Research
Behind the hot local online ad market
By Diego Vasquez
Jun 3, 2008 - 1:10:20 AM

While web advertising’s torrid ad spending growth pace has finally begun to ease up a bit, local internet growth remains huge. In a report issued last week, Williamsburg, Va.-based Borrell Associates, a research and consulting firm, raised its forecast for 2008 local web ad revenue slightly, to $13.1 billion, or 50 percent more than last year. Some of the growth is attributable to traditional local media like papers, TV and radio selling advertising on their own sites, at a time when their offline revenue isn’t growing nearly as quickly, or it's sinking. But the major local driver is what Borrell terms pure-play companies selling low-cost advertising that reaches consumers not while using the web to read the news but while researching products and prices. Still, this blistering growth cannot continue apace. After four years of compound annual growth of 48 percent, local online revenues will finally slow to single-digit levels by 2012. Gordon Borrell, chief executive officer of Borrell Associates, talks to Media Life about how local models have changed over six years, the biggest revenue drivers, and why everyone’s targeting the Yellow Pages.
 

What did you find most interesting or most surprising about this study?
 
The most startling thing overall was the heavy-duty increase we’re seeing in online ad spending by local advertisers. I was actually a bit skeptical when we issued our initial projection for 2008 at the end of 2007, knowing we were going into a recessionary period and expecting the smaller local advertisers to scale everything way back.

What I didn’t know was whether they were prepared to accept the internet as their personal advertising Jesus, or whether they’d fall back on one or two “old reliables” like direct mail or Yellow Pages.
 

What's the most important thing that media buyers or planners can take from it?
 
If you’re not 100 percent up to speed with the plethora of options the internet offers, you better be soon.

There’s a tremendous sucking sound from advertisers wanting to soak up everything they can about the opportunities that the internet offers. It’s a very, very confusing world out there, with lots of acronyms like SEO, CTR, SEM, etc., and lots of opportunities to buy the exact wrong thing.
 

You've been doing this report for six years. What are the biggest changes you've seen from the first year's findings to the most recent?
 
Hands-down, the biggest change is the way traditional media companies--or at least the smartest ones--are viewing the internet.

Back in 2002 everybody was sick of approaching the internet as a hobby, a way to do cool things. The survey was actually designed initially to see if anyone was making money (which they weren’t at the time).
 
Today we have everybody thinking of it as a new business, and we have a lot of incumbent media companies understanding, finally, that it’s not about their core product line at all. It’s not about a newspaper web site or a TV web site or a Yellow Pages web site.

It’s about totally new products and services that use the unique computing capabilities of PCs and networking capabilities of the internet.
 

What are the biggest drivers of local online revenue this year?
 
Two things: The tight economy and the fact that internet advertising actually works.

Well, at least some of it does. Advertisers are finding that the CPM (cost per thousand) is extremely low relative to what they’re spending with traditional media.

They can reach exact targets--a family looking for a new house, someone who’s researching Lasik surgery, a person in need of information on digital cameras--instead of relying on mass media to cast the net far and wide.

“Mass” still works, but in recessionary times advertisers get very frugal and buy target instead of mass.
 

When will we finally start to see a slowdown in local web revenue growth and why?
 
We think we’re in for 18 more months of strong growth. Then it slows down, and perhaps retrenches a small amount, before it settles in at a certain share of all advertising expenditures.

That’s predicated on the belief that local online advertising won’t take anymore than, say, 30 percent of all ad budgets--along the lines of what newspapers, TV or direct mail might get. 

We could be wrong, but if we were it would be because it would take even more share than 30 percent.
 
We’ve already been wrong in the recruitment category, where recruiters are spending the majority of their budgets on online media. That’s an odd phenomenon and one we’re watching very closely.
 
The next category would be automotive. If we begin to see auto manufacturers and dealers spending 40-50 percent of their budgets on online media, all bets are off on where this will end up.

But I honestly don’t think we’re looking at that scenario at all.

The fact is, TV advertising works very well, and newspapers and Yellow Pages, and radio [do too]. They each have specific attributes, and the internet has its own attributes. Again, I’m expecting marketers to hit on an appropriate mix in the next 18 months or so.
 

Why are we seeing the assault on the Yellow Pages by local online entities?
 
The internet’s search-and-sort capability has proven to be the biggest detriment to classified advertising and Yellow Pages. Both are cases of large, rich databases of consumer information that gets served up far better on a computer than it does on pieces of paper.
 
Classifieds fell first because newspaper print classifieds were inherently flawed: They provided only the amount of listings that people could afford to put in the newspaper. Craigslist came along and, bingo, “free” blew that model right out of the water. So the internet provided massively more listings, with a more efficient way to display them.
 
Yellow Pages took longer because, hey, the book already had every single business and personal listing. So it was just a matter of faster speeds--broadband internet access--finally giving the internet a “quicker draw” capability.

So the rush is on, and everybody wants to start their own Interactive Yellow Pages directory.

The other driving factor is that the newspaper industry is frankly tired of being disrupted and has gone on the offensive. Print directories are a natural target. Direct mail is next.
 

Why do local newspapers continue to draw the biggest share of local online revenues?
 
It’s simple, they’ve had the content that was, and continues to be, the most important and most “monetizable” -- is that a word? -- on the internet: advertising content.

When people want to know what’s for sale, they turn to the local newspaper. Newspapers have had the ability to up-sell their current print advertiser base to the ‘net, and that has served them very well.
 

What are the potential problems facing newspapers in their reliance on classified ads for web revenue?
 
They’ve actually been lessening their reliance on the three verticals of real estate, automotive and recruitment, although they still comprise 63 percent of newspapers’ total online advertising. If they continue to rely on these categories so heavily, they’ll miss other opportunities in categories like health care, travel and entertainment, technology, etc.

But like I said, they’ve recognized this and are doing their best to build out the online business beyond just a classified advertising up-sell.
 

You observe that "radio is not as motivated by an internet threat as other legacy media are." Why?
 
It’s pretty simple. Their advertiser base hasn’t been affected as much. You don’t see advertisers saying, wow, I can put my 30-second radio spot on the internet! Put me there now!

But you do see classified advertisers finding viable applications on the ‘net, and TV advertisers and Yellow Pages advertisers going that route.  So radio hasn’t really been threat-motivated. It’s more opportunistic for radio operators, and as with any opportunity, it’s optional.