Tuesday, September 13, 2005

ISSUE: What will finance journalism if all classified revenues go away?

Smartmoney.com: Sector Patrol: Craigslist: Stopping the Presses?

Craigslist: Stopping the Presses?

By Will Swarts Published: September 7, 2005

IF YOU'RE READING THIS, you might already believe newspapers are dead.

You'd be partly right and partly wrong. But as shareholders of major media companies such as Tribune (TRB), the New York Times (NYT), Gannett (GCI) or McClatchy (MNI) know, the mere debate has been brutal on stock portfolios. With the exception of E.W. Scripps (SSP), major newspaper stocks are down for the year — in fact, down from the start of 2004 — with declines ranging from slow leaks to plunges.

And with the surging popularity of Craigslist.org, an online haven of mostly free advertisements that's expanding its reach every day, the downdraft could intensify. Craigslist, founded in 1999 by Craig Newmark, operates in 113 cities in the U.S. and 34 countries and attracts more than 10 million viewers a month. It runs as an online community forum, rather than a traditional ad-driven business, and that sets it apart: It charges only for job ads in New York, San Francisco and Los Angeles. Everything else — real-estate ads, merchandise ads, personals, and on and on — is free. The site's popularity grows every day. And as its volume of ads increases, Craigslist becomes even more of a liquidity center — the eBay (EBAY) of local classifieds.

Last year, in fact, eBay bought a 25% stake in the company for $15 million. And yet profits still aren't a huge priority for Craigslist, which has only 18 employees and hasn't overhauled its business model. "I think many skeptics were somewhat nonplussed at first but they'll see that really very little has changed," Craigslist spokeswoman Susan MacTavish Best said in response to emailed questions.

The trouble for newspapers is clear. Classified ads account for about 40% of the average U.S. newspaper's advertising revenue, according to Mort Goldstrom, vice president of advertising for the Newspaper Association of America. Craigslist is their kryptonite. It competes with newspapers essentially by not competing. Why would customers pay if they don't have to?

According to the Newspaper Association of America, total annual classified ad revenues have dropped since 2000. Estimates peg full-year totals for 2005 at $16 billion — not far off the 1997 level, according to the NAA. Even a booming real-estate market can't stanch the tide; real-estate classified ad revenues dropped last quarter for the first time since 2000.

Newspapers have fought back, but have had to sacrifice profits for market share. In 2000, Knight Ridder (KRI), publisher of 32 papers including the San Jose Mercury News, the Miami Herald and the Philadelphia Inquirer, joined forces with Tribune, publishers of the Chicago Tribune, Newsday and Los Angeles Times, to buy CareerBuilder.com, a job placement and recruiting site now linked to about 130 U.S. newspapers. In 2002, Gannett, the nation's largest newspaper chain, took a stake as well. Apparently, their online exposure hasn't been quite enough — in May, Knight Ridder made all self-placed, private-party, online-only merchandise ads free in 22 of its 29 newspaper markets. At the end of last month, the San Diego Union Tribune started offering free three-line ads to individual sellers of cars and other merchandise for less than $5,000.

"I think the publishers are making efforts to shift their business models, and they recognize that the Internet is more and more important," says Jim Goss, a media analyst with Barrington Research in Chicago. "The challenge is to get paid for it." (Goss owns shares of Tribune. He doesn't own shares of Knight Ridder or Gannett. Barrington Research doesn't have investment-banking relationships with those companies.)

Newspapers have long embraced the Internet, of course. There's nary a local paper without some sort of web presence. "I think that newspapers have been very quick to adapt online," says Goldstrom. "If you look at the top 10 web sites of any individual local market, you'll find that the newspaper [there] is probably at the top of them." Anthose web sites are selling plenty of traditional business-to-consumer ads. But according to a McKinsey study published this spring, the cost of an online ad can be as little as 25% of its print equivalent. The Internet might be a new platform for newspapers, but it hasn't been an especially lucrative one. To succeed in the latter, they might have to cannibalize the former.
On top of that, newspapers could lose nearly all of their classified ad revenues to Craigslist, which seems to be extending its influence every day. According to Classified Intelligence, an advertising consultancy and newsletter publisher in Altamonte Springs, Fla., Craigslist's monthly unique visitors total of 10 million nearly doubled in the last year, during which it has added about 65 U.S. cities and regions and expanded into Asia, Europe, Africa, Australia and South America. Its five million new classified ads each month generate two billion page views. (In the wake of Hurricane Katrina, it also became an information lifeline for residents of the battered Gulf Coast, setting up a special section where people can list contact information for people displaced by the storm, arrange transportation and temporary employment, and vent their frustrations about relief efforts.)

Gary Pruitt, chief executive officer of McClatchy, publisher of 29 newspapers, including the Minneapolis Star-Tribune and the Sacramento Bee, said during his company's second-quarter earnings report on July 14 that outside competition was a concern. "We are, though, aware of the Craigslist effect, and not just Craigslist, [but] other classified services," he told investors and analysts. He said McClatchy, like other newspaper companies, is working to keep its prominent position in local markets. That might be harder to do as Craigslist and other classified challengers localize their content and undermine newspapers' status as the dominant source of information for local buyers and sellers.

Craigslist's revenues are estimated at around $10 million a year, exclusively from job ads. As use skyrockets, the company has been mulling a minimal charge — probably $10 — for real-estate listings in New York, but has not made a final decision on imposing the fee. "We're still considering this," says Best.

Contrast those numbers with 2005 revenue forecasts from the New York Times, at $3.4 billion; Tribune, at $5.7 billion; and Gannett, which is expected to rack up $7.6 billion in sales, according to earnings tracker Thomson First Call. These figures represent a much wider array of business activities than classified ad sales alone, but it's clear that Craigslist's pricing structure isn't geared to compete with the media behemoths.

"Craig [Newmark] is the most important person in the newspaper business who is not in the newspaper business," says Sreenath Sreenivasan, dean of students at the Columbia Graduate School of Journalism in New York. "He's certainly somebody everyone on the business side is talking about, and anyone on the news side of the business who's not is sticking his head in the sand."

It all sounds dire, and perhaps it is in the long run. But in the short term, newspaper companies have plenty of life left in them.

"The buzzword lately has been Internet, Internet, and that newspapers are dead," says James Walden, a publishing analyst with mutual fund tracker Morningstar. "Media pundits have claimed the sky was falling and been wrong before — they were wrong about radio and about television. [The newspaper industry] is a mature — and declining — business, but there's still value to be added. Organic growth will continue to be challenging, but these companies are still extremely profitable from both a bottom line sense and in their ability to generate cash."

"I think it's really too early to say that Craigslist is the model to be emulated, or that it's really the clear winner," says Rick Summers, a technology analyst at Morningstar. "On the other hand, they're amazingly successful, depending on how you determine their measure of success."

Craigslist's mushrooming traffic numbers reflect another Internet phenomenon — which is the same reason many local papers enjoy dominant traffic numbers in their own market. A site's stickiness, as the industry calls it, demonstrates that site users are creatures of habit, which both keeps viewers checking high-school football scores at the local Times-Review-Herald-Picayune-Gazette and buying and selling on Craigslist.

"When things are free, it's hard to provide someone with an incentive to switch," Summers says.

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