Craigslist: Stopping the Presses?

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.)