Early Prime Day Deals Roe v. Wade Overturned Surface Laptop Go 2 Review 4th of July Sales M2 MacBook Pro Deals Healthy Meal Delivery Best TVs for Every Budget Noise-Canceling Earbuds Dip to $100

Why Google bought Zagat

Google and other major Internet companies have already picked the low-hanging fruit in mobile advertising, and now they're gearing up for an even more robust harvest: the local market.

The next big battle in mobile could be over who will dominate the untapped local search and advertising markets.

Google, the Internet giant of giants, has been adding local marketing to its core suite of services for the last few years. It's launched a local daily-deal effort with Google Offers. And it's been pushing its local search and location-based services on its Android smartphones and tablets as a way to capture more of the local advertising market for some time. But its announcement last week that it is buying local restaurant guide Zagat will add yet another layer to its strategy for attacking what is expected to be a lucrative and fast-growing segment of the online advertising market.

"For Google and other online companies the lower hanging fruit in the mobile market has been picked," said Karsten Weide, a research vice president at IDC. "And now these companies are trying to tap the local advertising market, which at this point is wide open and has the potential to be much bigger than the more general mobile-advertising market."

Indeed, Google isn't the only company trying to wring revenue out of advertisers looking to target consumers based on their location. But it's likely the one with the best chance.

A crop of smaller players--such as review site Yelp, local coupon specialist Groupon, and the restaurant reservation broker OpenTable--have already become destinations for many mobile subscribers looking for local retailers, restaurants, or deals. And of course, larger players--including Google as well as Microsoft, Yahoo, and AOL--also see big potential in the local market. And each of them are forming strategies to get a piece of the action.

Just how big could this market be in the next few years? U.S. mobile ad spending is expected to grow from $790 million in 2010 to $4 billion in 2015. The local portion of that total is projected to grow from $404 million to $2.8 billion, according to BIA/Kelsey, a consultancy in the local media market. In other words, the local portion of the total will grow from 51 percent to 70 percent by 2015, BIA/Kelsey predicts.

Why local advertising is a good fit for mobile
There is no question that the mobile market in general is the next frontier for advertisers. According to IDC's Worldwide New Media Market Model, by 2015 more U.S. Internet users will access the Web through mobile devices rather than through PCs or wireline services. The more eyeballs there are glued to mobile devices, the more important that platform becomes to advertisers.

But as people increasingly access the Internet from their mobile devices as opposed to from their desktop computers at home, there is a greater need to provide search results, marketing offers, and suggestions from "friends" that are relevant to where a person is at any given time.

"As the audience becomes mobile, it's geographically targetable," said Jay Adelson, CEO of SimpleGeo, a geolocation startup. "And this isn't just a benefit from a pure ad perspective, but it also helps add richness to the apps by providing location. It's one of the most important trends in mobile search."

While people may be accessing the Net with their smartphones to check social-networking sites or to read e-mail, more and more are also looking for restaurants and movie theaters. They're using mapping apps to plot their routes. They're checking social-networking sites for recommendations for places to go and see. And they're in search of discounts for nearby stores and merchants.

All of this leverages existing GPS and Wi-Fi technology that can pinpoint subscribers' locations.

And for Internet users who are mobile, geographically relevant search results tend to be more important than they are for traditional desktop users.

"I'm not suggesting that there isn't any local search traffic on the desktop Internet," Weide of IDC said. "But the share of local search requests on mobile is much higher. And that creates a perfect opportunity for marketers."

Google's golden opportunity
Most experts would agree that the local mobile advertising market is still relatively untapped, but Google has a distinct early advantage. About 60 percent of ad revenue on mobile devices comes from search, according to IDC. And Google commands about 90 percent of that market.

By contrast, Microsoft, Yahoo, and AOL have little room to compete in any significant way when it comes to mobile search. Display advertising accounts for the other 40 percent of mobile advertising, but Weide said the market is fragmented. And Google also commands a strong position with close to 20 percent of that market.

But Google and the rest of the major Internet brands have a couple of key problems when it comes to addressing the local advertising market. For one, they lack much of the local content that would attract local advertisers. Google's acquisition of Zagat is a step toward getting some of that content. Zagat has a ready-made, deep inventory of reviews across multiple business categories, which Google can use to sell advertising. Google has tried to acquire this local content before from Yelp, but the company turned down its offer.

Other large Internet players, such as Microsoft, Yahoo, and AOL have also been busy accumulating access to local content. For example, Microsoft's recent deal with Facebook and Twitter integrates Facebook friends' suggestions and tweets from Twitter into the mobile Bing search results. While this is not local content per se, it offers suggestions from a user's own network of contacts, which is likely to include some recommendations for restaurants, stores, and other types of services in a subscriber's local area.

Yahoo and AOL have addressed the local content and advertising market through partnerships with local newspapers. For example, Yahoo not only aggregates local content from local newspapers, but it also provides its own original local content. AOL's purchase of the hyperlocal blog site Patch two years ago is part of its strategy to provide more original content that can be used as inventory to sell for local advertising. While most of these efforts have so far concentrated on building inventory for traditional online advertising, these companies are also moving some of these relationships toward mobile platforms.

But content is only one barrier that Google and other companies face. They also need to sell ad space to local businesses.

"For Google and Microsoft and all the other big names, it's been much easier to sign up national brands to target customers in particular geographies," said Charles Golvin, an analyst with Forrester Research. "But it's much harder to get the mom-and-pop stores on board. That takes actual feet on the ground."

Ideally, Google or any of these other larger Internet companies vying for the local advertising market want the neighborhood locksmith or plumber advertising in addition to a Macy's or Home Depot. But these businesses typically are much less likely to have an online presence at all.

For decades, the local phone companies have effectively addressed this market with directories, such as the Yellow Pages. Businesses paid a premium for large advertising space. And for a long time this was a lucrative business for the Baby Bell local phone companies. But over the years after the telecom industry has consolidated, most of these companies have spun off their directory businesses. AT&T is one of the few that has held onto its business. And the company has adapted it to the modern age with an app for smartphones called YellowPages.com.

IDC's Weide said that AT&T's YellowPages.com is likely the best kept secret in mobile advertising with an annual run rate of $1 billion in revenue. And he believes that AT&T, more than Microsoft, AOL, or Yahoo, will likely be the biggest challenger to Google in local advertising with the YellowPages.com app that can be installed on smartphones.

"The question for AT&T and its YellowPages.com is whether they can branch out from the directory business to incorporating other forms of advertising," he said. "If they do, they may be one of the few that can take on Google."