Owning the Consumer vs. Owning the Advertiser

Tags: business, IYP, local+Internet, yellowpages

The Internet yellow pages market is shaping-up as a battle between the yellow pages publishers (YPPs), who own the advertiser, against the leading Internet portals, who own the consumer. The $100 billion question is who will win.

Owning the Advertiser
The YPPs clearly own the advertisers. For over a century, they have built an infrastructure around selling and managing one of the primary advertising channels for local businesses. The YPPs each have thousands of salespeople on the phone and on the street, building relationships with local businesses.

These salespeople, their “feet on the street”, maintain and nurture the greatest asset the YPPs have, the relationships with the local businesspeople, the advertisers.

As with newspapers, telephone directories have encountered very little regional in-market competition. Just as cities naturally evolved toward a single dominant newspaper, the local telephone company owned the directory business in markets in which they operated, with a few notable exceptions. This provided the YPPs with regionally insulated monopolies. The advertiser had other options for their advertising budget (e.g. the newspaper), but the consumer was essentially a captive audience. So by default, they owned the consumer.

The Internet has broken regional monopolies on information. As a result of Feist v. Rural, directories are now aggregated on a national basis, and local users get their own local slice of this information on demand. The typical “one newspaper town” and “one directory town” has given way to a competitive free for all. The result is that the YPPs no longer own the consumer; the consumer is a free agent.

Owning the Consumer
In the other corner, we have the challengers, Internet behemoths like Yahoo, Google, MSN and AOL. In terms of sheer numbers of website visitors, these companies clearly own the consumer. Even focusing solely on the yellow pages market, Yahoo’s IYP is the clear market leader.

An even bigger threat to the YPPs is search engines. Consumers are increasingly using search engines to find everything on the Internet. Will the search engine become the de facto local directory? That is exactly what Google’s local search engine, and every other search engine, is attempting to do.

Consumers are being wooed by portals, search engines, local newspaper sites and Internet yellow pages (IYP) sites. The YPPs can certainly buy consumer attention through Internet advertising. But that buys visitors; it is up to the YPPs to turn those visitors into loyal customers. You cannot buy loyalty, you need to earn it.

Can the YPPs deliver sufficient value to earn consumer loyalty, or will the Internet portals integrate other value-add, such as local search, coupons, voice-over-IP (VOIP), instant messaging and much more to create a more comprehensive and more compelling consumer solution?

This train of thought raises another question. In the software business we always ask whether something is a standalone product or a feature. This question must be asked of the IYP as well. Is IYP a product or a feature? And what does the future hold? Remember, WordPerfect was once the leading product, until Microsoft released the Office Suite and turned it into a feature. The once mighty WordPerfect is little more than a technology footnote now.

What Does it All Mean?
Let us assume that the Internet companies own the consumer and the YPPs own the advertisers. Given the current market shares and trajectories, this is not an unreasonable assumption. Does this create an opportunity for coopetition? We’ve already seen some relationships between Internet portals and YPPs.

Can the market settle into an equilibrium where the Internet portals own the consumer relationships and the YPPs own the advertiser relationships? The answer is short-term: yes, but long-term: no. There are two very powerful dynamics to consider in answering this question.

The first rule of advertising is: Advertisers follow consumers, not the other way around. If the consumers all choose to use Internet portals, local search engines, or newspaper websites to find contact information for local businesses, then that is where the local businesses will advertise. Another way of saying this is that owning the consumer trumps owning the advertiser.

Internet-based self-service is finally driving the long anticipated disintermediation. You may recall the early days of the Internet, when every pundit said that consumers would work directly with businesses and the Net heralded the death knell of the middleman. Instead, it created a number of new middlemen. But self-service is changing that. Just look at how the airlines have unceremoniously cut off the travel agents. The only travel agents airlines pay are the large travel sites that own consumers. Look at how companies are selling direct to consumers and businesses through eBay. Look at how people are selling directly to others through Craigslist, and the impact this has had on the newspaper classified ads. The list goes on and on. Self-service interfaces are becoming simple enough that disintermediation is starting in earnest.

Internet-based self-service is the ultimate in disintermediation. Local advertisers won’t jump to self-service right away, in fact it could take years to build critical mass. But it will happen. As self-service solutions get better and advertisers come to realize the benefits afforded by self-service, they will adopt this mode of operation.

At this time, the YPPs’ large local sales organizations are a valuable asset. As Internet portals leverage their natural cost advantages (no ink, paper or distribution costs) in combination with simple self-service interfaces, the average deal price will drop well below the level that will support inside sales, let alone outside sales. Then the large local sales forces become a liability.

While this article paints a dire picture for YPPs, it is by no means a foregone conclusion that the Internet portals will eventually displace the YPPs. The YPPs have a window of opportunity—during this transition phase—to act decisively in the Internet. If YPPs are proactive they can win. But being proactive means fully embracing the resulting price destruction that the Internet will force on the yellow pages market. It means cannibalizing huge and profitable revenue streams, and that is a tough pill to swallow. But somebody is going to do it. If the YPPs don’t do it themselves, there are plenty of competitors waiting in the wings to do it to them.