Local small-business advertising has been largely synonymous with Yellow Pages. But a compelling case for the rise of classified-and-vertical marketplaces is made by Oodle CEO Craig Donato. (It is a position that we obviously admire, having just launched our Marketplaces research program.)

There has been “a radical transformation in how the world looks,” says Donato. It isn’t about republishing ads in numerous publications. “Republishing ads is lunacy. It is about having traffic delivered to your Web site.”

The consumer focus is still locally oriented, spanning many categories. This is good for a newspaper or a Craigslist. But on the market “sell” side, sites have to be vertically organized. That makes the market ripe for the new breed of SEO/SEM reps — and it is naturally becoming more lead driven, even as it creates fragmentation. “It is changing the expectations of advertisers,” says Donato.

The change has affected aggregators like Oodle too. While competitors like Edgeio switched business models (and have apparently folded), Oodle is going strong, he says. “We are very effective at monetization. We have more demand than supply. The rate of bidding is up 10 percent.” In fact, he says the company is set to start earning its first profits in 2008.

One big change for the company is a smaller reliance on newspaper partners like The Washington Post. The partnerships will continue, but Oodle is doing a lot more work with TV station group owners, such as Cox and Media General, as well as a bunch of SEO/SEM agencies. It is also going to announce a deal shortly with “a major online community,” says Donato — presumably meaning Facebook or MySpace.