Search Engines Are Revving Up for a Local Fight

Last week the search-engine stocks went loco. Now the race is on to go local.

Shares in search-engine operators Mamma.com (MAMA Quote) and Ask Jeeves (ASKJ Quote) surged last week, demonstrating that Wall Street's interest in the Internet paid-search business hasn't flagged. Indeed, one of this year's biggest events is expected to be Google's initial public offering later this year.

In the meantime, participants in the pay-per-click search-engine business have their eye on what they see as a hugely lucrative subset of the paid-search market. That niche covers pay-per-click ads from local merchants who, unlike online retailers such as Amazon.com (AMZN Quote), are simply trying to reach customers in their immediate geographical area.

Essentially, making progress in this niche means competing for customers with the Yellow Pages and local papers. The market is huge, but no one has yet figured out quite how to reach it online, despite many attempts from big Internet companies to do so. And with all that money at stake, the search-engine outfits are about to encounter new foes.

That would mean, for example, that a user who typed "shoes" into a search engine would end up not with a listing of mail-order shoe stores, but with a listing for a shoe store a half-mile away.

"Anybody would agree there are lots of small, local advertisers who are not online ... who rely on print yellow pages to get new customers," says Danny Sullivan, editor of SearchEngineWatch.com. "The key thing is to come up with the advertising product that's not overwhelming" to potential advertisers, he says.

Fully Scalable

The spoils in this fight are potentially huge. The yellow pages market amounts to $15 billion annually, on top of the $30 billion market for newspaper classified ads. Those are phenomenal numbers given the lesser, if fast-expanding, scale of Internet commerce: Piper Jaffray said last year that the U.S. pay-per-click market would top $4 billion in 2007.