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Can Yellow Pages Stay in the Black?

The announcement that Verizon Communications (VZ) put its directories business up for sale touched off the usual barrage of speculation over possible buyers and a sale price. The upshot: Expect a bidding war that could fetch anywhere from $13 billion to $17 billion (see BW Online, 12/6/05, "Yellow Fever, Courtesy of Verizon"). Indeed, Carlyle Group, a large private-equity firm that recently sold directory Dex Media to R.H. Donnelley for $9.5 billion, is taking a look at the Verizon unit, say sources close to the deal.

But as competition from rivals such as Google (GOOG) for local advertising intensifies, the value of traditional yellow pages businesses is a matter of debate. "The long-term future of this business is suspect," says an investment banker who has handled telecom deals.

Phone companies have long dominated the yellow pages business, thanks to their widely recognized brands, databases of local phone numbers, and relationships with local merchants. Over the last few years, however, independent yellow pages publishers such as Yellow Book USA, a unit of Britain-based Yell Group, have been taking share by charging about half as much for ads as the phone companies.

FIVE MORE YEARS? More recently, Web giants such as Google and Yahoo! (YHOO) have leaped into the local ad market. And down the road, wireless operators are expected to compete more aggressively for local ads as consumers ping their cell phones for restaurants and bar locations on the fly. So as the market crowds and ads shift to the Web, how long can the business of selling ad space in fat yellow books stay profitable? And which players will ultimately win?

The short answer is that the traditional yellow pages business is expected to remain profitable for at least five more years. Although they seem like relics, the paper-bound tomes are still an effective advertising tool. In a sense, yellow pages were an early iteration of search engines. Like with Web searches, when consumers use the yellow pages, they're already looking to buy or find something.

Yellow Pages Assn. President Neg Norton says advertisers pull in revenues that average 13 times the price of each ad. In addition, he insists that yellow pages are not anachronisms in the Digital Age. According to his figures, 18- to 24-year-olds use the print books 30% more often than older adults as they establish households and get married. "There's still tremendous value in the print business," says Dennis Payne, CEO and president of AT&T Yellow Pages. "It's got more content than any other resource out there, electronic or print."

FIGHTING BACK. Over time, though, analysts expect more local searching to move online. Researchers at Kelsey Group, a Princeton (N.J.) consulting firm, predict that by 2009, one-third of the $15.5 billion yellow pages market will be on the Internet. Google and Yahoo are building up their local search operations, and Time Warner's (TWX) America Online unit and IAC InterActiveCorp (IACI) are trying to switch local advertisers to properties such as AOL's DigitalCities and IAC's CitySearch sites.

Yellow pages publishers are fighting back by setting up their own sites. Verizon has, while AT&T (T) and BellSouth (BLS) last month relaunched Still, about 66% of searches for local businesses begin at search engines rather than yellow pages sites, according to a Nov. 29 report from Deutsche Bank.

In the end, the battle for dominance of local advertising will hinge on which medium can deliver the most customers at the right price. Yellow pages publishers have the relationships and all the data on local merchants. But Internet companies dominate the online audience, wield more expertise in Web technology, and offer a more transparent pricing engine for advertisers -- you only pay when users click on your ad.

"THEY'LL GET TOGETHER." It's possible that an Internet company could purchase a yellow pages publisher. But most analysts think the high price of yellow pages operations means partnerships are the more likely path. "The wave of the future is to figure out the right way to partner with the portals and search engines," says one private-equity investor.

Already, the online directories of the phone companies act like online media buyers of sorts, purchasing keywords from Google and Yahoo for their advertisers. "A search engine like Google has the traffic, and yellow pages publishers have the data," says Goddard. "Ultimately, it's likely they will get together." Now, if only online publishers would deliver laptops to doorsteps.


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