Small Biz, Big Bucks

Google, Yahoo!, and the Yellow Pages are hotly pursuing lucrative ads from locals

In New York City, people move from the Upper West Side to the West Village, from Riverdale to Red Hook, from Bay Ridge to Battery Park. All David Cohen wants is for folks in transition to call his company, the five-truck Divine Moving & Storage. Cohen tried advertising in the Yellow Pages, but increasingly he is shifting his ad spending to Google Inc. (GOOG ) and Yahoo! Inc. (YHOO ). Cohen has to cough up about $7.50 each time someone clicks on the Divine ad that appears when they search for "Movers NYC." But he figures 30% of those surfers hire Divine, providing 90% of his business. "That's why we can afford to pay $7.50 a click," he says.

Cohen and millions of small companies like Divine are in the middle of the next big fight over the future of advertising. Yahoo and Google have built booming businesses out of helping companies use the Web to reach national and international audiences. Now they're leading a gaggle of Net companies going after the ad dollars of small businesses -- movers, mechanics, and pizza makers -- that get their customers within a few miles of home.

It's a $15 billion market that has been dominated by local phone companies, via the Yellow Pages. The Bells see the danger and are racing to build up their own Web presence. SBC Communications (SBC ) and BellSouth Corp. (BLS ) have even merged their online publishing units and snapped up the site from a Henderson (Nev.)-based startup. Now they're preparing to launch a megasite to fend off the Net players.

Why all the fuss over ads for plumbers and personal injury lawyers? Money, and lots of it. Yellow Pages is an incredibly lucrative business, with profit margins of 50% or more. SBC pulled in $2 billion in operating profits from its publishing unit last year, on revenues of $3.8 billion. Researchers at Kelsey Group predict $3.8 billion of Yellow Pages money will move online by 2008. To put that in perspective, the total Internet ad market was $9.6 billion last year. "The local search market should be larger than [Google's] other markets because most people's purchases are local," said Eric Schmidt, Google's chief executive, at an investor conference on May 25.

Such emerging competition means the musty old Yellow Pages are heading for a burst of innovation. Forget flipping through a fat phone book. Instead, you can go to the Web and search for Italian restaurants in your ZIP code. The listings may be paired with sample menus, customer reviews, and a map of the neighborhood or a satellite photo. Yahoo will even let you send directions to the restaurant from your PC to your cell phone with a single click. "This is the stuff that makes local come alive," says Paul Levine, general manager of Yahoo Local.

The phone companies aren't letting the Net upstarts come up with all the new ideas. While SBC and BellSouth may be the most aggressive, all four of the major Yellow Pages publishers are gearing up for the competition. Verizon Communications Inc. (VZ ), which runs the most popular of the Bell sites,, has developed technology to let Web surfers search for local stores and Net retailers simultaneously. All four of the majors are encouraging entrepreneurs to buy all their Net advertising, including on Google and Yahoo, through them to save time. "Small businesses want to go online, but they want it simple," says George Burnett, CEO of Dex Media Inc., the Yellow Pages publisher in the 14 states served by Qwest Communications International Inc.

This won't be a simple fight, with one side clearly winning and the other losing. Yahoo could best Google, while thrives. All three could struggle if an innovative newcomer emerges.

The phone companies start off with a faithful following. People have long turned to the Yellow Pages to find insurance agents, car dealers, and doctors. And consumers -- especially older ones -- will take that strong brand recognition with them as they move online.

But portals have a big edge among the younger generation, and they're better positioned to pull together all the information people need to research products and find the companies that sell them. Already, search engines attract 66% of online local-search users, while the Yellow Pages listings get 34%, according to researcher comScore Networks Inc. "People will ultimately start that process with a search engine and end it with a search engine," says Jeff Lanctot, vice-president for media and client services at online ad agency Avenue A/Razorfish.

The Web outfits are using several approaches to move into local advertising. Yahoo has 176 million registered users, so it can direct local ads to people who have provided their cities or ZIP codes when they registered. It also has a customized local site that asks searchers for the city or ZIP code they want to search. Google has a similar service, Google Local. Both portals are rolling out an even simpler method: They're figuring out where someone is by tracing them back to the city from which they access the Net.

Once they know where a surfer is, the search engines aggregate content they think the user wants. Type "Cheap Indian Food San Francisco" into Google Local, and you'll get a listing of restaurants meeting that description, such as Naan 'n' Curry on O'Farrell Street. A map shows locations for all the choices. The Naan 'n' Curry page has links to reviews from regular folks at and professional reviewers at CitySearch. "Having the most complete content will drive the user experience," says Sukhinder Singh-Cassidy, general manager of Google Local.

Mindset Minder

Yahoo's approach is to combine content with a greater ability to close a sale on the Web. Its local search engine has links to let you book tables at restaurants or buy movie tickets on the site. Yahoo also is offering to build basic Web sites for small businesses -- at no charge -- so they'll be more likely to buy online advertising from the Net giant.

Yahoo also is testing a technology called Mindset that lets you use a sliding scale to tell Yahoo whether you are beginning to research a product or getting close to buying it. If you're buying a car, for example, you might get links to auto-information sites if you're just starting to compare Fords and Toyotas, or connect to dealers if you're ready to talk price.

While the phone companies have strong relationships with local businesses, their argument that entrepreneurs need a simple approach to Net advertising may not hold up. Consider Michael Jimenez, a custom upholsterer in San Rafael, Calif., who began advertising online in January. It's taking him some time to learn search advertising, but he has no doubt that it's worth it. Revenues for his 10-worker business are up about 10% over the past five months, thanks to the 1,000 or so inquiries he has gotten from his Google ad. "I want to do more of it, I know that," he says. Meantime, Jimenez plans to reduce his quarter-page phone-book ad to a listing of his phone number and Web address, saving most of the $500 a month he has spent on Yellow Pages advertising.

In the end, this battle will boil down to which medium can deliver more customers to advertisers -- and then prove their performance. "I look very heavily to [ads] where I can track a specific customer," says Wayne Ussery, director of Internet marketing for Jim Ellis Automotive, a 12-store dealership in Atlanta. Ussery is still experimenting with a variety of online advertising. But already, 40% of the people surfing come from Google. That's a mighty big head start for the Net players.

By Timothy J. Mullaney

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