• by Ross Fadner , May 18, 2004

Vertical directories are poised for something of a renaissance, further complicating an already fragmented local search marketplace for advertisers, according to a new report by The Kelsey Group, a research consultancy.

In the 63-page report entitled "Digital Directories: Interactive Local Media," author Carlotta Mast notes that vertical directories excel because of their ability to provide a "deep well of localized content" consisting of merchant contact information, including products and services as well as related background information. "One could argue that many of these verticals more efficiently facilitate the buyer-seller interaction than traditional media," Mast notes.

The report notes that vertical directories are in a favorable position to drive the local search marketplace because their granularity is attractive to local advertisers. However, according to Kelsey Group Analyst Greg Sterling, the question remains whether there will be enough of a demand to drive local search advertising growth across multiple channels, or whether a fragmented landscape will keep advertisers away.

"[Interactive Yellow Pages], newspapers, search engines, vertical directories--all are competing for the same pool of advertisers," says Sterling. Kelsey Group data shows that the average small- to medium- sized enterprise (SME) has just over $6,000 in its ad budget; the issue is where to appropriate it. Sterling says that most of these advertisers are still largely unaware of their online advertising options; in fact, just 15-20 percent of businesses in the United States have a Web presence, according to GeoSign. "The vast majority of businesses need to be better educated about the options out there," he says.

The Kelsey report notes that vertical directories could drive more and more SMEs online. Some vertical directories go so far as to help local businesses develop and host their own Web sites in addition to deploying their listings across a range of Web publishers. Sterling says that in some instances, vertical categories offer "a more compelling user experience than interactive Yellow Pages or newspaper [Web sites]."

Sterling says the success of vertical directories is contingent upon the category, and how seamlessly each category advertiser appropriates its online ad spending. The report cites successful vertical directories in the following categories: travel, law, finance, automotive, real estate, health care, and shopping. The report says that most vertical categories have made search the primary form of site navigation--which, in turn, has made sponsored listings an increasingly valuable channel for advertising revenue. Even so, Sterling notes that there are relatively few advertisers in the online classifieds space.

While portals, directories, and search engines may all be competing for the same advertisers, Sterling notes that if the consumer demand is high enough, they will all be able to coexist, and even drive traffic to one another in certain instances. Search engines, for example, will inevitably drive traffic to vertical directories.

Partnerships are also a possibility. One such partnership is between the Sacramento Bee and a local Sacramento Yellow Pages provider; Sterling says it will be interesting to see how the merging of a Yellow Pages directory with newspaper content and classifieds listings pans out.

"This industry used to be very consolidated," he adds, underlining print Yellow Pages' and local newspapers' domination of the medium. "Now, with all the options," he says, the result is "a fragmented marketplace, and that creates a lot of confusion."

Sterling says that within each vertical category, "consolidation will happen across the board. [Currently] there are a lot of players out there, and the world has only so much room for them. ... If you've got any kind of traction, you're probably going to be bought," he says.