Those Fingers Were Made for Walking

At a meeting with some colleagues earlier this week, the topic of the Yellow Pages came up (yes, when you're with a group of printing industry analysts, that kind of thing happens...). Once upon a time, there used to be only one phone book, and the publisher of it used to even advertise it on TV; remember the old "let your fingers do the walking" ads from the 70s? A later, to my mind less effective Yellow Pages campaign featured a variety of people getting ripped a new one for calling Directory Assistance for numbers they could easily have looked up in the book.

Back in 2000-2001, when I still had a landline, I used to get three phone books: one mega-book for the entire Capital District (what bugged me was that they had sold ad space on the spine to a bankruptcy lawyer and it said "Bankruptcy" in big letters--and whenever anyone came over they would see it on my bookshelf and ask me with concern why I had a book on bankruptcy--I finally had to black it out with magic marker), one slightly smaller one for Saratoga Springs and surrounding towns, and one very thin one for just Saratoga.

However, three years ago, when I got rid of my landline in favor of a cellphone, I stopped getting any phone books. After all, as far as I know, there is no directory anywhere of cellphone numbers. I could probably order a phone book from...someone (I recall you used to be able to do that). However, I'm cheap and lazy and can just as easily look things up online.

I mention this, because it occurred to me that as more and more people ditch landlines in favor of cellphones (and, thinking forward, as more people turn to VoIP), will anyone be getting phone books? At the same time, online search is becoming more and more popular. And what happens to companies that rely on Yellow Pages advertising? I expect they will need to move online, if they haven't done so already.

I also mention this because Verizon is looking to shed its directory publishing business, and this article in Business Week talks about the exaggerated rumors of the death of the Yellow Pages:

The announcement that Verizon Communications (VZ) put its directories business up for sale touched off the usual barrage of speculation over possible buyers and a sale price. The upshot: Expect a bidding war that could fetch anywhere from $13 billion to $17 billion (see BW Online, 12/6/05, "Yellow Fever, Courtesy of Verizon"). Indeed, Carlyle Group, a large private-equity firm that recently sold directory Dex Media to R.H. Donnelley for $9.5 billion, is taking a look at the Verizon unit, say sources close to the deal.
But as competition from rivals such as Google (GOOG) for local advertising intensifies, the value of traditional yellow pages businesses is a matter of debate. "The long-term future of this business is suspect," says Michael Price, senior managing director of Evercore Partners, a New York-based investment bank.

Phone companies have long dominated the yellow pages business, thanks to their widely recognized brands, databases of local phone numbers, and relationships with local merchants. Over the last few years, however, independent yellow pages publishers such as Yellow Book USA, a unit of Britain-based Yell Group, have been taking share by charging about half as much for ads as the phone companies.

FIVE MORE YEARS? More recently, Web giants such as Google and Yahoo! (YHOO) have leaped into the local ad market. And down the road, wireless operators are expected to compete more aggressively for local ads as consumers ping their cell phones for restaurants and bar locations on the fly. So as the market crowds and ads shift to the Web, how long can the business of selling ad space in fat yellow books stay profitable? And which players will ultimately win?

The short answer is that the traditional yellow pages business is expected to remain profitable for at least five more years. Although they seem like relics, the paper-bound tomes are still an effective advertising tool. In a sense, yellow pages were an early iteration of search engines. Like with Web searches, when consumers use the yellow pages, they're already looking to buy or find something.
Yellow Pages Assn. President Neg Norton says advertisers pull in revenues that average 13 times the price of each ad. In addition, he insists that yellow pages are not anachronisms in the Digital Age. According to his figures, 18- to 24-year-olds use the print books 30% more often than older adults as they establish households and get married. "There's still tremendous value in the print business," says Dennis Payne, CEO and president of AT&T Yellow Pages. "It's got more content than any other resource out there, electronic or print."

FIGHTING BACK. Over time, though, analysts expect more local searching to move online. Researchers at Kelsey Group, a Princeton (N.J.) consulting firm, predict that by 2009, one-third of the $15.5 billion yellow pages market will be on the Internet. Google and Yahoo are building up their local search operations, and Time Warner's (TWX) America Online unit and IAC InterActiveCorp (IACI) are trying to switch local advertisers to properties such as AOL's DigitalCities and IAC's CitySearch sites.

Yellow pages publishers are fighting back by setting up their own sites. Verizon has SuperPages.com, while AT&T (T) and BellSouth (BLS) last month relaunched Yellowpages.com. Still, about 66% of searches for local businesses begin at search engines rather than yellow pages sites, according to a Nov. 29 report from Deutsche Bank.

In the end, the battle for dominance of local advertising will hinge on which medium can deliver the most customers at the right price. Yellow pages publishers have the relationships and all the data on local merchants. But Internet companies dominate the online audience, wield more expertise in Web technology, and offer a more transparent pricing engine for advertisers -- you only pay when users click on your ad.