One of the basics of business history is to start small and scale upwards. All of the great franchisers of the late 20th Century practiced this. The name of the game was turning a profit in one community before moving on to others. The speed with which the franchises spread was based on the need for volume in a world of small margins, but the brilliance of people like Ray Kroc and Sam Walton was formed in a deep understanding of customer needs — something they gained by being up close and personal.
In so doing, each developed an appreciation for servicing (or creating?) the wants and needs of their neighbors. This meeting of a local human demand has been the cornerstone of business development since the beginning. It's interesting, too, to note that when the discount store phenomenon began in the 60s, it did so in a climate of local laws that prohibited outside discount stores in the name of protecting local businesses. How far we've come.
So we shouldn't be surprised, as we move from Media 1.0 businesses to the wild west of Media 2.0, that the concept of the importance of geography is extremely rare. This is especially true when looking at how venture capitalists work in the digital age and where their money is going to help build the new world. These smart people are exploiting the lack of walls — geographic or otherwise — that the internet enables, which means profitable scale can be achieved more quickly than building Wal-Marts in expanding circles around Rogers, Arkansas. MySpace, for example, redefines the idea of community, and there's little need for a geographic base with youTube or NetVibes or Pandora or a hundred other 2.0 start-ups. And yet, the biggest of the digital big boys, Google and Yahoo!, are now working to reposition (at least a part of) themselves as companies with geographically local value, which has turned the old franchising model upside down.
Google has begun placing local ads on their mapping application, which means people who use it to get directions are now going to encounter billboards along their digital trek. Yahoo! has begun offering local news items aggregated from the RSS feeds of local media companies as a new, local service for their users. This remarkable ability for a single, outside entity to better serve the information needs of geographically disparate people than the media companies in those geographic regions is a sad commentary on the ingenuity of local entreprenuers and the investment community that serves them.
From a distance, it seems that this is the way the big VCs and their money want it to be. By continually supporting only those business models that attract large numbers quickly, they are forcing basic top-down (1.0) laws on those of us who see greater value at the local level. So while the web and all that it offers is moving to a one-to-one or bottom-up paradigm, the world of the dollar continues to draw its influence and power from the top-down. This is beyond ironic, especially with venture capitalists who tout Media 2.0 applications.
It's also not healthy for our economy or our culture, because as the Googles and youTubes of the world continue to grow, they do so at the expense of local communities. Every advertising dollar spent on Google Local, for example, is money taken from the local community and transferred elsewhere. That's just fine with the investors of those companies, of course; it's the American way. But our unbridled support of this means fewer choices in a world that these investors proclaim as one of more.
In the venture capitalist world, no one is more visible, transparent and open than Fred Wilson. He operates an important blog and is the Managing Partner of two venture capital firms, Flatiron Partners and Union Square Ventures. He's based in New York and is widely quoted by my colleagues throughout the media observation world. I've been reading his blog for several months, and his is an important voice in the Media 2.0 space.
In an email exchange over the weekend, I asked Fred why VCs seem to avoid local investments.
I have had numerous discussions with people doing local stuff like New West, Fresno Famous, Buffalo Rising, the stuff going on in Charlotte, Northern Virginia, Philly, etc.
And I have encouraged all of them to come see me when they have a model that can scale to a real business.
The truth is that most of these services don't yet have more traffic than my blog, which is shocking to me, but that's where it's at today.
I think we are going to cross the chasm soon, and people will start using the web for local news instead of or as a compliment to the home town paper.
But the geeks are the first to adopt this stuff, whether its blogging, online commerce, PayPal, eBay, digital downloading, youTube, etc, etc.
So until the soccer moms, plumbers, and grandfathers start going online with the gusto of the geeks, we'll have to wait for these opportunities to turn into venture plays.
The examples Fred lists above generally attempt to deliver hyperlocal news and information using a reach/frequency business model. This is why he expresses surprise that his own blog delivers bigger numbers. But local attempts to capture ad dollars this way — even those that involve the local citizens media community — are competing with other local portals in a never-ending quest for eyeballs. Their competitors have two advantages. One, they have deeper pockets, and, two, they have mainstream media outlets with which to promote their online activities, so it is an extremely difficult, uphill climb to capture market share.
Meanwhile, everybody misses the point of slick 2.0 applications elsewhere pulling ad dollars from businesses more interested in doing business than propping up what used to be the only ad game in town. This should be viewed as a significant challenge to media companies and local investors across the country, because there is significantly more at stake than meets the eye. As that ad money drifts outside the local community, it will impact more than just the media businesses located there. Big cities don't build stadiums to make professional sports team owners happy; they do so, because a local pro sports team means far more to the community than ticket sales. Same with local advertising dollars.
No one sees this better than Gordon Borrell, whose research and consulting business is based on counting local ad dollars spent online. One service he provides is a precise analysis of the local online ad business, and the volume of dollars being spent usually astounds executives of local media companies, most of whom are getting only a very small slice of the pie. Many simply refuse to believe the numbers, while others look at their sales managers with that unmistakable "you're not doing your job" look, and neither of them know what to do. And in my business, I find that when eyes are finally opened, local media companies find themselves at a significant disadvantage, because they have neither the resources nor the time to try and capture that which has been lost. That they will continue to lose even more is still not enough to force such investments.
Borrell poses an important question when he speaks with local media companies. "Will," he asks, "the online advertising pie ever reach the local/national parity that's found with advertising overall?"
Like Borrell, I believe parity is possible — but not without three important things happening first.
One, local media companies simply must move forward with Media 2.0 concepts that offer real value to the communities they serve. This is a difficult proposition, because a.) most existing media companies don't understand the space and b.) they're too busy defending themselves against the disruption to see the value of embracing it. While existing 2.0 applications have proven that geography isn't a barrier to entry, the reality is that every community has an identity and values that cannot be duplicated from without. It's simply a matter of applying technology properly. Unlike a Wal-Mart Supercenter moving into the neighborhood, barriers to entry in this space make it possible for anybody to compete without spending a fortune.
Two, the local advertising community needs to be brought up to speed on what's possible locally in the 2.0 space, and that doesn't mean spending more on some local media company's portal website. This is the biggest roadblock to breaking the stranglehold that well-funded outside entities have on those local ad dollars. Inexcusable local advertiser ignorance is bliss to those who are sucking ad dollars away from local communities. And there's a catch-22 with this one that moves the ignorance into the category of deliberate. Ad agencies have a lot to lose in a world that doesn't respect middlemen or their role in the economy, so they don't really want to learn. These companies will disappear as an advertising factor downstream unless they, too, find a way to embrace the disruption.
Three, the VC community needs to see the potential in Borrell's reaching of advertising parity and help fund local online businesses that may or may not be affiliated with public media companies. Outside investment capital isn't encumbered by quarterly bottom line demands, and local media companies are helpless to invest the resources necessary to create local 2.0 applications. As Fred noted, hyperlocal efforts to date aren't "real" businesses yet, and the big VCs are more interested in duplicating that which already works than trying to build things that might. So the job falls to local investors and entreprenuers, but so far, that's not happening. Everybody, it seems, wants the big score.
The reality is that there are likely many more cumulative local ad dollars that one can obtain with an old-fashioned strategy of applying the franchise model to New Media than by spending lots up front to build a new, global start-up. The technology is there to do so; it's just a matter of the right entreprenuers and the right investors finding each other.