The study, entitled "The Geo-Google Threat: Search Engines Target Local Advertising," suggests that the newspaper classifieds industry must quickly adapt to the growing threat posed by Internet search engines and Interactive Yellow Pages (IYP) directories, especially as new technologies emerge that will make their databases more granular.

Why do newspapers have to worry? Simply put: people are becoming more accustomed to finding what they want, when they want it online. In addition, targeting technologies are enabling search companies with massive databases to localize their content and instantly deliver it upon request. Advertisers are flocking to these mega-databases because they only pay when users click on their ads. The result, as one newspaper executive deftly notes in the Budde Group Report: "In today's world, you are always going to be in bed with a competitor."

"Potentially, there could be a lot of different models," says Neil Budde, president of The Neil Budde Group and co-author of the report. "I wouldn't rule out the possibility of newspapers working with Yahoo! or Google," he says, adding that much is yet to be determined in the local advertising sector because the majority of businesses nationwide still have no Web presence.

Kelsey Group Analyst Greg Sterling doesn't think local search will necessarily spell disaster for newspapers and other traditional classifieds providers. He says that according to Kelsey Group figures, the general classifieds market is expected to grow from $17 billion to $18.5 billion in the next few years as the economy improves.

"It would be wrong to tell you that newspaper revenues will go away because Google and Yahoo! will take it all," Sterling says. "I don't want to be too alarmist about it, [though] some percentage of [their revenues] will go online."

The real question, Sterling says, is whether local newspapers can successfully offer their readers online alternatives such as those offered by The New York Times, The Los Angeles Times, The Boston Globe, and The Washington Post. While these newspapers each have built successful digital businesses and ad models, Sterling says that online newspapers in general are not doing enough to promote their own classifieds, which are an even more critical source of revenue for smaller players than the larger ones.

Both Sterling and Budde concede that those at greatest risk in the decidedly hierarchical newspaper marketplace are the really local papers. The Knight Ridders of the world will be able to adapt to the changing newspaper marketplace and turn their attention to online publishing as consumers do.

Sterling suggests that newspapers--recognizing the importance of reaching their readers online--could position themselves as complementary to Internet Yellow Pages providers, and by partnering with them could help them to make up for the amount of traffic they lose to search engines. A good example of this from the Budde Group report is the partnership between the Sacramento Bee and the local Yellow Pages provider Sure West to bring local residents Sacramento.com.

"The traditional difference between newspapers and the Yellow Pages used to be that the Yellow Pages was published once a year," Budde says. "Now, of course," he says, citing the Internet, "things are different."

Both Sterling and Budde noted that it will be interesting to see how the partnership pays off for the Sacramento Bee and Sure West. Nevertheless, notes Budde, "local newspapers have a huge challenge in drawing people in and promoting their classifieds."

The Kelsey Group's Sterling says that newspapers will have to rely on the strength of their editorial content to retain consumers, but increasingly, news aggregation is the order of the day, and large search engines represent the ultimate in news aggregation. The implication for smaller publishers is that the traffic they receive from search engines is often one-stop, one-time-only traffic.

Even so, Sterling says that classifieds spending will continue to move online, but there will still be a market for traditional classifieds because there is still little incentive for local businesses to take their spend out of traditional classifieds media and move it online. "Some percentage have moved online, but the vast majority haven't," he says. "How do you get them online? Google and Overture [currently] have no channel for that."

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