Yellowbook CEO Joe Walsh made a very direct case this morning for massive consolidation in the core U.S. Yellow Pages business sometime over the next couple of years. Ultimately, Walsh believes there will be a single national print Yellow Pages company, which he says will be an excellent platform to pivot to a digital business.

As moderator Neal Polachek noted, Walsh arguably fundamentally changed the U.S. Yellow Pages industry by offering a direct competitor to the incumbent Yellow Pages publisher in major U.S. markets, something that was fairly rare before the late 1990s.

That competition, based on the premise that incumbent Yellow Pages advertising was overpriced, spurred a wave of me-too competition in large markets, creating a huge oversupply of Yellow Pages in most U.S. cities. The economy and the shift to digital is beginning to correct this oversupply.

“We are seeing the fifth and sixth book begin to go away,” Walsh said. He compared this excess of competition with the more recent oversupply of daily deal companies. “We are seeing the over the top stuff starting to shake itself out, leading to a more direct and full consolidation next few years.”

On yesterday’s Future of Yellow Pages panel, Dex One Chief Strategy Officer David Sharman referenced consolidation indirectly when he expresed a desire for Dex One to gain a fully national platform to sell digital advertising solutions. Last year, Dex One was widely rumored to be a potential merger partner for SuperMedia, but that deal never materialized.

In his presentation, Walsh said his modeling shows that consolidating two hypothetical large directory businesses that are seeing roughly 15 percent annual revenue declines, as well declining EBITDA despite cost cutting, could stabilize revenue declines and eventually return to EBITDA growth within a few years.

Asked what will trigger this consolidation, Walsh said it will just take the right group deciding the opportunity is ripe.

“We are almost there. It will take a financial group that says ‘I see it, let’s go.’ Some would argue it has been sitting there for a while,” Walsh said, adding that it won’t happen this year. “But defiinitely before the next time I am here.”

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The Internet Yellow Pages business model has largely refocused on hosting small-business websites, and upselling from that position. At least, it has for Yellowbook.

Yellowbook Chief New Media Officer Pat Marshall, speaking at the recent Borrell conference in New York, said “it used to be about listings. Now it is websites.” Marshall noted that Yellowbook will be hosting 210,000 SMB websites by the end of the month.

The websites act as a foundation for a variety of other bundled offerings, including search engine optimization and social media. Marshall said that one business went from being on the 316th page in his category to page six to page one using Yellowbook SEO.

All this has transformed Yellowbook’s positioning with customers. Ultimately, it is about “trust, simplicity and performance,” said Marshall. “We see ourselves as more of a mutual fund than a pure play.”

As for Facebook, “our job is to tell [advertisers] the dos and don’ts. It is not to tell them to do it. Whether companies actively work with Facebook “is a demographic thing, not a geo thing,” said Marshall.

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Yellowbook’s Mike Wilson told us this morning that the company is confident that the trial will be successful and Yellowbook will roll it out across the country, reaching at least a dozen markets by the end of the year. Wilson tells us adding markets will be relatively easy, since Yellowbook will already have sales and customer support assets in place in markets where it expands.

“All we will need to do is flip a switch,” he says.

In Canada, Yellow Pages Group announced its own deal-a-day program through its Red Flag Deals Web site. YPG is currently gathering subscribers for its deal-a-day program, which will launch first in Toronto and Montreal.

Yellowbook’s Wilson tells us there are a number of benefits to entering the group buying space, in addition to the obvious new source of revenues. One key benefit is the excitement around deal-a-day products gives Yellowbook an entree into sales calls with non-advertisers and former advertisers that wouldn’t be there if the topic of conversation was print Yellow Pages.

“I really like our chances in this space,” Wilson told us. He fully expects the group buying space to become crowded, which could lead to price competition. He believes Yellowbook’s organizational scale, profitability and diverse product set enable it to ride that out more easily than a start-up.

In addition, Wilson says Yellowbook has the ability to offer deals on a more hyperlocal basis in order to avoid the phenomenon of the small business that sells too many deals and cannot fulfill them all, causing a consumer backlash (and nasty Yelp reviews).

Groupon and its leading competitors have been taking measures to make offers more geotargeted and personalized, as my colleague Peter Krasilovsky reports on the Local Media Watch blog.

Wilson says Yellowbook already understands neighborhoods, has asked all members to sign up with their ZIP code, and plans to arm its reps with optimal deal limits based on category and geography.

The basic mechanics of the product are similar to Groupon’s.  Once a deal tips, Yellowbook pays the merchant what was collected, less its commission, which Wilson says is in the range of 50 percent, similar to Groupon. This represents the first time Yellowbook has collected money directly from consumers, rather than from the SMB advertiser. “That really changes the conversation with the advertiser,” Wilson says.

Yellowbook did not build the deal-a day-platform internally, but rather has partnered with a third-party software firm. Yellowbook would not reveal the firm, but it is believed to be NimbleCommerce. Yellowbook is currently selling deals and signing up users. It plans to open up offers to consumers around mid-September.

Wilson will be a speaker at the upcoming Directional Media Strategies conference in Dallas, but on the unrelated topic of iPad development. The event will also feature a session devoted to the deal-a-day phenomenon with Perry Evans of Closely and Tim O’Shaughnessy of LivingSocial.

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Here is a summary of recent, noteworthy developments in the global Yellow Pages space:

Following an industry trend, U.K.-based Yell has begun distribution of a truncated Yellow Pages directory in a three-pronged effort to save paper, reduce waste and meet changing user needs. Recent consumer research underscores a desire for a book smaller in dimension. The new directory, downsized by five centimeters in height and four in width, is expected to scale back Yell’s annual paper use by up to 5,000 tons, or 16 percent, from 2009.

Tupalo.com, a Europe-based “social Yellow Pages” site, has come stateside with a new property in Houston, Texas. Headquartered in Vienna, Austria, Tupalo has built online communities in several European nations, and is touting its U.S. product as “the ultimate Houston city guide.” European Directories, a publisher with operations in Austria, the Czech Republic, Denmark, Finland, the Netherlands and Poland, is a strategic investor in Tupalo.com.

While Tupalo is expanding, Eniro has divested its joint-venture holding in Suomi24, a Finish social media network. Eniro received 5.6 million euros to sell back its 50 percent stake to Aller Media Oy, citing a desire to focus on its local search core. Eniro and Aller will continue their partnership in other formats.

Yellowbook Network received the top raking among IYP networks in comScore’s June 2010 list of the Top 50 U.S. Web Properties. YellowBook, a division of Yell Group, ranked 26th overall in monthly unique visitors with 36.4 million.  SuperPages.com Network was next among IYPs with 34.1 million, followed by AT&T Interactive Sites with 28.1 million.

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Yellowbook seems to be making strides toward becoming a real multiproduct company, and it is committing resources to promoting the idea to small businesses through television advertising. Convincing small-business advertisers to single source their local advertising through the Yellow Pages channel is an executional challenge, but it is also a marketing challenge.

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Yellowbook had signed on to a new local ad exchange launched today by Chitika, an ad network established in 2003 that serves more than 2 billion monthly impressions across 80,000 Web sites. The core idea is to apply the ad exchange model to the local and mobile space.

For Yellowbook, the exchange offers a way to better monetize its own  local traffic while offering its existing advertisers broader reach. Yellowbook has half a million advertisers and generates more than 100 million searches per month, according to Mike Wilson, GM and vice president of digital media at Yellowbook.

The new ad exchange also has mobile local and pay-per-call components. Chitika says it already serves 100 million local mobile impressions every month.

Chitika has created a local-oriented mobile ad unit that will detect mobile devices and serve an ad designed for mobile users. The ads also allow visitors who receive a local ad on their phone to call the advertiser with one touch.

“We’re always looking for unique opportunities to extend the reach of our more than half a million clients beyond the traditional distribution platforms,” says Wilson. “The first time we saw what Chitika was doing with LAX, we recognized the incredible impact this synergistic platform could deliver. We believe it meshes well with our overall performance advertising strategy.”

In an e-mail, Chitika CEO Venkat Kolluri offered his take on the deal’s most significant elements. 

He said the idea is to “bring to the table the distribution that we already have in our network. Basically we want to aggregate and re-direct the ‘local’ supply and create an adsense-like network for the search+local+mobile sector. We need to draw the industry’s attention to the intersection of search, local and mobile and build a program with special focus in this sector.”

Kolluri also emphasized the fact that the LAX is an open platform. “To be able to succeed and make this work we need to make the program as open as possible so that all types of players can benefit from the core ecosystem.”

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Today, Yellowbook is rolling out a partnership with European mobile app developer Adaffix similar to deals Adaffix has been launching in recent months across Europe. The app presents a clear monetization opportunity by suggesting three alternative businesses when the caller’s first choice merchant doesn’t answer the phone.

Under the partnership, Yellowbook will be the data provider for the Adaffix app in the United States. The app is available on all smartphone platforms except for Apple because the iPhone currently doesn’t enable multitasking. The Adaffix app runs in the background, and provides three basic services: the auto suggest feature noted above; caller lookup, in which it accesses its partners’ data to match phone numbers from outside the user’s address book; and Facebook ID, basically displaying the Facebook photo of callers whose app is linked to their Facebook profile.

While the parties are reluctant to call the deal exclusive, Adaffix CEO Claudia Poepperl says the company generally works with one publisher partner in each of the countries it operates in. Right now, it has deals with European Directories across Europe and in Germany with Das Telefonbuch.

Clearly from a monetization standpoint, the auto suggest feature is the key to the Adaffix app. Now, the suggestions are based on relevancy, essentially category and location. Eventually, Yellowbook hopes to monetize auto suggest with some flavor of performance-based advertising or premium placement.

Yellowbook has been an aggressive innovator in mobile, coming out early with iPhone and iPad apps, and pushing hard into other systems, notably Android, which Wilson says is currently a much bigger source of mobile lookups for Yellowbook than the iPhone. That’s a good thing since the iPhone is not an option for the Adaffix app.

Today, Yellowbook describes itself as being more in the user aggregation stage than the discreet monetization stage, but Yellowbook’s Mike Wilson says that longer term, mobile advertisers will be “part of the same conversation” as online as a source of revenues, and he wouldn’t rule out mobile eventually being at equal footing with online as a revenue source.

“We see it as similar to print in the sense that there is a strict association between lookups and calls in both,” he says.

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He also said a couple of things that were kind of interesting. He made a distinction not based on big versus small markets, but rather coastal versus heartland. Asked if phone books would still be around in five years, he said “Yes,” but added that in some coastal markets, the migration from print to digital usage might be completed within five years. In smaller markets in South Dakota, Mississippi and so on, print is strong today and will likely still be strong in five years. And when asked what his biggest seller is today, his answer without hesitation was “Web sites.” Click here or on the image below to watch the interview in its entirety.

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Yell’s decision furthers a global trend to reduce the footprint of print directories, with the primary stated objective of increasing possession and usage, particularly in large markets. Reducing the size of the book also lowers costs and improves the environmental friendliness of the book, or at least enhances the product’s green image.

In the United States, Yellowbook (a division of Yell) has converted several of its directory titles to a compact format, with the tagline “new eco-friendly size.” While today’s announcement does not reference Yellowbook, BIA/Kelsey would expect that Yellowbook will soon follow Yell’s lead and covert most or all of its print directories to the smaller format.

Other publishers that are widely using the compact format for their main Yellow Pages directories include Eniro and PagesJaunes.

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