ReachLocal Files for IPO - Initial Thoughts

First, the Yelp almost-deal, then ReachLocal. 2009 is ending with a bang for the online local advertising market. At its core, ReachLocal is an advertising agency for local businesses, as they buy media for local SMB's in both the search and display markets. However, being an advertising agency for small businesses is a terrible business, so ReachLocal's novel solution is to use a ton of technology to (hopefully) make it a not-terrible business. They compete most directly with Yodle and Dexknows.

A couple of interesting insights from the S-1.

• ReachLocal sells their service on a fixed fee basis, but buys media in auction marketplaces (everybody knows that search is an auction, but most display networks essentially operate through a similiar auction approach where the impression is sold to the highest bidder). From a sales/marketing standpoint, this makes a ton of sense as most local businesses have failed at buying search campaigns directly because of the need to manage their bids daily.
• This practice leaves ReachLocal exposed if prices increase and in a position to profit handsomely if prices decrease. I was surprised to see two things: first, Reach Local spent 55.6% of the advertising fees it charges local clients on media. If you compare this to a typical agency that may get 15-20% of the media spend, this is really, really high. Basically, a local advertiser is paying 2x to ReachLocal rather than going directly to Google. I've heard the pitch before and I know that ReachLocal's will tell you that their keyword generation, bidding and optimization tools result in most local advertiser's that were spending in Google actually spending less and getting much better results. Having bought a lot of search, I can believe that. The nature of local advertising probably results in a lot of opportunity in the long tail and some good technology can unlock that opportunity. My concern would be about how this plays itself out over time. If ReachLocal, Yodle and Dexknows are reasonably successful, they may end up squeezing each other's margins unless they can effectively pass through the price increases to advertisers (which maybe they can).
• On that note, ReachLocal only spent 52.7% of the advertising fees they charged on media in 2008 vs. 55.6% in 2008. Considering the awful local advertising market in 2009 - in general - I find that suprising. Would have thought this would have been a year when their gross profit increased because there were a lot less local advertisers spending on search.
  

On my next post, we'll talk about some of the sales dynamics, but you can read the filing here: Reach Local S-1 filing

Yext: Can It Work?

A new local advertising platform called Yext completed a round of venture investment earlier this month. I was speaking with a few VC guys prior to the announcement and there was definitely a lot of interest in the company and the solution that they are offering.

The Basics
Yext offers pay per action phone calls. Yext distributes unique phone numbers on its own site and through its publishing partners. When those phone numbers are dialed, Yext records and transcribes the phone calls (example transcription), looking for keywords in the conversation. The basic idea is that advertisers only get charged for "good" phone calls and don't get charged for junk calls - like automated phone calls, sales calls, etc. According to Yext, 44% of inbound phone calls are irrelevant, so advertisers wouldn't be paying for these.

A Novel Solution
The Yext approach is a novel solution to a couple of issues that plague the online local advertising industry: getting the phone to ring and only paying for quality leads. In addition, the fact that the unique phone number can be distributed to many publishing partners makes Yext interesting because they have the ability to aggregate web traffic, enabling them to achieve scale for local advertisers. Further, they represent an easy monetization option for publishers.

Will it Work?
The basic idea behind yext is that advertisers will bid more for higher value phone calls. The common example given is that a phone call about a transmission repair is worth a lot more than a conversation about an oil change. Advertisers can set bid prices for the different keywords, thereby rewarding higher quality calls with higher payments to publishers (and to yext).
IMO, there are a couple of critical factors to getting it to work (I'm going to assume that yext will be able to solve the biggest technical challenges, which may or may not be a good assumption). First and foremost, they will need active bidding on the part of local advertisers. Without active competition for the "transmission repair" call, the advertisers will not have any real incentive to increase bid prices. If they don't increase the bid price, then the publishers will not benefit from the new advertising product.

The second factor is whether consumers will continue to use the phone as their primary way to interact with local businesses. The assumption of most local advertising is that advertisers prefer to get the phone to ring. This may be true, but what do consumers prefer? Personally, I hate calling 3 or 4 auto repair shops for a quote. Many times, I'm forced into it because their websites are so awful and because there does not exist a "lending tree" for local services (unless RedBeacon takes off). But, if there way, I would much prefer to interact through email. Its so much more efficient.

I wish the yext team the best of luck. I'm looking for a way to give it a test drive so that I'll have a much more informed opinion. Perhaps, I'll start with our site that helps consumers find a chiropractor.

Local Advertising Starts with Google Maps

With the rollout of Universal Search and Google Maps, the term "local search" was born. And by local search, we mean showing up in the local results on Google when you search for something that Google determines to be related to a local service provider. (I just searched for "immigration lawyer in Google," a term our site for immigration lawyers - usimmigrationlawyers.com ranks #1 for and the local business results is in the 4th position) Makes sense that this is an obvious place to start for local businesses that are looking to generate traffic and a presence online. Why? It's free!!

I imagine that someday Google will introduce a paid option that co-exists with their local business results so that they can make more money out of this incredibly valuable traffic. But, for now, they seem to be content with investing in the user experience and building local business profiles to sprinkle into their search results. So, here are a few links that I've found that are helpful for anyone looking to get displayed in those results.

• Interview with Carter Maslan, Director of Product Mgmt for Google Local
• Anatomy & Optimization of A Local Business Profile

Welcome to Online Local Advertising News

Conventional wisdom suggests that the newspaper and radio advertising markets are dying. While we are at it, let's throw the Yellow Pages into that category. While the reason for it is (generally) obvious: nobody reads the newspaper, listens to the radio or uses the Yellow Pages because they are either using their iPhone or laptop to get a much better experience.

So, if the consumer is moving online, one must assume that the advertising dollars are moving online. Based on that premise, a ton of capital has been invested in startups and technology companies. However, while advancements have been made, nobody appears to have revolutionized the industry.

On this blog, I'll chime in on the goings-on in the industry. Full disclosure: As the CEO of ExpertHub, I do have a horse in this race, particularly for local professionals. But, my hope is that it will make my posts a little more insightful.