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Is local search really the ‘next big thing’?

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Local search is being promoted as the next lucrative frontier in the $1.6 billion paid search advertising game, but the nascent industry’s growth may be slower than some expect and its ability to entice local small-business advertisers, in particular, is not assured.

Paid search has grown impressively, from $250 million four short years ago. Now the search engine companies are pursuing local search to expand their advertising base.

The audience is certainly there. ComScore found that 25% of Internet users in the fourth quarter of 2003 were conducting local searches. Researcher the Kelsey Group, in conjunction with online comparison-shopping portal BizRate.com, found that a quarter of commercial searches by online shoppers are local.

Search engine companies and online directories are jockeying to capitalize on this market. Google last month officially announced Google Local. Yahoo!’s Overture said it will introduce a new local product within the next few months.

"We’ve been doing local search since 1997, but we’re in the midst of finalizing development of the next level of local search," said Geoff Stevens, general manager-local at Overture. Meanwhile, Online directory InfoSpace last week agreed to acquire rival Switchboard in a $160 million deal, in order to expand its directory traffic.

Local growth in double digits

Local search spending is estimated to grow 23% to $502 million in 2004, and to $824 million in 2008, with a compounded annual growth rate of 15%, according to Jupiter Research. But that growth will be slower than online advertising overall, according to a Jupiter report released last week called "Local Search: Growing Revenue in a Transitional Market." According to the report, online advertising will grow an estimated 19% annually.

"[Local search] is not the next big thing," said Niki Scevak, analyst at Jupiter Research, taking the hype down a notch. "It’s an interesting, valid market, but it won’t grow as fast as many people expect," he said.

Scevak’s sober assessment regarding the market potential for paid local search is grounded in a few key factors, most of which have to do with the advertising target: local small businesses.

Unsuccessful migration

Small, service-based businesses with geographically concentrated customers have not successfully migrated online in significant numbers yet. "Attempts to migrate local small business online have largely failed to date," Scevak said.

Small businesses—lawyers, accountants, travel companies and local services such as plumbers and movers—typically make up the heart of Yellow Pages advertising, but they are largely absent from the search marketing landscape, which is comprised of national advertisers.

A recent Jupiter survey found nine in 10 search marketing advertisers have a national presence. The local market is also highly fragmented.

Another challenge may be in the pricing model itself.

In addition to print Yellow Pages, local businesses are already using online advertising via Internet Yellow Pages companies, such as Verizon’s Superpages, which has more than 100,000 advertisers. Typically, the prices for these online directory listings is fixed, just like the print editions.

For this reason, some industry observers, believing the old saw that "old habits die hard," think it will be difficult to transition small businesses to search marketing, and its pay-per-click model.

"Widespread local advertiser adoption of pay-per-click is by no means a foregone conclusion," said Greg Sterling, program director for Digital Directories: Interactive Local Media at the Kelsey Group. "They prefer a fixed-price model."

Kelsey Group conducted a focus group recently on this topic that found considerable confusion and skepticism among small and mid-sized business about pay-per-click search marketing.

"People are concerned with how much money they would be spending on a monthly basis," Sterling said. "They are skeptical about the claims being made."

Scevak said simplifying the pricing model for the advertiser and proving the value of local search will spur growth.

Meanwhile, some observers think growth may come through cooperation between Yellow Pages publishers and the search engines, which have complementary strengths.

Search engines have telephone sales staffs that mainly cater to larger accounts and have the online distribution the Internet Yellow Pages can’t match; the Yellow Pages providers have localized sales forces that sell both on- and offline ads.

"Search engines are going to learn how to live with the Internet Yellow Pages," Podell said.

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