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Interview with Heath Clarke, Chairman and CEO of Interchange

A few days ago, we talked with Heath Clarke, Chairman and CEO of Irvine-based Interchange, the company that operates the Local.com search engine (www.local.com). Heath has been the CEO since 2001, was President and Chairman of the company since March of 1999, and saw the company through its IPO in 2004. We caught up with Heath to get some insight into the local search market and how the company's focus on local search has been going.

Ben Kuo: Tell us a little bit about Interchange, and Local.com?

Heath Clarke: We were founded in 1999, and have been in Southern California since we started. We have 60 employees in the Irvine Spectrum, and had an IPO in late 2004. We've been in the search marketplace since 1999, and get our revenues from search advertising. We have specialized in local search. We filed patents in 2002 in the area, focused on that developing our KeywordDNA technology in 2003, and did our IPO in 2004. In 2005, we purchased the Local.com domain name, and oriented towards more of a consumer facing model in the local search sector. Late in 2005, we launched Local.com using our KeywordDNA technology. It's about a year later from when we launched, and we are now in the top 10 companies for local search--number four, when it comes to just local search companies. Our competitors include CitySearch, Verizon Superpages, Yellowpages.com, and Dex Online.

Ben Kuo: How do consumers use your service?

Heath Clarke: Local.com is basically a local search engine that consumers can use to find products and services in a specific region. For example, if you are looking for a specific business in Irvine, you could use Local.com for that. Or, if you are looking for a specific product, say in Irvine or New York, you can also use it for that. We also allow you to look for things like "a romantic restaurant near the Golden Gate Bridge" and we'll pull up ratings and reviews of restaurants. You can even book a table through selected restaurants. We also provide ratings and reviews on contractors, and we present ads that enable you to connect with local merchants you've been searching for.

Ben Kuo: How did you end up focused on local search?

Heath Clarke: Back in 1999 and 2000, we were focused on national search, when it was just search. As the industry evolved, search advertising started to get specialized. At the national search level it's "flowers", at the local level, it's "flowers in San Francisco". We saw big drivers, which are driving the industry today, which is the adoption of search advertising by local businesses. This started to occur heavily in 1999, when Overture invented the model. What we saw, was a new method for advertising, to reach out to consumers with targeted messages for business--for things like flowers, and car insurance. That's a proven model today. Six or seven years later, as a function of that model, more advertising has shifted into the online space, and because of more advertising, more has shifted into search advertising. That in turn has seen more dollars shifting into local advertising. What is driving that shift is that one quarter of searches are local. Consumers are looking for things to buy in a specific region. That's driver number one--consumer habit. Something like eighty percent of income is spent within fifty miles of home, and a lot of that is driven by local commerce. People are doing what they were doing already, just doing it on the Internet. Data point number two is that the search advertising model is a proven model. Half a million businesses are early adopters that do it today--and there are ten million businesses that don't do it yet. The market is "Crossing the Chasm", where it's moving from early adopters to the mainstream. That's where we saw the future of search advertising back in 2002---inherently local. That's why Google, Yahoo, and MSN are entering into this space.

Ben Kuo: Speaking of those guys, how do you compete with the big guys?

Heath Clarke: The recent comScore data came out showing that in search volume, Google is the biggest, Yahoo is just behind them, and there are a number of other players--and we're definitely up there. We have as much local search traffic as AskJeeves and Infospace and other companies. We're also growing. Our goal in terms of competing is we're focused 100% on local. We're a dedicated local search engine. We're not doing lots of other stuff, not trying to also be a portal. That's our advantage and disadvantage. We are focused on providing relevant search results to users, and wrapping around that more and more content and information that consumers are looking for. It's still the early days, and we think we can build a differentiated product offering that appeals to the local search marketplace. We're finding that sixty percent of visitors to our web site visit again within thirty days, a pretty good number.

Ben Kuo: How are you attracting users to Local.com?

Heath Clarke: Many of our competitors are actually friends, in this respect. We do lots of search engine marketing. If you go to Google and do a local search, you might see an ad for Local.com in the sponsored area. If you go to Yahoo today and look for a plumber in Los Angeles, you might see us in Yahoo. We get good traffic from those sources and repeat users. The bulk of our traffic is from search engine marketing, to build market share--and it's been good at that. Longer term, as we differentiate our product and build repeat and organic traffic, we'll see much higher traffic from organic search than from search engine marketing. We now have ten million visitors a month to our site.

Ben Kuo: Do you have your own advertising network, or where are you getting your advertising?

Heath Clarke: In terms of advertising on the site, that is through partnerships. Our biggest partner is Yahoo, and also Business.com and Superpages.com. It's coopetition--we work with our competitors, and partner so we can generate more revenue together. Yellowpages.com is another partner, Citysearch is another partner. However, when a consumer does a search on Local.com, that's 100% from our own technology--KeywordDNA. Around those search results, we place sponsored listing from inventory from about twenty different partners. Some percentage of those users will click on sponsored links and generate income for us.

There are three value creators in the search industry -- traffic, most important, far and away -- technology, the second most value, and we have twenty one patents issued or pending--and the third is advertising. Clearly, we are partnering for the advertising. However, to build a defensible market, you also have to have direct relationships with advertisers so you can own all of the value creators. We're testing products that local business can buy in the second quarter, and are actively looking at M&A from that standpoint, to accelerate our advertiser base.

Ben Kuo: How has it been being one of those Internet era companies that started right before the bust?

Heath Clarke: It's been interesting, and it's been educational for companies that didn't necessarily get financing before the tech wreck. We learned very rapidly that we have to watch every dollar. We hung on in 2000, and in 2001, and in 2002. It was tough going, but we came out if it--and came out of it with a better model, and a better focus on what would happen in the future. Our IPO didn't get out until late 2004, and that has allowed us to accelerate what we're doing. 2005 was very much a transitional year for us, and 2006 is the start of the local model, really. That's where we'll gain traction.

Ben Kuo: Thanks!


 

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