Report: Local Search Worth $2.5 Billion by 2008

Local paid search advertising is on pace to generate $2.5 billion in 2008, according to a new research report.

In a study expected to be released today, The Kelsey Group estimates that locally targeted listings are the next frontier for paid search, tapping into the 10 million small- and medium-sized businesses in the U.S.

The Kelsey Group, Princeton, NJ, estimates that 60 percent of searches are local in nature, and 10 percent of those searches are for a commercial service or product.

As top search engines Google and Yahoo add more local search options, the market is forecast to grow from $1 billion today to $2.5 billion in 2008.

U.S. Bancorp Piper Jaffray expects the overall search market to increase from $2.3 billion in 2003 to $5.7 billion in 2008. The investment bank expects search engines will draw more traffic as broadband penetration increases. It expects search volume will grow as much as 20 percent during the next few years.

Yellow pages ads remain the chief marketing medium for small businesses. The Kelsey Group said that while nearly 80 percent of small advertisers use offline directories, fewer than 20 percent use search engines. Of the $22 billion spent on local advertising, search accounted for just 3 percent compared to the 46 percent tied to yellow pages.

Consumer habits are expected to foster some shift to search, as 57 percent of consumers told The Kelsey Group they used search engines during the past year. Search engines remain a much cheaper way to generate leads, with the average cost of a lead at about 35 cents compared to $1 for offline directories.

Google has experimented with a local search engine that returns results and a map keyed to a person’s location. Yahoo’s Overture Services is also experimenting with local search on its AltaVista search engine. In its testing phase, Google’s local search does not return advertiser links. Overture’s local search has only a small sample of advertisers participating in the test. Google offers keyword advertisers the opportunity to show their ads only to Internet addresses in their geographic target area.

CitySearch has emerged as an early leader in offering local search listings. Barry Diller, head of CitySearch parent company InterActive Corp., New York, told investors last month that the local search program, started in March, would have 50,000 advertisers by the end of 2004. Diller said the company has discussed supplying its listings, which specialize in restaurants and nightlife, to both Google and Yahoo.

CitySearch last week revamped its site to emphasize search and expand beyond its traditional reputation as a source for restaurants and nightlife to include categories like health and beauty.

“They definitely are a model in many ways for where the market is going,” said Greg Sterling, the author of the report.

According to The Kelsey Group, search engines need to offer local search options to expand beyond their current base of 200,000 to 250,000 advertisers. Its survey of small businesses found that 60 percent of respondents said three-quarters of their business comes from advertisers within a 50-mile radius.

“There is a real opportunity for paid search to move into the local area,” Sterling said. “The challenges are real, though, for paid search to penetrate this market.”

One of the problems facing local paid search is the need for large sales forces to sell the listings to small businesses accustomed to the offline directory model that local search most mirrors. Search company hopes to deal with this problem by tapping into Verizon Information Services’ 2,600-strong sales force in a partnership to display locally targeted paid listings on

Also, local search needs to overcome the traditional reliance of small businesses on directory listings, which can account for all of their marketing budgets. The Kelsey Group said paid search is still too complex for many small businesses, and scarce search inventory remains a problem.

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