entrepreneurship at the intersection of sports media and the social graph

Google Inc., which helped popularize the idea of automated ad sales on the Web, has been quietly turning to an old-fashioned tool—phone calls—to compete in the hot market for local business advertising.

The Internet-search giant this year has hired several hundred sales representatives to call U.S. businesses such as spas, restaurants and hotels to promote new advertising initiatives, people familiar with the matter said. The effort includes an office in Tempe, Ariz., with around 100 sales representatives, one of these people said.

Since 20% of searches done on Google are for local information, "a strong Web presence can help neighborhood businesses answer those searches and bring in more customers," said Marissa Mayer, Google's vice president of geographic and local services, in a prepared statement. Google's new local ad offerings "are simple and they work, so we've been investing in marketing and sales to support them."

One person who has experienced the results is Debbie Codino, a manager at Bob Brown Tire Center Inc. in Portland, Ore. She said she hangs up daily on callers who say they can help boost the small tire shop's presence on the Web to attract new customers. But when she received a call from a Google salesman last month, she stayed on the line.

Ms. Codino quickly agreed to pay $25 a month to highlight her store and show a 10%-off coupon when people use terms like "Portland tires" in a search on Google. "I was surprised," she said. "This time it was really Google calling so I was motivated to listen."

Google, of Mountain View, Calif., is better known for search algorithms and the engineers who refine them to get better results. The company's $24 billion in revenue last year came almost entirely from AdWords, a self-service system developed 10 years ago to let anyone buy text ads that show up next to search results. More than one million small businesses, from makers of boots to distributors of special shampoo or contact lenses, advertise through Google on AdWords to drive online sales or get people to download catalogs, among other things, according to some analysts.

But AdWords never fully took off with local businesses, in part because it includes features viewed as too complex or time-consuming for average business owners to use, according to former Google employees. For example, AdWords uses an auction-like system to determine prices for ads. By contrast, Google introduced ad offerings this year for local businesses that cost a fixed amount per month, the kind pitched to Ms. Codino.

So far, only a fraction of local businesses advertise online. BIA/Kelsey, a local-media advisory firm, estimates that local businesses will spend about $20 billion online this year, a figure that could reach more than $35 billion by 2014.

Google signaled a strong interest in the market with an unsuccessful attempt to buy Groupon Inc., a fast-growing company that offers users daily deals on a variety of goods and services. People familiar with the matter have pegged Google's offer at $6 billion; both companies have declined comment. Had that deal been reached, Google would have picked up a sales force of more than 1,500 people who call local businesses to get them to offer discounts to Groupon customers.

Companies such as Groupon and Yelp Inc.—a business-reviews website that has hundreds of sales reps—have attracted big Web companies such as Google and social networking site Facebook Inc. to the growing online local ad market. Google tried to buy Yelp last year, people familiar with the matter have said.

The direct-sales approach on local business "constitutes a cultural change of sorts" for Google, said Greg Sterling, an analyst at Sterling Market Intelligence, but a necessary one. Paying sales people generates lower profit margins than a system like AdWords, "but what Google has come to see is that without a sales force or at least human involvement in the process, they're not going to acquire these small businesses as customers," he said.

Direct sales isn't a new approach for Google in handling large advertisers. Though many of Google's 23,000 employees have technical jobs, the company says it also has several thousand salespeople who work with Fortune 500 companies, small and medium-sized businesses and ad agencies on text and graphical ad campaigns, among other things.

To reach local businesses, Google has already built relationships through Web pages it developed last year for them on its search engine. Known as "Place pages," they list basic information, such as the location on a map and a summary of customer reviews.

Google's new sales reps are primarily selling two ad offerings called "tags" and "boost" to the four million businesses that have contacted Google electronically to verify the accuracy of their Place page. The ads show up on Google search results and in Google Maps that display local businesses.

When Facebook earlier this year began its own effort to establish relationships with local businesses, known as Facebook Places, its Chief Executive Mark Zuckerberg said the social network would compete with Google's offerings but added that the local market is huge. A Google executive said he welcomed Facebook's moves.

Links to Place pages on Google's search engine recently became more prominent on the results page for searches covering everything from Italian restaurants to spas. That has put Google into conflict with some business-review sites that generate revenue from local businesses, such as Citysearch.com, which claim Google is crimping their sites' growth by directing more Web searchers to its Place pages. Google executives say the changes are meant to improve users' experience and they believe the changes have generally helped direct more users to non-Google sites that specialize in local-business information.

Mr. Sterling said he expects Google to offer more opportunities for local businesses to reach consumers, perhaps through Groupon-type daily deals. In addition, Google Chief Executive Eric Schmidt said recently that Google's Android software for mobile devices could help people use those devices to pay for goods at a local store, rivaling credit cards.

"Google has always had large sales forces and, quite frankly, the advertiser opportunity has always been bigger than the number of people we were able to hire," said David Scacco, who joined Google as the first advertising sales executive in 2000. But he said Google co-founder Larry Page stressed from the beginning the "need to build automation," or allowing advertisers to buy ads through a self-serve system rather than just hiring scores of salespeople to reach the advertisers.

Mr. Scacco, who is now chief revenue officer at MyLikes, a social-media ad company, said Mr. Page would tell Google's ad team: "If you only throw people at the problem, you won't innovate."

Write to Amir Efrati at amir.efrati@wsj.com

Local has been a category that has long attracted a lot of attention from internet startups. Not surprising given that it is a $130Bn market. Now that Groupon and Living Social (a Lightspeed portfolio company) are growing s0 fast, it is attracting even more attention from startups.

Most of these startups focus on innovating on their product, and aim to have a “sales light” approach.

Usually they start with a self service business model, expecting local businesses to go to the web to sign up for service on their own. They mostly point to Google as the evidence that self service can scale.

I’ve long been skeptical that self service works for selling products to local businesses. From my time at CitySearch in ’96 to today, I haven’t seen this work. In fact, I’d argue that ReachLocal exists as a public company solely because Google can’t get local merchants to self serve. Today, perhaps lost in the holiday shuffle, the WSJ notes that even Google has turned to a call center sales force to reach local merchants.

The Internet-search giant this year has hired several hundred sales representatives to call U.S. businesses such as spas, restaurants and hotels to promote new advertising initiatives, people familiar with the matter said. The effort includes an office in Tempe, Ariz., with around 100 sales representatives, one of these people said.

The other business model that startups attacking local hope to rely on is channel partnerships. Many startups have struck deals with local yellow pages, or newspaper groups, to sell their product too. They have typically been disappointed when sales numbers come in far short of projections. It is hard to get someone elses salesforce to know and care about your product as much as you do, especially when they are used to selling traditional media and not online media.

The winners in this category (Yelp, Groupon, Living Social, Yodle, ReachLocal, CitySearch etc) have all relied on a direct sales force, whether on the phone, or feet on the street, to drive their revenue growth.

If you want to make a business in local online media, you have to control your own destiny and build your own salesforce.

In the current issue of the New Yorker, columnist James Surowiecki, who I generally admire, gets it exactly wrong when it comes to Groupon.

He writes:

" But it seems unlikely that it’s going to become a revolutionary company, along the lines of YouTube, Facebook, Twitter, and Google. ....Groupon, by contrast, is a much more old-school business. It doesn’t have any obvious technological advantage. Its users don’t really do anything other than hit the “buy” button. And its business requires lots of hands-on attention..."

Well, that's a defensible opinion, but after visiting CEO Andrew Mason this week in Chicago, and thinking about it a bit, I must say that I wholeheartedly diasagree.

Many folks think of Groupon as a relatively simple idea. A daily deal, a large sales force, and that's about it. Too easy to copy (there are scores of "Groupon clones"), and too labor intensive (the more small businesses you want to work with, the more sales and service people you need).

All this is true. But it fails to understand the power of Groupon's model. To sum it up: Groupon has built a new channel into the heart of the the world's economic activity: Small businesses. And it is that channel where the true power lies.

First, the economic math: Small businesses create more than 50% of US GDP and create more than 75% of net new jobs each year. But small businesses represent a fragmented, maddeningly difficult sector of our economy - 23 million small pieces loosely joined. Any platform that has connected them and added value to their bottom line has turned into a massive new business.

Over the past century, there have been two such new platforms. The most recent is Google, a proxy for the rise of the web as a platform for small business lead generation. Before that, it was the Yellow Pages, a proxy for the rise of the telephone as a platform for lead generation.

Groupon, I believe, has the potential to be a new proxy - one that subsumes the platforms of both the Internet and the telephone, and adds multiple dimensions beyond them.

I know that's a stretch, but hear me out.

First, let's review the Yellow Pages. What is it? Well, for the most part, it's a paper-based publishing platform that combines a curated local business phone directory with advertising listings. Nearly every single small business with a phone number is listed in the Yellow Pages, and a large percentage of them also buy advertising to promote their wares as well.

In short, the Yellow Pages is a platform that connects every single consumer with a phone to every single local business with a phone.

As a business, the Yellow Pages consists of folks who manage the listings and produce the books, as well as a very large sales force which calls on local businesses. Once a year, the product turns over, and a new book is made.

That's it. Simple (and certainly not technologically defensible), and while it's clearly in decline, the Yellow Pages is currently a $15 billion revenue business in the US alone. Now, the Yellow Pages is also an online business, but they were late the party, and have pretty much lost to Google when it comes to the platform play.

Google represents a second new platform which connects consumers and small businesses. Many forget that it was small business that drove early adoption of AdWords (as well as Overture, its early competition). And while not every small business is yet online - 36% of US small businesses still don't have a web site - a the clear majority of them do, and milllions of them use AdWords, as well as organic search, to drive leads to their business. Google makes billions of dollars leveraging its platform, which, by the way, has subsumed the Yellow Pages business and grown well past it into any number of other markets, including most major international regions.

Google alone is on a $30 billion revenue run rate, and it's only ten years old. That's twice the US revenues of the Yellow Pages, which were built up over more than 50 years.

So to review, the Yellow Pages leveraged the telephone to create a massively scaled and profitable platform connecting consumers and businesses. Google did the same, but leveraged the Internet (and subsumed the telephone as well).

And Groupon is doing it again, subsuming the telephone, the Internet, and leveraging an entirely new platform: the mobile web.

Now, before you yell at me and claim that Groupon is anything BUT a mobile-driven company (the company sends email to 40mm US subscribers, for example), recall my definition of mobile is a bit more complicated than most.

Remember MOLRS? As I said in that post: "if you are going to think about mobile, you have to think about social, local, and real time." In short, mobile is meaningless without context: Where someone is (or is about to go), who someone is with (or about to go meet), and why someone is where they are (or with who they are with). And, of course, when someone is where they are (and with whomever they are there with...).

Whew. Sorry, but you get the picture.

Now, let's think about MOLRS in relation to small business. First, small business owners (SBOs) care deeply about location. Are they in a good location? Will customers be able to find them? Is there parking? A good neighborhood? Strong foot traffic?

Second, SBOs care deeply about relationships and word of mouth (or what we will call social). Do people refer their friends and family to the business? Are people happy with the service? Will they say nice things?

Third, SBOs care very much about timing (what I call "real time" in my MOLRS breakdown). What are the best hours for foot traffic? What are the best times to run promotions? How can I bring in more business during slow times? How does seasonality effect my business? When should I have a sale?

In short, SBOs are driven by local, social, and real time.

Turns out, so is Groupon.

Now, ask any small business owner what they wish for more of, and they'll give you a resounding answer: More customers. It's why they pay for the Yellow Pages ad, and it's why they buy AdWords from Google.

And it's why they are starting to buy Groupon's product, at a breakneck pace. Sure, some of them buy too much of it, or fail to do the math and lose money on the come. They'll adjust, and if they don't, smarter SBOs will eat their lunch, and the world will move on.

To my mind, the proof is in Groupon's growth rate. I've never seen anything like it - well, since Google. And just as Google lapped the Yellow Pages in a fraction of the time, Groupon seems to be on track to do the same to Google.

Good sources have told me that Groupon is growing at 50 percent a month, with a revenue run rate of nearly $2 billion a year (based on last month's revenues). By next month, that run rate may well hit $2.7 billion. The month after that, should the growth continue, the run rate would clear $4 billion.

Google's run rate, when revealed in its IPO filing six years ago, was staggering - it grew from under $200 million to $1.6 billion in less than three years. Groupon is on track to do the same - but in less than one year.

That's pretty extraordinary. But remember, Groupon has figured out a way to deliver what SBOs want most: more customers in their stores. And unlike Google or the Yellow Pages, Groupon doesn't sell advertising. Instead, it takes 50% of the actual revenue driven by its platform. Trust me, that's potentially a much bigger number.

Actually, it's pretty interesting to see how the business model of driving leads to business has shifted as each platform has risen to dominance. The Yellow Pages charge a set price for a display ad, with no guarantee that the ad would drive any leads. Google turned the model upside down, and charged only when people clicked on the ad. Groupon doesn't charge anything at all: It simply takes half the revenue generated when a deal is fulfilled by its platform.

So to summarize, I think those who claim Groupon's business is too simple are focused on the wrong things. Sure, there are other deal sites. But none have Groupon's scale. Sure, Groupon's model of one deal in one city on one day is limited, but it's easy to see how the product scales against category, zip code, time of day, and many other variables. And sure, Groupon has a lot of people who have to touch a lot of businesses and a lot of customers every day. But to me, that's the company's strength: SBOs are in the people business, and therefore, so must Groupon be.

And this, to my mind, is why Facebook or Google can't compete with Groupon. Imagine Facebook or Google with 1,000 people who do nothing but talk to customers all day long? Yep, I can hear the laughter from here....

While I was visiting earlier this week, CEO Mason told me that a significant percentage of Groupon's customer service reps are members of Chicago's vibrant improv scene. That makes sense to me - if you are going to deal with possibly upset people all day, it helps to have a culture of humor and thinking on your feet.

That culture will serve Groupon well as it attempts to deal with world record-breaking growth. While there is no certainty the company won't blow its lead, it's already a major international player. And while Mason would not comment on the rampant speculation over a $6 billion offer from Google that reportedly fell apart last week, in the end, it may be that the idea of Groupon being purchased by Google is as silly as the idea that the Regional Bell Operating Companies, who originally had the monopoly on the Yellow Pages market, could or should have bought Google.

In the end, it wouldn't have been a fit.