Dave Naffziger's Blog

I was in Phoenix for a friend’s bachelor party. The 30 person group largely consisted of current and ex-consultants, many of whom are in the private equity business. I had a short conversation about a Yellow Pages investment that one firm was considering. As part of their due dilligence, they had looked at YP trends around the world and spoken to CEOs of top YP companies. They were surprised to find that spend on YP ads was flat to positive despite clear indications of declining usage. We spoke about this a bit, and I realized that they weren’t familiar with the seniority-based model that provides tremendous price support to YP ads.

Ads in each segment (full-page, half-page, etc) are shown in order of advertiser seniority. So, the first full-page roofer ad you’ll see is for the roofer that has been a continuous full-page advertiser the longest. He pays the same rate as the other advertisers, but his page generates the most calls. If he reduces his ad size, he would go to the back of the list for the new ad size.

The roofer is in a difficult business position. Assume usage of the directory is declining at 5% a year. His YP spend is delivering him fewer and fewer customers every year and his cost per lead is going up by the same amount. There is no way for this roofer to incrementally reduce spend at 5% a year. His only option is to reduce his spend from a full-page ad to a half-page ad. However, he’ll also be moved to the end of the half-page ads. He would see his inbound referrals plummet and his cost per lead rise.

At some point, the roofer will pull his ads entirely or the YP will reprice back to market. The result will be fast declines in YP revenue as the price supports breakdown and YP ads get priced back at market. The graph below illustrates what I expect to happen.

This is obviously one of many YP industry scenarios. Fundamentally, the Yellow Pages are not going to be able to support steady prices while usage declines. They may let prices fall gently, they may sell other inventory (keeping revenue high, but at tighter margins), or we may see something else entirely new. It will be interesting to see how this business evolves.