How Local Advertising Matters for These Global Brands

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Former Speaker of the House Tip O’Neill famously said “All politics is local.” To be successful politically, you have to put your constituents’ concerns and needs first. They put you in office, and they can remove you just as quickly. In the financial world, social media has helped websites and mobile apps become international business by emphasizing local businesses. Not only is this a big money making strategy, it also has the effect of making local businesses stand out vs. big national chains, allowing Main Street and Wall Street to profit.

Facebook's local advertisers = big revenues

The second quarter for Facebook (NASDAQ: FB) was one of the best since going public last year, thanks to revenues that came from selling advertising, with much of it coming from local businesses.

Like most internet services, Facebook collects a treasure trove of data from its users, especially locations. This enables local advertisers to specifically target people in that area using “Likes”, interests, check-in locations, and even some status update keywords. This makes for precise marketing that is not only cheaper than a TV commercial, but has a more specific client range that takes advantage of word of mouth to do most of the work.

When it comes to a cheap initial investment for advertising, Facebook is one of the best sites for small businesses. Last quarter, 72% of monthly active users (MAUs) in the US and Canada were daily active users (DAUs), a 2% increase YOY. For advertising purposes, it is a win-win scenario because not only have MAUs increased, but DAUs are increasing enough to keep pace. This coincides with a reported $721 million in advert sales, or 85% of total revenues.

Part of it comes from a news feed upgrade that allows companies to post on behalf of a profile when that profile “likes” an item, which shows up in the News Feeds of that person’s friends, allowing for increased exposure over the traditional side-bar advert. It costs more, but it seems to be good value for businesses, as Facebook has seen a near $1 per user rise in advertising, to $3.67 per daily user. This supplies a great avenue for local stores to reach out to local customers, while increasing the return on investment for advertising via the power of word of mouth.

Yelp-tastic returns

Yelp (NYSE: YELP), meanwhile, provides a more custom,interactive platform with review-based social network. Yelp’s structure links with sites like Facebook and Twitter by allowing “Yelpers” to rate and review businesses and post them to Facebook. Businesses can advertise on Yelp by going to the top of mobile searches for a certain area. 

Yelp's other strong suit is the community level management. Each city has its own community manager who advertises local events and businesses. The manager also promotes Yelp users to “elite” status, enabling that user to attend special elite-only events, like free menu tastings and exclusive privileges at clubs or parties, simply for being active. 

It is no surprise that businesses leap to take advantage of Yelp when they can. This quarter, 51,400 businesses bought accounts on Yelp, a 62% increase from the year prior, which led to a $33 million revenue increase YOY. Mobile phone usage, encouraged by Yelp to earn rewards, accounted for 40% of ad impressions and 59% of business searches, showing the power of mobile advertising. Businesses even offer discounts and giveaways to those who “check-in”, which leads to more frequent business, and more positive reviews at little cost to the bottom line.

Local business getting linked

So we've discussed how businesses advertise to locals, but what about hiring people? In steps LinkedIn (NYSE: LNKD).

Rather than making friends, you make “connections” with people in different businesses and skill sets to build a personal networking base. People you interact with are separated by degrees of connections, from knowing a guy in one of your own networks to meeting someone through someone else, almost like being at a job fair or a corporate shindig.

Unlike Facebook, which doesn’t charge individual users for access, LinkedIn provides the chance to upgrade one’s profile for a fee to gain better access to job opportunities. In a tough economy like this one, having better access to job providers and getting one’s resume out there could be vital, meaning those that can, will pay for that advantage.

This all translates to strong earnings. With 189 million monthly unique visitors, it’s a growing website that markets almost as Facebook in a suit jacket. Thanks to the premium subscription services, it has netted $364 million of revenue and $89 million in EBITDA, 62% of which came from North America. Like Facebook, it does sell advertising as well, but the main advertising comes from job seekers themselves looking for career advancement, which is a unique, and much needed, service to workers.

The bottom line: a bit pricey, but room for growth

Suffice to say, we have hit the point  where social media can be used to reward investors through selling custom, data-driven advertising. In addition to the growing daily usage of popular social networking sites, all three companies posted solid returns in the 2nd quarter.

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So far though, each company is very expensive when looking at forward P/E, with Yelp posting a 237.6 ratio, LinkedIn with a 112.2, and Facebook with a 40.5. Yelp is the weak link with a profit margin in the red at -9%, owing largely to less monetization than the other two, but with local advertising becoming more important, Yelp should erase these red numbers in due course. As long as Main Street thrives, Wall Street will thrive as well. 

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