• by Mark Walsh  @markfwal, May 30, 2008

Local Internet advertising is expected to increase 50% in 2008 to $13.1 billion as small and medium businesses facing a faltering economy turn to less expensive options for reaching consumers, according to a new study.

Rather than buying media packages that bundle online with traditional outlets such as print and broadcast, the 2008 Borrell Associates report on local Web site revenue found that local advertisers are increasingly shifting dollars to the Internet only.

"What happens in a recession is advertisers are forced to make more economical decisions about how to spend marketing dollars," said Gordon Borrell, CEO of the local media research firm. "And the Internet, as they've tested it over the last several years, is cheaper and seems to work."

While Borrell forecasts local online ad spending will grow another 40% to $18.2 billion in 2009, the category will gradually slow down and level off at about $23 billion by 2012. Growth over the next four years will average about 15%. Market research firm eMarketer projects that overall online ad spending will increase 23% to $25.9 billion this year.

That current boom has especially benefited Internet-focused players such as Google, Yahoo, Realtor.com Yelp and Local.com, with much of the growth driven by search campaigns and other direct marketing efforts online.

Overall, stand-alone Internet companies accounted for 57.3% of local online ad dollars, followed by newspapers (24.6%), directories (7.8%) and TV stations (6.9%).

The online versions of local Yellow Pages directories have also made gains even as advertisers continue to abandon print listings. Revenue for Interactive Yellow Pages (IYP) is expected to hit $1.2 billion this year, up more than 20% from 2007.

Despite a host of emerging challengers online, the Borrell report credits Yellow Pages publishers with successfully expanding onto the Web while protecting their core customer base. The three traditional local media companies with the highest proportion of online revenues are all directory publishers--AT&T Yellow Pages, Yellow Pages Group (Canada) and Idearc (Yellow Pages)--at 10.7% to 9.1%.

Pricing help explain the exodus online. The Borrell study estimates Internet CPMs at $3.65--lowest of all media--compared to $9.29 for Yellow Pages print ads.

"Unfortunately, they're contributing to the erosion of the print product, but if they don't do it, somebody else will," Borrell said. The online gains won't be enough to offset the nearly 40% drop projected for Yellow Pages print revenue in the next four years.

Newspapers likewise are targeting the Web even as their share of local online ad spending has dwindled to 24.6% from 44.1% in the last four years. Newspapers sites pulled in more than $2 billion in 2007, surpassing all local online media companies combined.

For the first time, large newspaper sites drew more than half their revenue from non-print advertisers, suggesting the online operations are building a broader base of customers from which to generate new income streams.

The Borrell report also found almost all newspaper sites are also operating at a profit. One company surveyed, for example--with $400 million in total revenue--was generating $11 million in online sales at a 65% profit.

With local TV stations doubling their Internet-only sales forces in 2007, the firm expects their online ad sales to exceed $1 billion this year. TV Web revenues increased 72% in 2007 to $772 million, with the average for large market stations passing the $1 million mark for the first time.

Borrell also projects strong ad growth this year for local radio station sites to $255 million from $189 million. Even so, radio accounts for less than 1% of the local online ad market.