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— Backstory —
Just looking at the stock prices for the two largest independents in this once charmed sector of media, Idearc Inc. and RH Donnelley Corp., warrants a "Whoa! What happened?" Idearc, now at $1.55 per share, topped $68 last August; RH Donnelley, now at $1.31 per share, touched $38 last August. (AT&T Yellow Pages is the biggest player but remains safely ensconced in its Ma Bell parent.) Investors have obviously voted, sending the stocks down 98% and 97%, respectively. But what, exactly, were they voting on?
One big thing: That a certain online monster is going to come in and steal the entire industry once we all go digital. And two other matters: A downturn of even modest proportions might trip up Idearc and RH Donnelley because of all the debt they carry; and a recession could discourage lawyers, dentists, insurance agents and plumbers (to cite Idearc's top four revenue contributors) from renewing their local display ads. We'll concede the debt loads -- $9 billion for Idearc and $10 billion for RH Donnelley -- are pretty scary. But both were carrying more at the end of 2006 than at the end of 2007. Besides, for its trailing 12 months, each posted cash flow of $1.4 billion. That makes neither as leveraged as certain media companies taken private just before the curtain came down on private equity's covenant-lite era. The argument can also be made -- and locally entrenched yellow-page sales forces are out there making it -- that recessionary times are when advertisers need directory representation the most. Cash-strapped customers might be advised to cut back elsewhere, given industry research that puts the return on investment from yellow-page advertising at double that obtained from newspapers, triple that from magazines and 5 times better than television. Back, then, to the Google juggernaut. Granted, the company's dominance in search engine optimization, or SEO, is so great that "Google optimization" is considered a legitimate SEO alternative. But another acronym is, to date at least, just as relevant: IYP. IYP stands for interactive Yellow Pages. And for the $15 billion in stakes representing the U.S. directory-advertising industry, it's not at all certain SEO is destined to trump IYP. Here's why: A Google search on "carpenter Teaneck" returns, as its first entry, 10 business names, ranging from "Mr. Handyman" to "Anne Carpenter Inc.," as well as a phone number for each. Below that, though, is a link to encyclopedia.com entry about Mr. Edward Carpenter of Teaneck, who's further identified as a New York City school administrator. So much clutter follows, scrolling down, that even early adopters can be forgiven for missing that bulky old print product they used to peruse as kids. It's the product that frequently served up a photo of a local carpenter with his listing and invariably informed readers that he and his family had been "serving Teaneck for 50 years," considered "no job too small" and could also "Hablo Español." And if that weren't enough, the same page probably offered equally informing nuggets about a competitor whose business might have been located a little closer. Anyway, not to put too fine a point on it, SEO isn't there yet. IYP isn't either, even though AT&T has the best address -- www.yellowpages.com -- for the mission. Idearc isn't far behind with its superpages.com, to which it added Switchboard.com through an acquisition last year. And RH Donnelley got in the space with DexKnows.com, through its purchase of Dex Media Inc. in 2006, and built it out by buying Business.com in 2007. Still, an expert who requests anonymity concedes, "there's no better mousetrap." Yet he knows what the inevitable development of one will do -- "what the iPod did for digital music" -- and he knows what it will look like, too. "As soon as they come up with a screen interface that replicates a real yellow page, the print version is dead." The only issue then will be whether the feet-on-the-street model today's directory publishers employ has enough appeal to small-business owners and other advertisers to thwart Google's automated fill-in-the-form model. But even that could be moot, given the precarious financial shape of those leading the IYP charge, should they cede to Google that almighty mousetrap. Richard Morgan covers media for The Deal. |
Many have bowed before the juggernaut of Google Inc., but none so profoundly as the Yellow Pages.
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