So many startups are focusing on local services, telling restaurants and shops they can reach nearby customers with carefully targeted online ads. But this kind of business is a serious grind, as you can see with the fall of Patch Media.
AOL has at last said it's willing to part with Patch after investing $200 million to $300 million over four years. At an investment conference in New York, AOL CEO and Patch co-founder Tim Armstrong called Patch "an asset with optionality for AOL." That's execu-speak for possible death -- through it seems that AOL still holds out hope that a corporate partnership might save the operation.
The takeaway here goes far beyond one startup: Though endlessly hailed as a huge opportunity, local online media has largely turned into a vortex of failure and disappointment. As failures pile up, you have to wonder how other high-profile startups will ever find ways of wringing big profits from what has proven to be a decidedly low-margin and slow-moving market.
Writing in The New York Times today, David Carr summed up Patch’s problems aptly, describing its business model as beset by "the tyranny of small numbers."
"Both the journalism and the ad sales were hand-to-hand," Carr wrote, "a retail effort that required spending a lot of money to go after pretty small revenue."
As a result, many startups are distancing themselves from the local-minded ideas that made them interesting in the first place. Take Curbed Network, which would seem to be a paragon of local online publishing, with a slew of mini-sites, each at the intersection of an individual city and a topic, like real estate (Curbed.com), restaurants (Eater.com), or retail (Racked.com). Though it seems that Curbed has adroitly managed the local game, with smart, sharply written editorial and an aggressive publishing strategy, its new owner, Vox Media, reportedly paid just four times revenue for the network and promptly declared that Curbed is "not a local play."
Apparently, Curbed's channels are now "huge mainstream consumer categories," positioning that makes them attractive to efficient national brands.
Then there's Foursquare, a well-funded startup with a big focus on local businesses -- and little revenue or profit to show for it. This is the case despite the fact that, unlike Curbed and Patch, Foursquare doesn’t have to create its own content or hire journalists. Its information comes from users and partner sites.
When we asked CEO Dennis Crowley about his impressive new technology for pushing unpaid recommendations to users, he stuck to Foursquare’s local roots, describing how the app could suggest a bacon-and-bourbon cocktail at a particular bar. But when I asked about how Foursquare advertising will evolve, he went national, giving an example of how a new ad product could be used by J. Crew and American Express.
Part of the reason it’s so tough to sell to local merchants is that they are struggling with tight margins and a lack of online sales infrastructure and savvy. The same technological disruptions that make it possible to launch local websites and apps tend to undermine the very businesses that could support those startups, while also making it easier for online competitors to join the fray.
One local site whipsawed by these forces is Groupon, as much a poster child for local media failure as Patch. After witnessing an explosion of competitors on the one hand and a slog of a sales effort on the other, Groupon has been able to stop its own stock slide only by getting into the humdrum, old-school business of credit card processing.
Sometimes, old-fashioned penny pinching can get a locally-focused startup farther than technological innovation. Yelp, for example, is still losing money. But as the use of its service on mobile phones expands, it has brought its costs under control compared to last year. The stock tripled in 2013.
That’s the sort of performance spike that’s rare in local media. The norm is Patch. But there is at least some hope for the future.
