It's the End of Classifieds as We Know Them

By: Steve Outing I have a used bicycle to sell, so how do I go about selling it? Place an ad in my local newspaper classifieds section? Fat chance. (That's so 1990s.)

My first thought is to post a free ad on my local (Denver-Boulder) edition of Craigslist.org, the quickly expanding community classifieds-listing service that's especially strong in the merchandise-for-sale-locally game. (With some 23,000 active ads, obviously people in the Denver area are using the service.)

My second thought is to put it up for auction on eBay, which will cost me only a very small listing fee (less than most newspaper classified ads). Shipping cost? My buyer will pick that up if it's a non-local sale.

My third thought: my local newspaper, which offers restricted free ads for merchandise selling under $50. But I want to list my bike at $300, so I'll have to pay up for an ad. (The Daily Camera will charge me $14 for a 14-day minimum run.)

Forget it, I'll go with free and have Denver Craigslist help me sell it.

The lowly merchandise category

Nearly every segment of newspaper classifieds remains under attack from online competitors, but perhaps none more than the merchandise category. Private-party for-sale ads continue to slip away from newspapers, as people grow more comfortable using the Internet to buy and sell used goods.

Of course, the merchandise/other category -- which at its core includes private-party sales, garage sales and the like -- accounts for only 17% of the total U.S. classifieds pie of $15.8 billion (2003 figures). Says Newspaper Association of America vice president for advertising Mort Goldstrom, the segment may be small compared to the traditional classified cash cows of jobs, real estate and autos, but it's important because it's a "readership thing."

That is, even if this is the segment where declines will hurt newspapers the least in terms of dollars, it can have a larger impact by taking away readers of newspapers who used to come to the newspaper specifically to see what their neighbors were offering for sale or to find deals. Many of those people have left for Craigslist and eBay.

(Online classifieds accounted for $1.24 billion in 2003 revenues, according to the Internet Advertising Bureau. More than $24 billion in goods were sold on eBay last year. It doesn't take a newspaper economist to tell you that that industry classifieds revenue number from the NAA would be a lot bigger without Craigslist and eBay in the picture.)

Time for newspapers to go free?

How do you compete with free? That's the big question when it comes to Craigslist, the San Francisco free-classifieds online service that's now expanded to 57 cities worldwide (most in the United States.). After capturing hearts and minds in its early days in San Francisco, it expanded to a few other major cities. Lately, it's been opening in smaller markets like Albuquerque, Anchorage, Boise, Buffalo, Fresno, Memphis and Santa Barbara.

According to founder Craig Newmark, Craigslist "in principle will go anywhere on the planet where people want us." That doesn't mean that little towns across the country will all get their own yourtown.craigslist.org sites in the near future, but the privately held company is known to be considering making its service available to rural areas. The company also is gearing up to publish foreign sites in languages other than English.

The business model behind Craig is free, mostly. Right now, Craigslist charges only for employers to post help-wanted as in San Francisco, New York and Los Angeles, but that will expand, and the company is considering charging for apartment-rental ads in big cities like New York. All other ads are free to post. The model is classifieds as content and community, not as strictly revenue-producing advertising.

Craigslist is a serious business now. Its 2004 revenues are projected to be just under $10 million (that with only a few cities charging for anything). We know its revenues and valuation (in the range of $60-$100 million) thanks to the recent sale of a 25% share in the company by a former Craigslist employee to auction giant eBay. The deal gave eBay non-voting rights in Craigslist, and the relationship is seen as a way for eBay to share its expertise and learn about local markets from an online merchandise pioneer.

Not doing enough

Newspapers seem to be reacting somewhat to Craigslist's growth and popularity. It's increasingly common to find newspapers offering free merchandise-for-sale ads, though with restrictions. A common newspaper approach is to offer free ads to people selling goods priced at under, say, $50 or $200. Such free ads usually are limited to a few per month, and there may be other restrictions. Or text ads may be free, but there's an upsell fee for adding photographs or enhancements (boldface type, color screens, etc.).

But is that enough to prevent Craig from eventually stealing away most of newspapers' merchandise ads? Probably not.

Peter M. Zollman, publisher of Classified Intelligence Report, says newspapers may be best served by offering some free categories of merchandise ads, with the goal in mind of recapturing ads lost to free services like Craigslist and to people selling goods via eBay auctions.

The way to survive with such a strategy, he suggests, is to run some free ad categories online and a smaller number of free print ads. (For instance, a paper might offer online merchandise ads for free, but set some price restrictions on the free print ads -- say, the price must be below $750.) Then surround the free ads by contextually relevant display ads -- for example, for sporting goods categories, free for-sale ads are accompanied by paid ads by sporting goods stores and fitness centers. And offer up-sells for free ads -- that is, paid enhancements to highlight ads.

Zollman, who keeps tabs on the classifieds market worldwide, says he's seeing European publishers, especially, becoming increasingly concerned and alarmed about the prospect of Craigslist competing with them -- and making significant efforts to counter Craigslist, should Craig expand even further throughout Europe (which is likely).

But that's less the case in the U.S., says Zollman. His company is currently working on a research report (due out in about a month) about the outlook for the classified merchandise segment, which will include interviews with dozens of newspaper executives about their reactions to and actions being taken to counter the Craigslist/eBay threat.

He says that during his research, he was shocked to interview one classifieds manager at one of America's largest newspapers and discover that this person was only "vaguely" aware of Craigslist, and didn't even know whether or not Craig was operating a free-classifieds site in his town. (It does. The local Craigslist.org in that manager's community has nearly 30,000 active free ads at this writing.)

Zollman says that for young people, especially, Craigslist is keeping them away from newspapers. His 23-year-old son recently found a Washington, D.C., apartment and bought a TV and coffee table through Craigslist. He's writing an article for his dad's newsletter explaining to newspaper publishers why he didn't bother looking at The Washington Post's classifieds, either online or in print.

All that doesn't mean Zollman thinks there's no future for newspaper merchandise classifieds. There will continue to be a place for the newspaper when it comes to the classifieds merchandise category, at least in the near- and medium-term future, he says, but publishers need to start adapting much faster.

Go free to increase revenues?

Over at Future of News, a Boulder, Colorado-based developer of self-service Web classifieds ordering systems for newspapers, they're seeing growth in free classified-ad placements. President Christopher Ryan estimates that 10-15% of the consumer-self-service ads placed online for his newspaper clients are free.

And here's a telling tidbit from Ryan: The clients offering free ads for some categories (mostly in the merchandise category) are the ones getting the most paid revenue from online classifieds placements overall.

Ryan's company has seen firsthand how convoluted many newspaper classifieds pricing structures have become -- and he thinks that that's a serious disadvantage when it comes to competing with online threats like Craigslist and eBay. Try to place an ad at many newspaper websites, he points out, and you won't be able to figure out how much a placement will cost until the end of the ad-submission process because of arcane pricing rules.

Indeed, Ryan thinks that simplifying pricing is the single most important thing newspapers can do right now to compete. He believes that while in 10 years merchandise ads indeed could all be free, for now he suggests that newspapers not take away fees for all merchandise categories. Rather, he suggests, do it selectively.

The local answer to eBay

Clearly, merchandise auctions on eBay have grown mightily -- and earned billions of dollars that might have gone to the newspaper industry in the past. And so far, the newspaper industry has not come up with much of an answer, other than some experiments like the St. Petersburg Times' "Click and Buy" feature on its online classifieds, which is somewhat akin to eBay's "But It Now" fixed-price feature of online auctions, and CityXpress business auctions run by newspapers (which don't address private-party merchandise sales).

CityXpress is poised, however, to start offering newspapers the opportunity to hold local-oriented auctions that let individuals put merchandise up for auction, a la eBay. That's expected to debut later this year. The local auctions that CityXpress will host for newspapers are interesting, because you could auction off items to a local buyer base that wouldn't make as much sense to auction on eBay -- such as a used refridgerator that an auction winner could come pick up at your house.

Future of News' Ryan confirms that it is time for the newspaper industry to get cracking on competing directly with eBay. Especially now that eBay has that 25% stake in Craigslist, it's more than likely that eBay will start to go local with city-specific auctions. If newspaper classifieds executives thought eBay was scary before, wait till it goes local. (Sounds like the CityXpress move to support individual-seller auctions is coming just in time.)

But there is a weakness in the eBay model, and that is that buyers can't physically see and touch the merchandise offered. Ryan sees a future where some enterprising publishers set up local auction warehousing facilities where sellers drop off items for sale, buyers can come to inspect them (or just view them online), and the facility handles fulfillment (either customer pick-up or the product is shipped to the buyer).

That's a model where newspapers could have an advantage (though conceivably, eBay could do the same thing in some cities). It would allow sellers to avoid having to deal with strangers coming to the door to look at that used bicycle, and serve those buyers for whom touching the merchandise is the only way they'll buy.

Obviously, such a line of business is out of newspapers' area of expertise. Ergo, there's a business idea for some entrepreneur looking to partner with the newspaper industry.

A proactive approach

In California, executives of the independent Bakersfield Californian recognize the merchandise-category threat. They hired online-news pioneer Dan Pacheco, president of the Colorado-based Future Forecast consultancy, to serve as new product manager and help the paper devise ways to respond to the gathering online classifieds threat.

Pacheco says that newspapers in bigger markets already have a problem with the merchandise category, and it's trickling down to medium-sized markets like Bakersfield. Nearby Fresno already has a Craigslist site, and Bakersfield could be next. The Californian wants to be ready. Some 26% of people in Bakersfield use eBay to buy and sell.

"I think once people start using Craigslist (and eBay for merchandise buying and selling), they don't go back to using newspapers," he says.

eBay is a model that newspapers should watch, obviously, and "trust" is the ace in the deck. Pacheco says newspapers need to think about how to incorporate trust features into their classified marketplaces. With eBay, people are willing to send money to complete strangers in other states or countries because of eBay's feedback system, where you can trust a seller or buyer because of the comments of other people who've done business with that person.

Consider the typical newspaper merchandise classified ad. If I place an ad to sell my bicycle in my local newspaper, potential buyers know nothing at all about me as a seller. That's a big disadvantage over online merchandise marketplaces that make trust central to the buying/selling experience.

Pacheco says that for a newspaper to compete effectively in the future, it should think about things like tracking the behavior and feedback of all users of its classifieds, allowing buyers to rate sellers and aggregating all the ratings over time -- just like eBay does.

In the next 12 months, look for the Californian to make some moves in response to the Craigslist/eBay local threat, says Pacheco.

It's all about trust

Historically, consumers have trusted newspapers, and that spilled over into success in the classifieds marketplace. That dynamic seems to be changing. Now, consumers trust Craigslist and eBay.

Craigslist founder Newmark credits trust for his business' meteoric rise. "You deal with institutions you trust," he says, and mainstream media has lost some of the public's trust recently -- especially, in his opinion, for not questioning the run-up to the Iraq war and not asking the tough questions of the U.S. government.

His customers trust Craigslist within the confines of the services it offers, Newmark says, because the company devotes itself slavishly to customer service and to maintaining the integrity of the ads that are placed on its site. Indeed, Newmark "demoted" himself to managing Craigslist's customer service and spends much of his time keeping out the spammers and scammers. (While I was interviewing Newmark, he multitasked by doing his ad monitoring as we spoke.) He brought in an outside CEO, Jim Buckmaster, to drive the business forward.

Newspapers obviously still have much to learn from the Craigslist and eBay phenomena. Let's hope they educate themselves quickly.