Online Economics - 2006 Annual Report

Spending on local advertising should continue to grow in 2006 and beyond as a mix of so-called old media and Internet companies compete for an increasingly lucrative market.

Local online advertising generally includes automotive, real estate and employments ads. It accounts for approximately 30% of all online spending. In 2005, spending on local advertising was projected to reach somewhere between $3.2 and $4.1 billion, up from $2.7 billion in 2004.39

The predictions seemed to be holding up in 2005. Media buyers and planners reported that they spent 18% of their clients’ ad budgets on online local media in the third quarter, up from 13% in the first two quarters.40

When we look closer at how local online advertising is shared across the different types of Web sites, we see that newspaper companies and non-traditional media companies, such as Google and Monster.com, continue to perform well. Newspapers grabbed 44% of the local online advertising marketplace while companies like Monster.com and Google, among other non-traditional companies, absorbed 40%.

Meanwhile, Yellow pages and television and radio sites are still receiving a relatively small piece of the pie , though growing . In 2004, TV stations increased their local online ad revenue nearly 59% to $119 million , while radio stations’ revenues nearly doubled, reaching $34 million. 41

Where Local Online Advertising Goes

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Source: Borrell Associates, "What Local Web Sites Earn," March 2005

Looking ahead, newspapers may find themselves facing even more competition from the non-traditional, Internet-based companies for local ad dollars. Research from the Kelsey group estimates that Internet companies’ search engines will generate $3.4 billion in local ad sales by 2009.42 In San Francisco, some analysts believe that if Google is successful in its bid to provide the city with free, universal WiFi, local newspapers — estimated to have lost between $50 million and $65 million in employment advertising revenue to craigslist — could see their share of local ad revenue further reduced.43

In addition to businesses and marketers becoming increasingly comfortable with and knowledgeable about the Web, perhaps another reason for higher growth at the local level is new developments in technology. Not surprisingly, Google jumped into the game with the 2005 launch of a product that combines its online maps with local search features that include links to local businesses.44

Market analysts generally agree that there will be strong growth in local advertising, but differ over how strong and how it will get there. According to Jupiter Research, local online spending will reach $5.3 billion in 2010. Borrell Associates anticipates that the market will grow to $8.6 billion over the next five years. The reason for such a gap is that Jupiter Research analysts believe that the market will remain heavy on classified ads rather than moving toward a more lucrative, search-based market that currently exists at the national level. According to David Card, vice president and senior analyst at Jupiter Research, local businesses still lack a sense of comfort and familiarity with local online advertising:

“[Local advertisers] are going to have to go through the whole education process that multinational advertisers went through. It’s many years behind where current online advertising is.”

Borrell Associates, on the other hand, believes local advertisers will be able to adapt more quickly to a search-based market, and thus projects higher growth for the rest of the decade.45

Like the industry over all, the local online advertising industry is still maturing. Currently, around 2% of all local advertising is spent online, though it is projected to reach 6% of all local spending over the next five years.46 For online advertising to continue to grow at the local level, it will have to reduce its “dependence on bundling print or broadcast advertising with online advertising” and continue to “reach out to that large segment of advertisers that don’t currently do business with them,” according to Borrell Associates.