A New Zip Code

Until recently, the online local space was considered sleepy at best, dormant at worst. Yet no one doubted its potential at some point down the line.

But now, a confluence of factors is spurring interest in the local Web. As a result, several major online media companies are embarking on ambitious content plays in the segment, including AOL’s local news project Patch.com and MSNBC.com’s purchase of EveryBlock.com. Plus, both Google and Microsoft have recently shown interest in purchasing the local listings guide Yelp.

“Online local is the largest commercial opportunity yet to be won,” says Jon Brod, evp of AOL Ventures. “It is the great white space.” And advertisers are finally giving online local some marketing cred. Borrell & Associates predicts that local online ad spending will reach $14.9 billion this year, an increase of 5 percent. “Local is certainly the new black,” says CEO Gordon Borrell.

However, while local has been one of the few segments growing over the past year, that’s not exactly TV money. So why the interest in the space if the dollars aren’t huge? “Local newspapers used to be the 800-pound gorilla,” says Charlie Tillinghast, president and publisher of the MSNBC Digital. “The demise of newspapers creates a great vacuum.”

Tillinghast says that demand can be met by EveryBlock, which is attempting to become a hyperlocal resource by gathering and organizing info from government agencies, and then tasking local users to provide block-by-block news. “We’re going after the truly local stuff, the messy part of local. The potholes.”

Patch, AOL’s growing network of local news sites, may not aspire to be all about public works departments, but they are digging deep into local content. The company has hired reporters to report on towns like Garden City, N.Y., covering topics like the creation of a new animal cruelty unit, the doling out of the town budget and high school hoops.

“This is low-cost professional journalism,” says AOL’s Brod. “What used to be cost prohibitive and labor intensive isn’t anymore.” In other words, publishing technology is cheap, and there are tons of unemployed freelancers out there looking for work.

Consider startup Examiner.com, led by former AOL Digital Cities exec Rick Blair. The company has tapped a staggering 29,000 writers, including former reporters, bloggers and passionate locals, in 240 U.S. cities. Blair says that Examiner.com now reaches 18 million unique users. But the majority of its writers are part-timers. “We tell people, ‘Don’t quit your day job,'” says Blair. Still, not everyone sees hyperlocal news as a gold mine even if costs are low. “The audience opportunity is what is driving the investment,” says Tillinghast. “I don’t think it’s the revenue.”

“AOL and some of the other guys are a bit misled,” says Borrell. “There are very few examples of where local news is supported by ads. More money is going to sites where people are reaching buyers.”

Borrell is referring to local online lead specialist companies like Yodel, ReachLocal and Local.com. These companies, which have exhibited the largest ad growth in the space, do the dirty digital work that many small businesses aren’t equipped to do like creating banners and videos, and navigating search marketing. The fact that the local lawyers, plumbers and pizza places were just not ready to market online (many still don’t have Web sites) has always been considered a major hang-up in the local online space.

But according to analysts, that’s changing with the growth of social networking which has made it easy for local businesses to market themselves for free without even building sites.

“When you look at local brands, the uptake of small business on Twitter is big,” says Matt Booth, senior vp and program director, Interactive Local Media. “Something like 60 percent of new businesses expect to build a Facebook page. You have the phenomenon of these things being omnipresent, and they’re free and have a lot of traffic.”

Borrell agrees. “The Internet allows such a great level of targeting,” he says. “If you want to reach 18-to-24-year-olds in Duluth, Facebook allows you to do that in a heartbeat, and with your credit card after midnight. You can’t do that with a newspaper.”

AOL’s Patch strategy, besides hyperlocal reporting, also taps self-service advertising. In each market it enters, the company is creating Web pages for nearly every local business and do-it-yourself ad platforms.

However, despite the proliferation of localized content and ad options, perhaps the single biggest driver of the local online medium over the last few years is the smartphone, and the string of apps that followed. Once millions of Americans started carrying around both the Web and a GPS device in their pockets, that opened up huge marketing possibilities and elevated local in the ad industry’s conscious.

“I think the iPhone was the tipping point,” says Chris Tolles, CEO of the local news aggregator Topix.com. “Two years ago local was not a big topic. You used to hear buyers say, ‘I’m buying Chicago, New York, Albuquerque and the Internet.’ Now when I walk into [an agency], the kid who uses Foursquare on his iPhone says, ‘Yeah, local’s important.’ I can pitch a local play, and people are listening.”

Yet others maintain that local online advertising will always be provincial and not the domain of big media shops in New York.

“Our thesis on local is that it’s very large and very fragmented,” says Jay Herratti, CEO of Citysearch, which just rolled out CityGrid, an extensive local online ad network that taps into numerous existing local sales nets. “Madison Avenue is only part of the market.”