Hyperlocal in 2012: More Consolidation and Scale, Less ‘Free’

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In 2011, we saw the explosion — and the beginnings of the implosion — of the deals industry with the shrinking, and even folding, of several companies. The most shocking example of this was the crippling of BuyWithMe, which showed that the market wasn’t mature enough for a deals company to sustain such an aggressive roll-up strategy when it was forced to slash its staff in half and continually needed more cash and couldn’t interest any investors to participate in another round.

Others in the deals space disappeared altogether — particularly in the Chicago market, where Groupon towers over other deal hopefuls. In the fall, dog deals company Doggyloot absorbed PetSimply; Local Offer Network acquired Raleigh’s Redeemio. But generally, we’re expecting more consolidation.

In the LBS arena, Facebook’s purchase of Gowalla was the first sign of more consolidation to come. Other smaller LBS companies are struggling to make substantial in-roads with consumers and merchants — something they need to do not just for survival but to deliver the revenue results expected by their VC investors. Facebook’s acquisition validates their business, but it also brings a 1,000-pound gorilla into the game perhaps in a bigger way than Places.

What it comes down to is that hyperlocal companies like Foursquare and Groupon, despite their “hyperlocal” raison d’etre, need scale to bring an effective proposition to merchants and big brands. Scale helps, even if that just means a larger audience within a metro area or even a single neighborhood.

I think we’ll see less “consolidation” per se among companies in the hyperlocal publishing space, but we will see more partnerships with LBS and deals companies. Foursquare partnered with Groupon and other deals companies and content sites this year; Patch, like many media sites, launched a deals business. Next year hyperlocal companies will continue to form such partnerships and eventually will merge their businesses together.

The second part of this is less of a prediction than a hope. There’s a $45 billion local ad market that will be fought over and captured by the companies that survive the consolidation and create lasting business models. But the road to getting there is, so far, littered with “free.” In one interview after another in our Case Study series, merchants sing the praises of hyperlocal — because it often costs them nothing to play. Foursquare? Free, just post a location. And the merchant interface is free as well. With deals — as we all know, there is a price merchants pay, but it’s no cash upfront. Hyperlocal publishing is perhaps the least “free” of all for merchants, and that’s likely due to a legacy of ad-supported media. But there is no legacy ad-supported LBS, and deals have done an awful job of transitioning the coupon model — where clients pay upfront — into one that works in the group coupon business.

I’m excited about 2012 as all companies in hyperlocal are learning and maturing their way toward the lasting, sustainable ecosystem we so strongly believe in here at Street Fight.

Laura Rich is Street Fight’s co-founder and CEO.