Conference Notebook: As Legacy Media Struggles to Adapt, Startups Shift to Software

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galaxy-gear_001_front_lime-greenFor local media, the writing has been on the wall for years; but now, the disruption is palpable. As the cash cows, which local media and yellow pages business have fed on, begin to shrink, and investors struggle to adapt to a less attractive balance sheet, the disruption is coming to a head. Meanwhile, an emerging trend toward automation could threaten an even wider swath of legacy business.

During BIA/Kelsey’s Leading in Local event in Austin Wednesday, executives from local media and yellow pages companies spoke about the challenge in weaning these companies off still-profitable, but doomed businesses, toward a higher-risk-and-lower-margin future.

“Part of the transformation is explaining to investors that theres a shift going on from a business that’s value based and high margin and rel. little comp, to one that’s higher growth but with lower margins of the legacy business,” said Gordon Henry, a longtime yellow pages exec who now heads up small business initiatives at Deluxe Corporation, during a panel Wednesday morning. “Investors in established legacy companies very often bought into a business that had a protected business with an established model, but what they need to do is see that there’s a next phase where there’s substantial growth with acceptable margins.”

But it’s not just legacy firms who are struggling to woo investors. Speaking on a panel, Mike Dodd, a partner at Austin Ventures, cited concerns about the high customer acquisition costs and relatively poor lifetime value of small businesses as reasons why the venture capital community has remained tepid about the local space: “If you’re selling a software to a local business, churn is often much higher, and the unit economics are not great. Local is just a lot trickier,” he said.

Part of what’s contributed to the high churn rates is the abundance of publishing and marketing startups in the industry over the past few years. With the exception of some large direct players like Yelp and Google, the differentiation between most marketing and publishing products is incremental, and switching costs for local businesses are low.

The market dynamics have, in part, caused a shift in the startup community toward operations software for small businesses, which companies can sell as a service and play a bigger role in the day-to-day lives business owners. For startups like LevelUp, which continue to make money off of marketing services, attacking the pain points in a legacy operations’ infrastructure — namely, payments — provides a critical tool in keeping small businesses engaged.

During a keynote Wednesday, LevelUp’s CEO Seth Priebatsch laid out a troubling thesis for the payments industry, arguing that the emergence of mobile payments and key regulatory changes will eventually lead to the elimination of the $50 billion in interchange fees, which payment processing firms charge small businesses annually. Instead, Priebatsch argues, companies like LevelUp will process payments for free and generate revenue marketing, loyalty, and other value-added services.

It’s an argument Priebatsch made first in late 2011, but one that has come to fruition over the past two years. Not only have interchange fees begun to decline, but the integrated operations-marketing model is gaining steam faster than ever before. Payment companies like Square and eBay have worked to expand added services, as a few of the larger publishers — namely, Yelp — have started to integrate commerce services like delivery and reservations via partnerships with SaaS providers.

Steven Jacobs is Street Fight’s deputy editor.