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SLIDES
The
path to the future
Andrew Day, CEO,
World Directories
SLIDES
The
path to the future
Leo
Reif, Vice President, Media and Telecom Group,
CSFB
SLIDES
The
path to the future
Michel
Sasportes, Partner, OC&C Strategy Consultants
The question often asked of strategic consultants is, what are the growth perspectives and what are the threats? I have been asked this question at least ten times over the past five years. Today, I will try to stick to the basics of what strategic consultants look at. There are two elements here: firstly, the evolution of consumer and end‑user practices, and secondly, the advertising trends and what this tells us about the evolution of the business.
a. Mature markets
We are moving into a world full of technology. We are no longer in a growth market. We will be in mature markets within five years. This is remarkable. Within ten years, we have achieved maturity in the online market. Across Europe, the PC penetration rate is 70%. This is not the case in all countries. There are discrepancies among different revenue categories and households. This will not be the case five years from now. Broadband has 50% penetration. This will have a significant effect on the way people look at directories.
Mobile has roughly 100% penetration. It is a very mature market. You are starting to see consumers having two mobile phones. 3G represents about 50% of the growth.
GPS has about 20% penetration in the car market, either through direct equipment or through add‑ons.
This all means that we are going to see directories through screens. For this reason, EADP may change its logo within the next five years. This is something that could be discussed. We are still in a world of paper directories and a growing Internet market. There will be a shift where most directories will be on screen. Paper will no longer be the focus.
We have started to see the impact of the use of local media to search for information. Print and Yellow Pages have decreased over the past two years to 75% and 60%. All the Internet media and search engines have grown consistently for the past two years. This is only the beginning of a massive switch. This raises the question: who will be the leader in consumer search?
b. Consumer search
Consider the generation factors. 80% of those who were 15 to 24 years old in 2002 had the propensity to search using the Internet. What will happen in five years? Consumers are going to turn primarily to screens to look for things as they get older. You do not lose the habits you form in earlier years. This is an issue for some printed page sectors.
However, to date, directories have not performed that badly. We do not have the exact figures or balance of sales from online to offline, but most players have achieved migration from offline to online revenues. The significant growth in online is driven mainly by the convergence of existing SMEs and not the acquisition of new categories in business. The industry has performed well overall.
c. Targeting customers
How many sites or customers were targeted directly through search engines and through directories? This is linked to the proportion of websites that the SME customer uses. Today, the proportion is close to 60%. SMEs are those businesses smaller than 50 people, which encapsulates most directory businesses. 80% of Yellow Pages customers have a direct web presence. They can search directly using not only the directory but any engine. The SMEs that are targeting your customers are also younger and searching online. They replicate what they are doing in their own business. Roughly 50% of searches for companies are done through search engines. In the future, 80% will use the Internet first to look for information. It will not be the only tool used. Other media will be utilised but the first place people turn to will be the screen.
d. Efficiency
This is not the whole story. Efficiency is also key. You can have many people online but if the proposal is not efficient for the advertiser you have a problem as a seller. How can you measure efficiency? What is the cost per lead of the different media? Internet and online Yellow Pages are doing fairly well. More critically, what is happening to the cost per lead of print Yellow Pages? It is performing better than other print media, but it is significantly less efficient than other Internet media. This is the kind of matrix that your customers will use.
e. Volume
If you do not have volume, efficiency means nothing. You can have very low costs in meeting your customers but if you do not have volume, you will need to diversify. For example, we performed the most common searches in the UK – restaurants, plumbers and car repair – in a small city such as Cambridge and benchmarked search results across different engines. Incumbents Yale and Thompson do fairly well. Google is an interesting case. Traditional Google, google.com, had very limited responses but were highly paid. Google Local has a stronger reach in some local categories. This highlights the distance between the different target groups. A consumer who migrates to online searching where he or she gets numerous responses will probably not go back to offline searching. This is a risk indicator. In order to monitor the reach, you have to repeatedly do these kinds of searches in smaller cities. Google is in the US, Canada, the UK, Japan and China. It is probably moving to continental Europe soon. Yahoo Local is present in the US. These are the players to keep an eye on.
f. Sales
How do we make money? The critical factor is sales. This is probably the core asset in the business. A local sales force is critical. The issue for newcomers is whether a local sales force will be established. Google will not set up a local sales force. It is too costly. It is a technology company and is not used to this. They sell direct. They take orders more than sell. They do not know how to manage this. One of their options is to acquire.
One option is to leverage a partnership with local players, in particular if you have a strong number two in your market. The number one might hesitate to take such a step but the number two may well play this kind of game. For example, in the UK, if you do a Yahoo Local search, a double branding page appears: one with Yahoo and another with Thompson Direct. There are risks to this but partnerships are possible.
Is it possible to make pre‑emptive moves? Can local leaders work with international leaders to group and share their core assets: the sales force? This is an open question for the industry and will be discussed in the boardrooms over the next five years.
a. Branding
The traditional search sector is a world of brands. It will not be a battle of technology but of brands. What are the implications of this for SMEs and your clients?
b. Consolidation
Can you consolidate media locally? Travel, for example, has gone through such consolidation. Some markets are still to be consolidated at the local level. The real estate and car markets do not have local leaders. Such consolidation will probably be achieved through acquisition. We are talking here about diversification.
c. Rated information
The other, trickier way is to take the consumer route. Consumers want qualified information, rated information. This is a growing trend on the Internet. You now not only find the product but the ratings for the product submitted by other consumers. This is extremely difficult for the service industry, where you do not want to have your customer rated by the consumer. It is still something to look at. eBay has done superbly in making money out of consumer ratings. You could have discounts or better insurance if you sell to well‑rated sellers. Zagat, a US restaurant directory, extracts some money from consumer ratings. Consumer subscription is offered on this basis.
d. Mergers and acquisitions
In all cases, the next five years will be extremely exciting, particularly in terms of M&A. The M&A we will see will probably not be private equity or cross‑border consolidation but cross-media consolidation, local and international‑local. The capital structure of directories opens up the game. The fact that some of them are in the hands of private equity and the high evaluation of the Internet players might be good catalysts for the changing of ownership of the industry. There are doubts about the real value of pan-European deals. Rather, we will probably see alliances of international brand leaders and local brand leaders. This is clearly very exciting.
From the Floor
[Inaudible]
Leo REIF
In the future, consolidation may mean [inaudible] but also across platforms. You may see the big US directories players in different industries coming to Europe. Once US consolidation has taken place, US directories will start to look outside the borders. I did not have any specific companies in mind that are looking to do that. There is a lot going on in the US with the independents and so on. This is probably something for the medium term.
From the Floor
[Inaudible]
Andrew DAY
Certainly, the use of local search and paper performance allows you to attract a more global advertiser or large corporate advertisers. This is probably just as well. In some cases, these customers have advertised with us but in many markets they are the first people to move. If they have been in print they are more willing to take on online, voice or wireless. They are also more sophisticated in their marketing. They want such things as proof of return on investments. This is a perfect example of trying to get the top end of the market. We should also remember some of our customers are too small to be included in some of our large Metro books. We need to have other strategies to capture customers falling out of those large Metro books: local books, print verticals, online verticals and so on. It is an opportunity to go up and down: down to protect, up to expand. Some of the push advertising options in wireless and real-time advertising – that is, rather than advertising once a year or on a website, advertise between 12:00 and 14:00 if you are within 5 kilometres of a city – allow you to take marketing spend from other areas. It is not just a case of switching customers but advertising to particular users at particular times. An interesting development is the return on investment criteria. Return on investment measured as clicks per euro is erroneous. What advertisers want is sales. The same number of clicks on two different media may represent a difference of four- or five-times return on investment. The wireless world blows this right open. I think industry is underdone on return on investment. We have allowed somebody else to come in and define return on investment as click per euro. Ask you advertisers: they want money spent in their shops for their services.
From the Floor
[Inaudible]
Andrew DAY
This is not an issue for us. 99% of our business is inclusion advertising. It is obviously an issue for people like Google, but to be quite frank we need to move onto a more sophisticated understanding of what return on investment really means. Fraud would reduce a click measurement. The real issue is what the people who are clicking through from those other search engines are spending online or in a shop compared to those who look for a particular brand. We may not understand why someone would spend €20,000 on a full‑page ad in Antwerp. He knows, however. He knows that he gets a certain number of people who come in through his door and spend €500 a time. He adds it up and works out what his return on investment is. Our advertisers know more than what we put into the media and our sales collateral. There is a certain irony in that. The industry needs to be more aggressive in taking the lead on its measurement system.
From the Floor
I think this relates to any type of business. I want to ask about movement from display advertising to classified advertising, which can be within a directory. How does it compare to trade magazines, local newspapers and so on? I work for a B2B specialist trade directory. Can Leo make any comments on the business information in the B2B sector? Is it too small for you to analyse?
Andrew DAY
I have spent more time in an Australian environment where display advertising, certainly the Yellow Pages, is very strong. In World Directories publications, display advertising penetration is unbelievably low. This is a real opportunity for the industry. This needs to be supplemented with such things as key word search. When you put display with key word search, the boundary between classified advertising and display starts to blur. You do not need to decide on these things but give very strong product offerings that cover the full range of options and let the person who is advertising decide how they can best get to their customers. It is so much easier to provide the options an advertiser wants rather than guess what might be the best option further down the line. Most of us do not do this. It is not that expensive to provide choice.
Leo REIF
In the B2B sector, assets are attractive to financial buyers as well. They have many of the same leverage characteristics as directories, but obviously not as good. You have seen a lot of assets changing hands and private equity firms, particularly medium and smaller sized, buying and selling assets. There are a number of deals going on at the moment. There is a lot of activity in the sector for many of the reasons that directories have been so active.
Carlos
[Inaudible] Classified directories are the real economic push for the industry. However, most of the publishers have inherited the White Pages, the traditional telephone books. In some countries White Pages are successful, in others not so much. From a publisher’s point of view, do you see the White Pages as a compliment to the Yellow Pages? Do you see no future in them? Do you see a future in the advertising market for the White Pages? 50% of the paper used today in directories is for the White Pages. This question is significant for paper mills and printers.
Andrew DAY
The White Pages offers good value to advertisers when it is positioned in the right way. In Australia, White Pages advertising revenue has grown by 15% for the last four years and represents around 25% of the spend of Yellow Pages. Here in Europe, the White Pages spend has declined and is now very low. When you look at the value proposition of White Pages advertising, it is amazing that it is sold at all. We sell it as an afterthought. Secondly, it does not have much product or colour. In many cases there are no logos. We do not push its value and we do not sell it well. There is a real opportunity for White Pages revenue in the print industry. I see a three to five year complementary growth scenario rather than the main game. At the same time, there is a lot of cost in White Pages. Most of us would like to split business and residential. 100% of the revenue comes from business and 70% of the cost comes from residential. With revenue growth and cost reduction, EBITDA growth in White Pages should be quite strong. White Pages online is a brand new game and can be extremely strong. In markets where it is used well, it has very high usage. In Australia, we charge an extra 20% to put online Yellow Pages ads onto online White Pages. This is an easy cross-sale. The connectivity that will happen in online and wireless, the White Pages will get stronger. I am amazed that the White Pages do not work so well in Europe. There are many regulatory reasons for that. It depends on what the local telecom company wants to do. This has constrained how we have been able to tackle it to date. It represents an opportunity and is an important part of our business plan.