Raiding the 'Free' Market

By: Jennifer Saba Five months ago, The San Diego Union-Tribune made a bold move -- at least in the staid world of classifieds. In response to ever-growing threats, the paper decided to offer private-party print ads, for merchandise $5,000 or less, for free.

One could say they didn't have much of a choice. Research conducted in 2004 suggested that the paper's entire classified section was losing relevance, not just its private-party category. Competitors like Craigslist and eBay and even the print components of online sites like AutoTrader were circling the Union-Tribune's market like sharks, just as they are doing elsewhere.

"We were always viewed as the most trusted source," says Scott
Whitley, the Union-Tribune's advertising director. "People read classifieds because they were fun. They found stuff they didn't expect to find. It was entertainment." But like a popular sitcom gone stale after too many seasons, the Union-Tribune did little to refresh its routine -- and audiences began to turn away. "The discovery factor was in our competitors' pages," Whitley admits.

So a few months ago, the paper redesigned its classified section to make it more user-friendly. They took the slew of contact numbers and boiled it down to one. The category classes got a brush-up to appear more modern. For example, ads for hybrid vehicles are now listed separately from traditional automobiles.

More than aesthetics, the move to make private-party ads gratis was imperative in the classified overhaul. The program offers three lines of advertising, for seven days, for free. And the ads run for free on its Web site, SignOnSanDiego.com. "We made a fairly early decision we were going to have to go to a free model," Whitley says. "We had to change to reflect the community. Then it became a decision of how far and how wide to take it."

The Union-Tribune, which reported a daily circulation of 314,279 in the September 2005 FAS-FAX, is already benefiting. Whitley says that as of mid-December, ad count for the private-party category had grown by 160%. Activity in the online section that encourages people to place their ads through the web ballooned 400%. The paper's call volume increased 27%.

The Union-Tribune understands it has to spend now to gain in the future. Whitley estimates that the paper is losing about $1 million in private-party ads since the move to free -- the category represents about 5% of overall classified revenue. In addition, $1 million went towards promoting the program and another $1 million accounts for added newsprint costs.

In the long run, the loss is perhaps negligible -- San Diego is betting that a healthy private-party ad section will lift the entire category. "This was not a revenue play, it was about readership and strategy," Whitley says. "If we don't have the vibrancy that private party brings to the pages, the rest of our franchise is significantly at risk."

The question now is: Will other papers around the country embrace free classifieds? And do they even have much of a choice in 2006?

Give a little, gain a lot

Aside from outside players like Craigslist, Google, and Microsoft, not to mention the countless other publications that threaten a newspaper's classified territory, newspapers also have to deal with classified revenue's general ups and downs.

In a report issued by Merrill Lynch, analysts for the research firm wrote, "given expectations of a slowing economy in 2006, classified advertising, the most cyclical component, is likely to slow." Within the category, auto will continue to slip, though not as dramatic as last year's high single-digit decline. More bad news: It's unlikely that real estate, and to a lesser extent help wanted, will repeat the high single-digit gains this year.

In response, more and more papers beyond San Diego are studying the idea that free private-party ads will help save the classified category and grow readership. It's a concept that had been tested and proved by at least one paper, the Arkansas Democrat-Gazette, in Little Rock -- purportedly the first paper to venture out with free private-party ads.

The Democrat-Gazette, a 176,917-circulation daily, started giving out free private- party ads in 1978 in a risky attempt to win a losing newspaper battle -- it had only 18% of classified market share -- with a competing daily, then the Arkansas Gazette. The idea was that free private ads would bulk up the section, which would draw more readers, which would lead to more automotive advertising.

The family-owned Democrat, as it was known at the time, found the strategy worked not once but twice. Circulation increased, forcing the owners of the Gazette to sell to Gannett; later, Gannett pulled out of the market -- and in 1991, the Democrat purchased the assets of the Gazette.

That same approach is pushing back on new competitors today (see "Battle for Bentonville," E&P, Nov. 2005 ). The Democrat-Gazette still offers free private ads with the generous ceiling of $20,000. "We want the content, and we want lots of cars," says Classified Advertising Director Scott Stine. The paper gets away with such a high maximum because it employs a reservation system that limits the amount of free private-party ads and allows for upsells.

The system is broken down by classification. As a hypothetical example, only five ads for, say, an Audi selling under $20,000 are allowed daily. If those slots are full, the buyer of the classified can wait until the next time the space is available, or they can pay for it if they want that ad to run immediately. Stine points to another benefit: "We're giving ads away, but we're selling several thousand a month in enhancements."

Last year, the department expanded the free category and watched the numbers increase. In August, the private-party lineage doubled when compared to the previous year, and the paper picked up a whopping 72% more paid ads. For 2005, private- party ad count was up 5%.

The free ads (which include upsells and those not wanting to wait around for a booked reservation) lifted the entire classified category, even auto. In 2005, classified ad revenue was up 8%. Automotive grew 3.7% in the same period. In December, auto was up 5%, and that was up against tough comparisons -- in 2004, auto jumped 45%. Says Stine, "The revenue you gain far outweighs the revenue you give up."

Dissecting Craigslist

The Union-Tribune and Democrat- Gazette aren't the only ones that know "free" lures them in. Just ask such competitors as Craigslist, Google, and Microsoft.

"The long-term risk I think for publishers is not just free ads from Craigslist, but from lots of different sources," says Barry Parr, a media analyst with Jupiter Research. "A lot of big players are going to put a lot behind this. All of these companies are going to give away classifieds in order to build an audience."

No other competitor has been on the minds of newspaper classified managers as much as Craigslist. The stripped-down online listings site has been around longer than you think -- more than 10 years -- and started more as an accident than any calculated move to take down the newspaper industry.

In 1995, Craig Newmark founded the site in San Francisco as a community forum, a place where he and others could recommend things to do around the city. The site took off, and people started postings all types of listings for things such as jobs and apartments for rent -- all for free.

Since then, Craigslist has mushroomed to 190 sites in all 50 states. It gets over three billion page views per month and over 10 million unique visitors. In 2005, the number of page views grew by 200%.

The seemingly massive operation -- though it won't comment on numbers, Craigslist reportedly pulls in about $10 million in annual revenue -- is operated by a small team of 19 staffers who keep the sites humming. The employees largely field requests from Craigslist users. The most common inquiry: people wanting Craigslist to cover more cities.

Though the majority of the listings are free, Craigslist makes revenue by under- charging for job listings in three cities: New York ($25), Los Angeles ($25) and San Francisco ($75) (see chart, page 73).

Jim Buckmaster, Craigslist's CEO, says the only reason the site charges for job listings in those markets is to enable them to cover their costs. But beyond that, they use it as a way to mitigate the flow of postings. Craigslist started charging for jobs in New York and Los Angeles in mid-2004. "It was driven largely by the fact we were having trouble physically managing the number of ads coming in," Buckmaster explains. The site is considering implementing charges for job postings in four other cities.

And though Craigslist might be known as a place to look for quirky things or people, its No. 1 section for page views is jobs: It posts about 250,000 listings each month.

The numbers are formidable, but it's difficult to judge exactly what Craigslist is doing to newspapers. In its stomping grounds of San Francisco, Craigslist is pummeling newspapers. According to a widely circulated report from consulting firm Classified Intelligence in December of 2004, it was estimated that Craigslist had already cost Bay Area newspapers $50 to $65 million in employment advertising revenue.

When asked how he feels about Craigslist being thought of as a serious threat to newspapers, Buckmaster responds, "For any business that is focused exclusively on doing as well as it possibly can for its customers or users, I think it is nonsensical to say that another company is threatening its business. For any business that does not put its users first to the exclusion of all other considerations, loss of business is inevitable."

Gordon Borrell, president and CEO of Borrell Associates Inc., says the Craigslist effect is real but it's hard to put a number on it: "What they are taking away from newspapers is a big question. It's probably more of the strategic franchise than actual dollars. But in the end, the strategic franchise is far more valuable."

Jupiter Research's Parr holds the same view: "I don't think Craigslist is the largest threat to newspapers right now. Having said that, what it represents is a warning of free classifieds. There are other ways to exploit a lot of things learned from Craigslist."

Google, Gates get into the act

Which inexorably brings us to Google and Microsoft. Both giants may be launching versions of Craigslist with their own spin.

In November, Google floated Google Base, a database that lets users upload personal information that might not be found anywhere else. Marc Leibowitz, Google's director of strategic partnerships, explains that someone could put their mother's chicken soup recipe on the site for other people to search and use. It's almost like a more manageable version of Google's search engine. But it lets anyone add just about anything to the database.

The site is still in beta, but its launch caused more excitement -- and angst --than the hookup of Brad and Angelina. It's still amorphous, yet it has the faint smell and shape of a classified site.

Google's Leibowitz suggests otherwise: "Google Base is a way to access and index the world's information and drive traffic. I think a lot of the early characterization of what it is isn't on the mark." He explains that Google Base is just another way for people to add new content, something to which Google surfers wouldn't normally have access -- such as mom's chicken soup recipe.

This, of course, depends on what people plan to post. If Google Base decides to add an e-commerce component, which at this point remains undecided, it could allow users to catalogue stuff in their garage and, if they choose to, sell certain items.

Banc of America Securities analyst John Janedis wrote a research note after the soft launch of Google Base predicting that if the sole revenue stream will be derived from keyword advertising, it will likely take share from other players. He maintained that it will be some time for Google Base to grow and that the impact to newspapers is more psychological -- at the moment.

Leibowitz emphasizes that Google Base would rather partner with newspapers by giving the local content of the Daily Miracle a large platform. "It's a complementary distribution tool," he says. Google Base has a relationship with newspaper company-owned CareerBuilder for job postings, though Leibowitz wouldn't reveal any specifics. "We are very open and excited about having conversations with any publisher, particularly newspapers. We are all ears about indexing content," he adds.

With a bit more confidence, however, you can add Microsoft to the growing list of Craig imitators.

The company has announced plans to launch a classified site, rolled out in various markets, at some point this year. Code-named "Fremont" after a Seattle neighborhood that hosts a popular flea market, the service plans to have a mix of listings, social networking, and community features "in a trustworthy environment," says Garry Wiseman, a product unit manager for Windows Live Expo.

Microsoft plans to support the project through contextual ads. "The goal is to provide our customers with the easiest way to sell and purchase items online," Wiseman says. And like Google, Microsoft is willing to oblige print partnerships. "We are happy to work with partners whose products are desired by consumers, and currently that would include offline publications," he adds.

Google and Microsoft, while wildly successful, still have to sell this idea to the public to make it catch fire. "Any local application only works if you have a certain amount of users," explains Jupiter's Parr. "You could launch a big national service and if you've got 100,000 users nationwide you're not going to have a lot of local users."

The home-turf advantage

The local level is where newspapers have an advantage. As the San Diego Union-Tribune and Arkansas Democrat-Gazette have shown, not charging for private-party ads brings eyeballs. Eyeballs bring more ads.

Other newspapers are on to this, but are still evaluating how to go about it. Usually, the bar for merchandise for free ads is set modestly low, around $250 or $500. Some aren't going free but are dropping their prices.

Craigslist is on the scene in Raleigh, N.C., yet The News & Observer has not embarked on free ads. Durwood Canaday, the paper's vice president of classifieds, says it has lowered its classified rates, now $14 for a 10-day print and online ad compared with about $50. Canaday says they are monitoring the rate for 90 days.

"The concern is with the loss of private-party ads. If that occurs, do you in time lose your commercial business?" asks Canaday. "It may well be that private-party ads are free, period. At this point, nobody really knows what it will take to safeguard the franchise."

Austin, Texas, a college and tech-savvy town with the unofficial motto "keep Austin weird," loves Craigslist. Ron Mann, classified advertising director at the Austin American-Statesman, says his paper has responded to the popularity of Craigslist by expanding merchandise in the private-party category. The paper promotes free ads too, but only online -- and only for merchandise $200 or less. Says Mann, "It's safe to say we're assessing where we need to be."

Steve Bernard, senior vice president of advertising at The Sacramento Bee, has noticed that even a low ceiling brings results. For the past year, the Bee has been running free private-party ads to anyone with $250 or less in merchandise to sell. Private party makes up about 15% of the paper's classified revenue and accounts for one-third of its classified lineage.

Bernard considers the move a success, and is thinking about raising the amount for a free ad. He says he harbors no illusions: "It's just a toe in the water to test it. I do believe that all newspapers, if they are going to compete, they are going to have to have free listings at significantly higher levels."

As more outside companies eye the spoils of classifieds, newspapers are soon going to have to take more chances. "I'm romantically inclined to say that newspapers have put so much of their hearts into [classifieds] this year and will be able to make the transition," says Gordon Borrell. "However, history is against them. The path of disruptive technologies before them has ruined or severely damaged other businesses. I'm afraid it's the path you are probably going to see here."

That's if more papers don't start moving more quickly. Maybe that's why the Union-Tribune's Whitley doesn't feel as if his paper has done anything out of the ordinary -- even though all eyes around the nation are on his metro. "It isn't bold at all," he testifies. "It's simply doing what we have to do to protect our franchise."