Kendall Fargo was ready. It was 2002, and Handspring was launching the Treo. As the vice president of Internet and enterprise, he was bracing for some heavy online selling.

He needn't have bothered. “The traffic went up exponentially,” remembers Mr. Fargo. But instead of online sales shooting up, “we saw demand through the retail channel go up significantly.”

That's when Mr. Fargo had his eureka moment. The Treo wasn't just an organizer, which is what he had sold in the past. It was also a phone and a fashion statement, and people wanted to hold it in their hands to see what it looked like. They couldn't do that online.

Mr. Fargo was so taken by the sudden realization that he decided to build a business around it. He started StepUp Commerce, which feeds sites like Google, Oodle, and Pricerunner with information on what's in stock and how much it costs at local stores.

His customers include the owners of shops like La Place du Soleil, a gifts and housewares shop in San Francisco's Russian Hill neighborhood. The store doesn't have a web site for search engines to crawl, nor does it run online ads. But by signing on with StepUp, which provides feeds on local stores to Google, La Place du Soleil shows up on Froogle. StepUp has been making money from the start and Mr. Fargo expects the company to turn profitable in the summer of 2007.

Mr. Fargo was early to realize what many startups and venture capitalists are catching on to now — that small neighborhood businesses are a vast reservoir of revenue heretofore untouched by online retailing and the power of Internet search. It's like eating all the cookies in a cookie jar and then discovering that it's still half full with crumbs. E-commerce makes up just 2.5 percent of U.S. retail sales, and offline buying in local stores makes up the rest. And the Internet is increasingly influencing where and how people spend their money offline, according to Greg Sterling, an analyst with The Kelsey Group.

But putting those crumbs together until they equal one cookie can be a tricky business. It's this fragmented market that startups as well as large Internet companies are beginning to fight over — the small and mid-sized businesses that newspapers and yellow pages have courted for years. They want local advertisers, who spend a total of about $30 billion annually across all forms of media. And they want local publishers whose web sites they can run ads on.

Consumers, Content, and Brands

“Local is the last frontier,” says Shawn Riegsecker, CEO of Centro, a startup based in Boston that's building an online platform for advertisers to buy local ads on. “The portals, that's done. The vertical [sites and search engines], that's also pretty much done. The local industry has the most consumers, the best content, recognizable media brands, and the least amount of advertising revenue on their sites.”

There are at least 7 million small businesses in the country. If you count independent contractors and freelancers, the number goes up to 25 million.

The Kelsey Group predicts that the U.S. local advertising market will hit $124.8 billion in 2010. In 2005, it grossed $96.8 billion. U.S. local search and classifieds revenue will jump 25 percent to $9.9 billion in 2010 from $3.3 billion in 2005.

As more and more startups and VCs discover the last frontier, their ideas and dollars are changing the landscape of an area that used to be the unquestioned domain of the humble yellow pages.

Now, the yellow pages must compete with companies like Google and Yahoo, which are driven by the fact that about 20 percent of online searches have some sort of local component, and local keywords often sell for more than others.

This explains why Omid Kordestani, Google's senior vice president of global sales and business development, described local as a “huge opportunity” on the company's fourth-quarter earnings conference call.

True to form, the Mountain View, California-based search giant won't spell out what exactly it plans to do with its local product. Today, it's a patchwork of local search and maps. A local query on Google will pull up a listing, a map, and any relevant color and facts that it could mine from the web.

Google wanted “to do local search in a way distinct from the yellow pages as it's been online from the early days of the web,” says John Hanke, director of Google Local, and founder of Keyhole, the satellite imagery and mapping company Google acquired in 2004.

Under Attack

Pity the yellow pages, some of which have been in business for close to a century. The $15-billion industry is at the center of a land grab by some of the richest companies around. But don't count the yellow pages out yet. Almost a decade ago, Red Herring had a cover that showed the yellow pages torn in half. Yellow page publishers are still around — and they may have finally figured out how to protect themselves from Google. For some, the answer is partnership.

BellSouth's sales force, for example, sells Google's AdWords, the program through which marketers can buy keywords that pull up their ads. Google might have the largest user base of searchers on the planet — but it needs local advertisers. Too bad, then, that many of them find online ad buying a fairly intimidating process. Enter the yellow pages.

“We're finding that a lot of businesses that want to be on Google and Yahoo need full-service assistance,” says Robyn Rose, vice president of Internet marketing at Verizon Yellow Pages.

Her salespeople have been selling print ads to small businesses for years. They now go to those same customers with offers to build and host web sites — and, of course, an online ad pitch. They promise ads that show up on the web sites of the yellow pages as well as on search engines. They also offer pay-per-call ads — online ads seen on Yahoo, Google, America Online, and other sites that generate phone calls, instead of Internet links — to those businesses that still don't have web sites, such as the neighborhood gardener or plumber.

Those are the relationships that will help yellow page publishers survive in the face of competition from a Yahoo or a Google, says Simon Greenman, senior vice president of digital strategy, innovation, and products at RH Donnelley. Mr. Greenman's company, Dex Media, was recently acquired by RH Donnelley. “They do not have the relationships and channels to gather a lot of that content,” says Mr. Greenman. “It's easy to sell to national brands, but it's hard to sell to local advertisers.”

What local advertisers want, says Chris DeVore, COO and co-founder of Judy's Book, is the same thing consumers want — good word of mouth marketing. “Local merchants are constantly bombarded by offers to advertise,” says Mr. DeVore. Sites like his give them very targeted ad opportunities, he says.

Community Content

Judy's Book is built around the concept of reviews and content posted by communities across the country. When users click on a paid listing, they're taken to the reviews posted by their peers.

“I'm interested in the phenomenon of user-generated content,” says Brad Feld, managing director at Mobius Venture Capital. “One of the areas it's very relevant in is local search with local advertisers.”

That's because advertisers don't want to pay just for exposure, but for real demand, he says — something that peer-to-peer reviews can push.

Execs at Yahoo would agree with him. The Sunnyvale, California-based Internet media company has blended its local product with its social networking product, Yahoo 360. It has listings, maps, and reviews from your friends and peers. It is, in other words, the most comprehensive offering out there, says Mr. Sterling of The Kelsey Group. It is also one of the most popular local sites on the web, with 27 million unique users in the United States in January. And the ability to leverage the power of the community is a key differentiator, says Paul Levine, general manager of local at Yahoo.

Judy's Book wants to do something along similar lines. But the one-year-old site's user base is much smaller at this point. It had 186,000 unique visitors in January, according to comScore Media Metrix. No wonder, then, that Yahoo is the company that startups like Judy's Book fear.

“They want to own the online offering, the social experience — they've got groups, mail, 360,” says Mr. DeVore. “They aren't well tied as yet, but they're trying to cobble together a cohesive offering.”

Yahoo, however, has something in common with these startups: It faces some of the same challenges. A lot of local information exists in people's heads, says Tom Wailes, user experience and design manager on the local team. But access to Yahoo's pool of loyal users and money helps, notes his colleague Jeremy Kreitler, senior product manager of Yahoo's local and maps group. He points to developers building applications on top of Yahoo local — like web sites that map sex offenders in a neighborhood.

More users coupled with more applications adds up to more market share. While big names are fighting over market share, startups are devising self-serve ad programs inspired by Google's AdWords and Yahoo Search Marketing.

Such startups include Centro, run by Mr. Reigsecker, a 33-year-old Mennonite who dreams of changing how locally owned and operated publishers operate.

Centro is building a platform through which local advertisers can assemble and publish their display ads themselves, and national advertisers can target people on a one-to-one basis across thousands of local publishers. If Mr. Reigsecker succeeds, he could move the sophistication level of the local advertising industry up a few notches.

Finding Space

Online ads are getting more expensive. Demand is outpacing supply, and popular sites are getting sold out. That could push businesses back to traditional advertising, says Mr. Sterling of The Kelsey Group. Companies ranging from Centro to Google are gearing up for that change.

“Down the road, you'll have the single platform or some Internet dashboard that allows you to execute multiple media buying — and maybe even rich media,” says Mr. Sterling.

With Google's acquisition of dMarc, which sells radio ads, and its experiments with selling ads in print media, it's already becoming a one-stop shop for radio, print, and online ads. It needs to add a television component. Spot Runner could well be Google's next acquisition aimed at garnering local ad dollars.

Spot Runner, which raised $7 million from Battery Ventures and Index Ventures, generated a lot of buzz when it launched earlier this year, because it picked up the Google model, simplified it even more, and applied it to TV ads: self-serve, automated, and online. The company sells customizable, pre-fabricated TV ads for as little as $500 to small businesses — which typically believe that TV advertising is out of their reach.

“Big ad agencies don't care about this market. It's not their focus,” says David Waxman, the company's chief creative officer and co-founder. “We're opening up a new market by bringing TV advertising to people who haven't had it before.”

From TV advertising to an online presence, La Place du Soleil and millions of other small local businesses will be ushered into the global economy.