While online ad spending has exploded over recent years, local advertisers have only recently begun shifting their ad dollars to the web in significant numbers. In 2007, online will account for only 3 percent of all local ad spending, equal to about $2.9 billion of the $97 billion spent yearly. But as local sites begin to incorporate more sophisticated tools like online video and national advertisers start looking to local sites to peddle their products, that number is set to soar. A new eMarketer report, released yesterday, predicts that local online advertising will hit $7.8 billion by 2011, or more than three times the $2.1 billion generated last year. Local Yellow Pages will account for some of that growth, as will newspapers, which have begun entering classified advertising deals with portals like Yahoo instead of trying to compete with them. David Hallerman, senior analyst at eMarketer and author of the report, talks to Media Life about the importance of paid search, how local web advertising growth compares with national, and what steps newspapers must take to remain competitive.
 
What did you find most interesting or most surprising about this report?
 
The potential for the growth of local online advertising is very dependent on where people go for local news and local information, which is a combination of newspapers, local sites and search.

The spending on local online might have more potential for growth than even a niche like online video, although you can’t compare the two because they might be part of each other.

But when you figure there are 210 designated market areas in the U.S., that gives a sense of how complex local advertising can be. Part of the complexity also is there are two streams—national businesses advertising locally and the small and mid-sized businesses that are in local markets and only advertise locally.

Running a small business takes a lot of time. While some have the time to do marketing online, it’s hard to factor in. So that’s why we’re starting to see various deals that over the next few years will show growth.

How important is paid search for local advertisers?
 
Paid search will be half of local online revenues by around 2010 or 2011. In 2007 paid search as a percent of total local online is 43 percent, but by 2011 will be 51 percent. There again, deals will help it grow.

Google has deals with internet Yellow Pages that are run by the traditional Yellow Pages companies. They have their feet on the ground, and they already have connections with local advertisers. Internet Yellow Pages are really kind of niche by themselves, really because people go to search engines first when they want to find something online. But they could integrate them.

How does local growth compare with national growth for online?
 
Local is growing faster, but it’s coming from a much smaller base. It only represents about 13 percent of total online ad spending. By 2011 it will be 17 percent, so it’s easier to get a higher growth rate. In 2007 local U.S. online will grow 41.5 percent while national will grow 26.8 percent. But local contributes a lot less to the whole pie.

Which forces will drive growth in U.S. local online ad spending?
 
Well, the newspapers are large. They’re desperate to at least gain back some of the revenues they’re losing in print. They are some of the most established local media players, ones who’ve had active web sites online even before local TV stations. And some of the savvy sites are including more video and other things that don’t appear in print. So that’s why they’re making deals with Yahoo, because they need to find additional revenues.

The potential contradiction is overall revenues are going down. There will have to be a period for the newspaper industry of treading water somewhat. Online’s not going to replace print entirely.

What is the newspaper’s business’s greatest strength on the internet?
 
Local news and their brands. They’re already known in their communities, and that’s what brands are all about, being known. Awareness.

What type of ad networks might newspapers consider creating to boost their online revenues?
 
Well, they are creating networks as with the Yahoo deal. But the two largest chains are not part of the Yahoo deal, Gannett and Tribune, because they have CareerBuilder and Yahoo has HotJobs. That’s part of the disagreement.

For an industry that’s really hurting, the more unity there is, the more strength. But they don’t have the technology, so if they can work out something with Yahoo -- or Google, which has its Print Ads program -- it would make any network more valuable. If advertisers knew the one main way to buy and get into all the important newspapers in one source, that would give newspapers more leverage.

Why do estimates for local online ad spending by different forecasters vary so widely?
 
I’m not certain entirely, but toward the end of the decade they do vary less. At this point, part of it is the difficulty in measuring the local market.

As I mentioned, there are 210 DMAs, and thousands of local sites, from TV stations, radio stations, etc., and there are millions of potential advertisers. So in a very key sense, it’s harder to measure than national advertising, where there are fewer variables involved.