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July 2010 | Volume 2/Number 4
Guest Room

ReachLocal's IPO Validates Local Online Advertising Space

By Court Cunningham

At the end of May, local online advertiser ReachLocal became a publicly-traded company. ReachLocal's IPO is exciting for the local online advertising industry because it validates the fact that the category's long-expected potential is now a reality.

With $80 billion being spent on local advertising offline and already $8 billion being spent online, local is one of the fastest growing segments online today. The growth and market opportunity has spawned rampant innovation as evidenced by Google's Local Business Center (now called Google Places), CitySearch's launch of CityGrid, the rise of locally-oriented social networking sites like Foursquare and Yodle's own Yodle Organic.

ReachLocal's IPO is a big indication of how the world is changing. The number of consumers using the Internet to find local products and services, already more than 80 percent, continues to grow, and local businesses will be spending money online to reach those consumers as they search. According to BIA/Kelsey that number is expected to be $36.7 billion by 2014, from the $8 billion spent as recently as 2009. This growth makes sense given that almost half of the nearly 15 million local businesses in the U.S. today still don't have a Web site, let alone a paid search campaign to promote their businesses.

When these local business owners are ready to grow their business through the Web they are usually looking for a complete solution for all their marketing needs. Local business owners don't have time to deal with all the complicated and increasingly fragmented aspects of local marketing while also trying to grow their businesses.

Another major effect of ReachLocal's IPO is that many new online advertising providers will be getting into the game. While there are several major players right now, few have the perfect formula to cost-effectively sign up and serve local businesses. Achieving that balance requires product and process innovation, and the race is on to see who will be the dominant player. Seventy percent of small business owners say they are looking for a single-source marketing partner, according to Yodle research, which means winners will need to offer a breadth and depth of solutions that go beyond pure paid search marketing, including: online reputation management, social media and social networking, local maps listings, and more. Over time local online advertising companies' dependence on paid search and sponsored ads will decrease, and businesses with a broader set of product offerings will become necessary to take a more dominant position in the market.

There has been significant discussion of ReachLocal's lack of profitability and implications that local online advertising may not be a sustainable business model. Local advertising platforms will never be a high margin business, but with such a gargantuan market opportunity, 5 percent to 10 percent margins can create tremendous shareholder value. Amazon.com has 3 percent margins, but generated $1 billion in cash flow last year – pretty valuable in my book. The evaluation of an industry as risky or sustainable should be about proof points like cash flow rather than focusing heavily on percentages of margin.

Time will tell how quickly local online advertising will rise over offline alternatives, but this IPO certainly demonstrates that it is a high growth and high potential segment. The economy is going to creep back up slowly, and with that will come a fresh opportunity for local businesses to embrace the opportunity of promoting themselves online.

Court Cunningham is CEO of Yodle (www.yodle.com) and co-author of the book Local Online Advertising for Dummies.

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