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New Media Finds Success With Local Ads, Old Media Struggles


Web companies tapping local advertising markets by offering cheaper, more accountable ways to reach consumers are thriving at a time when the longtime dominators of that market - newspapers, radio stations and television outlets - are reeling from the stagnating economy.

The disparity of performance between old and new media at the local level could be the making of a permanent shift to online advertising spurred by the financial crisis and its aftermath. Under increasing pressure to cut costs, merchants are discovering the value of the Internet as a marketing tool for reaching a targeted audience while closely tracking their return on investment.

"Our October was better than September, and our November was better than October," CitySearch Chief Executive Jay Herratti told Dow Jones Newswires.

CitySearch - a unit of IAC/InterActive Corp. (IACI), Barry Diller's digital media empire - is an international Web site used by Web surfers to find dining and entertainment options in specific cities, making it an attractive advertising outlet for restaurants and theaters.

IAC Chief Financial Officer Tom McInerney said on a recent conference call following the company's third-quarter earnings release that CitySearch and Match, local online advertising businesses that make up about a third of IAC's revenue, have seen "no discernible impact" from the economic downturn. ServiceMagic, another local ad business making up 10% of IAC's revenue, has seen a slight downtick in its growth rate, but the ServiceMagic's pace remains strong. This comes as IAC's non-local search and display ad businesses are starting to feel the effects of the slowdown.

"One would expect you might see [an impact] in local advertising at some point," McInerney said. "We are not seeing that so far, which is a good thing."

Revenue Increase

In the third quarter, ServiceMagic posted a 37% increase in revenue to $33.8 million compared with the year-ago period, and it reported operating income of $8.1 million, up 76%. Match, an online dating service, saw its revenue increase 5% to $93.5 million, while its operating income declined by 18% to $24 million because of increased marketing spending.

The company doesn't break out results for CitySearch but has said the business became profitable in 2005, and it's expected to reach $100 million in revenue next year. Herratti said that the business has had consistent double-digit revenue growth for the past three years and that the current downturn could trigger the massive migration online from advertisers that the industry has been expecting.

"We're still waiting for the day when the floodgates open," he said. "Maybe this is the tipping point, and something big will happen."

While its success in local advertising hasn't prevented IAC shares from sliding lower in recent months, the stock has held up better than its peers. Since IAC broke itself up Aug. 21, shares of the remaining parent company are down 9%, narrower than the 36% drop in the S&P 500 over that period and even better than peers like CBS Corp. (CBS), Gannett Co. (GCI) and New York Times Co. (NYT), all of which are down at least 46% over that period.

Herratti said the local online market has been growing at 17% to 20% annually, and he expects that to increase as advertisers become more comfortable with the complexities of digital media.

"We have more consumer demand than we could possibly deal with," Herratti said. "Our problem is signing up more merchants to our service. The penetration is still extremely low in terms of percentage of local merchants that have actually gone out and are doing Web advertising, but these tough times should make people finally take the time to shift their advertising spend online where it can be used more efficiently."

Traditional Media Struggles

Traditional media companies in print and broadcast have struggled for years with the rise of the Internet. Their future is viewed as increasingly uncertain as they have been unable to renew growth prospects with revenue generated online. With the ad market now mired in a recession, major media conglomerates are embarking on painful consolidations and restructuring measures.

For its third quarter, CBS reported television ad revenue down 14%, while radio ad revenue dropped 11% and its outdoor advertising business posted a 4% decline in North America. Across the board, the company attributed its performance to weakness in local advertising.

News Corp. (NWS) Chief Executive Rupert Murdoch said the outlook for his company's local television stations was "grim."

Meanwhile, digital media companies are taking market share.

Scott Saklad, general manager of the Red Sox Team Store near Fenway Park in Boston, has been advertising for years with outlets like New England Sports Network, Boston's local cable sports network, and WEEI, Boston's sports talk radio station. This year, he shifted a portion of his ad spending to TruMedia Networks, a company that develops online communities for Boston sports teams like for the Red Sox and for the Celtics.

"You can't replace TV and radio because they paint such a broad brush, but it's important for us to be where the real diehard fans are, and many of them are online on sites like Sawxheads," Saklad said. "TruMedia understands my market and its unique culture in a way that the big guys don't, and the Web provides more measurable results."

Local advertisers are also turning to Google Inc.'s (GOOG) AdSense service, which can place their text ads on Web sites that specifically cater to their target audience.

"Ad Sense helps us identify additional advertisers eager to access consumers in the local market," said Rafe Anderson, chief executive with TruMedia. "It's clear from the sponsors we work with that it's less about branding and more about results from the click through to the sale."

For its part, CitySearch allows merchants to sign up for an online ad budget of a few hundred dollars. In return, it can deliver a top listing in their search database and a profile that includes features like promotional videos.

Budgets are spent on a pay-for-performance basis, and so CitySearch gets paid only when users click on a client's listing, view menus and driving directions, or make a phone call for a reservation.

CitySearch competes with major search engines, but Herratti said the search giants often act as partners because they deliver traffic to CitySearch.

"There's still so much room for competition in this business that the players will never be pushing against each other," he said.





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