• by Mark Walsh  @markfwal, December 10, 2007

Local online ad spending will surge 48% in 2008 to $12.6 billion, buoyed by demand for paid search and video advertising, according to a new study.

Spending on local search alone is expected to double to $5 billion, while online video will triple to $1.3 billion, predicts local media research firm Borrell Associates. Despite predictions of an economic slowdown next year, the firm's forecast for 2008 exceeds the estimated 44% growth for local media in 2007.

"We thought it would be slowing down by now but it hasn't at all," said Gordon Borrell, CEO of Borrell Associates. "The Internet has hit critical mass and it's become very practical for local advertisers because it appears to be driving more store traffic."

The report points out that growth rates for most local media companies--whether TV stations, newspapers or Yellow Pages publishers --haven't kept pace with the overall rate for local online ad buys. Pure-play Internet companies for the first time in 2007 captured a larger share of local ad dollars than locally-based traditional players, at 43%.

Internet-only companies Local.com and Business.com posted the biggest online ad revenue gains among local media companies--at 138% and 84%, respectively, in 2007. Google's local ad business grew 46%.

Gains by the Internet-only insurgents came mainly at the expense of newspapers, with a 33.4% share, and Yellow Pages directories, 10.1%. Those categories have lost a combined 20 percentage points of market share in the last three years.

To better compete with Internet rivals, the Borrell study advises that local media companies move beyond relying on traditional reps to sell online ad packages. "There is increasing evidence to support the idea that a greater investment in an independent online sales force will be necessary to continue the growth these properties have enjoyed for the past few years," the study states.

Nearly all local media business that focused on convergent sales strategies have seen slower growth. "Their convergent sales dreams are fallling apart," Borrell said. His firm estimates that online-only sales forces for local media Web sites grew by 50% this year, and will increase another 30 to 40% in 2008.

Borrell also predicts more partnerships between Internet portals such as Yahoo, Google and AOL and local media as they embrace competition. "Formerly sworn enemies are seeing the wisdom of combining their strengths to increase revenues for both sides," according to the report.

The jury is still out, however, on the success of the year-old alliance between Yahoo and 400 local newspapers nationwide, which has failed to halt the downward spiral of print ad revenues.

The predicted surge in spending on paid search and video will come at the expense of traditional Web display ads. Search is expected to increase to nearly 40% of online ad budgets and video to 10% in 2008. At the same time, spending on standard ad formats such as banners will shrink to 50.2% from 68.1%. Newspapers are leading the video ad charge, typically selling 60-second spots at $150 to $500 per month in categories such as homes, autos and health. Yellow Pages directories have also begun to offer video ads.

In five years, Borrell predicts that three quarters of local online advertising will go toward "infomercial-type" video ads and paid search.