• by Lynn Russo , November 29, 2005

For the first time since the Internet's birth, local online advertising is showing significant growth. The market is projected to finish the year 51.5 percent ahead of 2004 -- its largest boost in five years, according to Borrell Associates' 2006 Outlook report. Healthy growth will continue in 2006, if not quite as strongly, at 39.3 percent.

"We've reached the tipping point," explains Kip Cassino, Borrell's director of research. "What typically causes this is people talking to each other and saying, 'I've been doing this and it's working,' and word spreads." Advertisers will have spent $4.1 billion online by the end of 2005 -- just 3.1 percent of the entire nearly $130 billion local advertising market. That figure is projected to grow to $5.7 billion in 2006 and $8.6 billion by 2010.

Local paid search -- the largest local online category -- should grow 161 percent by 2006, to $906 million, and will account for nearly half of all local online advertising by 2010. Online promotion is the fastest-growing online segment, projected to reach more than $3 billion by the end of this year.

Print and TV Most Vulnerable

Newspapers garner nearly half (41 percent) of all local online advertising, while all remaining media sites combined -- television, radio, yellow pages, and local magazines -- capture just 27 percent.

Newspapers and TV stations are vulnerable because they're selling online as a print add-on, without a dedicated online sales staff, and relying on established classified categories.

"Local media sites with high market share tend to have dedicated online-only staffs, multiple revenue streams, and less dependence on classified categories," says Cassino.

And a recent study by Sarah Farebrother, a University of Missouri-Columbia graduate student, found that online newspapers' classified ads don't exploit the Web's creative capabilities: photography, audio, video, and animation. Larger newspapers are more inclined to use instant messaging and e-mail.

Not All Local Is Local

Out-of-town pure-play Internet firms own 31.9 percent of the local online ad market. IAC Financial & Real Estate, for instance, leads with 180.2 percent growth in 2005, followed by Google with 95.6 percent.

"Almost exclusively, our clients are national advertisers taking advantage of local search marketing opportunities," says Chris Copeland, partner and managing director of Outrider North America. Outrider's local search portfolio comprises retail, direct marketers, and e-commerce companies, but in the future, Copeland says he expects to see such local or regional groups as auto dealer associations or travel groups get on board.

Copeland finds Borrell's local search numbers too optimistic: "In the traditional local market, someone purchases a yellow pages ad, the creative is done for you, the listing is put in the book, and you're done." The active auction model of search, on the other hand, demands "a level of engagement that most local businesses won't be willing to commit to." Copeland estimates that 70 percent or more local search advertising is done by national advertisers: "Unless those numbers change, we simply can't reach what the projections show."