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

Shares in search-engine operators ( MAMA) and Ask Jeeves ( ASKJ) 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 ( AMZN), 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 "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.

The big problem is that companies have been talking about tapping into the yellow pages market and developing local online advertising since the mid-1990's. Back then, Microsoft ( MSFT), for example, had high hopes for its Sidewalk venture. Using pay-per-click advertising -- in which advertisers pay for each time a search-engine user clicks on their listing -- is simply the latest tactic in trying to break the market open.

While the leaders in the pay-per-click search business -- Google and Yahoo! ( YHOO), which last year acquired market builder Overture Services -- have said they are working to develop the local pay-per-click market, they're not the only ones.

Last week, Verizon ( VZ) unveiled a revamped version of its site -- which, like Yahoo! GetLocal and Switchboard ( SWBD), is one of the largest yellow pages providers on the Net.

That revamped version introduces pay-per-click advertising for both national and regional advertisers. As part of that new program, says it has set up a process that makes it easy for small businesses to set up their online advertising, including selecting the keywords that will trigger their listing when a potential customer is doing an online search.

"We really do think this is going to change the way people are going to shop, especially locally," says Lester Chu, vice president of marketing and strategic planning at Verizon Information Services.

Customer Touchpoints

Another hopeful in the local pay-per-click market is Citysearch, the entertainment and nightlife site now owned by Barry Diller's InterActiveCorp ( IACI). Citysearch launched its pay-per-click advertising model in mid-2003.

In an interview earlier this year, Citysearch President Briggs Ferguson acknowledged that the SuperPages sales force's pre-existing relationships with print yellow pages advertisers were a "huge asset" in selling advertising for its site. "They clearly have an advantage in having the installed base that they do," he said.

But, he said, the productivity of Citysearch's sales force had increased significantly over the past nine months. "We actually have a very productive sales call," he said.

While Citysearch -- one of the holdovers from the enthusiastic mid-'90s launch of local content sites -- is a recognizable name in its top markets, it has to increase its unaided awareness among Internet users, Ferguson said. It also has to expand the typical perception of Citysearch as an information source for bars, restaurants and events into new categories.

What both Citysearch and Verizon are doing is worth watching, says's Sullivan. "These are places that do have some traffic. They do have an existing audience. They do have good content. They do have advertisers."

Peter Krasilovsky, vice president of the local-media-focused research firm Borrell Associates, says, "Citysearch, like a lot of other local media companies, hasn't really been able to make it on the Internet by selling traditional-like advertising. ... The Internet yellow pages have been similarly disappointing for the incumbent yellow pages publishers, who have poured millions of dollars into trying to drive traffic to them." For Verizon, depending on the pay-per-click model "is a very bold step," says Krasilovsky. "And if they fail, they're going to have to start from scratch with something else."

Krasilovsky says it is exciting how small businesses are beginning to pay attention to search engine marketing, but he cautions against concluding that recent local initiatives signal lasting success. "It's a major revolution," he says, "but the money is not there yet."

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