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JUNE 7, 2005 NEWS ANALYSIS :TECH By Timothy J. Mullaney YellowPages Goes for Gold on AOL The SBC-BellSouth online directory will strike a portal deal that could help it claw back the ground lost to Yahoo! and Google The fight over who will control the $15 billion U.S. commercial directory business as it moves online will intensify tomorrow. BusinessWeek Online has learned that BellSouth (BLS ) and SBC Communications (SBC ) have reached an agreement to supply Yellow Pages listings to AOL (TWX ), including its flagship U.S. online service and AOL.com portal. The deal could nearly double the reach of YellowPages.com, the SBC-BellSouth joint venture that merged their online Yellow Pages units last November. YellowPages.com will integrate SBC's SmartPages.com site and BellSouth's RealPages.com by late 2005. "SMART DEAL." The joint venture is at the heart of the two companies' strategy to meet competition from Yahoo! (YHOO ) and Google (GOOG ), whose new local search engines use zip codes and city names to help consumers zero in on small, local businesses like plumbers, auto mechanics, and restaurants. That market has traditionally been the purview of the print Yellow Pages, which serve more than 2 million small-business advertisers. But the phone companies have got off to a slow start in fighting off the online interlopers. A comScore Networks survey released in April says 66% of Web surfers looking for local information use search engines rather than Internet Yellow Pages sites. Adding AOL, which accounted for 59 million Web Yellow Pages searches in the first quarter of 2005, will help to shrink the gap between the two Bells and their closest rivals. Yahoo accounted for 464 million local searches in the first quarter, according to comScore Networks. Google accounted for nearly 429 million searches. BellSouth says YellowPages.com and affiliated sites were used for about 210 million searches per quarter before the AOL deal. "It's a smart deal, one they had to do," says Greg Sterling, an analyst at local-advertising research firm The Kelsey Group. "They need to market their own sites, but in the short term they also need distribution." EYEING BIG GROWTH. The battle over local Internet advertising pits some of America's most powerful companies against each other over a highly lucrative business. Profit margins at Yellow Pages publishers are often higher than 50%, excluding interest, taxes and noncash charges. There's one hitch: The print Yellow Pages business is growing slowly -- only about 1% to 2% a year, according to researchers at Kelsey. But the combined business of Internet Yellow Pages and local Web search is expected to grow 50% a year, from about $670 million last year to $5.1 billion in 2009. To seize the industry's big growth market, BellSouth and SBC teamed up last year. Their separate Yellow Pages sites had fallen well behind portals and even Verizon's SuperPages site in attracting surfers. INTUITIVE BRAND NAME. Piper Jaffray Internet analyst Safa Rashtchy has argued that Google and Yahoo have a built-in brand advantage in convincing consumers to research products and choose merchants online. She believes that Bells needed to come up with an equally catchy brand image, such as YellowPages.com, to keep their own sites in the forefront of consumers' minds and have a chance to compete. Together, BellSouth and SBC bought the startup YellowPages.com, which had a nationwide sales force, extending the two Bells' reach outside the states where they're the primary local phone carriers. It also provides an intuitive brand name for people who want to find local merchants. The AOL-YellowPages.com deal is not likely to have an immediate, major financial effect on any of the companies. Sources close to the deal said YellowPages.com is paying to have its advertisers appear in color-enhanced, more detailed listings at the top of each set of search results. FIGHTING FOR THE FUTURE. The deal gives the Bells the ability to tell advertisers who use both the print and online Yellow Pages that their ads will reach more people for about the same price. "We're a media company, and our goal is to build the largest audience," YellowPages.com CEO Charles Stubbs said in an interview before news of the AOL deal broke. The joint venture has similar deals with Yahoo and Infospace (INSP ). AOL gets more complete listings of local merchants, giving surfers a reason to choose its Yellow Pages product over Google or Yahoo, as well as ad revenue. In effect, the pact gives AOL a cut of the efforts of the 4,000 sales reps working for the printed Yellow Pages published by BellSouth and SBC. "This agreement extends our strategy of partnering with leading companies to provide our audiences with powerful and comprehensive search and directory services and to open up new opportunities to meet growing demand from advertisers," says Jim Riesenbach, AOL's senior vice-president of search and directional media. The deal's real payoff will come if it helps AOL and the Bells improve their position against the portals. The stakes are control of a local advertising market that Google CEO Eric Schmidt told an investor conference last month should be bigger than other markets the search giant has yet entered. If the Bells and AOL lose that, they will have lost a major part of their future. Mullaney is BusinessWeek's E-Business Editor, based in New York

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