Dave Naffziger's Blog

It was kind of cool to see Quova float across my VentureBeat feed late last week. Enterprise companies rarely cross the startup feeds, particularly those that are infrastructure companies. It is also amusing to see how the media reports news from companies you are actually quite familiar with.

The VentureBeat article is here and Quova’s press release is here. Other than making up a competitor that doesn’t exist (DoubleClick), there wasn’t any real analysis in the VB article or facts that couldn’t have been found in the press release.

The on-demand geolocation from Quova is significant because it drastically reduces the entry cost for world-class IP geolocation. We had experimented with a similar service nearly 6 years ago, but never really had the business structure to really sell or develop the service. The company that will most likely be affected is MaxMind, a tiny company that produces ok geolocation data. They’ve sold primarily to companies that were too small to afford Quova’s technology and have been successful amongst the solo-developer crowd.

I’ve written before about some of the many ways that local businesses spam the yellow pages.

Google Maps has now ‘arrived’. Local businesses are now spamming Google Local (Maps). Surprisingly, many of the techniques that are being used to spam Google, have been used for many years to spam the Yellow Pages.

Mike Blumenthal has several great examples, including my favorite example: 0 & 0 24 Hr Locksmith (and their 1699) listings for a locksmith in Philadelphia (why does the locksmith profession attract spammers?).

While local business spammers won’t have the sophistication of your typical web spammer, what they lack in sophistication, they make up for with sheer numbers.

Backfence’s recent shutdown has been well covered, however wasn’t much of a surprise. Greg Sterling sums up the business model challenges in local:

The business model (and specifically sales) is the fundamental challenge in local. Judy’s Book shifted its model and InsiderPages sold to IAC partly because of the Herculean effort involved in selling into the small business market. Selling ads to local businesses is extremely difficult. And scaling is difficult because all the momentum and credibility must be recreated in each expansion market, unlike nationally focused sites.

So, what is so hard about local?

• Cost of Sales. Might as well get the obvious one out of the way first. Unless you’re able to get self-serve to work, you’re likely selling over the phone. This puts cost of sales in the $200 to $300+ range per sale. Since you’re starting out and don’t have all of the automated benefits of a telesales force at scale, it will look way higher. It took Citysearch $100M to get right side up.
• Inventory. The contractor doesn’t much care for the user reading reviews of restaurants. The further you segment, the easier ads are to sell (the they convert), but the lower the volume you have to offer. We found it hard to generate meaningful impressions for businesses other than restaurants and hard to clear cost of sales for rational advertising.
• Density. Greg nails it above. Critical mass must be achieved in every metro (or sub-metro) area. Furthermore, success in one city does not translate well to success in another.
• Poor existing monetization options. AdSense and YPN performed the best for us, but that was at low single digit eCPMs. Pay per call provides no where near the monetization opportunities.
• Lookup-biased traffic. This is a problem unique to local reviews sites. If you’re doing good SEO, you’re getting tremendous traffic from users searching for the name of businesses (“Wild Ginger”, “Fleur de Lys”, etc.). These are usually looking for phone numbers or addresses and are often existing customers of businesses. The real value for advertisers is in generic searches (“Seattle Restaurants”), when users haven’t made a decision yet.

Solutions to the Monetization Problem

These have all been tried with varying degrees of success:

• Sell Other Inventory. Citysearch is first and foremost a calling card for its telesales reps. They sell advertising on Citysearch, but they also sell clicks on Google and Yahoo. In fact, I’d argue that a large percentage of their revenue comes from off-site PPC sales.
• Partner with Local Sales Forces. The inverse of Sell Other Inventory. Cox-owned Kudzu has arguably sold the most local on-site ads/profiles, but has done it through the existing Cox sales force. A $20-$50 monthly fee becomes an ‘easy’ add-on to businesses buying $500+ monthly advertising packages. And what sales rep wouldn’t want a way to increase their ASP. The problem for startups is these companies are all big slow moving companies that frequently have competitive offerings. They’re hard deals to count on.
• Sell Display Ads (or sponsorships). To national advertisers. Totally different type of sales force. It works for newspapers and radio stations.
• Saturate. See Local.com’s results pages. 100% of the above the fold real estate is taken up by ads They claim an admirable eCPM of $35.
• Self Serve. The holy grail for local websites. To date, only Google, Yahoo and maybe some of the IYPs have successfully self-served local businesses. At JB, we thought consumer reviews would open the door for self-serve advertising. We never fully tested self-serve, but learned that the activation hurdle for local businesses is high.

Yes, there is a giant pot of gold in local. No, it isn’t easy to reach.

Some of these challenges and solutions alter when you shift towards shopping oriented activities as JB is currently doing. I’ll save some of that for a later post.

A common thread with old media companies is that they don’t get that new media is all about the user experience. 6 months ago, I spoke on a panel at the Kelsey Group’s DDC2006 Conference, and while there listened to several keynotes that extolled the strength of the YP business, and their ability to meet the needs of their customers. It took me a little while to realize that their ‘customers’ were advertisers. A few presenters never even mentioned the consumer.

Fast-forward to NewTube, the confirmed video venture from News Corp/NBC Universal. Michael Arrington has a great writeup summarizing his thoughts from the Media/Analyst call that they did. I didn’t listen to the call, so I’ll quote Arrington’s impression:

I think a better approach would have been to focus on the user experience, but this was hardly mentioned (except at one point when Zucker said “we are shocked at the willingness of the consumer to sit through the whole show with ads on NBC.com”).

On television and in movies, content plays a tremendously important role in attracting users. There is little difference between the outlets that provide the content - one theater is not different from another. One television channel provides an identical user experience as the next.

Online, overall experience is far more important. Attracting the users is more than just having great content. The users need to be able to share, mashup and engage with the content. The content itself remains important, but that importance has decreased significantly vis-a-vis the overall experience.

It’s still all about the user. But the users today require more than just the content.

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.

Rumors have swirled for a week that a public company was buying Insider Pages, and VentureBeat just announced that Citysearch was the buyer.

I didn’t expect IAC to be the buyer. The Yellow Page companies (who are JUST ‘allowing’ their users to write reviews) are further behind and have a lot more to gain than IAC. Plus IAC has Citysearch, the granddaddy of review sites. However, as I thought about it more, I began to think it “kinda” makes sense for a few reasons:

• AskCity. Yahoo has been quickly establishing itself as the dominant player in local (certainly from a product perspective). IAC’s assets have been spread across semi-independent companies (Citysearch, ServiceMagic, LendingTree, Ticketmaster, etc.). AskCity was the first step by IAC to bring those sites together (of course, I’ve thought that they were going to build a more coherent experience for several years). Insider Pages brings must-have functionality to Ask (write a review), and helps close the product gap with Yahoo (they still have a long way to go).
• Citysearch. IAC has little need for restaurant reviews (yelp). Their editorial and enhanced business info around restaurants is unmatched. They have a ton of reviews (around >2M reviews), although they are of poor quality. They will continue to get restaurant reviews in high volume - InsiderPages can help them sort out the quality problem. Citysearch doesn’t have much review content outside of restaurants (where the money is).
• IAC’s local sales force. Clearly, the buyer needed to have a local sales force. The real challenge in local is figuring out how to make money. Building and scaling a local sales force is incredibly expensive, but an existing sales could begin selling the local inventory immediately. Citysearch was the first company in the local space to build a sales force. It took them tons of capital, but few companies understand selling online local better than citysearch (of course, they’re largely selling Google and Yahoo clicks, not ads on their local properties).
• Price. The price of the transaction isn’t known, but its rumored to be slightly above the capital invested. Ouch for everyone (investors get money back, employees get nothing, buyer still paying 10M). Its an expensive purchase (rumored around $10M), but that can seem cheap when put up against IAC’s other purchases.
• Bill Gross.

But still:

• 600K reviews? Yes, its a lot of reviews and there are only two other sites with similar numbers, but Insider Pages lost momentum in a huge, huge way. I think they were at 500K 12 months ago…
• More Reviews? IAC is already heavily invested in local reviews - more than anyone. Does growing their review base by 20% really help them much?
• Price. Could IAC have deployed $10M more efficiently than a company that spent heavily on local sales? Is integration going to be more effort than building from scratch?

Well, I’m curious to see other reactions among the local bloggers.

Update:

• Duh - I forgot to mention that Citysearch was an Idealab company (thanks Donna). So is Insider Pages.
• Peter Krasilovsky at LocalOnliner also notes that Citysearch has purged nearly 80% of their reviews and currently has 400,000.