Scale Economics (continued)

The most interesting news on Techmeme this morning (to me) is that Yodle is operating at a $30mm revenue run rate. I don’t know Yodle’s competitor Reach Local‘s annual revenues, but I suspect they are at least double that and probably more. When you add up all the competitors in the market for selling search solutions to the "local" and/or "SMB" markets, it’s probably at least a couple hundred million in revenues and growing fast.

On one hand, we are bemoaning the potential loss of local news organizations and on the other hand we are witnessing a significant new market getting built selling search and other tools to local small businesses.

As more small businesses find channels and tools to buy targeted media, this market is going to start to benefit from scale economics just like Google and the display ad networks and exchanges have in the past few years.

We talked about all of this in the revenue breakout group at the Networked Journalism Summit last fall and I just found Scott Meyer’s notes on our breakout group. Scott called it "How Joe The Plumber and Google Saved News". That sort of sums it up.

But the big point here is that Google is not an end to end solution although it’s a critical component and there are many innovative new companies building some pretty big businesses on top of and around Google in the local small business market. There is an opportunity for all local media companies including newspapers to do this. But sadly most of them aren’t interested in reselling Google and other scaled and targeted advertising systems to their customer bases. Apparently they should be.

A good place for any local media company with such an interest to look for a solution is our portfolio company Clickable‘s services offerings. Clickable’s partnership with Lexis Nexis is an example of the kind of thing that local media companies should be doing today.

#VC & Technology

Comments (Archived):

  1. fredwilson

    I should have been more clear.Selling advertising pays the salaries of these journalistsAnd to date, the local media organizations have focused entirely on selling advertising on their own propertiesBut they have a great advertiser base and they could be selling other things to those advertisers and making a profit on that which would help, maybe not solve, but help the revenue issuesHope that helps

    1. Elia Freedman

      Thanks, Fred. That makes more sense. I agree that it doesn’t completely solve the problem. Given that, if local news sources can combine some sort of adwords with social networking capabilities and some level of investigative reporting, the staff probably doesn’t need to be as big either. I can’t help but wonder if this will be an innovator who starts by buying out a local newspaper (and staff) or whether this will be a new model that replaces it. It’s a very interesting — and important — problem.

  2. Elia Freedman

    I read your previous post and this one. I’m not certain I see the connection. Google (and Yoddle) aren’t providing news, their selling advertising. That’s not news. The concern from my perspective is regarding where is the money going to come from to pay for investigative journalism? There’s an awful lot of editors on the web — people willing to write op-ed pieces — and very few original stories. Now it may just mean that WSJ and NYT and Fortune and a few others supply all the investigative research. Consolidation is possible. But to look at Google and say they are re-doing the way we think about news? I don’t understand that at all. Are they providing the revenue infrastructure for a new wave of local, investigative research news outlets? Maybe. But someone needs to step up and put a plan together for how to do that. (It’s a compelling next venture for me, but I need to finish one first.)

  3. maxkalehoff

    Thanks for the comment! (For all other readers, I work at Clickable.) A key element of our thesis is that incumbent sales-channels and existing brands in the small and local media/marketing space are critical — because with small businesses, relationships really are everything (hence, the partnership with Lexis Nexis and more to come). Any old-school, local media sales exec will tell you this, as will any local business owner.In online advertising, the incumbent local marketing/media brands have nuanced requirements. Specifically, they need technology partners with lead-generation platforms that: 1) efficiently deliver value (as in real PROFITABILITY) to their small and local business customers to drive satisfaction, retention and investment; and 2) can scale and migrate those customers up to larger monthly spending bands as they achieve success, either with white-labeled do-it-yourself tools or light agency services.As you noted, there are a lot of interesting companies that are building businesses on the Google grid, but this budding industry is learning that small and local businesses are highly sensitive to ROI and where every dollar of investments goes. Return doesn’t meet expectations as much as it should, so there’s been a good level of churn among many attempts. As such, the successful local online media/marketing brands will be those that invest far greater share of their customers’ investments into media spend (versus margin and operating costs), and with greater precision and result. Margins of resellers may go down, but the successful ones will win in the end thanks to: the ability to manage much higher customer volumes efficiently; higher customer retention through better product value, achieving lower sales and marketing costs; and migration of happy, successful customers to higher monthly spending bands, which are more profitable to serve.

  4. usern

    What does Clickable do that Adwords/Analytics doesn’t?I read through the website and tried to view the demo (however it was offline).I can’t for the life of me see the value here with Clickable unless you needed extreme hand holding as a business new to internet advertising. We’ve got several companies spending throughout a range of budgets and can’t figure out how this could be helpful for any of them. Take this as constructive feedback, either the product or the message isn’t up to par.To be sure, there is a fortune to be made here in this space (I remember a company in India is using AI to compete).

    1. fredwilson

      It’s probably the message that’s not up to parIt’s a simpler UI combined with a recommendations engine and the ability to buy across multiple platforms (google, yahoo, Microsoft, more to come)I’ll pass along the feedback

    2. maxkalehoff

      Hi Usern: Max here from Clickable. Thanks for checking us out. What is the value proposition? Clickable’s core tool is an online solution that makes it easy for advertisers and agencies to manage pay-per-click (PPC) performance across ALL major advertising networks, not just Google Adwords (the description on our home page). The thing that kills in-house as well as agency search pros is the complexity of managing performance across different ad networks. It’s very difficult for most search professionals to switch from Adwords, to Panama to AdCenter — the friction of different user experiences. And the fact is that for every hour an advertiser spends in a network interface, there’s several hours of tedious spread sheet analysis on top of that. It leads to burnout and a talent gap in the industry, as well as huge amount of churn among businesses that might otherwise succeed. Additionally, Clickable’s ActEngine makes recommendations, from bid management to qualitative best practices — based on goals that you, the advertiser, define. The actual analytic engine promotes proven best practices in less time. Moreover, Clickable’s conversion tracking system delivers advertisers accurate, independent and consistent success metrics across all networks, creating a meritocracy across the networks, where ROI is rewarded (versus familiarity with any single interface). Clickable’s conversion tracking even informs the ActEngine in real time for better recommendations. We’re also constantly investing in our community and support infrastructure to ensure a world-class experience, including incorporating your feedback into frequent and significant product releases. Finally, as Fred noted above, we’re partnering with local, incumbent media and marketing companies to power their local and small-business advertising offerings with our core technology — which brings more scale and effectiveness to these traditional organizations. That’s an exciting frontier.Finally, it would be my pleasure to offer you a private demo. I also would consider it a great favor if you could share with me additional insight on where our value proposition failed to come through. That is of the utmost importance and we take your feedback seriously. I checked our online tour, and it is working as of this writing, but thanks for the heads up; any technical descriptions on your browser, location and connection would help us isolate any issues with our third-party video serving company. You can reach me at mkalehoff at clickable dot com.Warm regards,Max KalehoffVP Marketing at Clickable

  5. matt martone

    Your post hits the nail on the head.I run a small local ad agency in nj and use Clickable. Because of Clickable, my business can scale. Without it, I would be spending countless hours managing search campaigns for customers without much budget.You mention local newspapers…It’s going to take some really hard work to find local newspaper owners whom are the visionaries they need to be in order recognize the value in working with Clickable.A month or so ago I approached a local newspaper about a white-labeled partnership with my company. The newspaper would offer local search marketing to its advertisers. My team would build the landing pages and use Clickable to manage the paid search. The promise was that this would have helped the paper revitalize its brand, add more value and retain customers. They wanted no part of it.I was really surprised. The owner was blind to amount of funding that has gone to Reach Local, Yodle and Clickable. He also seemed blind to market share that Reach and Yodle have already taken.

    1. fredwilson

      MattI am so happy to hear that clickable is a good solution for you. I think it could also help the local media companies out, but who knows if they’ll bite on this value proposition. I hope so.

  6. RacerRick

    Local small businesses do not advertise online. Very few plumbers, electricians, refrigerator repairmen, etc take ads in Adwords.A lot of them are still in the yellow pages, but how many people still use the yellow pages vs. Google?I think the main reason why most local businesses aren’t advertising online is because the Yellow pages model had a service component versus the search engine model is do it yourself.With time and more service providers, we’ll see more local advertising which will bolster google, but also small newspapers (probably not the NY times and WSJ).But services like Yodel are only a bridge – the advertisers will learn how to do it themselves because they just need to learn it works and then they’ll realize it’s cheaper.

  7. vacanti

    Great post and completely agree. The yellow pages industry is also well-positioned to exploit this market but unclear if they are interested.

  8. Dave Chase

    I’d venture a guess that Rick hasn’t spent much time with local small business owners who would be the target of something like Clickable. I’ve started referring to these folks as Main Street CE*Os (E = Everything) as the vast majority are simply too time starved to do what Rick alludes to… “But services like Yodel are only a bridge – the advertisers will learn how to do it themselves because they just need to learn it works and then they’ll realize it’s cheaper.” It’s not an exaggeration to say that one needs to spend 100 hours per month running a good search campaign. It’s also cheaper to go the do-it-yourself route on plumbing, electricians, etc. which I’d argue are less complicated search. DIY is a viable solution but I’d venture to say it’s less than 10% of the market.Since participating with Fred at Jarvis’ New Business Models summit, I contributed a couple thought pieces (Five Fatal Flaws Killing Local Internet Plays –… and Ten Point Plan to (re)building a successful media salesforce) that speak to what most are doing wrong from what I’ve observed and how to fix it. In a nutshell, it’s not a tweak here and a tweak there.I’ve also had a minor epiphany when it comes to thinking about the viability of local media. If you think about what made newspapers viable for so long it was the fact that they had two products/businesses that were largely unrelated but delivered by the same organization. They had a news/info biz monetized by display ads and a classifieds biz enabled by classified ads. The classified biz was enabled by the distribution/audience of the news franchise. To date, most local internet plays have struggled to make it work relying solely on display ad revenue. My site ekes out a profit which is reasonably rare for a pure play local internet play but it’s hardly providing killer financial returns. My belief is that it’s going to take a similar dual business model to support local media (we’re working on doing that ourselves).So the question is what will be the accompaniment to the display ad biz? We’re seeing a few different things explored/discussed. E.g., micropayments and non-profit/foundation support are oft-discussed. I don’t believe those have much opportunity to scale beyond some exceptional situations. There are a number of other possibilities but I think the Clickable-like model is a viable “other” business model. The challenge for Clickable and others is they are left partnering with incumbent media who are too often averse to taking on something so different.The interesting/loose parallel with the classifieds being enabled by the news distribution historically is with those sites selling online directory solutions bolted on to a news site. Since most local news sites have the highest PageRank in their area, the PageRank is a form of “distribution” advantage that the news sites have and usually don’t recognize. When you have a high PageRank site with a leading directory solution, the businesses in that directory should show up very high in SEO and thus the news site has some unique value they are adding.The challenge remains regarding setting up a winning sales model to capitalize on this. The approach I’d espouse is much closer to Dell than it is a traditional local media salesforce (full disclosure: I do some consulting on this so have a dog in that fight). When I was at Microsoft and focused on the local space, we often thought that the biggest asset that the incumbent newspaper and yellow page companies had was their local salesforce and relationships. Having gotten closer to “the last mile” of the Internet, I’ve come to believe that in most situations the local sales organizations of the incumbent media is more encumbrance than asset. The smart incumbent media should setup a parallel telesales based model that are filled with “hunters” and leave the existing salesforce to harvest the longtime advertisers as long as they can. Btw, this outbound telesales org is dramatically different than the typical “call center” that newspapers have for classifieds so thinking that that group will have success is a longshot.Btw, I have no connection whatsover with Clickable but think that their approach is a key piece of the puzzle. We happen to be working with a competitor of theirs and I’m glad there’s competition for orgs to partner with for local media providers.

    1. fredwilson

      Wow, dave this is a great commentI had not read our Five Fatal Flaws post. It’s greatThanks so much for stopping by and sharing this with us

  9. Dave Chase

    Thanks Fred. Sorry it took me so long to see this post. I got way behind on my RSS feed reading. The silver lining in this economy for Clickable and companies like it is that our #1 competitor has been inertia. That is, small advertisers doing what they’ve always done ad-wise…newspapers, Yellow pages, etc. We’re finding the economy is causing most of them to question every dollar they spend and thus we get a chance to compete.The other dynamic is it’s forcing folks to be creative. Let me give you one example. A business that would definitely fall into “the other 80-90%” not advertising in newspapers. It’s a custom woodworking business that has been doing projects in our high-end resort area (Sun Valley) – they specialize in stairways but also do custom wood heating vents/grates and random other things that are custom. Two years ago, he was too busy with local business. As real estate tanked in our area, he’s realized his offerings are applicable in other markets besides Sun Valley and has setup a website to sell/market these. He has robotic woodworking equipment that can do amazing things. Random example, he sold 90,000 custom wood plugs — they cover up the hardware in wood beams. It’s fun to see a business like his experiment and flourish. Those ‘good news’ stories aren’t getting much press but they are out there.

    1. fredwilson

      You are rightI sent around the post you wrote and linked to yesterday to a bunch of ourcompaniesThere are very big opportunities in local/smb for sure

      1. David Kidder

        Dave Chase’s comment is thoughtful. So thoughtful, I passed it on to my co-founder, Munish Gandhi, and our VP, Marketing, Max Kalehoff. We debated it and would like to share a few themes we’ve been riffing on. Overall, we believe there are six fundamental challenges that prevent local-market online advertising from taking off. I’ve outlined them below, and shared how we’re addressing them.1. Passive & Indifferent Sales Organizations: As Dave stated in past postings, there is a chasm between “order takers” and “order makers.” Order takers are antiquated sales organizations, while order makers are innovative teams that passionately find business opportunities in underserved segments, new revenue streams and different sales approaches. Dave correctly emphasized at the New Business Models for News Summit that was put on by CUNY, and hosted by Jeff: “As long as established media organizations are led by an order-taker mentality, their decline will be assured. Many respected analysts in the local-advertising industry have underscored that the model poised to succeed is a new type of sales team, an independent one, divorced from the legacy of its ailing industry.2. Flight To Performance Marketing Goals: There’s been success in quantifying the value of search advertising inventory, and connecting that investment to advertiser goals. However, we need to know more about the distinction between local online display ad sales and the efforts David is pursuing with advertisers. His model, which has had some success, relies on proprietary measurement and insight about the local audience to demonstrate value and sell inventory more effectively. However, we believe display advertising’s viability and return to prominence is contingent upon connecting investments to marketer’s performance-based goals, whether branding or precise direct-response outcomes. This is more likely to happen amidst transparency, not the opacity of proprietary measurements.Importantly, we recently received confidential yet highly valid data revealing that massive volumes of display impressions are required to achieve equal economic impact as search in a performance context. On average, 100 impressions are required to equal a single click-through, and one million Impressions to equal to a single normalized CPA goal. That volume of required display ads to complement and drive search is far too great for most local advertisers goals. To be sure, the jury is still out on the purpose of display advertising for small and local advertisers.3. Advertiser Skill Gap And Complexity Paralysis: Time and complexity are the central reasons why small and midsize advertisers fail online. At Clickable, we’ve addressed this with a tool to make advertisers bionic – “better, smarter and faster” – so they can achieve more in less time. We empower them instantly with actionable analytics that continuously apply over 100 best practices, qualitative and quantitative, across all their campaigns.But the incumbency of skill is an equally important story. Successful advertisers invest enough time to keep abreast of constant changes required to stay competitive in the dynamic Google marketplace, the most important advertising network. That’s difficult, but it’s far more difficult to keep abreast of the dynamic rules and nuances on all other potential advertising networks and formats (in addition to Google). Tools that simplify and standardize performance-based advertising across all networks and formats are necessary for local-market advertising to work.4. Questionable Success For First Wave Of Resellers: Almost three years ago, Google strategically exited the direct sales and services business within the local, small and midsize advertiser segments. Why? First, the local segment represented approximately 90% of customers, but only 10% of revenues. The SMB segment represented 25% of customers, and 40% of revenues. Among both of these segments, there was customer churn of up to 50%, and sometimes more, with education a significant additional cost. In response, Google created several local-market teams, rooted in an incentive-based reseller program, effectively paving the way for companies like Reach Local, Yodel, Marchex, and Webvisible. The challenge will be to scale a market where too many customers were not satisfied and failed to experience economic value.5. Technology Scalability: Any business school will teach you that you cannot take more value from a customer than you return. If you are going to pocket 50% or more of a customer’s advertising investment, you better be certain the remainder is put hard to work. The technology behind building and managing customer campaigns, landing pages, keywords, tracking and optimization must perform. But in most cases, the technology and infrastructure is flawed or doesn’t exist. That is yet another reason why local advertisers fail to experience value, and why the local-market advertising industry is failing to scale.6. Flexible Advertising Solutions That Grow With Businesses: Additionally, local and smaller advertisers often want more than entry-level search-driven clicks and leads packages. They want to achieve marketing goals, and mature into middle markets. This is why Clickable is a pure-play product company. We are addressing the maturation of advertisers from local, to small, to middle market with three products: Clickable Leads, our entry-level leads-generation package; Clickable Pro, our self-manage advertising dashboard that introduces unprecedented simplicity; and Clickable Assist, our light managed-services package.From an advertiser’s perspective, we are the Apple of online advertising because our intent is to disrupt the friction of time, complexity and incumbency of networks and formats. We’re empowering advertisers to easily migrate to goals, budgets and overall programs that drive their business. This can be any combination of leads, self-managed campaigns on our tool, or our Assist packaged services. This can happen at Clickable, or under any premium vertical brand that has longstanding sales relationships with local advertisers and small businesses, such as newspapers, credit-card companies, telecom companies and even software and information services providers.Conclusion:We believe there will be multiple stakeholders and winners in this next wave of local-market advertising. Perhaps the biggest winners will be local advertisers that benefit from greater transparency, accountability and economic value. But the market frictions outlined above are very real, and are compounded by a fight to the top on features (featuritis), and a race to the bottom on pricing. The most successful local online advertising platforms will remained disciplined and steer clear of these diversions while delivering superior value for their advertisers.We’d love to be as helpful to you as possible. Please feel free to contact us anytime.Warm regards,David S. KidderCo-Founder, CEOClickable, Inc.

        1. fredwilson

          Thanks DavidThis is a great treatise on local advertising’s evolution