Why Local Ads Aren't Coming Online

Earlier this month, JPMorgan analyst Imran Khan released a fascinating report called “Nothing But Net.” It’s a very insightful piece of analysis overall, but in one area Khan makes a similar mistake to one I keep hearing from numerous analysts. They seem to believe that all traditional media budgets will get eaten by digital media in the next few years. This doesn’t seem like a bad assumption. It sounds logical, after all.

But it’s completely wrong.

The report talks about dollars moving from local newspapers to online display advertising. It concludes that the trend will continue forward with ad dollars from local advertisers moving online because of diminishing distribution.

Another report I read from another analyst this year suggests that radio dollars will move to search.

Both of these conclusions are wrong. They miss motivational factors. Advertisers buy ads in a specific media because they believe it will give them something specific in return. And media tend not to be completely interchangeable. The idea that an advertiser who’s been spending money on radio will shift the budget to search is ludicrous; the goals and effects of running ads (let alone the methodologies) are completely different. And the idea that a local business will shift spending from a local newspaper to online display is similarly flawed.

I’m fairly certain the numbers used by J.P. Morgan’s analysts include classified ad revenue. Classifieds have been decimated in local ad spend, but display ads in local newspapers are probably just as strong as they have ever been, despite shrinking circulation. This is mainly because there are no alternatives for local businesses, including local affiliates of national brands (e.g., local auto dealers, quick-service restaurant franchises, national retailer locations, etc.), to reach their local audiences. Much of this has to do with creative production and the lack of online inventory that can be targeted locally.

National advertisers that buy in newspapers may well reallocate newspaper dollars to other media. But I’m betting the local spenders won’t. They really don’t have too many alternatives. They don’t have any way to build banner ads, and they’re unlikely to be able to get enough inventory in search to meet their needs. I see no evidence that local advertisers are moving dollars online — only the decline mentioned in the report, which I believe represents only classifieds and some national ad spend moving elsewhere.

There isn’t enough local inventory online to support shifting dollars. There’s really no mechanism for a small local advertiser to buy from the majors.

Imagine this scenario: You’re a local auto dealer with $5,000 to spend annually, and you call Yahoo, MSN, and AOL. You request geotargeted inventory that will match the newspaper circulation numbers of some local designated marketing area (DMA). You won’t get a phone call or e-mail returned. There isn’t a sales force today set up to go after the local market at any of the majors online, so the salespeople you’re trying to engage with are the same ones handling national budgets that are significantly larger. If you were a salesperson on commission, whose call would you return: Ford’s national ad agency media buyer or the dealership ad manager at Sweeney’s Ford in Greenfield, MA?

Local newspaper ad spend on display ads is very unlikely to move online for the next few years. The reason is similar to why television didn’t drop for some time despite shrinking audiences. There just isn’t an alternative to reach the target audience that a small local business, even a local affiliate of a national brand, can take advantage of.

And newspapers are the only channel local advertisers can quickly and inexpensively switch out creative on a weekly or biweekly basis. This is very important to a local business with product inventory that it needs to move but differs week to week. Most newspapers will handle creative production and keep insertion orders open for the entire year for their local customers, which further facilitates this.

Local search has mainly solidified around mapping, which is great at taking advantage of people searching for a product in a local area but not for driving awareness of a sale or trying to create demand. And without a sales force and creative production resources to serve the local markets, it’s highly unlikely that much of the local inventory available within the online space will ever get sold to local businesses. The infrastructure is really set up for supporting national advertisers with localized creative.