Today Yellowpages.com, a subsidiary of AT&T, announced a multiyear distribution deal with Microsoft. In April, Yellowpages.com’s local listings and advertisers will begin appearing across Microsoft properties, including, MSN Yellowpages, MSN Search, Live Search and Maps.

Financial terms of the transaction were not disclosed. Typically, however, these distribution deals involve a minimum guaranteed payment in exchange for traffic guarantees. The top payment on traffic referrals is usually capped.

The Idearc deal, which this deal replaces, was rumored to be worth more than $20 million per year to Microsoft. We would therefore expect the AT&T deal to be within that range.

The Yellowpages.com announcement is more bad news for Idearc, Microsoft’s current local provider. On top of the distribution loss, Idearc recently had a string of high-profile executive departures that include: two CEOs (the last one eight days into the job reportedly leaving for health reasons), the CFO, the chief legal officer and the president of the Internet group. The company also reported lower than expected earnings weighed down by heavy debt service. Finally, it means that Idearc reps will face off against Yellowpages.com reps touting valuable logos in their sales kits.

The Microsoft deal means AT&T has now closed exclusive distribution agreements with all the major portals (AOL, Microsoft and Yahoo!). The company also has a reseller agreement with Google.

Yellowpages.com CEO Charles Stubbs expects the MS deal to add an incremental 35 million monthly searches on top of 125 million currently reported. Stubbs was pleased that this deal brings the company even more reach “across all 50 states.”

What’s the point of specifically mentioning all 50 states? Well, Yellowpages.com has been aggressively adding “white space” sales reps (areas where AT&T does not operate with a print book). We estimate the company has added more than 1,000 Internet sales personnel over the past year. These reps predominately sell in locales where Idearc operates print and online. From AT&T’s perspective, this means that all sales are truly incremental dollars with little fear of print cannibalization.

We will offer more detailed analysis of this deal in an upcoming Kelsey Group Advisory.

Update: Idearc Media has issued the following statement on the AT&T-Microsoft agreement:

“Our agreement with MSN did not meet our expectations and did not perform as effectively as we had hoped. We are continuing to pursue other opportunities for our advertisers — given that we have a performance-based model and a different strategy than MSN.”

David Drummond, senior vice president, corporate development, and chief legal officer, responds to Microsoft’s acquisition of Yahoo!. In part:

“… Microsoft’s hostile bid for Yahoo! raises troubling questions. This is about more than simply a financial transaction, one company taking over another. It’s about preserving the underlying principles of the Internet: openness and innovation.

“Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC? While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies — and then leverage its dominance into new, adjacent markets … “

Read the entire letter on the official Google blog.

Intuit has announced that it will acquire Homestead Technologies, a company that provides a suite a Web creation and e-commerce tools, for US$170 million in cash. This acquisition continues Intuit’s march into what we term a “connected services,” or combined software and Web services, business.

We have been believers in this concept for some time now. In fact, we ran considerable analysis around the acquisition of StepUp Commerce for US$65 million and the Google-Intuit deals last year (for example, please see: Intuit Deals With Google, StepUp to Have Major Impact on SMEs). Kelsey was the only firm pre-briefed by these companies ahead of the acquisition and partnership.

A lot has been written on this topic and we disagree with the naysayers. Intuit has proved it can drive self-registration of SMBs with product lines as diverse as payroll. The advertising products will get there as the assets are consolidated and programs fall into place. We expect that this will take time since integrating changes into software products takes longer than changing Web sites.

We still believe Intuit’s software and services model is where we’ll see a strong competitive advantage with regard to the SMB market emerge. Again, Intuit is the company to watch for this software and services model.

If it were not for U.S. and European regulators, we would add Microsoft here as well. As it stands, it’s hard to know with certainty how much cross services bundling will cause the various agencies to slow the process with regard to the software giant.

No doubt, Allison Mnookin will tell us more at the following ILM:07 session, Friday, Nov. 30:

9:30 am - 10:00 am
Keynote Address
Allison Mnookin, Vice President, Small Business Division, Intuit
For Intuit, the publishers of Quicken and Quikbooks, nothing is more important than engaging the small-business owner, and leveraging that relationship –something Intuit is effectively doing with Google and others. This keynote by Intuit’s Small Business leader Allison Mnookin addresses the challenges of winning strategies for small-business services and advertising, and Intuit’s success strategies.
Moderator: Neal Polachek, CEO

AT&T has bought Ingenio and will use its call tracking platform across Yellowpages.com, 800-YellowPages, Mobile and Print Yellow Pages. We think the deal is quite important. This is a story that will unfold in the months ahead as more information about integration becomes public.

For a while now, we have been saying that the inclusion of call tracking is the inevitable conclusion of a true multi-platform business where usage is distributed across mobile, print and the Internet.

Our view is that call tracking provides a sort of “portfolio optimization” of lead delivery. For example, if the Internet cannibalizes consumer usage traffic from print, call tracking can make up for the declines via mobile or search.

This is easier said than done. But we have viewed this outcome as a foregone conclusion for some time.

Some will say this acquisition is defensive posturing. We disagree. If you take AT&T and list the company’s portfolio of assets, you quickly realize that it maintains a leading position in every key market in which it operates save one: the Internet. Even with the latter, we’re talking about overall usage and not the ability to successfully sell SMBs into the channel, per se.

Market fragmentation is making advertising more complex, time intensive and accountable. But advertisers want accountability and simplicity. This gives it to them.

In our view, Ingenio is a good acquisition for AT&T for a few reasons:

It’s profitable, with revenues rumored to be north of US$100 million.

• It has key distribution with key portals like AOL.
• It has substantial technical experience in pay-for-performance, call optimization, call tracking and lead tracking.
• It’s rumored to have hundreds of key patents around call tracking, pay-for-performance and cross-media lead optimization.
• It has deep experience with PFP bidding engines and placement.
• It has a strong management team with big ideas about multi-platform lead optimization.

This shows that AT&T has enormous plans across all the company’s business units. In our view, this includes print directories as well. There are numerous categories, for example, where prices have risen to such an extent that many advertisers have left the print book. Value-based pricing opens the door to bring back advertisers, sell new ones and retain more of the current ad revenue base.

In the end, value-based advertising is what this is all about. This means simple and accountable results for advertisers. If AT&T can successfully employ this strategy across the company’s diverse set of assets (print Yellow Pages, Internet, mobile, directory assistance and ad-sponsored DA), it will have managed to push to the forefront of the strategic landscape.

We’ll have more to say later.

A few of us were invited to attend the Piper Jaffray Global Internet Summit in Laguna Beach, California, this week. (We decided to tough it out and attend.) Peter ran an interesting panel titled “The Local Opportunity.” The panel included Peter Horan, CEO of IAC Media & Advertising; Zorik Gordon, president and CEO of ReachLocal.com; Russell Horowitz, chairman and CEO of Marchex; Jeffrey Stibel, president of Web.com; and David Liu, CEO and founder of the Knot.

The participants echoed findings from our research that small businesses need help with Internet advertising. The panelists widely agreed. But there were a few interesting deviations around who would actually be the best seller of local ad inventory.

Zorik Gordon stated: “Self enrollment doesn’t work. We have 10,000 customers and we’ve had four self-enroll. The jury is out in the long run, but I can tell you that putting a button in QuickBooks after someone files their taxes is not going to work.”

He went on to claim that “the incumbent Yellow Page publishers are economically disadvantaged. We get 50x sales efficiency vs. a print rep.”

Horowitz disagreed, saying that “incumbents should not be counted out.” We have heard, but have yet to confirm, that some of his incumbent partners are pushing very high billings through Marchex.

Horan, meanwhile, suggested that while IAC has a bunch of “Premier 1.0 Brands,” he envisioned a day when media partners would sell CPA-based advertising on the company’s behalf. Horan drove IAC to lead the MerchantCircle investment “to increase the lead flow of our operating businesses.” Most of the businesses that sign up with MerchantCircle do not return, so it will be interesting to see whether Horan’s thesis bears fruit.

There were two interesting differences in sales strategy from The Knot, which is the leading Wedding portal, and Web.com. The Knot’s Liu said “95 percent of the businesses we sell have Web sites.” Conversely, Web.com’s Stibel suggested that most of its customers are new to the Internet. In fairness, Stibel’s Web.com is the largest independent seller of Web products with more than 250,000 merchants. It claims more than 4 million accounts in all.

Liu summed up his top sales representative’s strategy for closing business. She told him, “David, I only need three words to sell: Sugar, Honey and Darling.”

Most participants agreed that selling was easier than retaining. Everyone agreed that delivering value to the advertiser was really the only thing that mattered.

Google announced the beginnings of a consortium that includes 30-plus members to create an open source mobile operating system called Android. The operating system is built on the open Linux Kernel and uses the liberal Apache v2 open source license.

The liberal open source license means developers will be able to build applications for mobile services worldwide much like they do for the Internet today. Updates and new applications will be managed through a publicly accessible repository where each platform module is assigned an owner who validates developer contributions.

The consortium lacks some big names such as:

• Other Internet portals like Yahoo!, currently one of the leaders in the mobile space
• Microsoft, which likely views the open source consortium and, especially Google, as competitive to the company’s internal efforts
• AT&T and Verizon, two dominate carriers with the majority of U.S. mobile phone subscribers
• Nokia, now the owner of NAVTEQ, which provides Geographic Information Systems (GIS) data that powers the routing information for most Internet and mobile mapping applications
• Apple, which has deep relationships with both AT&T, via the company’s iPhone, and Google, where Eric Schmidt is a board member

So, What Does All This Mean?

First, we are reiterating our U.S. mobile forecast through 2012. The forecast breaks out usage and revenue into the three ad segments: Ad-Sponsored Voice Services, Mobile Search and Browse and Multi-Modal Applications. Today’s announcement gives further indication that this is indeed the correct lens through which to view this nascent ad market. Our U.S. forecast calls for these three segments to grow from $33.7 million to $1.42 billion, a 116 percent CAGR, through 2011. We should start to see mobile services via Android in 2008 in Europe, the U.S. and Pacific Rim.

Importantly, we were very adamant (much to the disappointment of many stakeholders with embedded applications and walled services) that the mobile market would evolve to become an extension of the Internet. Today’s conference call and announcement indicated that “Android will include a full browser experience and that no special development effort for mobile browsing will be required.” Again, in our mobile forecast we made note of the fact that existing advertiser networks and subsequently current Internet ad economics would play a crucial role (clients and those with our U.S. mobile forecast, please see slides 36, 38, 40 and 41, which outline Internet ad economics and compare our forecast assumptions).

Next Date to Watch: Nov. 12

On that day, the Software Development Kit (or SDK, if you like acronyms) will be released. This will give the first look into the state of interface and tool set that has been developed. “With devices built on the Android Platform, users will be able to fully tailor the phone to their interests. They can swap out the phone’s homescreen, the style of the dialer, or any of the applications.”

And of course, my personal favorite from the consortium Web site, “Applications are not set in stone, and differentiation is always possible. For example, if you want to include Hotmail instead of Gmail, it will not be an issue.” The person who added this line has a keen sense of humor.

The Lingering Questions …

On the conference call, Google sidestepped the rampant rumors of a Gphone prompting Jeff Graham of USA Today to compare Schmidt’s comments to a political campaign by asking, “What’s the deal?” Schmidt would only say that there would be thousands of Gphones and that Google does not preannounce any products. Net/net: Expect more speculation about the Gphone.

And Apple? Schmidt praised the iPhone, mentioning that he is in fact an iPhone user. Later, a Telegraph reporter mentioned that the Apple Runs LS 10 and comes out this week in Britain and probed for a connection. Andy Rubin, founder of Android and now the Director of Mobile Platforms for Google (the company acquired by Google and the namesake of the mobile effort), said to that question many companies will build on top of this platform.

Reading the Tea Leaves (Purely Speculation, for Fun)

Given:

• AT&T is the largest U.S. wireless carrier
• Apple’s partnership with AT&T
• The historic competition between Apple, Microsoft and Google
• Microsoft’s statements around the importance of the mobile ad market and the company’s computer operating system market share
• The SDK release next week, which, depending on how one reads into the release, may or may not include at least some touch screen application development tool kits

It sure looks like Apple sits in one of the most important positions in this nascent market.

Today, I had a brief call with George Garrick, CEO of Jingle Networks, which operates the service 1-800-FREE411. The Jingle team has been aggressively wringing costs out of the system for months trying to reduce the cost per call as much as possible.

In some locales, where there are fewer advertisers, Jingle has removed the operator fail-over. This means the cost of fielding the call drops substantially. We have estimated this cost previously at less than $0.03 per call at volume.

Garrick suggests Jingle is aggressively pairing the revenue of a call with the expense associated with handling it, as well as “dialing up the recognition rates as much as possible with Nuance’s latest release.” Further, after some prodding, he says that, “Our blended rate is significantly below $0.10.” He wouldn’t be specific, but other sources tell us Jingle is automating north of 65 percent of its calls.

We have good numbers on the types of advertiser feeds and distribution deals that Jingle has cut with Idearc and others. We estimate its average revenue per call is close to $0.07 today.

What does this mean? If we’re right about our numbers, it means Jingle is very close to breakeven on a gross margin basis – close, as in this quarter.

Garrick would not confirm or deny these figures, but did say, “We’ll have some interesting news at the Kelsey conference next week and Pelorus the following.”

You heard it here first … Jingle — per-call (or gross margin) breakeven.

As part of the mobile forecast we released last week, we thought it would be interesting to show a little detail about the ad-sponsored directory assistance portion of the forecast. As we wrote previously, we have been watching the market unfold for over a year. The predictions in the original report last October along with earlier briefings are turning out to be correct.

In the most recent report, we forecast that ad-sponsored DA calls will exceed 2 billion annual calls by 2012, a 50 percent CAGR. Further, mobile revenues will grow at 112 percent CAGR over the same period.

A suggestion was made that this forecast is “bearish.” This is a little like saying Google had poor results with a quarter-over-quarter growth rate of 58 percent or that Warren Buffet is a mediocre investor since the compound annual gain of Berkshire from 1965 to 2006 is only 21.4 percent. It’s just plain wrong. The U.S. ad-sponsored DA market is growing — and rapidly. Nevertheless, it’s apparent that we are in a period of heightened expectations due to the stellar performance of a few Internet stars.

The ad-sponsored DA business is about two business segments. The first is the mobile market and the strategic imperative to create a dial-around-business to bypass U.S. wireless carriers. The second is an “Audio Ad Business” that seeks to push audio ads across traditional market boundaries. Here, we’ll focus on the latter.

These markets include terrestrial radio, Internet radio, podcasting, ad-sponsored DA and all other markets where an ‘AdSense’ like audio ad network could be created. This is a prediction that we have been speaking and writing about for some time. It is our belief that Google and others are seeking to create an audio ad business that encompasses many markets. These audio ad products will become audience reach products. The first step, which we are witnessing, will be ad networks and others building and aggregating audience.

In the same fashion that AdWords advertisers can opt in or out of AdSense so too will audio ad subscribers be able to opt in across formats and markets (for example, radio and ad-sponsored DA). There are many subtleties to work through in this emerging market, and we’ll save this discussion for a later post.

The following chart is similar to one in our forecast. It shows the relative upside of audio ads based on geography contrast with the current ad-sponsored DA revenues per call. Please note that the radio prices were reduced to a per-impression basis for comparison sake.

Take a look at the trend line for the “Per Call Ad Sponsored DA Revenues” from the forecast through 2012. Compare the price of an average radio impression nationally (lower dotted line) and the price for a New York City radio impression (upper dotted line). You should keep in mind that the radio spot cost is illustrative and there is a lot of variation by station, cluster, format, market, day-part, time of year, DJ mentions, etc.

Based on current average ad-sponsored DA pricing, we believe there is solid revenue upside, especially in large metro markets. We believe more and more advertisers, even small businesses, will become accustomed to audio ads and this market will grow substantially. The pieces and sales forces are not yet all in place, but we see them coming together. Ad-sponsored DA is a good introduction to audio ads.

Soon, we’ll see companies like Jingle offer a lot more voice services like movies, directions, restaurant reviews, news, weather, etc. Microsoft’s Tellme already offers many of these. Google and others will expand their consumer offerings. Portal-backed ad networks will push audio ads across markets. (Then we’ll write more blogs that link back to this one.)

Some of us have spent a considerable amount of time working with radio and want to offer a word of caution. Before you copy this graphic and rush down to your nearest Clear Channel radio cluster manager, demanding they sell your audio ad product, let us save you some time. They won’t. The cluster manager has a very important job. Pushing, cajoling and demanding the sales force sell out the inventory all day every day — that’s when they are in a good mood.

Regardless, the next few years will be anything but business as usual. In many markets we are on the verge of a “transformative” change.

We just released our U.S. mobile advertising forecast, and the fact that this market represents a promising opportunity hardly needs repeating. Nevertheless, the U.S. mobile market has remained largely out of reach for many years.

The often-cited statistics about how many more mobile phones there are versus computers suggest we are on the verge of a market transformation akin to the early days of the Internet’s growth. While forecasters and pundits have touted the potential of mobile advertising for years, the U.S. market has failed to materialize. We believe this is about change.

Specifically, we believe the U.S. mobile ad market will grow from US$33.2 million to US$1.4 billion in 2012, a CAGR of 112 percent.

Definitions are important here since it seems no two forecasts measure mobile the same way. We break mobile into three distinct ad segments: ad-sponsored directory assistance, mobile Internet (search, browse, etc.) and multi-modal applications. We will have much more to say about these components in future posts.

The two largest contributors of revenues will see a substantial increase in usage:

• Ad-sponsored directory assistance will grow from 270 million calls in 2007 to 2.1 billion calls in 2012, a CAGR of 50 percent.
• The number of mobile Internet users will grow from 37.9 million in 2007 to 91.7 million in 2012, a CAGR of 19 percent. 

The question is: Why now? We believe the market is converging around several important themes that will drive mobile ad adoption:

1. Top-line search growth is slowing. Portals and search companies must move their monetization products into markets where they can utilize existing ad products (e.g., paid search links) to promote top-line revenue growth.
2. Google, the largest search engine in terms of share and revenues, has considerable ad overhang, meaning advertisers want to spend more money than current traffic levels can support. Some estimates put the ad overhang at Google between US$1 billion and US$2 billion. In this context, mobile traffic translates to an increase in revenue events and top-line growth.
3. The mobile and search markets are linked, and we believe market share in one could affect the other. Therefore, Microsoft will push hard into mobile, and Google will attempt to retain its dominant search position. Meanwhile, U.S. carriers understand the market position Internet search dominance affords and will not allow their products to be relegated to a secondary standing. In Europe, for example, as Google’s search share has increased so too has its mobile market share. Operator-specific search in Europe in the meantime has declined.
4. U.S. carrier dominance and the proliferation of voice query products (like ad-sponsored DA) mean we will see an increase in dial-around services that attempt to circumvent the carrier deck using voice in and data out. Kelsey clients are familiar with this trend since we predicted Google’s market entry — led by 877-520-FIND, the predecessor to 800-GOOG411 — and Microsoft’s acquisition of Tellme more than a year ago.
5. GPS handset devices are shipping en masse this year, and 50 percent replacement is expected within five years, allowing improved mobile applications.
6. Apple’s iPhone represents a transformative device, and many manufacturers will enter the market with similar form factors driving down prices.
7. Finally, Yellow Pages companies such as AT&T are executing on a multi-channel ad business. Mobile represents a critical link in this multi-channel strategy where these companies will try to dominate ad share.

Last week, Local.com announced that it will acquire PremierGuide, a white-label local search solution, for US$2 million. I’ve read a handful of reviews about this acquisition and most seem to be missing the most important part of this deal: It’s about the money.

Specifically, it looks to me like this deal has a pay-back for Local.com of about one year. I spoke with Heath Clarke, CEO of Local.com, about the deal this week to confirm a few numbers. Sure enough, here’s why this deal was such a no-brainer for Local.com. In fairness, Local.com is a public company and Heath would only tell me that my numbers were in range (or close or no comment). Here are the details I put together:

• PremierGuide has about 55 million page views. Based on a few calls, I’ve triangulated CPM to roughly $14. It has the retail Google ad share and a few other smaller ad deals.
• Local.com reports about 10 million unique users. After pulling apart the financial statements (and making a few more calls), the company has a CPM of about $40 (plus or minus). This CPM rate is a combination of a negotiated performance rate from YSM, an Idearc distribution deal and a few others.

Therefore, Local.com should generate top-line revenues off this acquisition of roughly $2.2 million per year vs. an estimated $770,000 that PremierGuide had been generating previously (note: the Local.com release says $800k). There is even more upside here since the Local.com folks will likely go back to the ad networks and demand and receive a deeper ad revenue share for the combined traffic.

Then, of course, Local.com is out actively looking for other distribution, acquisition and partnership opportunities, which should continue to increase the top-line revenues.