Display advertising and local search have been key points of emphasis for major online search engines and networks in earnings calls over the last several weeks. This raises an interesting question about the interplay between local search and display ads: Can local spend help drive display advertising over the near or medium term? While we at Marchex are big believers in the local growth opportunity, we believe that traditional cost-per-impression (CPM) based display advertising needs to evolve if it’s going to effectively capture the hearts and minds of local advertisers.

According to recent articles in the New York Times and Bloomberg, AOL CEO Tim Armstrong has declared display advertising and local web sites as top priorities for the company moving forward. Similarly, Yahoo! has been focused on selling display ads and has repeatedly talked about display as a growth engine. Not to be outdone, in their recent earnings call, Google stated that display ads are a great complement to search advertising as it believes that there is an opportunity to strengthen search campaigns using display to bolster its AdWords campaigns.

So how can these big search engine players maintain and grow their display advertising revenue line by capturing the growing local advertising market as more and more local advertising shifts online? Well, let’s look at what matters to the local advertiser. For decades the advertising industry has talked about the fact that local advertisers care only about one thing: Does this ad make the phone ring? So in essence, the volume of display that local advertisers will purchase is closely tied to the ability of display ads to drive phone calls. With that as a backdrop, let’s take a look at display and how it might fit into this primary goal of the local advertiser.

Display advertising: Current numbers and forecast

Given the go-forward focus of these search engine players on display advertising, let’s first examine the recent display ad figures. In Microsoft’s second quarter earnings call, online ad revenue in the quarter was down 14 percent due to a material decline in display ads across the board. And Yahoo! communicated that display was also down 14 percent year-over-year.

Additionally, based on a survey conducted earlier this year by Borrell Associates called of local businesses’ online intent for future ad spending, “standard format” advertising (CPM-based display or banner ads) is forecast to decrease in local business ad spend by 9.1 percent in 2009, and by as much 62.3 percent by 2013. According to Borrell, much of this is due to the fact that local businesses are expected to shift their budgets to paid search, email marketing and video and that new local advertisers are more likely to jump right to performance advertising and do very little with “Standard Format.”

Given these findings and stats, how can the big online search and advertising players adapt to this trend, and maintain (or even grow) more local advertising dollars in their display products?

The local opportunity

According to another Borrell Associates report, with , from $4.1 billion in 2008 to $5.3 billion in 2013, these large search engine players are right to put more emphasis on the local opportunity.

We believe that this local advertising shift from traditional offline marketing to online performance-based advertising has accelerated in the last 12 months due to a combination of the poor economy and the abundance of tools to track online ad effectiveness. Essentially, local advertisers need to get more for their marketing dollar, and they are benefiting from the lessons learned by the national advertisers, including tools to track leads or phone calls generated.

Yes, there is some measure of value for all businesses—including small businesses—in branding and seeing their display ad on a targeted page. Will small businesses pay for this ad in CPM terms three to five years from now? Some will. However, there is an inevitable conclusion to this story. Small businesses will demand transparency and results from all forms of advertising, just like the vast majority of national advertisers. We talk to small businesses every day, and every day we hear more of them ask about measuring the number of leads or calls they get from their campaigns. The effectiveness of local display advertising will increasingly be measured the same way.

Let it ring

While we understand the big online search and media players’ desire to make display a primary goal, especially given the historical significance of CPM-driven revenue, we believe that they will need to adjust their approach to display ads to capture local dollars.

Display advertising can and should be part of a marketing mix for the local advertiser, but most small advertisers will ask how many calls were driven, how many emails they received, and how many new customers were generated as a result of their display ads, just as they ask us the same questions about their search campaigns.

The best approach for the big display networks may be to offer the bulk of their display inventory as a performance-based product for local businesses. We believe this type of transparency would build trust with local businesses and speed the growth curve of local online advertising.