How Much Is ‘Local Search’ Really Worth?
Journalists and financial analysts keep asking the question, “When will local search finally take off?” By that they mean ad spending. After all, locally targeted advertising in traditional media such as newspapers, yellow pages, radio, outdoor, direct mail, spot cable/TV and coupons easily exceeds $100 billion annually in the U.S. And consumers have already embraced local search—or at least the search for local information online.
So the conventional wisdom goes: the dollars will follow the eyeballs. Well yes and no, as I’ll try and explain below. But first, for this inaugural column on local, we thought it would be interesting and informative to round up the various local online advertising forecasts and offer some perspective on what the “local search market” may be worth today and several years from now.
Because of differing definitions (and methodologies), it’s hard to make “apples to apples” comparisons among the various estimates. But here are the major local Internet ad spending forecasts today:
The Kelsey Group
The Kelsey Group forecast consists of Internet yellow pages (IYP), geotargeted paid-search advertising and local mobile ads (still tiny). Last year online classified advertising was included in the forecast, which appears to have been excluded this year. Wireless is also de-emphasized in the current forecast.
2006: $4.1 billion
2011: $11.1 billion
The previous Kelsey forecast put U.S. local search revenues (as defined above) at $1 billion in 2005.
(Disclosure: I was Kelsey Group analyst until April, 2006.)
Borrell casts a broader net in its definition of “local online advertising.” As a consequence its numbers are larger. Included in the definition are geotargeted display ads and classifieds, local paid search, local video and locally targeted email advertising.
2007: $7.7 billion
2010: $9.3 billion
Jupiter, which has historically taken a contrarian position and been bearish about “local search,” similarly defines a relatively broad category for “local online advertising.” While not quite as broad as Borrell, Jupiter includes paid search, locally targeted display advertising and classifieds. Jupiter believes that classifieds will dominate (61%) local spending through the forecast period and estimates geotargeted paid search advertising will reach $2.1 billion by 2011.
2006: $4.3 billion
2011: $8 billion ($2.1 billion attributable to local paid search)
The data aggregator has in the past couple of years started generating its own online ad forecasts. The company doesn’t explicitly define what segments comprise its “local online advertising” category but it appears to generally mirror the Borrell definition. Local paid search is broken out as a subset of the larger local category. However, notwithstanding its apparently broad definition of local, eMarketer’s projections are more conservative than any of the other firms.
2006: $1.3 billion ($800 million attributable to local paid search)
2010: $4.9 billion ($2.7 billion attributable to local paid search)
Following the most conservative of the local forecasts is the most bullish. In a recently released 425 page report entitled “The User Revolution: The New Advertising Ecosystem and the Rise of the Internet As a Mass Medium,” Piper has aggressively embraced local search.
Piper estimates local online advertising, here defined as local search, IYP and classifieds, to be worth $4.589 billion today. The firm contends the medium-term local market potential is $25.9 billion. Piper also believes that local can eventually represent 50% of all search volume, assuming improvements in data quality as well as several other upgrades and innovations.
2006: $4.589 ($989 million attributable to local paid search)
Market potential: $25.9 billion
Drivers and Barriers to Growth
Having seen all those numbers it remains difficult to predict exactly how fast the market will grow. There are numerous variables and potential developments that could moderate or accelerate the growth and “migration” of locally targeted ad dollars to the Internet. Indeed, the “local Internet” is evolving rapidly. But it is also highly fragmented and arguably getting more so all the time as new consumer sites launch at a regular pace—each one to be supported by geotargeted and typically small businesses ad dollars. But scaling and cost-effectively acquiring those small business advertisers is a tremendous challenge.
Several high profile local consumer sites have changed course or bailed out recently in recognition of these challenges. Yet behind the scenes an entire ecosystem is emerging to simplify online marketing and make it more accessible for local businesses. (National businesses have agencies to do their media buying and face different challenges.) Yellow pages publishers, newspapers, web hosts, a few verticals and others now sell SEM and SEO clicks (and calls to a lesser degree) to local businesses.
Without going down the rabbit hole of a thousand-word digression, let’s say that within a year or two it will be relatively straightforward for any small business in the U.S. and perhaps abroad to buy geotargted ads online. That said, getting their attention will remain something of a challenge and self-service is unlikely to draw more than a reasonable minority of the addressable small business market.
That, of course, raises the question: What is the addressable market?
According to directory industry sources there are 3.2 million print yellow pages “advertisers” in the U.S. today generating just under $15 billion in annual revenues. (Advertisers is in quotes because the definition is somewhat elastic; the actual number is probably fewer.) The U.S. SBA says there are more than 25 million “small businesses” in America, defined as 499 or fewer employees. However a more reasonable figure, and addressable market estimate, is between 10 and 15 million small businesses.
Yet if 3.2 million U.S. small businesses each spent $1000 per month online, the cumulative total value of that spend would be $38.4 billion annually. However this scenario wildly exceeds even the most optimistic revenue projections for local online advertising. And that doesn’t include national advertisers (e.g., brands, retailers) targeting local consumers.
Clearly, on paper, the local market has enormous revenue potential; that’s the tantalizing part for everyone involved. But the complexity of local “on the ground” far exceeds that of national online advertising or general paid search—which is where the adventure begins.