Why the Groupon-Fueled Hyper-Local Ad Bubble Is Set to Burst

The news that AT&T (T) will start a competitor to Groupon makes it official: We're in the middle of a hyper-local advertising bubble. All the signs are there. First, there's the sheer number of new companies offering mostly identical services:

Groupon
LivingSocial
Facebook Deals
Google Offers
Aol's Patch.com
Yelp
Krillion
Spreebird
AT&T's YP.com

They all do basically the same thing: allow advertisers to reach consumers based on their location, often with discounts. Just how many Groupons do we need?

Secondly, we're seeing a rash of companies with silly names -- another sure sign of a tech bubble. Remember Boo.com, Flooz.com or Pseudo.com from the late 1990s? All out of business. Now we're looking at Krillion, Spreebird and Yelp. Hmm.

What little economic information we have about these companies indicates that they are driving down prices for digital advertising and ruining each others' profitability.

Siphoning money from established players
Coupon giant Valassis (VCI), which for years dominated the world of grocery discounting through its traditional Sunday newspaper inserts, saw revenue fall 0.5 percent to $547 million in Q1 2011 after gaining revenue last year. Valassis ought to be enjoying a sales boom as U.S. ad budgets grow. Some of that lost revenue was from its ailing newspaper segment, which Valassis is trying to get out of. But it made only $45 million from its digital operations such as Redplum.com.

Just to put that in perspective: The company that has controlled about 50 percent of the U.S.'s entire coupon market since 1970, and has longstanding relationships with virtually all the biggest advertisers in the country, gets only $45 million per quarter from its digital coupons. Hmm, again.

It's not just Valassis. News Corp.'s (NWS) revenues in its publishing segment -- which houses its local newspapers and News America Marketing Group, the company that controls the other half of the supermarket coupon trade -- declined 2 percent to $2 billion. News doesn't break out the NAM numbers, but it's suspicious to me that neither of the traditional coupon giants can increase their revenues during an economic boom.

UPDATE: Q1 2011 revenues at Insignia Systems (ISIG), a small rival of both Valassis and NAM, also declined. Are you seeing a trend here?

Profits are MIA
We don't know that coupon promotion money is being siphoned off by Groupon et al. But we do know that some of these companies are unprofitable because they are providing advertising services at less than cost price. Patch.com, for instance, which is trying to replace the local newspaper as the display ad venue of choice for small businesses, will lose $100 million this year, according to Forbes.

It's all good for advertisers, of course. They will be more than happy to allow tech startups to subsidize their marketing departments with venture capital money. The next question is, which of these companies will survive and which will go to the wall?

Related:

Image by Flickr user photoclinique, CC.

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