Local Internet services struggling

Recent shifts in the business of localized Internet services -- companies based in cyberspace, but selling to localized markets -- demonstrate that companies are still struggling to find a business model that works, according to industry observers. And in some cases the foe they're battling is the Internet's own borderless nature.

"[Localized] companies are all pretty much struggling and trying to figure out what to do," said analyst Seema Williams of Forrester Research. "They're banking on the promises of online marketing, that you can go one-on-one with users and be familiar with their previous purchasing habits. But some sites are there, and some sites aren't there."

Enterprises such as Food.com (formerly Cybermeals), CitySearch (Nasdaq:TMCS) and Microsoft Corp.'s (Nasdaq:MSFT) Sidewalk were formed under the assumption that the Net is just as good at distributing local information and services as it is at relaying sports scores from the other side of the planet.

Targeting teething problems
Because everything you see on a Web browser can be customized just for you, it should be possible to show users only what's relevant to them: Targeted advertising and news, even interactive services tailored to your demographic and geographic information.

But reality hasn't quite caught up with that dream, say those within the industry.

This week, for example, Food.com announced a major strategy shift in selling its online meal-ordering service. The company is phasing out most of its online advertising deals with portals such as Yahoo! Inc. (Nasdaq:YHOO), Lycos Inc. (Nasdaq:LCOS) and Excite Inc. (Nasdaq:XCIT) in favor of an "offline" campaign using billboards, radio spots and the like.

The reason? The Internet just wasn't local enough.

"We found that those were very national-scope deals, and we were having tons of banners running in places where we didn't have any restaurants," said Food.com spokesman David Gilcreast. "We'd get click-throughs from consumers and then no restaurants turned up for them, so it was turning out to be a negative consumer experience."

The one national online advertising contract Food.com will keep is with America Online Inc. (NYSE:AOL). The world's largest online service is uniquely able to target content and advertising to its millions of users because it owns their geographical information -- along with their credit card numbers and demographics.

Food.com says its main business is concentrated in local areas of only a few blocks -- difficult to advertise on national or international online properties.

"The bad part about the Internet is that it's there all the time, for anybody," said Food.com chairman and CEO Rich Frank. "In the movie business, we wouldn't open in some towns because we're not ready yet. But on the Internet there's tons of 'you're not quite ready for them yet.' "

Food.com isn't the only localized company that has shifted its initial focus.

Shift in focus
CitySearch, which recently merged with TicketMaster Online, and Sidewalk both began by imitating the newspaper model of attracting local advertising around localized content, but have since shifted focus towards e-commerce transactions.

Yahoo!, Excite and Infoseek Corp. (Nasdaq:SEEK) have moved away from building localized sites in favor of personalized home pages aimed at individual users.

At the heart of the problem is that most online companies just don't have enough personal information about their users to make targeting effective.

"They wind up having a lot of information on a very small percentage of their audience, and ... a little bit of information on most of their audience," said senior analyst Marc Johnson of Jupiter Communications. The ability to truly target individual users, he said, is "still a ways off."

Targeting will become more practical, observers say, as online services learn how to entice users to give up more specific information, something they have so far resisted.

"The value proposition online is changing," said analyst Williams. "If you say 'Give me your information to personalize this site,' people are going to say, 'Personalize, what's that?' But when you say 'We can tell you about specials at XYZ restaurant,' then it becomes valuable."