Extinction Threatens Yellow-Pages Publishers

Industry's Web Sites Have Small Audiences, and Economic Downturn Has Eroded Ad Dollars; Hearst Unit Throws In With Google

The yellow-pages industry is running out of lifelines.

In recent years, as its customers migrated to the Web -- flocking to sites like Google -- the telephone-directory business followed, hoping the Internet would be its salvation.

But that strategy hasn't panned out. Now, the economic downturn is sending the already ailing business into a tailspin.

The audience for online yellow pages remains relatively small, and traffic growth is slowing. So many directory services are vying for the ad dollars of local businesses that no single site has an authoritative roster.

Meanwhile, ad dollars are drying up as small businesses -- the industry's bread and butter -- find it harder to pay bills or have cut their spending sharply.

Print and online ad spending on yellow pages will plummet 6.3% next year, more than double the rate of decline expected for broadcast TV, according to forecasts by Wachovia analyst John Janedis. Within the next four years, ad spending will fall 39% in print directories alone -- the steepest projected decline across all local-media categories, according to media-research firm Borrell Associates.

"It's pretty darn hard out there for everybody, and those that have less staying power, it just looks like it's going to be a difficult environment to be able to hang on in the long term," said Dave Swanson, chief executive of R.H. Donnelley, a Cary, N.C., yellow-pages publisher, during a conference call on the company's third-quarter earnings.

Facing the real prospect of extinction, the publishers, many of which have considerable debt, have been slashing jobs, scrapping dividends and exiting unprofitable markets. Shares of two of the biggest publishers, R.H. Donnelley andIdearc, have plummeted 99% in the past year.

"The main pure-play companies do not have capital structures that would enable them to endure perpetual high-single-digit or double-digit declines in cash flow and remain viable entities or solvent entities over time," says Mike Simonton, an analyst with Fitch Ratings.

Yellow-pages publishers have spent the past several years attempting to reinvent themselves, launching a slew of digital offerings for advertisers, and retraining their sales forces to sell digital ads alongside print ads.

But Internet revenues remain anemic. At less than 10%, online-ad dollars make up only a modest portion of total revenues and aren't growing fast enough to offset steep declines on the print side, says Mr. Simonton.

Analysts say yellow-pages sales teams face an inherent conflict. While they are pressured to sell both print and online ads, Internet ads are often a third of the price of the print product. The top priority for the sales teams often is to sell the print book first, then sell the digital products.

Even if online revenues were growing at a faster clip, analysts are cautious about the prospects of online-only directories. Yellow-pages ads are the only form of advertising many small businesses buy, and the online ads are typically sold in conjunction with print listings, Mr. Simonton says. That means that if businesses aren't buying the print ad, then the online ad disappears too.

In a last-ditch attempt to succeed online, some publishers have struck ad-sale partnerships with Internet companies like Google. White Directory Publishers, which publishes directories in 90 small to medium-size markets, says it is often more effective for small businesses to have a presence on Google than on a directory Web site. But many small- to medium-size businesses don't have the expertise or time to create effective Web sites or buy and track search ads, so White Directory is offering to do it for them.

"They all believe they have the URL and the Web site that's going to win," Jeff Folckemer, chief operating officer and chief executive-designate of White Directory, part of Hearst Corp., says of the directory companies. "Our philosophy immediately was to go right to the big guys."

Mr. Simonton cautions, however, that even if publishers survive, any growth they achieved since the last downtown, in 2001, will be short-lived. "That extra growth coming from new businesses are the first to fold in a downturn. You basically give back in one downturn what took seven years to grow."

—Shira Ovide contributed to this article.

http://online.wsj.com/article/SB122688313315132107.html