the Internet's challenge to Yellow Pages

Those who ponder the value of thick yellow books thrown in front of their doors should recognize that the Yellow Pages have been a great business.   Judge Harold Greene’s Consent Decree (1982) that broke up AT&T noted, “All parties concede that the Yellow Pages currently earn supra-competitive profits.”[1]  In the divestiture of AT&T, Judge Greene assigned the Yellow Pages business to the Bell local operating companies in part because state telephone regulators used Yellow Pages profits to subsidize local telephone rates.  At least through the 1980s, local telephone company Yellow Pages received 95% of Yellow Pages advertising revenue.[2]   Local telephone companies largely owned the Yellow Page advertising business in their local operating territories.

Costs of selling advertising make up about half of costs for a telephone company’s Yellow Pages directory.   An analysis of New York Telephone’s Yellow Pages costs in 1980 indicates that sales costs, production costs, and general and administrative costs (including promotional expenses) accounted for 45%, 23%, and 11% of total costs, respectively.  Paper, printing, and delivery costs amounted to only about 20% of total costs. Information technology has probably reduced the share of production costs, while rising materials costs have probably raised paper, printing, and delivery costs.  Selling costs are probably still about half of total costs.

The Internet’s challenge to traditional Yellow Pages concerns product quality, users habits, and new services, not the cost of paper, printing, and delivery.  Online searching is more convenient than getting a paper directory and manually looking through it.  Online information is more voluminous, more graphically attractive, and more readily kept up-to-date than information in a paper directory.   Local businesses can readily purchase advertising online and create their own online presence.  Increasing a business’ local online visibility and enhancing a business’ local reputation are rather different services than selling traditional Yellow Pages advertisements.

The Yellow Pages have a sales force with established relationships with local business.   What they have to sell, and what they are able to sell, is the key industry issue.

Notes:

[1] U.S. v. AT&T, Consent Decree, 552 F. Supp. 131 (D.D.C 1982) pp. 193-5.

[2] Lazarus, William Warren, The Yellow Pages: A Medium, An Industry, Ph.D. Dissertation, MIT, 1984, p. 491;  Evan D. White and Michael F. Sheehan, “Monopoly, The Holding Company, and Asset Stripping: The Case of Yellow Pages,” Journal of Economic Issues, v. 26, n. 1 (Mar. 1992) p. 161 states the telephone company (utility) publishers controlled more than 96% of Yellow Pages advertising revenue, citing US West 1986 Fact Book and Statistical Summary, p. 18.

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