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Jupiter: Local Search Expectations 'Overheated'

A new report tossed cold water on hopes for explosive growth in the nascent local search market, predicting it will not grow as fast as the overall online advertising industry.

Jupiter Research issued a report yesterday forecasting that the market for local search advertising — including Internet yellow pages and local offerings from search engines — will grow 15 percent annually to reach $824 million in 2008, up from $408 million in 2003. The growth rate is lower than the 19 percent Jupiter forecasts for the overall Internet ad industry.

“The expectations around this are overheated,” said Niki Scevak, a Jupiter analyst. “You need to look at the market and what's driving it.”

Scevak said one impediment to the market's growth is a lack of searchers. Through its annual survey data, Jupiter estimates the number of online directory site users has not kept up with the rate of Internet user growth from 1999 to 2003. In 1999, 58 percent of Internet users reported using an Internet directory; in 2003, 43 percent did.

He said a poor user experience at Internet yellow pages sites, which have made up the bulk of the local search market, is partly to blame. With Google, Yahoo and other search engines entering the picture, Scevak expects user experience will improve drastically but not enough to draw large amounts of local advertisers.

Jupiter notes that traditional yellow pages advertisers differ greatly from paid search advertisers. While paid search is dominated by businesses selling online, yellow pages publishers depend on small service firms, often without a Web presence.

“In any type of search for those type of businesses, there's a telephone component on the end,” Scevak said, noting that tracking ROI is much more difficult than for online businesses.

The bearish outlook for local search contrasts with some other forecasts. The Kelsey Group has estimated that the local search market could reach $2.5 billion in 2008, depending on how successful Google and Yahoo are in deploying local search opportunities. Both search giants see opportunities in expanding well beyond today's base of 200,000 search advertisers into the pool of 10 million small and midsized businesses nationwide.

A Kelsey Group survey last month of small businesses with Web sites found just 11 percent used price-per-click advertising prevalent in the search industry. With some estimates that 70 percent of small businesses have no Web site, the actual percentage using search advertising is much lower.

Search engines have forged ahead with plans to offer more local search options. Yahoo last month released SmartView, a tool on Yahoo Maps that gives users access to local information in 55 categories. A week later, Google countered with the beta release of Google Local, a new search engine that returns both commercial and non-commercial local information from yellow pages data providers and Google's index of 4 billion Web pages.

Jupiter predicts that most local search advertisers in the next two years will come from the current pool of paid search advertisers, with early adopter service businesses like doctors, lawyers and plumbers leading the second wave in three to five years.

“It's a very real opportunity, but in terms of the expectations, they need to be checked a little,” Scevak said.

Brian Morrissey covers search marketing for DM News.com. To keep up with the latest search marketing news subscribe to our free e-mail weekly newsletter Search Engine Marketing by visiting //www.dmnews.com/cgi-bin/newslettersub.cgi .

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