Will All E-Commerce Be Local Someday? Regional Markets Lucrative

BOSTON -- On the Internet, there's still one last place where "b-to-c" isn't a four-letter word: the local market.

Investors have usually thought of the Internet as a place where companies are everywhere in the world, yet nowhere in particular, at the same time. But one of the biggest untapped business-to-consumer commercial opportunities on the Net is advertising and selling things to people in a specific locale -- getting people to buy their next book from the store down the block, not from

Amazon.com

.

That's the belief, at least, at

Local Online Commerce 2000

, a conference run by the

Kelsey Group

research team in Boston this week. As Wall Street at large has grown disenchanted with the idea of companies selling items such as furniture, compact discs and pet supplies online, participants in the local market have gathered to hear executives from the likes of

America Online

(AOL)

,

Knight-Ridder

,

(KRI)

,

InfoSpace

(INSP) - Get Report

and

Ticketmaster Online-CitySearch

(TMCS)

talk about the opportunities and challenges of using a localized Internet to market to consumers -- and make money in the process.

Good Camerawork

Perhaps the best snapshot of the local market came from Ted Leonsis, who, as president of AOL's

Interactive Properties Group

, oversees the company's

Digital City

network of local sites. Leonsis, who joined AOL in 1994, describes that moment at AOL with what one might call the paradox of the futurist: Entrepreneurs always misjudge how long it will take for whatever they're building to take off, he says. But when it finally does take off, it becomes far bigger than they ever imagined it would. So that's how AOL went from a handful of subscribers to becoming, with the

Time Warner

(TWX)

acquisition, what Leonsis calls "the world's most-significant media company."

So how does AOL, circa 1994, apply to the local online market? "I smell the exact same thing," says Leonsis. "Local really is the next big thing," he adds, for the moment ignoring AOL's international expansion, its high-speed Internet initiatives and the industry's daily grappling with the future of online music.

In Leonsis' mind, localized Internet has passed a hype phase, settled back into reality and is now on the way to something big -- something that in the not-too-distant future will amount to a quarter of the online advertising business, which is estimated to have surpassed $4 billion in 1999.

He's not alone in his optimism. Dan Finnigan, president of

KnightRidder.com

, operator of the

Real Cities

network of local sites, estimates that eventually half of online advertising will originate from local decision-makers.

Big Numbers

Though AOL doesn't break out results for its local business, Leonsis dropped some hints about the importance of AOL's locally oriented operations -- not just

Digital City

, but also the recently acquired

MapQuest

mapping business and the

AOL Moviefone

scheduling and ticket-buying unit. Local is growing faster than AOL as a whole, Leonsis says; margins are as good as, or better than, the core business's margins.

And in a year and a half, local revenue will put the operation on the scale of a

Fortune 500

company. (The cutoff for the 500 was around $3 billion in revenue this year; on the other hand, the Kelsey Group estimates AOL's local revenue at $250 million for 2001. Take your pick of the numbers.)

Speaking of Fortune, AOL has big plans for sprinkling Digital City throughout Time Warner's media properties, Leonsis says. That might include linking local financial resources to

Money's

Web site, or putting a tighter link between

Entertainment Weekly

and AOL Moviefone. "The localization of all these national media properties is an incredible opportunity," Leonsis says. As an example of how AOL hopes to merge national media with local, the company announced Thursday a deal with

USATODAY.com

in which Digital City will be the exclusive provider of local news and content to the newspaper site.

As a sign of demand for, and commercial opportunities for, local information, Leonsis disclosed that a Digital City email newsletter launched about two months ago already has about 800,000 subscribers -- well on its way to about a million subscribers three months after its debut.

Crystal Ball

But the big money seems well off into the future. Ticketmaster Online-CitySearch -- the only publicly traded local player -- will have an estimated $195 million in revenue in 2000, more than half of that from online ticketing, not its CitySearch operations.

And it's unclear which theoretical path to profitability for local sites is the quickest. AOL has built on its community and personals properties; Leonsis proudly uses the example of a group of Jewish orthodontists from Baltimore who used Digital City to organize a local bike trip. TMCS is emphasizing its ticketing operations. KnightRidder.com's Real Cities, says Finnigan, is avoiding the other companies' strategy of building national local brands and is instead focusing on civic pride and utility wherever it operates. "Philadelphians care about Philadelphians and Philadelphia," he says.

Wireless data services, considered to be a key element of local services, is another unknown. It will take the now-clunky services three to five years to reach the level of acceptance that instant messaging has, estimates Leonsis.

But it will get there. InfoSpace chairman Naveen Jain, a wireless data evangelist, discounted a recent spate of stories, saying that wireless information services aren't all they're cracked up to be. "It's a new medium," he says. "In a new medium, there are problems." In five years, Jain predicts, with his customary optimism, all wireless voice customers will also be customers for data services. "This could be a trillion dollars," he says.

Well, you know what they say about entrepreneurs. They tend to underestimate the time the future will take to arrive. But they also underestimate how big it will be when it finally arrives.