Yelp-ReachLocal deal and the future of Local Advertising

I live in Spain but follow all news about local online advertising business in the US. A few days ago I read this post from Greg Sterling about Yelp and Reachlocal partnership agreement.

I have been working on the local advertising industry during last 10 years (in Spanish market). I worked for classifieds giant Anuntis-segundamano (owned by shibsted) and have a good relationship with people from hibu and solocal spanish subsidiaries. I also own my own local online advertising business.

Our meetings with industry people are always related with local business market and strategy . They always speak about (also US top executives from that companies):

Home services category.

Transactions/Bookings.

When they ask me about those two questions I always reply the same:

If you are only thinking on that, you have a wrong strategy.

why do I think it?

from my point of view it is a simple answer. You just have to study the history of classifieds and yellow pages companies:

Based on huge local Sales force.

Always sold advertising, only advertising.

Always had a huge clients base from very different sectors, not only home services or restaurants.

Old Directory & Classified companies had big local sales teams. That means a huge cost in HR, so they needed a very high margin business model to be able to maintain the structure.

They chose advertising because controlled the distribution of content (yellowpages books & local newspapers). High product price with a 40% Ebitda. Great business.

But also, and not less important, a product to be sold to all industries. Sales people not visit just home service businesses but any other business in any industry (flowers, insurance agencies, private investigators, restaurants, lawyers, auto service…).

And that is the big problem to local advertising companies, they are used to sell a high price product, with high margins, to all industries when they controlled the content distribution.

Now, in the online world, they do not control the content distribution (google do it now) and there are other third people cheaper advertising products (google adwords) so they have to sell low price products with low margin rates. Bad business.

Moreover, if you are thinking to focus on Home Services industry ($400 billion business yearly in the US), you forget the rest of industries that bought your advertising products during years and are reducing the number of businesses that your sales force can access, doing it inefficient because they have to invest more time to select the businesses to visit.

Also if you think Transactions is the solution, think on 5% sale commision and compare it with a 40% of ebitda (just for advertising, not transaction…).

So Local Advertising companies, think on it: You sell advertising, to all industries. No software, no transactions, no just one industry.

Forget it. Focus on to find another good model for consumers & businesses like the one you had during years. Based on advertising of course.