenty of action for our clients," says Wright. "It works today."

My guess is that we will see interesting partnerships and buyouts among the current combatants so that the local search landscape will look very different in two years. According to the Kelsey Group's recent study of vertical directories, the average small or medium enterprise (SME) only has a $6,000 total ad budget. It seems unlikely that local buying can support a diverse and fragmented online ad market. Moreover, despite search engine hubris, I think it will take a long time for Webizens en masse to learn to use the Web as a local tool.

Ultimately, the big search engines are the likely winners here. The Web likes consolidation and just as job sites like Monster and CareerBuilder overwhelmed local venues for employment listings, general search will be the preferred source for local resources. An Interland survey of small business owners found that 36% already use search engine keywords as marketing tools, while only 12% use yellow pages and 5% use newspaper advertising. The best bet for everybody else is to find ways to partner with the major engines and hitch a ride on this slow moving but unstoppable train.