Friday, July 01, 2005

Printed Yellow Pages are in Strategic Peril

Tags: yellowpages, local, business

After my last post, some people in the yellow pages industry questioned some of my conclusions, so I thought I would detail them out here. First I’ll address the challenges facing the traditional yellow pages publishing industry.

Tactical Challenges:
These are significant challenges, but they don’t dramatically change the game, like strategic challenges do. In other words, the traditional directory publishers can meet these challenges by simply better executing their business than the competition:

1. Deregulation has resulted in competition from Independent publishers. These publishers are undercutting the traditional publishers pricing. As a result, they are capturing much of the growth in the industry. According to Simba the Independent Yellow Pages publishers grew 13% in 2004, while the overall industry grew only 3.9%. The Independent publishers were responsible fo the bulk of the growth in the industry.

2. As mentioned in my last post, as a result of Feist v. Rural competitors can buy national directory data for between $250K and $500K a year. This lowers the barrier to competition, resulting in more independent publishers.

3. Advertisers pay for a year of advertising. At the same time, most families throw out the old yellow pages when they receive a new one. So, the independent publishers stagger their printing cycles. The result, in a two-yellow pages town, is that each yellow pages book has an average shelf life of six months. So advertisers are paying annual prices for six months of advertising.

Strategic Challenges:
These are challenges that can effectively change the game. These challenges are the result of disruptive technologies that threaten the very need for and existence of printed yellow pages. Traditional yellow pages publishers cannot overcome these challenges by better executing their traditional business. These challenges require that the company modify, or at the least extend, its behavior to continue to maintain its role in the future.

1. Mobile Phones: When phones were tethered to the wall, a large yellow pages directory made complete sense. With mobile phones, bulky printed directories make little sense. This is compounded by the growing storage capacity of phones. It’s just a matter of time before phones come pre-loaded with local directories that are updated via the Internet. Many younger people, like my brother, don’t have a home phone; they just use their mobile phone for everything. In what must really scare the yellow pages (or at least it should) T-Mobile has decided to make Google’s search engine the default home page for their mobile phones. T-Mobile is effectively telling mobile phone users not to use the directory, instead use Internet search.

2. The Internet: The Internet provides users with an experience that is far superior to printed yellow pages. The advantages the Internet provides in terms of data freshness, richness, supporting data, etc. is overwhelming.

Let me dig a little deeper into the challenges presented by the Internet to provide a more complete picture.

User - Easier to Use:
The yellow pages rigidly force companies into predefined categories. These categories may not be intuitive to you or me. If I’m looking for in-home care, do I look under Nursing, Health, Health Services, Home Health Services, Hospice, Medical Management Consultant, Medical Service Organizations, Senior & Aging? Before long, I’m tearing my hair out…oh, hey, there’s hair replacement. In the Internet, you simply search, and in addition to the results you are presented with similar categories. Internet yellow pages are far faster and easier to use.

User – More Detailed Information:
Not sure whether that attorney in the yellow pages handles wills? Well, you have to call and ask. But with the Internet you can click on the law firm’s website, read the attorney’s bio. You can even Google the attorney to see what people say about him/her. The IYP might even have user ratings and reviews. If you’re looking for a restaurant, you can look at their menu online. The list of information available on the Internet is constantly expanding.

User – More Services:
With pay per call services Internet yellow pages can offer a call button that uses your PC speaker/microphone to call the attorney above. Or it might automatically place the call and ring your phone. You can get a coupon online. You might even be able to view the attorney’s calendar and schedule an appointment. A printed yellow pages can’t do any of these things.

User – Access:
Back in the day when we still used the printed yellow pages, I could never find it. I’d put it in a drawer and then I’d go back and it would be gone. And when was the last time you saw a complete yellow pages connected to a payphone? People rip pages out, lose it (or use it to prop-up a piece of furniture or something). I don’t know about you, but I know where to find the Internet, at home, at work, on the road, it’s always there.

Advertiser – Real-Time Modifications:
Yellow pages are printed annually, Internet pages are dynamically generated from the latest data each time you visit them. In other words, we are comparing a 12-month data refresh cycle to a real-time data refresh cycle. Seasonal businesses can leverage the Internet whereas they couldn’t take full advantage of the printed yellow pages. Real-time changes are very important in today’s fast-paced business environment. Not only can you change basic contact information, but you can also fix mistaken data and add more background information.

Advertiser – More Complete Data:
With printed yellow pages you pay according to the amount of space you use. This is because printed materials have ink, paper and distribution costs. The Internet has none of these. As a result, it is in everyone’s best interests that the advertiser put in as much information as possible to enrich the user’s experience. Advertisers can add menus, list selling points, services, inventory, specialties, include images of the people or the business itself, and much more.

Advertiser – Measurable/Trackable:
On the Internet you get a great deal of information about the visitors, what they click, where they go, etc. This is valuable information you can use to tailor your advertising. Ask any yellow pages advertiser how many responses they get to their ad. Most have no clue whatsoever.

Advertiser – Shorter or Even No Commitment:
Advertising in the yellow pages is a 12-month commitment with no guarantee of results. Advertising on the Internet, depending on the program, may have no commitment. With search engine advertising, you can try something for a few minutes, and then try something else, if you want to.

Advertiser – Costs:
A full page ad in the yellow pages can range from about $40,000 to $80,000 per year. Ads in search engines start at 5¢ to 10¢ per click. Shopping engines start at about 20¢ a click. The annual fee for the highest level listing on Yahoo’s Internet yellow pages (#1 in the industry) is $720 per city or $4,600 per metropolitan area, or between 1% - 10% of the printed directory pricing.

The confluence of disruptive technologies impacting printed yellow pages presents a serious and growing threat to their dominance of this valuable market segment. As mobile phones get more sophisticated they will store more directory information locally, and they will use the Internet to supplement this information.

Internet portals and search engines will continue to integrate more services to enhance their offering. As their advertiser self-service interfaces become more user-friendly, they will dramatically improve their appeal to small businesses. Newspapers are also adding local directories to their websites in their effort to remain atop the local advertising business.

The printed yellow pages are also suffering from an aging user base. A much higher number of new businesses are turning to search engines, Internet yellow pages and other alternatives to the printed yellow pages. This is evidenced by the steadily declining growth rates of the yellow pages revenues. This is a trend that will soon start to accelerate as Internet advertising becomes more approachable and more accepted and as more companies establish websites.

“The traditional media--newspapers, radio, and television--have seen spending by local marketers erode despite improved business conditions...Ad spending on the Internet will be up 15 percent to $7.8 billion” – Bob Coen, Universal McCann

I’m sure some readers, particularly those with a vested interest, will discount these arguments by pointing to the financials of printed yellow pages companies. I’ll address this in a follow-on post. But I will add that according to Harvard professor Michael E. Porter, growing profits and sagging revenues are actually a sign a business or industry in its twilight years. There is always talk of the sales forces of the yellow pages vendors. This reminds me of modern warfare, where air superiority is everything. Simply bomb the ground forces into oblivion, then mop up the pieces. More on this later.