Above the Crowd

Social-Mobile-LOCAL: “Local” Will Be The Biggest of the Three

June 25, 2012:

“Well I was born in a small town
And I live in a small town
Prob’ly die in a small town
Oh, those small – communities”
— Small Town, John Mellencamp

While “Social-Mobile-Local” is certainly an overused buzz phrase, most of the attention has been placed on the “social” and “mobile” parts of the phrase. In social, the spectacular rise of Facebook and Twitter is clearly a disruptive and critical trend. In mobile, the adoption of the smartphone (led by Apple’s iPhone and now catapulted forward by Android) is also a fundamentally important platform transition. Much less attention has been paid to the third concept, “local,” which is ironic since it may be a much larger real business opportunity than either social media or Smartphone application revenue. Over the next five years, this massive opportunity will come into focus as local businesses embrace the Internet and adopt new interactive technologies that increasingly automate the connections between their customers and themselves.

A Huge Opportunity

The attached slide will look familiar to readers in Silicon Valley. It appears to be a disruptive, up-and-to-the-right graph that we normally associate with break-out technology companies. This slide, however, maps the rise of the Yellow Pages industry in North America from 1920 to 2007. As you can see, the Yellow Pages business saw incredible revenue growth as the phone became the key point of connectivity for interaction with local business. At its peak in 2007, the North American Yellow Pages business topped out somewhere between $14-16 billion, depending on the source.

Total local advertising and promotion is much larger than just the Yellow Pages. A separate analysis done by Advertising Age, suggests that in 2007, local U.S. businesses spent around $123 billion annually on local media. However, starting in 2008, this market began to materially erode. Why? Newspapers, magazines, local radio, and Yellow Pages represent about 80% of this spend, and the rise of the Internet is unquestionably undermining the  core structure of these industries. Since 2007, Yellow Pages revenues have fallen in half in five years, after taking 87 years to reach their peak. Many newspapers have closed, and others teeter on the edge of bankruptcy. This is not at all shocking. We  know that consumers are using these products less frequently every day. The Yellow Pages business itself suffers from a terminal disease.

If you think back to five years ago, the small business owner was clearly an Internet skeptic. People would say things like “you should have a web site,” but for most local business owners — like a pet-shop or a locksmith — this didn’t mean anything. They had a phone, it was listed in the Yellow Pages – and people could find them. And if the potential consumer went online, the phone number could be found there as well. No problem. For those that did put up a web site, it was, in many cases, a non-event. Some customers might find it, but only the ones that were already looking for them. What’s the big deal?

An Online Awakening

Two things then happened. The first is the critical success of Yelp. Local merchants were suddenly profiled in an environment where the consumer, not the business owner, controlled the copy and the narrative. At first, it was easy to disregard this thing called Yelp as a passing fad. But the voices  got louder and louder – both the happy and the unhappy ones. Accountability and transparency had arrived at the local level. One has to suspect that Facebook’s pervasiveness played a roll in awakening the small business owner too.  By 2011, Facebook had reached 71% penetration of all 221mm U.S. Internet users. Regardless of  industry, when the small business owner now went home, his or her family was constantly on the Internet – playing games, doing research, connecting with friends. The Internet’s pervasiveness could no longer be denied.

Today, the small business owner’s attitude has shifted from denial to anxiety, and, as a result, these local business owners are rushing to the Internet in droves. In Benchmark’s own portfolio, we have eight companies (OpenTable, Uber, Zillow, Yelp, DemandForce, GrubHub, 1stdibs, and Peixe Urbano, *) that generate the majority of their revenue directly from local businesses. Based on estimates, these companies will represent approximately $735mm in revenue in calendar year 2012. Four of these companies have already seen a liquidity event (OpenTable, Zillow, and Yelp have had successful IPOs, and DemandForce was recently purchased by Intuit for $425 million). As small business owners embrace the Internet, the local Internet is firing on all cylinders. Not bad for a customer segment that was once considered a “do not enter” zone for venture capitalists.

The Smartphone as a Catalyst

If the decay of the Yellow Pages was a catalyst for the local Internet, then the rise of the smartphone is an accelerant. Smartphone adoption is staggering. Today, there are over 1 billion smartphone users worldwide, and in the U.S., smartphone penetration recently passed 50%. Google has announced that Android is activating over 850K new users a day. These mobile devices are frequently the preferred device (vs. a personal computer) when a consumer looks to interact with local businesses. For the eight companies mentioned above, mobile usage already represents between 25-50% of overall customer usage depending on time of day and day of week. And mobile usage looks destined to increase from here: DigitalBuzz predicts that mobile Internet users will pass desktop Internet users within the next 3 years.

The rise of the Smartphone as a new platform is a huge benefit for entrepreneurs. Simply put, large incumbents are typically slow to make shifts to new platforms. This is either because they are overly focused on their current strength, or simply too large and bureaucratic to move quickly. Often, it is a combination of both. Startups on the other hand are eager to find a point of leverage or advantage, and rush to new platforms. New platforms typically have  “hooks” that enable features that never existed on the previous platform, further differentiating the startups offerings. A great example on the Smartphone is using GPS for one button local search. New platforms also require new distribution techniques, and in such a “jump ball” scenario the incumbent’s advantage evaporates. One could argue the incumbents are even at a disadvantage as they are less likely to have the cutting edge technical employees who understand the new platforms.

Changing the Game: Going Deep

But there is an even greater limitation on the power of incumbents than their discomfort with new platforms. As the market moves away from Yellow Pages-like listings and directories as a proxy for advertising, many young companies, taking a page out of the playbook of data-driven software-as-a-service companies, have created deep vertical integration within their spaces in order to drive traffic and enable services. By organizing small business owners, supplementary service providers, and customers on a single canonical set of data, these companies are not only providing new ways for customers to discover local businesses: they are creating new ways for local businesses to interact with customers. They are moving from “listing” services to “automation” services, and they are stitching these Internet services deep into the nervous system of the target industry.

For example, a company like OpenTable provides, on a stand-alone basis, a premises based computer that is an extremely effective tool for restaurants to manage their tables — a digital version of the reservation book on the maitre d’s desk. By connecting that same data on the Internet, and aggregating that data from other restaurants, you have OpenTable’s incredible online reservation system. Along that same data spine, customers can add reviews, limousine services and florists can enhance the dining experience, and a location-aware Smartphone app can tell you what restaurant within walking distance of where you are has a table available right now. The “offering” is the complete network, not just one specific piece, and the pieces alone are less compelling.

Going “deep” like this is a significant challenge for larger incumbents. The playbook requires a deep understanding of the industry, access to all the key content and its structure, a targeted and experienced sales structure, and a willingness to invest in a market that may seem “niche” to the broader service provider. You have to be willing to get your hands dirty. These large companies favor a horizontal, one-size-fits-all approach, offering a widget that all local companies would potentially use (such as virtual loyalty cards). But these lightweight offerings from the incumbents will fall well short of the “automation” features and functionality enabled by the innovators digging deeper into the vertical.

We’ve already seen a couple of recent examples of this with Google. In mortgages, Google launched a product but ultimately retreated, citing prioritization concerns and “taking a hard look at products that haven’t been as successful as we had hoped.” A seemingly simple category like mortgages proved difficult to nail within the overall Google strategic framework. Likewise, in order to gain a foothold in travel — a space where deep verticals thrived for many years —Google ultimately realized they had to pay $700mm for ITA Software in order to acquire the vertical tools they needed to be successful.

The Real Winner: The Customer

If you look closely at many of the leading companies developing these deep verticals, like Zillow or OpenTable or Uber or AirBnB, they are providing far more than just advertising opportunities for local businesses. These companies are using new technologies like mobility and location to improve communication, interaction and overall customer experience.

The amazing thing about these new local Internet companies is how much value the consumer gets from this data-driven, vertically-integrated experience. Watching your Uber driver approaching your location on GPS forever alters your experience of taxis and limos, while at the same time providing total transparency up and down the value chain, from dispatcher to driver to fleet manager.

But the really exciting part is that we are still really early in this process of transformation away from listing/directory advertising to a local Internet.  By way of comparison, in the fourth quarter of 2011, Southwest Airlines reported that 86% of its revenue was booked online.  By comparison, only 12% of US restaurant reservations are booked online. Only 15% of dentists are connected to customers through services like DemandForce.  Only 3% of takeout orders are processed through online offerings like GrubHub. And less than 1% of realtors are premier agents on Zillow.

We all know intuitively where those numbers are headed in the future.

*Benchmark Capital is also super excited about its investment in Nextdoor, the leading social network for local neighborhoods and communities. Join 3,000 other local communities who have revolutionized how neighbors interact online. Check it out at www.nextdoor.com.

54 Comments

  1. ramy June 25, 2012

    Nextdoor could be tremendous. Why hasn’t this happened sooner?

    Reply
  2. mark slater June 26, 2012

    why cant you text any business? have you seen the data on generation Y and phone calls? they wont call – they will want to text. People still want a conversation – automation only goes so far – you still need a conversation layer that uses data and not voice to communicate with the merchant. At least thats what we think and it seems to be working!

    Reply
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  4. David Park June 26, 2012

    Awesome article Bill! About 5 years ago, my wife and I started just throwing away the Yellow Pages without even taking off the shrink wrap it came in because we were using Yelp. And this year, I think that the Yellow Pages stopped delivering to our home. Thanks for the shout out for Nextdoor. We’re working hard to grow the neighborhoods and members. And so I hope that the next time we’ll no longer an asterisk in your post! :)

    Reply
  5. Neal June 26, 2012

    For years and years, SMBs have been dealt with as a homogeneous marketplace. This is fundamentally a flawed view since even SMBs within a tight vertical e.g. dentists behave differently. What is homogeneous is their (SMBs) desire to grow the revenue and profitability of their business – some will focus on driving higher revenue per existing customer e.g. DemandForce, others will focus on acquiring new customers e.g. SEM, display and traditional media.

    If companies cannot help SMBs manage through dizzying set of media options and CRM tools, then we’ll see local independent service businesses begin to disappear and be replaced by the “WalMarts” of local service providers.

    Reply
  6. Shane Vaughan June 26, 2012

    Bill – couldn’t agree more. I think you’ll find this video on the Local Web of interest: http://www.youtube.com/watch?v=uyLMqO_yWog

    We think there’s a huge opportunity for national brands to support their local dealers, VAR’s and franchisees – especially via the web. The fact is, local marketing is hard, and it’s getting more difficult (and technical) with the move to online. Companies like OpenTable are taking the route of bringing in the SMB’s to a vertical experience 1 by 1. Our approach is to use the national brands that provide products to and through the SMB’s to drive Local Marketing Automation that is beneficial for both brand and SMB.

    Reply
    • locable (@GetLocable) June 27, 2012

      Balihoo is doing some interesting things… I mentioned ‘boring local companies’ in my reply to another comment above and many of these have national brands with co-op dollars going unspent – great to see a company empower local business owners who are too busy to invest the time to understand the changing media landscape take advantage of the opportunity and not leave co-op dollars unspent… good for the community too to have these dollars pumped in.

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  9. amit June 26, 2012

    “But the really exciting part is that we are still really early in this process of transformation” – couldn’t agree more. We think that maybe Facebook Pages is a way to accelerate the transformation as ~ 50% of local SMBs already have pages (http://www.localseoguide.com/48-of-small-businesses-have-a-facebook-page-ilm/).

    Reply
    • locable (@GetLocable) June 27, 2012

      All local businesses should have Facebook pages though the challenge for many local businesses like plumbers, electricians etc is that their businesses are just boring. They don’t have a lot to talk about or share via social media which people actually care to read – until you need a plumber. Interesting challenge local businesses face and they need a centralized presence to bring relevance and interest.

    • amit June 30, 2012

      I agree with your comment. SMBs may not have the time or need to use their Pages to drive engagement – i.e. they post content and measure likes, comments around it. But Facebook Pages can still be used to drive word of mouth via likes or reviews (posts) by users.

  10. @mark would be great to be able to text businesses. I found this funny in the recent movie 21 Jump Street (out today on PPV). Jonah Hill’s character who graduated high school in 2005, is making the awkward phone call to a girl, Molly, to ask her out:

    Molly Tracey: Oh! Hey, man! Uh…so weird that you’re calling me. I pretty much text, except for when a random old relative calls.

    I don’t really see why a distinction between social, mobile and local needs exist. We’re starting to see very interesting results with mobile+social on Facebook (e.g. http://optim.al/facebook-mobile-ad-performance-better-on-android-than-iphone/) and enjoying seeing how it plays out when you can hone in on a very specific geolocation for your ads/messages.

    Reply
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  12. Very interesting. Technology is happening so fast, a little backdrop is appreciated, to regain a sense of place in time. The anecdote about the Yellow Pages helped – thanx! How can you understand current events without studying history? The slide, “Growth Opportunities in Mobile Ads” in Businessweek, mirrors the slow acceptance of mobile ad spend, compared to traditional ad spend, such as in print, which is way saturated, as far as amount paid vs time spent by consumers: http://www.businessinsider.com/the-future-of-apps-deck-2012-3#-14

    Reply
  13. Dmitry Pakhomkin June 26, 2012

    Extremely well written post Bill. Also big still unexplored area is “online-to-offline” shopping where vast majority of stores are not included in the game that big boys are playing. Having this vertical covered on the actual local inventory level is another huge challenge. Moms’n'pops stores and independent retailers are still behind and need a lot of help.

    Reply
  14. Jason Scherr June 26, 2012

    Great article, agree with most of the points and totally see local being the new way to better connect with customers. It’s amazing how skeptical local businesses were about websites at first.

    At my start-up, Tivity (www.tivity.us/06), we are making it easier to connect with people looking to connect with local athletic, sports and fitness activities nearby. This could be anything from pick-up sports, to classes, to runs or adventures. Check us out and let a personal activity concierge help you find locally the activities that define your active lifestyle

    Reply
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  16. Mike OK June 27, 2012

    Great article. I have been developing a local search engine for years and now need to get it to market. Up here in Canada, people just don’t get how large and important the sector is.
    Any advice on how to move into a market dominated by deep pockets like Google and the Yellow pages??

    Reply
  17. Brandon Smith June 27, 2012

    Amen, Bill. We see massive upside in the local approach as the internet reaches smaller businesses and value is created by having a local presence online. Our focus turns to capital raising on local level, connecting businesses with everyday investors in their community. The local level brings a different source of value add for businesses as they connect directly with their customers and advocates.

    Reply
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  25. Gracie Binder June 28, 2012

    Bill,

    I think this is a fantastic article! As someone working in the emerging “local tech” space, I’m very excited to see how this industry will continue to evolve over the next few years. One thing seems abundantly clear, new technology is about to drastically alter the way consumers and local SMBs interact with each other. Many people believe this change will go hand in hand with smartphone technology, but I’m not convinced. Google Wallet and other mobile payment apps like LevelUp have seen less than stellar adoption rates, as have other mobile apps aimed at helping small business owners.

    Then there’s Square, a young company that has a much different take on technological advances for local businesses. They can also be considered a “mobile payment” technology, but their product doesn’t require a big change in consumer behavior, i.e. pulling out a smartphone and downloading an app to pay.

    I’m very interested to see how more startups can bring disruptive technology to the space without being, well, disruptive… I think that’s going to be the determining factor in which companies emerge as the dominant players in the local tech movement.

    Reply
    • amit June 30, 2012

      I like your concept of non-disruptive disruptions. We kind of used this approach in looking at the solution space. We looked at what is already being used by the masses and SMBs either for business or personally. We thought Facebook and texting were good basis for an initial solution which can then be expanded as other technologies/behaviors gain mainstream traction. As another comment pointed out many SMBs do not have the content, frequent use scenarios that typically drive Facebook Page engagement. That’s where texting can fill the gap as it is more immediate and closer to a point of transaction – ex: user gets coupon or users texts in request for quote. But Facebook Pages can still be used to drive word of mouth via likes or reviews (posts) by users. Ofcourse this concept has to be translated into the right product, messaging, distribution for SMBs – and thats what startups do.

  26. Gracie K. June 28, 2012

    Reblogged this on Gracie B. and commented:
    I think this is a fantastic article! As someone working in the emerging “local tech” space, I’m very excited to see how this industry will continue to evolve over the next few years. One thing seems abundantly clear, new technology is about to drastically alter the way consumers and local SMBs interact with each other. Many people believe this change will go hand in hand with smartphone technology, but I’m not convinced. Google Wallet and other mobile payment apps like LevelUp have seen less than stellar adoption rates, as have other mobile apps aimed at helping small business owners. Then there’s Square, a young company that has a much different take on technological advances for local businesses. They can also be considered a “mobile payment” technology, but their product doesn’t require a big change in consumer behavior, i.e. pulling out a smartphone and downloading an app to pay.

    I’m very interested to see how more startups can bring disruptive technology to the space without being, well, disruptive… I think that’s going to be the determining factor in which companies emerge as the dominant players in the local tech movement.

    Reply
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  39. Q2 Yelp Call: 40% of searches come from mobile. – q.e.d

    Reply
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  41. Tony Funderburk August 27, 2012

    A very nicely detailed and documented article…and it affirms what will always be true…real people need to do business with real people. I’d bet 90% of businesses are completely successful on a local level and will be quite content with that. Here in Colorado we’ve had advertisement for years that said “ABC”…which stands for “always buy Colorado”.
    My motto for it is “Stay Local…Go Mobile…Be Social”. :-)

    Keep up the good research!

    Reply
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  44. Ira Overshiner April 17, 2013

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  45. Aamir June 22, 2013

    Great idea to lead command of advertisement specially internet Or Web Marketer………………………………..Great Keep It Up

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  47. Hermann July 18, 2013

    Social Media in local invironment with interaction of users is one of the main topic of the IFRA 2013 in Berlin in october. It’s a exhibition mainly for publishing houses. greetings, hermann

    Reply
  48. rakesh raghuvanshi August 30, 2013

    We are excited to be named a LEADING IN LOCAL Future Star by BIA/Kelsey. The Future Stars program recognizes early-stage companies from around the world that are focused on developing the next big thing in local digital media and marketing solutions. Our special thanks to the initial set of publishers (AskLaila, Getit, Burrp, Minglebox and others) and 10+ national brand advertisers who believed in our concept and gave us a chance!

    Reply
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