Local Search Seen Setting the Pace

A new report from Borrell Associates predicts that online local search advertising will grow far faster than local online display ad spending over the next five years.

Local online advertising is enjoying a bonanza year, with many site operators reporting revenue increases of 50 percent or more. While newspapers and the so-called pure-play Internet companies continue to benefit, the heightened sales activity has also breathed life into a bevy of competitors, including independently owned city.com sites and Web operations run by local TV and radio stations. In any one market, dozens of companies – some of them not even based in the market – are rushing in to compete for local online ad dollars.

The prize – $4.1 billion in advertising revenue

The prize is a slice of the $4.1 billion that local businesses will spend this year for online advertising – 51.5 percent more than they spent last year. And it may be just the beginning: Even at $4.1 billion, local online represents just 3.1 percent of the nearly $130 billion that local businesses will spend on all media advertising this year. Our projections over the next five years show local online swelling to $8.6 billion – but still less than 6 percent of local ad spending.

Next year is likely to see continued growth, though not quite as strong as in 2005. Across all 211 DMAs, local online advertising may hit $5.7 billion in 2006, a 39.3 percent increase. Not all markets will fare that well: we expect a dozen small markets to see declines, while many of the larger markets will see above-average growth.

Local search to account for 1/2 of local spending by 2010

Site operators should not become enamored of all this growth. Although traditional media companies have built impressive local Web operations over the past decade, the foundation of their revenues is cause for concern. The practice of up-selling print or broadcast advertisers – especially with an “assumed” or forced online ad that is packaged with a newspaper ad or TV commercial – could collapse under the competitive pressure of more measurable and effective forms of online advertising

Looking ahead, the biggest growth category in online advertising is the one that most local site operators cannot even offer: Local paid search. Spending by local businesses on paid search is expected to rise 161 percent next year, to $906 million, and to account for nearly half of all local online advertising by 2010.

Big Newspapers face the prospect of being nibbled to death by ducks

Local banner ads and local listings will start declining to the point that paid search will roughly match it over the next five years,” Gordon Borrell, cautioning online publishers to keep an eye on the anticipated shift from display ads to search. “That’s going to catch a lot of newspaper and TV Web site operators off guard.”

Newspapers currently capture the 41% of the local online media spend, but that could change. As the president of Borrell told MediaPost, “Big newspapers are accustomed to tracking only a handful of local competitors, but with the Internet’s low barriers to entry, they now face the prospect of being, well, nibbled to death by ducks.”