Reports that Google ( GOOG) is amassing a radio-advertising salesforce sparked a wave of speculation last week, ranging from a possible partnership with Clear Channel ( CCU) to an all-out acquisition of the broadcaster.

But regardless of whether Google announces any sort of deal, the buildup is something that investors in the Internet sector should watch. It will have serious implications for the increasingly important local-search space.

Last week, a research note by RBC Capital Markets analyst David Bank set off a firestorm by reporting that Google had hired high-profile radio-ad salespeople, and was in the process of bringing in 100 more. Bank found the development odd because Google doesn't currently have many places to put radio ads.

Google's hirings led Bank -- who covers broadcasting, not the Internet -- to hypothesize that Google could strike a deal with Clear Channel. With control of 20% of local radio industry revenue, ClearChannel is the player most receptive to new technologies and sales strategies -- and one widely believed to be on the block.

While it's in a commanding position where online advertising and tech-savvy businesses are concerned, Google is far from having a lead in lucrative local search, where many elusive small businesses still dominate. Instead, Google is neck-and-neck with rival Yahoo! ( YHOO), which actually could push into the lead if it continues to build on new technology it will introduce early next year.

According to researcher ComScore, 29.8% of users launching local searches used Google -- virtually the same amount as the 29.2% using Yahoo!. Meanwhile, the local-search market grew a rapid 33.4% to $3.4 billion during 2005, and will total $13 billion in 2010, according to Kelsey Group, a research firm.

Google is well aware of this opportunity and has been trying to make inroads. In August, the company announced a partnership with Intuit ( INTU), which makes accounting software popular with small businesses, that will lead to the inclusion of Google's local offerings with Intuit's software.

But its radio-ad hires will give Google new ammunition when it comes to going after all stripes of the local market. Bank wrote that "hiring radio salespeople could simply be Google moving aggressively ahead of competitors to lock in what might be the most valuable relationships at the local level and leverage these relationships across all its products over time, including: search, radio, display, video and others."

Along with giving its local-search efforts a serious shot in the arm, the move also could help it navigate another roadblock on Google executives' minds.

"Over half of local businesses don't have Web sites yet, based on the estimates we see, and our local business center helps those businesses easily create a Web presence so they can advertise online," said company co-founder and President of Products Larry Page in a widely noted comment during Google's third-quarter conference call last month.

But skeptics note that there's a good reason that half of local businesses don't have Web sites: They do perfectly fine without them. And while it's a bit much to expect the local liquor store or drycleaner to setup an Adwords account, mom-and-pop businesses are more likely to go for an established form of advertising that gets their message across to local customers cheaply.

Local radio gives small businesses that opportunity while giving Google another avenue to bring these businesses under its fold. Using the medium, the company has a huge opportunity to make money from even those small businesses that don't want to go through the hassle -- or see the benefit -- of setting up a Web site.

"While half of these businesses don't have Web sites, I'd bet that almost all have telephones," says Matt Booth, an analyst at Kelsey Group. And Google is currently testing technology that will allow businesses to trace the advertising origin of each customer call, which CEO Eric Schmidt lists as a key priority, Booth says.

Pay-per-call technology places different phone numbers into different ads and routs all customer calls through an existing phone system while keeping track of which number was dialed. This lets companies know which ad spurred a customer's call -- and how to value each advertising mode -- without any significant changes in their own communications systems.

A radio-driven, pay-per-call model is especially appealing, given that businesses on average end up paying $22 for each call they receive by listing in local Yellow Pages, according to Kelsey Group. And customers who actually pick up a phone to make a call are much more likely to be serious -- and hence valuable to businesses -- than those clicking on a Web link.

Google isn't alone in seeing the market here. Yahoo! said recently said it expects local advertising to be worth three times more than national advertising over the long haul. The new Project Panama platform that Yahoo! plans to introduce early next year easily can be upgraded to include pay-per-call functionality.

And when it comes to local markets, Yahoo!'s myriad media-company relationships may give it an advantage over Google's much more automated approach, which has otherwise proved so successful in broad markets.

However, Google's stable of power hires could help close this gap and set the stage for an "extension" of the search king's worldwide dominance into each neighborhood.

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