Local Advertising Isn't Jumping Online

As the newspaper industry crumbles, online sites figured they'd cash in on local advertising. But "local" doesn't mean much online

By Sarah Lacy

For at least a decade, Web startups have spun visions of conquering local ad markets. Their dream is to tap that vast array of attorneys, lawyers, dentists, shoe shops, restaurants, and other close-to-home businesses that tend to advertise in the yellow pages. No single local business spends a lot on ads, but in aggregate, they represent a lot of money.

And why not chase the local buyers? Big national accounts have been snapped up by massive Internet companies with broad reach: Google (GOOG), Yahoo (YHOO), Microsoft (MSFT), and Time Warner's (TWX) AOL. And daily newspapers are in a serious state of decline, so all those advertisers who used to place ads in the classified sections of print newspapers will flock to the Web, right?

Market Growth May Decline

Not exactly. Local interactive advertising is headed for a big slowdown this year, according to Borrell Associates, an online advertising researcher. This year "will be the first in many in which some components of interactive advertising show little or no growth, or may even decline," Borrell said in a November report. The market will grow 4.7%, to $13.3 billion in 2009, after 50% growth in 2008, Borrell says. And don't expect a rebound when the economy recovers. The market shows "no sign of improving quickly, irrespective of upward movement in the nation's economy," the report goes on to say.

Local small businesses will likely curtail spending on Web software, too, and that's bad news for OpenTable, the online restaurant reservation company that in late January filed to sell shares to the public. After being in business for a decade, the San Francisco company eked out operating profit of just $261,000 on sales of $41.3 million in the nine months through September 2008.

Bright spots in the local market are rare. Even Craigslist, arguably the most successful of the handful of Web companies specializing in local advertising, has taken off in only a few cities and monetizes less than 1% of its users. Yelp, the online review site, has outlasted peers, but Chief Executive Officer Jeremy Stoppelman concedes it hasn't been easy.

There's No Here, Here

What happened to the "everything is local" adage? The concept of local is morphing quickly in a world where instant global communications and social media widen our circle of friends and acquaintances to include the world. In essence, we've become national—if not international—citizens.

Thanks to the myriad of online communities from information aggregator Digg to social network Facebook to niche blogs about everything under the sun, we can identify and coalesce around similar interests and shared passions with anyone in the world. You no longer have to be best friends with your neighbor or co-worker when a site like Twitter recreates a feeling of intimacy, if only a passive kind, online.