With a few notable exceptions, major media companies have not been known for their innovation in the digital age. After first spending years with their heads under the sand pretending that online media wouldn’t supplant their traditional business models, they have largely created defensive digital products, hoping to keep from falling behind rather than looking with a fresh eye to the possibilities of the digital future.

It’s telling that the news of the week is that of  Instagram‘s sale to Facebook for a sum greater than the market capitalization of the New York Times. Does anyone believe that traditional media companies, with all of their layers of bureaucracy and ingrained culture, could have created a digital product that would grow to be as quickly valuable as Instagram, or which could have gathered as many passionate users as the similarly hot Pinterest?

The answer is no, but it’s worth examining the reasons why not, and what needs to change if these traditional companies are going to finally evolve enough to innovate and compete — and to create the kind of valuable digital properties that are springing up everywhere around them.

One way that a few organizations are approaching this issue is by working to bring digital media entrepreneurs into the fold, with in-house incubators and grants for innovation.

The Knight Foundation has long nurtured media startups. With their latest news challenge competition, Knight has adopted the Tumblr blog platform and reduced the application to a seven-question elevator pitch. The mission of the new entrepreneurial society is speed: identify good ideas, get them funded and support the business execution. Hundreds of startup accelerators like Y Combinator (here’s a list) and the burgeoning crowdfunding movement (here’s another list) make it easier for entrepreneurs to get funded in the same way YouTube is being used to filter and identify creative talent.

Michael Maness,VP of media innovation & journalism at the Knight Foundation, told me recently about a couple of notable projects to bring innovation into media, the Public Media Accelerator and the Philadelphia-based Project Liberty Digital Incubator. “We realize that entrepreneurs need a comprehensive set of resources, and are developing a new program for the next group of Knight News Challenge participants,” said Maness. “We’ll be creating camps that mirror the Y-Combinator experience, and we’ll hopefully start to see other media organizations develop vertical accelerators like Turner’s Media Camp.

“On the hyperlocal front, I don’t see accelerators for local business startups, but we’ll start seeing local media projects crowdfunded,” he said. “For example, a new journalistic venture named Matter just got overfunded on Kickstarter; it’s similar to an earlier citizen funded journalism model Spot.us, a 2008 Knight funded startup.”

Meanwhile, David Austin, the senior director at Turner’s Media Camp told me a little about what a media company like Turner can do to bring startups in-house and nurture their development: “Traditional media’s strong suit is its quality content, and they need to find the most effective ways to get that content consumed,” said Austin. “Media Camp differentiates itself as an accelerator by providing entrepreneurs with channels to well known Turner media brands, and give them instant visibility. In the long run, we expect to build Media Camps in Los Angeles, New York, and overseas, and hope to impact how media is consumed on different local and cultural levels.”

These types of efforts point the way toward plenty of opportunities down the road for media companies that are willing to take the plunge. Media executives need to accept that the world has changed and adapt accordingly, and perhaps the next generation of agile startups may not be competitors destroying their value — but rather subsidiaries creating new revenue streams and value.

The typical online strategy for small business is to set up a website, a Facebook page and maybe a Twitter account to broadcast the day’s deal or menu item. The marketing method is essentially passive like traditional advertising; it requires that customers find the sites, usually via search engines, offline knowledge or a referring link. In today’s social marketing, once the customer finds the business’ social marketing channels, online conversations can take place as if they were physically behind the counter. The diagram below demonstrates how local marketing has evolved from advertising to social marketing, where the instigator of the transaction is the vendor and the recipient the consumer. With the growth of social media, the power to initiate transactions can start shifting to the consumer.

In my previous Local Network article “Hyperlocal Media and Collaborative Consumption Services”, I described how the “shared economy” trend has empowered the consumer to share their belongings and services via new online and mobile marketplaces. The flip side of  consumer supply is consumer demand. It’s intuitive that instant gratification in the form of the instant answer will be a powerful new way consumers will use these marketplace applications.

New startups like LocalMind and Zaarly are set up for locals to ask questions about the neighborhood or request items they need. Larger networks like Twitter and Foursquare are also peppered with these kinds of inquiries. The hope, for both consumer and the startups, is a relevant answer is returned quickly to validate application usefulness.

When consumers are asking to buy something, or for a recommendation for lunch, there is a lead generation opportunity. In the Zaarly example above, a local photographer can manually set up lead notifications for any local inquiries for photographers. As consumer demand apps proliferate (and here’s a big list, find examples under the Neighbor Support and Errand & Task Networks categories), leads will get generated across a vast network of independent, siloed services.

It’s plain to see that it’s beyond the scope of most small businesses to sign up for notifications for the slew (hundreds?) of new consumer demand services coming online, in fact they don’t even know they exist! There’s a huge opportunity to aggregate potential leads across these siloed services in real time, and notify or proxy respond on behalf of local businesses so they can service leads immediately. In this online new paradigm, small business no longer needs to wait for their customers, they cherry pick on demand.

The Business Insider report that local merchants can purchase a Google Adwords ad at 1/10 the price on Patch.com’s rate card, and still get Patch.com placement isn’t a revelation. It confirms the reality of excess premium inventory that plagues traditional media display advertising, and the ease of gaming the media buy system to get the lower rack rate. The trick is to purchase a Google Adwords ad, target the zip code of the desired Patch.com site, and specify Patch.com site as a “managed placement” in the Display Network.

According to the Patch salesman in the BI article, his client qualified for a $2 CPM rack rate that beat the salesman’s $20 book rate.

The worst part is my client is getting ads at a $2 CPM and getting impressions. I saw his dashboard. The whole point of Patch was that it was local but Google just has you put in your zip codes and then your ads launch.

My client did the math and they paid $20 for a cpm when I sold it.

I don’t know how Google gets Patch ads cheaper than I do but I can’t do this any more. It isn’t fair to the clients that pay the whole amount from me.

The divide between book rate and rack rate threatens publisher credibility at a time when local businesses are demanding two types of advertiser accountability. First, they want relevancy that their ads are being displayed only to their target customer bases, not shotgun to the annoyance of the general public. Second, they want to pay only for results. CPM based display advertising, like commercials and banner ads, focuses on traffic quantity over traffic quality and delivers neither the targeted relevancy and nor a guaranteed performance based pricing schema beyond “minimum pageviews”.

Google Adwords, Twitter’s new Promoted Tweets product for SMBs, Facebook ads, and even Groupon, all deliver relevant geo-targeted consumers on a pay per performance basis. These social media ad networks will pressure traditional local publishers to match their offerings on price and accountability. The inherent dilemma is local publishers need to connect to these established social networks for the consumer profiling required to deliver relevant advertising. How do publishers staunch the flow of local ad dollars to these ad networks when they can’t offer the same kind of Facebook profile matching services?

The media companies are building their own marketing services groups to show their clients how to advertise, and use social media. The Hearst Corporation, the owner of media properties including the San Francisco Chronicle / SFGate.com, developed Local Edge, a Hearst Media Services company, to provide a comprehensive portfolio of local business marketing services ranging from Search Engine Marketing to premium directory listings. Local Edge has succeeded in signing on the media marketing arms of other publishers, like DMNMedia tied to the Dallas Morning News.

Beyond big media’s foray into developing a new marketing services layer, a new generation of startups will help local publishers compete by adding value to the ad placement supply chain. Patch.com and a number of media companies, have partnered with PaperG to facilitate the ad creation process in real time so their sales teams can accelerate closing the deal with local merchants. Many publishers work with white label deals publishers to deliver daily deals to their readers. We see new social media marketing agencies like Hearsay Social and Main Street Hub competing with big media to supply local business services. In sum, these solutions make it easier for small business to participate in a new world of social marketing that extends beyond the banner ad.

The biggest occupational trend in the restructuring of the economy has been the newly minted entrepreneur. The media regales us with stories about the new startup incubators like Y Combinator, and the success stories of their progeny. All roads to developing a new business point to leveraging the Internet with some sort of social, commercial or mobile business model.

All new entrepreneurs face five hurdles in developing a new online business:

1. Business model. The first step is the hardest. You need to fix a problem, and it’s best to leverage your previous work experience to identify the problem and craft a solution.
2. Programming – what does the app look like and do? The second step is just as daunting as the first.
3. Creating the simple business plan and timeline. The faster to execution, the better.
4. Funding. How to bootstrap this? You won’t likely have a network set up to reach VCs and other institutional investors, but crowdfunding may be viable.
5. Go to market strategy. Execution of course is the most critical step to success.

1. Business model: Identifying the problem.

1. First timers should start local. It’s easier to build traction when focused on a small arena.
2. Building a service is easier than a product (but remember, VCs and investors generally shy away from service businesses because they are hard to scale). The most alluring aspect of building an online product like Instagram or Pinterest, is the potential to explode. Unless you have access to programming or funding, don’t try building a product. One exception is to clone a product idea for the local market using third party services that provide “plug and play” white label templates, like Chompon for building Daily Deals businesses.
3. Use your local network and past experience. For example, there is now a huge window of opportunity to help local businesses develop social marketing expertise on a turnkey basis. If you have established a local network, you can build this service business like Apsides Media Group and Socially Now by partnering with turnkey social media solutions providers. (Note: we help to build these kinds of businesses).

2. Programming

1. Chances are the new entrepreneur has no experience on the Internet beyond buying stuff at Amazon. Hiring a programmer is a major challenge because you don’t know how to create a spec, and it’s impossible to tell if the programmer is good and the price is right. The best way to build the web service is to teach yourself WordPress or use Tumblr to create a simple model of what you want. That’s your homework. I believe building the web service prototype yourself is important to understand how it will enable the business model.
2. The prototype can look clunky. It needs to reflect the business model, and you need to confirm with your peers and potential users/customers whether there is demand for your service. Iterate until it makes sense. Pivot if you’re going down the wrong track.

3. Create a simple business plan

1. The days of a 100-page business plan are over, unless you are the type who likes to do this. Business plans can be conceptually templated by taking hot or successful business models and applying them to new industries, geographies or service sectors. “Shared economy” or “collaborative consumption” business models are 2012′s buzz and can be implemented at a local level because most sharing requires physical proximity. Here’s a list of startups in this space. For example, if you know the hardware business, you could set up a city tool sharing model similar to Toolspinner.com.
2. One more great resource for new business models: The Unhyped New Areas in Internet and Mobile

5. Go to market strategy

1. Before launch, the web service will likely need some professional app development to make the user interface credible. It’s quite possible to continue to use WordPress, especially if you’re flexible to pivoting and plan to change messaging occasionally. By this stage, you should have developed a business plan that can potentially attract a team, including partners or co-founders who can help with technical development.
2. Your goal should be to prove that the business model is viable for a community. The execution stage is obviously critical, and in the next articles, we’ll look at various go to market strategies.

The new shared economy being ushered in by startups like Airbnb, Relayrides and Toolspinner is creating new marketplaces where locals can rent their own rooms, cars and tools to their neighbors. Coined “collaborative consumption“, this new trend enables the efficient consumer sharing of resources and goods that are used on occasion as an alternative to outright ownership and the garage clutter this creates.

What is Collaborative Consumption?

The first phase of the collaborative consumption business model started with B2C (Business to Consumer) companies like Netflix and Zipcars that consolidated inventories of DVDs and cars, respectively, to rent out at lower rates than local video stores and Hertz. The second and current phase introduces the new communal sharing or P2P (peer to peer) business model that leverages inventory owned by consumers (rooms for rent, cars, tools, expertise, time) to create match-based marketplaces. P2P transactions can be executed virtually like eBay where goods are transferred via mail, but the bigger implication of P2P for hyperlocal is in the rise of local social graphs where neighbors trade with and refer each other.

Consumers now have more options to rent over purchase, and this dampens retail demand. There’s literally no need to purchase a chain saw unless you’re a landscaper. Obviously, brands and retailers lose when their products are rented out or sold in the second hand market because they make no money. Yet, in the face of the shared economy, many local retailers will need to recoup lower sales volume by opening inventory to rental, just like Hertz on Demand and BMW’s Drive Now were created to counter the Zipcars concept. Adapting to radically new business models like rental will be traumatic for brands and retailers alike , and will present an opportunity for retail consultants versed in social media and social change who can connect consumers directly to these new rental businesses.

The Role of Hyperlocal Media in Collaborative Consumption

The big hurdle facing collaboration consumption startups is developing local traction. Main Street has never heard of Zaarly or Taskrabbit, and startups don’t have on-the-ground resources to educate consumers and brand in more than one market at a time. Hyperlocal media can take on the role of educating consumers; it can publish directories for consumers of the literally hundreds of services that are chasing niches ranging from dog-sitting to bike rental. Even better, media or tech companies might create aggregate sharing services center for their community in the same way daily deals aggregators filter deals sourced from hundreds of sites. And yes, there already is de facto local aggregation platform – it’s Craigslist, but its clunky user interface is inefficient and its user base has no credibility rating system.

Hyperlocal media should encourage collaborative consumption because it brings consumers, their neighbors and businesses into value laden conversations as they negotiate the errands of daily life. Media values this participation. However, there are two business reasons why traditional media companies may not immediately embrace collaborative consumption. The model won’t make them money unless they run their own shared services platform. It also threatens local advertising revenue from retailers faced with lower sales and pressure to reallocate marketing budgets to social marketing.

The elevation of standards in local marketing imagery is creating new opportunities for local professional photographers, above and beyond events like weddings and school pictures.

A year and a half ago in September 2010, MacUser’s Dave Stevenson lamented the “Tragic Demise of the Professional Photographer,” suggesting that photographers were being disintermediated by online stock libraries and more simply, the rise of the amateur snapper. But that was months before the advent of Instagram, arguably 2011?s most celebrated iPhone photography app, and Pinterest, the first pinup darling of 2012. Both apps have become well-trafficked hubs for professional photographers. Instagram, an iPhone app, lets amateurs create interesting snapshots and portfolios by providing a variety of photo filters. Pinterest gives users the tools to create bulletin boards of visual media. The significance of both apps’ popularity is evidence of the social media pivot towards curating and displaying visual media.

Text doesn’t tell the full story, especially when it comes to local marketing. Realtors understood this first as they went out armed with video cameras and used specialized publication services like WellcomeMat to edit and present professional home listings. Airbnb, the hot social rental startup, has enlisted an army of local professional photographers to help stamp out the badly-lit photos of cluttered living rooms that made the perception of renting other people’s homes iffy (they did mine, on the right, for free and yes, the listing looks a lot more professional).

Google also created a photo shoot pilot program called Business Photos concurrent with the launch of Google Places in 2010. Last week Google announced expansion of the pilot program by offering up a directory of Trusted Photographers to shoot the retailers and restaurants that depend upon visuals for marketing. This puts Google Maps/Places in a stealthy pole position to dominate local marketing by being the main geo-location resource where retailers can upload their visual marketing media. One can imagine what’s next: video reviews from satisfied customers just like Triple D, housed on Google Places not the restaurant website.

The plight of the professional photographer mirrors a recurring pattern of Internet disintermediation. Artists first bemoan that social media produces content that competes with their specialized offering, but pivot back to relevancy when they realize their unique skills can be marketed to the larger online market.

The default local community bulletin board of Web 1.0 was Craigslist. The second generation, including Topix and Outside.In (now a part of AOL), pioneered hyperlocal news aggregation to construct a feed-based local newspaper — but these companies’ main challenge has been to nurture local conversations around news. Topix in particular has been able to develop active forums at a citywide level. The next question is whether microlocal news and forums — down to the block level — will work.

EveryBlock, now a part of msnbc.com, was the first to develop a microlocal news source, aggregating publicly available neighborhood data like police blotter reports, graffiti complaints and Yelp reviews down to a block level. The array of aggregated data include 1) Neighbor contributions 2) Public records and 3) Web based reviews and listings.

Nextdoor.com is a new social “bulletin board” startup that attempts to jumpstart membership traction by setting a minimum of ten confirmed residents to establish a neighborhood. Once set up, the community bulletin boards provide typical utility, allowing neighbors to message each other, post events and classifieds, and make recommendations.

Is Facebook the solution?
Everyblock and Nextdoor are separate destinations that users normally don’t visit daily like Facebook. And they won’t visit them daily unless their neighbors are actively contributing new content. And when users do contribute content, like posting a neighborhood event or classified, they will generally gravitate to well trafficked sites like local media publishers (including Patch), or Craigslist for wider distribution. Communities need leaders: are there enough of them in smaller block-level areas to create traction?

Everyblock and Nextdoor may need to go where the local conversational action is, Facebook. For example, microlocals could partner with Facebook and allow their subscribers to create a Facebook group for their neighborhood with all the bells and whistles (classifieds, recommendations, events listings) associated with their web application. It would much easier to create “turnkey” neighborhoods by leveraging existing Facebook networks because it’s the simple Facebook login we’re all used to.

The obvious tradeoffs for this are 1) microlocals will lose direct visitors to their websites, and thus the necessary traffic needed to sell advertising, and 2) they get into bed with an elephant partner in Facebook that can change the rules  of the game easily. One possible business model would be to charge merchants for advertising across its own platform as well as through their associated Facebook group.

Last week at Inman Connect, a real estate technology conference, Jeff Jarvis discusses two ideas we believe in:

1) Real estate professionals can leverage their networks to become hyperlocal media resources. And by doing so, they benefit from building the community networks they need to source referrals for their real estate business.

2) Real estate professionals should be thinking beyond what used to be the work of real estate sales. As the industry changes and makes real estate a much tougher career, Jeff suggests that Realtors, as hubs of the community, can build new local businesses, like social media marketing, based on the work they do with their community.

Although Patch is growing its reader base, the company still seems to be struggling with thetraditional banner ad based business modelfor three simple reasons: 1) lower local demand for banner ads due to new marketing options like daily deals, social media and SEO marketing, 2) limited readership for publications serving small local markets, and 3) outsize editorial expenses.

Here are three new ways Patch can reinvigorate its business model and bring value to local merchants:

Generate new revenue by bringing small businesses into the social marketing age.

Although local businesses’ interest in banner ads is dwindling, there is a tremendous demand among SMBs for social media marketing services. Borrell Associates predicts that local spend on social media marketing will increase seven-fold by 2016. However, social marketing (running the gamut from daily deals and Yelp to Facebook and Foursquare), has become too arcane and complex for most local businesses to deal with. As a result, turnkey solutions are being developed to take the burden off of these businesses.

Patch has the corporate resources to either build their own turnkey offering for local merchants, or package best-of-breed solutions with service partners. Instead of charging $500 monthly for a banner ad, Patch could offer merchants a subscription fee of $500 to manage their social networks and social marketing campaigns. Yes, profits from a service offering are lower than a transactional model, but Patch’s expenses can be lowered as well.

Facilitate local production of content instead of paying  journalists in each city.

Employing a professional journalist in each town to write daily content is costly. Patch seems to be streamlining editorial now, but journalists should pivot from writing local articles to becoming editorial support for local bloggers — particularly those who write articles about their work or industry. Patch currently has over 13,000 local bloggers, but this can be expanded further.

Local content about food, sports, real estate and kids activities can be produced by business owners like restauranteurs, realtors, and summer camp operators, as a means to indirectly promote their businesses. By showing small businesses how to use blog writing and social media for marketing purposes, Patch would further invite the business community into the editorial process rather than shunting it aside as a cash cow to be milked. The tradeoff of content-for-marketing will be perceived as goodwill by the business community. Nurturing small businesses into participating in social media is also a natural lead into selling them the social marketing services referred to above.

Integrate national brands more deeply into the local marketing space.

National retail brands — like Home Depot, AMC Theaters and the Gap — don’t have brand presence at the hyperlocal level that Patch covers. Patch may carry banner ads from national brands, but it could create local “Home and Garden” sections that source content about home repair and related issues, and bring in national partners like Home Depot to build social bridges between their local store managers and consumers. The social media advisory model from above then kicks in, as local Patch managers assist sponsors’ store managers in developing conversations with the community.

Dialogues develop personalized business relationships that are akin to in-store customer support, a distinct competitive advantage for any national brand because very few are capturing these conversations at a granular level. Bringing on national partners and advising them on local social marketing scales the revenue base far more easily than engaging small businesses one by one. National retailers are not the only target; sponsors can range from recruitment firms developing “career” sections to motion picture studios for entertainment.

Here are six trends in 2012 that will impact hyperlocal media and business models. This was originally published at Street Fight last week.

1. Cross platform conversations

Livefyre and Disqus show glimpses of how conversations can move from Facebook and Twitter to online media and blog commentary. Local conversations happening on social media, especially Facebook, simply aren’t crossing over onto local media. Note the interaction on a city community page like San Francisco; it’s huge, but random in topic.

The big opportunity is to organize local conversations that are now happening on, say, the community page above, into topics like sports, culture, movies, things to do, business, family, etc. In 2012, cross platform systems that facilitate community engagement across all social media along these topics will develop. The current best example of local topical engagement is sports media like SBNation and Bleacher Report that encourage sports blogging and fan interaction at the local team level.

2. Influence peddling at a local level

The advent of Klout and other new forms of social influence tabulation mirrors the slow power shift of media influence from traditional to social channels. Anybody with a voice can build a following, and the new business models evolving around influence metrics allow businesses to reward influencers with the hopes of converting them into advocates.

On a national level, social influence has naturally followed the celebrities; Britney, basketball players and Obama come to mind. On a local level, social influence is still up for grabs. Many sports bloggers became part of the SBNation empire simply by being bloggers for their local team. The implied business model is local influencers will attract rewarding opportunities, whether it’s in the form of a media job or simply a perk from a local business wanting to engage them.

The recognition of consumer generated revenue opportunities

A candid consumer recommendation, or a compilation of great Yelp reviews, is far more credible for a business than an advertisement. Local businesses will be able mine and filter local conversations across the social media, and participate in social marketing their services to elicit favorable reactions and revenue opportunities. For example, high school and college students often use Facebook to set Friday night plans. The most influential of them will move crowds, and local businesses, like pizza restaurants and movie theaters, will build relationships with influencers using rewards, loyalty programs, or simply a friendly dialogue.

example: using Needium to create business building dialogue

Startups are developing to provide localized services to filter, monitor and engage consumers on behalf of small business. For example, Needium monitors Twitter for specific keywords and phrases such as “looking for a lunch spot in Union Square”, that signal consumer demand for their local business client, and then converses with Tweeters on behalf of their client. They are basically building a personalized geolocated mobile response system for local marketing.

Local brands move to app development

The rapid adoption to mobile platforms impels brands like Walgreens and Starbucks to create apps specific to the needs of their mobile consumer. Local brands are headed down the same path. Yes, being on Yelp, Foursquare and Google Places provides social visibility but it limits the consumer interaction to just a check-in deal. A local merchant should have its own app complete with loyalty program, special deals, inventory search and topical information that its customers need. Building a mobile app is still beyond the pale of 99.9% of local merchants, and it’s surprising I haven’t seen a startup financed to create turnkey mobile apps for small business.

Emergence of the local social media marketing agencies

The dearth of startups serving local business with mobile app development is indicative of a larger hole to fill: there are still few turnkey social marketing agencies serving the over 4 million small businesses in America. Local business needs turnkey solutions because the resources required to learn, implement and execute a comprehensive social marketing are daunting. 2012 will bring scalable turnkey service companies like Main Street Hub devoted to managing local social marketing for SMBs.

The New Role for Bricks and Mortar

Retailers can’t escape the impact of Amazon Price Checker and Groupon on their business. In-store price checking and daily deals threaten customer retention and profit margins respectively, and they certainly aren’t going away. So how will bricks and mortar remain relevant to, and more importantly, build loyalty from local consumers?

Before social media, the decision to visit a local business was based on personal need. Now, more decisions are based on serendipitous search for things to do, what to eat, where their friends are, and special deals. Bricks and mortar can position themselves to be destinations simply by making sure they are visible, preferably with attractive offers sprinkled here and there, in all the media consumer use to find them. They remain relevant because there are potentially more tangible reasons for people to go out! Foursquare and Yelp check-ins, events planning services like Meetup and Plancast, and mobile location services will be the currency that supplements local traffic to business.