According to recent articles in the New York Times and Bloomberg, AOL CEO Tim Armstrong has declared display advertising and local web sites as top priorities for the company moving forward. Similarly, Yahoo! has been focused on selling display ads and has repeatedly talked about display as a growth engine. Not to be outdone, in their recent earnings call, Google stated that display ads are a great complement to search advertising as it believes that there is an opportunity to strengthen search campaigns using display to bolster its AdWords campaigns.

So how can these big search engine players maintain and grow their display advertising revenue line by capturing the growing local advertising market as more and more local advertising shifts online? Well, let’s look at what matters to the local advertiser. For decades the advertising industry has talked about the fact that local advertisers care only about one thing: Does this ad make the phone ring? So in essence, the volume of display that local advertisers will purchase is closely tied to the ability of display ads to drive phone calls. With that as a backdrop, let’s take a look at display and how it might fit into this primary goal of the local advertiser.

Display advertising: Current numbers and forecast

Given the go-forward focus of these search engine players on display advertising, let’s first examine the recent display ad figures. In Microsoft’s second quarter earnings call, online ad revenue in the quarter was down 14 percent due to a material decline in display ads across the board. And Yahoo! communicated that display was also down 14 percent year-over-year.

Additionally, based on a survey conducted earlier this year by Borrell Associates called of local businesses’ online intent for future ad spending, “standard format” advertising (CPM-based display or banner ads) is forecast to decrease in local business ad spend by 9.1 percent in 2009, and by as much 62.3 percent by 2013.  According to Borrell, much of this is due to the fact that local businesses are expected to shift their budgets to paid search, email marketing and video and that new local advertisers are more likely to jump right to performance advertising and do very little with “Standard Format.”

Given these findings and stats, how can the big online search and advertising players adapt to this trend, and maintain (or even grow) more local advertising dollars in their display products?

The local opportunity

According to another Borrell Associates report, with local search advertising in the U.S. projected to grow 29.5 percent over the next five years, from $4.1 billion in 2008 to $5.3 billion in 2013, these large search engine players are right to put more emphasis on the local opportunity.

We believe that this local advertising shift from traditional offline marketing to online performance-based advertising has accelerated in the last 12 months due to a combination of the poor economy and the abundance of tools to track online ad effectiveness. Essentially, local advertisers need to get more for their marketing dollar, and they are benefiting from the lessons learned by the national advertisers, including tools to track leads or phone calls generated.

Yes, there is some measure of value for all businesses—including small businesses—in branding and seeing their display ad on a targeted page.  Will small businesses pay for this ad in CPM terms three to five years from now? Some will. However, there is an inevitable conclusion to this story. Small businesses will demand transparency and results from all forms of advertising, just like the vast majority of national advertisers.  We talk to small businesses every day, and every day we hear more of them ask about measuring the number of leads or calls they get from their campaigns. The effectiveness of local display advertising will increasingly be measured the same way.

Let it ring

While we understand the big online search and media players’ desire to make display a primary goal, especially given the historical significance of CPM-driven revenue, we believe that they will need to adjust their approach to display ads to capture local dollars.

Display advertising can and should be part of a marketing mix for the local advertiser, but most small advertisers will ask how many calls were driven, how many emails they received, and how many new customers were generated as a result of their display ads, just as they ask us the same questions about their search campaigns.

The best approach for the big display networks may be to offer the bulk of their display inventory as a performance-based product for local businesses. We believe this type of transparency would build trust with local businesses and speed the growth curve of local online advertising.

In my last post, I discussed the state of the union for newspapers. As we all know, newspapers have struggled to move their businesses and revenue online, and they have struggled to do it in a way that does not cause massive disruption. This has been discussed and agonized over by a number of writers and industry people in the past decade.

A representative sample is an article in the New Yorker magazine by Eric Alterman titled “Out of Print” (The New Yorker, Mar 31, 2008), where the author wonders “who will have the distinction of publishing America’s last genuine newspaper. Few believe that newspapers in their current form will survive.” He goes on to talk about the success of such online news sites as The Huffington Post, which are seeing strong growth in usage and ad dollars while maintaining a much lower cost base than traditional newspapers.

It is clear that we will see continued upheaval at the newspapers: some will work to evolve their strategy and embrace online, some will consolidate, and some will fold. From a strategic point of view, some newspapers have embraced the need to change their approach, to diversify and to create an online presence.

You have examples like the Washington Post diversifying with Kaplan, New York Times acquiring About.com, etc. So now that we see some newspapers building an online strategy, what is next? As some of these forward-thinking newspapers regroup, reorganize, reshuffle management ranks and eventually poke their head out of the fox hole, they will face a variety of important questions.

Today, let’s look at one important question facing the vast majority of newspapers: how do you recharge and begin to rebuild your advertiser and revenue base?

Here is one path forward for rebuilding advertising revenue:

1. Defend your advertiser relationships. The newspaper’s largest asset is the advertiser relationship. The advertisers trust their newspaper sales rep, as that rep has been working with them for years or decades. It is natural that they would look to you to evolve how they spend their advertising budget. Tell them you are building a plan to drive high-quality leads and customers from both offline and online sources.
2. Build next generation advertising packages for your local advertisers. It is about delivering high quality local leads to your customers at a reasonable price. This may include targeted online and offline advertising across a number of sources. You must embrace traffic outside of the online newspaper as part of this online solution, because your advertiser views broad exposure as an important part of the solution. You should consider including many online sources of local leads into your packages: Search; Internet Yellow Pages (like Yellowpages.com, Superpages.com and DexKnows.com); Directories like OpenList.com; and other local traffic sources like Citysearch, AmericanTowns and other applicable vertical traffic. Don’t count on the offline and online newspaper alone to be enough.
3. Make the phone ring. Most local advertisers want the phone to ring. So make sure there is a pay-per-phone-call component or call tracking component to your packages so you can prove the value when it comes time for that advertiser to sign a renewal. The renewal process will get much simpler if you are tracking all the leads you are driving for the customer: calls, emails, clicks to the advertiser’s Web site, etc.
4. Keep it simple. It is important to keep the next generation packages simple so that your salespeople and the advertiser do not get confused. For example: “We have three packages: Calls, Clicks or Both. You can spend anywhere from $1,000 to $5,000 per month. And we will provide you with monthly reports on your campaigns.” This alleviates the pain for an advertiser to have to think about managing and tracking their online marketing budget, which most businesses do not have the time or experience to do effectively.
5. Invest in training your sales team. No sales team will effectively make the transition to selling online, leads-based packages or call-based packages without extensive training. This investment in training is critical to your success, and it will require a material amount of time and money to get it right. If your sales team can become trusted consultants to your advertisers, helping them with their online and offline marketing, you will win back these relationships.
6. Incentivize your sales team to sell these new packages. If you introduce new products without incentivizing them appropriately, they will not succeed. The sales team will fall into the trap of selling what they know, which is offline. If you incentivize them to sell new packages that incorporate online or even call-based packages, they will follow the money and learn how to sell these next generation advertising products.

So let’s suspend disbelief and assume that someone out there sees an ounce of truth to what is discussed in this post. Where does a newspaper go for help in rebuilding relationships with advertisers, building these packages, supporting new products like call packages and lead-based packages, training the sales staff? Well, there are a number of service providers. There are larger players that have some scale, and there are a lot of upstarts that have nice powerpoints but have no experience in delivering large numbers of advertising packages effectively. Buyer beware.

John Keister is Chief Operating Officer, President and a member of the board of directors of Marchex. The Locals Only column appears on Mondays at Search Engine Land.

Have you noticed the number of layoffs being announced by newspapers of late? When the New York Times announced in February 2008 that they were cutting 100 positions from their newsroom, it was a sad moment. A prominent national paper that informs our opinion and dialogue was announcing a cutback. Then the San Francisco Chronicle announced last May that 25% of its staff would be cut by the end of summer. Since then The Washington Post, The LA Times, Chicago Tribune, Baltimore Sun, and just last month The Atlanta Journal Constitution all announced layoffs. One report states that there have been more than 70,000 US media layoffs since 2000.

Then I noticed that the newspaper vending machine for The Seattle Times was removed from a sidewalk location on my way to work. I always stopped at the vending machine, read the headlines, and if I saw an interesting article I’d go to my desk and pull up Seattletimes.com. All of this led me to think…will we see an acceleration of newspapers going digital or going away? Will the paper versions of these newspapers be a thing of the past? Should I have bought more of those newspapers on my way to work?

Why do I care?

All the obvious reasons! Newspapers inform our opinion, educate us, entertain us, and keep us in touch with the world. They employ some of the most educated and experienced writers and somehow I believe that as the resources at national newspapers decrease, the chances of the Woodward-Bernstein team uncovering the Watergate scandal, for example, go down in tandem. As do the chances of a great, well-researched, well-articulated news piece on the Iraq war, our presidential election process, health care, social security, and most importantly, the Seattle Mariners.

People have been watching the plight of newspapers for some time now, as the digital era marches on. So let’s be frank, this topic is not virgin territory. In the February 2007 version of Vanity Fair, Michael Wolff wrote an article titled “Is This the End of News?“, where he argues that the newspapers have no clear revenue model to pursue online, and that they are undermanned when faced with the likes of Facebook, Google, Digg, etc. He is not very hopeful that the major newspapers will find and pursue viable solutions to transition their businesses.

If we lose some of our national newspapers, what will we reference for informed opinion on important subjects? Will we rely on the Drudge Report? Valleywag? The Onion? Blogging sites? Entertainment Tonight? For some, the free online magazines or bloggers are plenty to meet their news needs. For many others, we believe the large national papers are important, whether that be the New York Times, The LA Times, The Washington Post, San Francisco Chronicle, Miami Herald, etc.

So why are newspapers cutting staff, struggling to make money, make payroll, and hold up subscription levels? Yes, online news and information is a big reason. I can read most national papers like newyorktimes.com for a fraction of what I pay for the paper version (many of the digital versions of national newspapers are free).

There is no easy fix. As newspapers try to move their business online, they further reduce their minimal subscription revenue and, more importantly, face substantially more competition for advertising dollars. Twenty years ago, offline, the newspapers were the kings of their respective cities, and advertisers needed to be there. Online, an advertiser can use Google or Yahoo! or other online traffic sources to target consumers in a given city.

So what is a newspaper to do? Well, they have tried many models. To date, unfortunately, there has been limited success. Here are some of the avenues that newspapers have pursued:

1. Some have tried to transform their entire business via M&A activity – like when NYT bought About.com. The M&A route takes a great deal of money and effort, but if a newspaper group has the resources, this is a legitimate way to try and bring the online advertising and online business DNA into an organization, provided senior management is truly committed.
2. Some have tried to sell a blend of offline and online newspaper placements. The challenge is that there typically is not enough online newspaper traffic to make up for the offline spend.
3. More recently, some of the newspapers have tried to band together and bundle their traffic for advertisers in an effort to make up ground on volume. The question is how much traffic do you need to be relevant to an advertiser? The other problem is that most online advertisers want the major search engines to be an important part of the mix when they place their online marketing buy.
4. Other newspapers have tried something else: They try to package newspaper advertising sales with a Google/Yahoo! search marketing package. In effect, they want to “draft” off the success and name recognition of Yahoo! and Google. One of the challenges here is that the newspaper sales teams may not understand the online search marketing sale as well as the newspaper sale. It takes a substantial amount of training and incentives to change behavior in the newspaper sales team. To date, very few newspapers have committed the financing and muscle to succeed in this regard.

As I said at the top, I care about newspapers – whether in the online or offline form. I want them to succeed, flourish, and have the means to staff the best writers in the country. What I am going to read in the park while I drink my coffee on Sunday? The Catcher in the Rye? Forget it! I want my old school newspaper! I want to read the columns from my local scribes, and from folks like George Will, Maureen Dowd, Mitch Albom. Next time I will offer a couple of possible solutions for newspapers to defend their advertising dollars, and potentially grow them over time.

John Keister is Chief Operating Officer, President and a member of the board of directors of Marchex. The Locals Only column appears on Mondays at Search Engine Land.