Michelle DiFeo, owner of DiFeo Glass & Mirror, bought her first yellow pages ad in 2004, the same year Google (GOOG) went public. While online search has exploded since then, DiFeo still takes out color ads in two phone books that cover New York’s Westchester County. She won’t disclose what she pays for the ads but says they’re worth the investment. For her customers, DiFeo says, using a paper directory is “a force of habit.”
Yes, phone books are still around. And while they eventually may succumb to the Internet, they’re not going down without a fight. Publishers threw 422 million directories on America’s lawns and doorsteps last year, according to research firm Simba Information. And businesses paid a collective $6.9 billion for ads in them, according to the market research firm BIA/Kelsey. Combining revenue from print and digital operations, directory companies took in 7.6 percent of all the money spent on advertising in the U.S. in 2011, estimates Simba.
“I know the popular perception is that it’s just gone away,” says Dennis Fromholzer, president of CRM Associates, which advises directory companies. He says people turn to paper directories in emergencies and around “life events” such as moving to a new home. “You are probably not going to find a roofer on your mobile device,” he says. “You may find a restaurant, but not replace your furnace.”
There’s no doubt the industry is shrinking, though. Revenue from print and digital directories has fallen an average of 13 percent a year since 2007. AT&T (T), the last phone company with a directory business, is in talks to sell its Yellow Pages unit to Cerberus Capital Management for $1.5 billion, according to two people familiar with the negotiations who were not authorized to discuss it. AT&T and Cerberus, best known for investing in Chrysler two years before the carmaker declared bankruptcy, declined to comment.
AT&T would be following the lead of Sprint and Qwest Communications—now part of CenturyLink—which sold their directory operations in 2002. Those businesses ended up as part of Dex One (DEXO), which went through a bankruptcy in 2009 that let it cut its $12 billion debt in half. In 2006, Verizon Communications (VZ) spun off its yellow pages unit, which filed for bankruptcy three years later. It emerged with less than a third of its original debt and a new name, SuperMedia (SPMD). Hedge fund Paulson & Co. is the largest shareholder in SuperMedia and the third-largest in Dex One after debt it held in both companies was converted to equity in the bankruptcies. The fourth major directory company, U.K.-based Yell Group, known for its Yellowbook brand, was once part of BT Group (BT) and grew by acquiring independent publishers in the U.S.
All three of AT&T’s big directory competitors have new management and are working on turnaround plans that involve developing the digital business and helping customers promote themselves online. “We are very much a company in transition,” says Matthew Stover, SuperMedia’s chief marketing officer.
The industry’s hopes for revival lie with small business owners like Les Watkins, founder of LD Watkins Construction Services in Granby, a town in the Colorado Rockies, who has advertised in the yellow pages since starting his company in 1993. He’s found that the print ads don’t help the custom-home building side of his business, which is more relationship-driven. “It would be like advertising for a girlfriend,” he says. They do help his “reactionary and spontaneous” lines of work, namely emergency repairs and insurance-funded restorations. He pays $500 to $800 a month for each of his ads, which he runs on the front or back cover of the local directories.
While Watkins has a website, he doesn’t buy online ads or know how to improve his search ranking. “I need to get my Google placement higher,” he says. That’s where yellow page companies see an opportunity—handling all the marketing for small businesses without Internet savvy, be it ads in print directories, buying keywords online, or managing Facebook pages. “We believe as the local media marketplace gets increasingly fragmented for small businesses, many people don’t have the time and inclination to figure it all out,” says Neg Norton, president of the Local Search Association, which, in a sign of the times, changed its name from the Yellow Pages Association last year.
Even if that strategy works, it might not be enough. Since 2007 digital directory revenue has climbed 14 percent annually to $2 billion, while print revenue has declined by $7.3 billion, according to data from BIA/Kelsey. Burdened by debt, the companies may not have the spare cash to make necessary investments such as retraining employees, says Lance Vitanza, an analyst at CRT Capital Group.
As a private equity investor, Cerberus is probably more interested in milking AT&T’s directory business for cash than trying a turnaround, according to industry analysts. It would calculate how much cash the business is likely to generate in the next few years, and base its purchase price on that, Vitanza says. “People like Cerberus are basically assuming the businesses aren’t going to be around in the long term,” says Vitanza.
That might be safer than betting on a turnaround, which can be very difficult to pull off, says Rita McGrath, a professor at Columbia Business School. For some investors, a steady albeit declining stream of cash is enough. “There is a huge amount of money to be made in end of life businesses,” she says. “Free cash flow that isn’t volatile is a beautiful thing.”