“There is a huge amount of money to be made in end of life businesses. Free cash flow that isn’t volatile is a beautiful thing.”
– Rita McGrath of Columbia Business School, as told to Bloomberg Business
Disruption can move fast. When Chris Silver Smith joined one of the largest publishers of yellow pages in 1997, he became part of an extremely profitable enterprise. While newspapers and television stations create expensive content like articles and sitcoms—and pay the bills by placing ads next to articles and playing them during commercial breaks—the publishers of yellow pages simply send every single household a thick book of pure advertising.
“The industry seemed so virtually indestructible,” Smith later reflected, that “veteran employees commonly told me that [yellow pages] company stock was a rock-solid ‘sure bet’ and local businesses would ‘always need the yellow pages.’”
The yellow pages veterans were wrong. Today, for many Americans, a yellow pages directory is a fossil from our pre-Internet past, a relic of the days before Google told us everything we needed to know. In 2007, a decade after he joined the “indestructible” yellow pages industry, Smith was the president of a search engine marketing company and wrote an article titled “Yellow Pages Will Be Toast in Four Years.” Within two years, three major yellow pages companies declared bankruptcy.
The yellow pages, however, are far from extinct—even though the Internet lets you find plumbers, DJs, and yoga instructors from a variety of sources, including Thumbtack. Publishers of the yellow pages remain billion-dollar companies, and 68% of Americans still have a yellow pages directory in their home. This is partly due to the relative success of some publishers at launching digital versions of the yellow pages. It’s also because the physical yellow pages are enjoying a long, drawn out, and profitable death.
The Golden Age of the Yellow Pages
Since its advent in the late 1800s, publishers of the yellow pages have operated a simple business model: A sales force charges local businesses for advertising, and the publisher ships a booklet of these advertisements—alongside a directory of businesses’ phone numbers—to customers’ doorsteps.
This was wildly profitable for most of the 20th century. Americans walk to the kitchen during commercial breaks and throw out coupon booklets, but customers treated the yellow pages as a resource rather than spam. It was the go-to and sometimes only way to find a doctor accepting new patients, a 24/7 plumber, or a pizzeria that delivered. In the 1980s, the average American used the yellow pages 1.86 times per week, and over 50% of Americans used a directory every day. For businesses, staying out of the yellow pages was the 20th century version of not having a website. Companies changing their name to gain a more favorable position in the directory was the 20th century version of search engine optimization.
Advertising in the yellow pages today costs from hundreds of dollars (to place a small ad in a rural area) to tens of thousands of dollars (to place a large ad in New York City) per year. In the age of Google, many small businesses now balk at the prices. But for a long time, business owners paid relatively higher prices. According to Chris Silver Smith, local businesses often felt “at the mercy of the [yellow pages] companies.”
Yellow pages publishers enjoyed a century of great profits because the industry favored monopolies.
The first yellow pages were published exclusively by telephone companies. They date to 1886, when a publishing firm producing directories for the Chicago Telephone Company decided to include a classifieds section. According to a popular story, the color choice came from a printer who ran out of white paper but decided to keep printing on yellow pages.
Only a few telephone companies operated in the United States, and AT&T dominated with as much as 85% market share. When AT&T invented the famous “walking fingers” logo for the yellow pages, it feared competition so little that executives did not trademark the design, which is why multiple American companies use the walking fingers logo and the term “yellow pages.” AT&T dominated the telephone market—and therefore the directory business—until a federal judge ordered its breakup in the 1980s.
The breakup led to increased competition in the yellow pages industry. The baby AT&T companies fought each other for market share, and independent publishers created their own directories. But the nature of the business supported the triumph of individual companies in each market.
Yellow pages were a fairly all-or-nothing business: customers wanted to use the most comprehensive and up-to-date directory. Since telephone companies had decades of experience publishing yellow pages and the resources of a large monopoly, they employed large sales staffs that kept advertisers’ dollars flowing and the listings accurate.
Competitors made in-roads in atypical markets or by publishing specialized offerings like Chinese- or Spanish-language yellow pages. In most regions, however, only a single or a few yellow pages directories served as the primary source of referrals for local businesses. If you wanted people to find your business, you had to be in the yellow pages that dominated your area.
It was an amazing business model. The content yellow pages provided—telephone listings—was cheap or even a monetized asset, with businesses paying to have their number listed. Yet businesses paid large sums just for the right to use bolded text in their ads. Yellow pages companies were regional Googles, monopolizing advertising for local businesses. In 1986, adjusted for inflation, the industry was worth over $14 billion. Publishers had profit margins of over 30% or even 50%.
Then, in the mid 1990s, as Yahoo IPO’d and the media described Amazon.com as a promising “upstart,” the industry faced an important question: Was the Internet a threat? Or was it an opportunity?
The Disruption Story
Yellow pages companies did not sit around and wait for disruption to destroy them. They launched digital versions of their directories, and prepared for the 21st century.
The Internet held great potential for yellow pages companies that could adapt. Advertisers love that digital ads provide precise information about how many visits and sales they drive. Some industry executives saw promise in charging small businesses to set up and manage their digital shingle—essentially acting as a guide to the digital era for small businesses.
Yet this could not outweigh the huge blow that the Internet dealt the yellow pages: It destroyed their monopolies and provided alternatives like Google and Facebook to the clunky, old phone books.
This meant more competition, and it also made online ads less valuable than print ads. It introduced a dilemma familiar to the newspaper industry: transitioning online cannibalized the more lucrative print business.
It didn’t help that many yellow pages companies acted like octogenarians fumbling around on their grandson’s computer. Some executives instructed their sales staffs to prioritize selling print ads, or failed to introduce an option to buy online ads independent of print ads. Other companies scanned their print ads instead of making originals for the net.
After a great, century-long run, the yellow pages industry faced obsolescence. Three major publishers declared bankruptcy in 2009, and since 2007, revenue has decreased by over $5 billion. A report by the Local Search Association and Thrive Analytics found that 62% of people used search engines as their first source of information about local businesses—compared to 27% for the online or print yellow pages—and that only 14% of people under age 29 described themselves as “extremely likely to use the yellow pages as a source of information.” Until a judge declared it a free-speech violation, multiple cities and states debated or passed bills that limited the delivery of “environmentally wasteful” yellow pages directories.
If you type “Do the yellow pages” into Google, autocomplete suggests, “Do the yellow pages still exist?”
A Profitable Death
If the yellow pages are a fossil from the Jurassic Era, then AOL dialup dates back to the age of mammoths and neanderthals. Yet the screech-screech of dialup is still responsible for the majority of AOL’s profits. In 2014, America Online raked in $143 million in profits from 2.1 million subscribers who pay $20 a month to watch Internet pages slowly load like it’s the mid nineties.
When entrepreneurs release a new product, they market it to “early adopters,” the type of people who love trying new services and stand in line for an iPhone on the day of its release. Products and services that have been rendered inferior by new technology stay in business thanks to the “laggards,” people who use outclassed products like AOL due to a lack of funds, skepticism, or sheer force of habit.
Graphic via Wikimedia
It’s the same with the yellow pages.
When the yellow pages company Idearc declared bankruptcy in 2009, it was one of three to do so. But then a funny thing happened. In just a year, it emerged from bankruptcy as a billion dollar company with shares that popped up to $44 a share during its first day back on the stock market.
Like its peers, Idearc filed for a special case of bankruptcy called chapter 11, which helps companies deeply in debt reorganize and pay back their creditors over time. “Essentially, we have a company with good potential being held back by a terminally ill balance sheet,” its chief executive announced in 2009. The company did not need loans; it simply could not pay the debts it had amassed during its heyday due to the recession and the decline of the yellow pages industry. Once it agreed with its lenders to reduce its debts, Idearc emerged from chapter 11 bankruptcy as a viable company.
Thanks to “the laggards”—the 68% of Americans who keep a yellow pages directory in their home—many yellow pages companies remain profitable and even larger than Idearc.
Incredibly, despite the rise of competitors, revenues from yellow pages directories kept rising until 2007.
The directories are still highly used in rural areas where Internet access is limited or the transition online has been slow. For the same reason, the yellow pages reach many low-income customers.
A majority of seniors also use the yellow pages. This isn’t promising for the future of directories, but as Fox News demonstrates, if you’re going to own one demographic, seniors are not the worst choice. Seniors have disposable income, they are set in their ways, and although many scrimp and save, they have expensive needs like home repair and healthcare.
The yellow pages even serve a niche among non-laggards for finding services like local home repair. In 2011, for example, Andrew Shotland posted the following on a search engine optimization website:
Hi. My name is Andrew Shotland and I am a print yellow pages user. I know, I am one of those cutting edge online guys who makes his living off the “yellow pages are dead” thing. But, then, a main water pipe to the house started to leak and flooded my lawn.
When he needed a plumber, Shotland turned to the yellow pages. Many tech-savvy people do the same. A survey conducted by the Local Search Association found that while search engines dominate for services like hotels, restaurants, and real estate, equal numbers of customers turn to the print yellow pages to find plumbers, electricians, and roofers.
The result is that many local businesses continue to advertise in the yellow pages. One publisher told researchers in 2012 that 80-85% of businesses renew their ads each year. Those businesses could be making a mistake. But Thrive Analytics—although performing research for the Local Search Association, whose membership includes yellow page directories—concluded that 88-90% of yellow pages ads generated enough profit to cover the cost of the ad.
With the yellow pages industry in decline, phone companies have sold off their directory businesses. But they have found eager buyers in private equity and hedge funds, whose executives want the steady stream of cash that small businesses pay the yellow pages every year. When Idearc emerged from bankruptcy, a hedge fund became its largest shareholder. In 2012, AT&T sold a 53% stake in its yellow pages business—the last held by a phone company in the United States—to Cerberus Capital Management for $950 million.
Why is the world of finance interested in yellow pages? Analysts at the time speculated that Cerberus was essentially interested in milking the yellow pages for every last drop of profitability. “There is a huge amount of money to be made in end of life businesses,” Rita McGrath of Columbia Business School told Bloomberg at the time. “Free cash flow that isn’t volatile is a beautiful thing.”
The Yellow Pages… Online
When yellow pages companies launched digital versions of their directories, they faced a daunting challenge. But they had a few strong assets to build on.
The yellow pages was a strong brand with a large customer base interested in buying. As a result, “yellow pages florist” or “roof repair yellow pages” is a popular search term on Google, and an expensive search results page for advertisements. Yellow pages companies also had pre-existing relationships with almost every small business—an asset that new competitors would kill for.
Many yellow pages publishers look distinctly 21st century. A Canadian yellow pages company has launched local dining and shopping apps, opened offices focused on mobile, and started phasing out its print deliveries—all smart moves that hurt its print business and therefore its immediate profits. In the United States, yellowpages.com is a Top 50 Digital Media Property with 22 million unique visitors. It ranks behind local search competitors, however, and falls out of the Top 50 most visited sites when mobile visitors are included.
The numbers for the industry as a whole are similarly mixed. When Thrive Analytics polled people about which resource they go to first for local business information, only 27% said the online yellow pages whereas 62% said search engines. Internet yellow pages, however, beat out review sites (22%) and daily deals sites (17%), and another 27% of respondents said they relied on the print yellow pages. The responses reflect the habits of a sample of people, though, and the responses of only twentysomethings probably look much more dire for the yellow pages.
Today the yellow pages no longer reign supreme. Once the publishers were the only game in town, and businesses feared being left out of the directories. Now the same companies are mid-sized players in a competitive industry, struggling to match the technological prowess of younger competitors and keep their customers from abandoning them. Yet given that the industry cites “the perception no one uses print Yellow Pages anymore” as a common challenge, their sizable revenues are very impressive.
Photo credit: Top photo by Jamie