Craigslist: The $5 billion juggernaut that crippled an industry.

Craigslist logoIt’s common knowledge that the business model for newspapers started going awry in a major way with the decline in newspaper classified advertising.

Craigslist played a huge role in that development, as the online classifieds site went about methodically entering one urban market after another across the United States.

And now we have quantification of just how impactful Craigslist’s role was.  It comes in the form of a May 2013 study authored by Robert Seamans of New York University’s Stern School of Business and Feng Zhu of the University of Southern California.

Titled Responses to Entry in Multi-Sided Markets:  The Impact of Craigslist on Local Newspapers, the study explored the dynamics at play over the period 2000-2007, focusing on newspapers’ degree of reliance on classifieds at the time of Craigslist’s entry into their markets.

What the researchers found was that those newspapers that relied heavily on classified ads for revenue experienced more than a 20% decline in classified advertising rates following Craigslist’s entry into their markets.

But that isn’t all:  The outmigration of classified advertising to Craigslist was accompanied by other negative trend lines — an increase of subscription prices (up 3%+) and lowering circulation figures (down nearly 5%).

Even newspaper display advertising rates fell by approximately 3%.

Were these developments “cause” or “effect”?  The study’s authors posit that fewer classified ads may have diminished the incentive for people to purchase the newspapers.  Also, display advertising rates tend to track circulation figures, so once the “decline cycle” started, it was bound to continue.

The study concludes that by offering buyers and sellers a free classified ad alternative to paid listings in newspapers, Craigslist saved users approximately $5 billion over the seven-year period.

Those dollars came right out of the hides of the newspapers, of course … and changed the print newspaper industry for good.

But here’s the thing:  The experience of the newspaper industry has relevance beyond just them.  “The boundaries between media industries are blurred and advertisers are able to reach consumers through a variety of platforms such as TV, the Internet and mobile devices,” the authors write.

The unmistakable message to others in the media is this:  It could happen to you, too.

A full summary of the Seamans/Zhu report can be found here.

Craigslist riding high … but clouds on the horizon?

Craigslist logoNow here’s an interesting statistic about Craigslist, the online classified advertising phenomenon and bane of newspaper publishers across the country. Online publishing consulting firm AIM Group is forecasting that Craigslist will generate nearly $125 million in revenues this year.

But here’s the real kicker: Craigslist is on track to earn somewhere between $90 million and $100 million in profits on that revenue. That kind of profit margin is basically unheard of – in any industry. And the fact that it’s happening in the publishing industry is even more amazing.

What’s contributing to these stratospheric results? After all, Craigslist bills itself as a “free classified” site. That may be, but the publisher derives a huge portion of revenue – more than 50% – from paid recruitment advertising, much of it coming straight out of the pockets of the newspaper industry.

And the rest? Chalk up most of that to advertising let’s euphemistically label “adult services.” (AIM Group calls it something else: “Thinly disguised advertising for prostitutes.”)

Of course, these lucrative revenues and profits have come at a price. Craigslist has developed a reputation – not wholly undeserved – of being a virtual clearinghouse for anonymous hook-ups and other forms of vice. Complaints of Craigslist becoming a haven for scam artists, thieves – even the occasional murderer – have become more common as the site has expanded its reach into more cities and regions — now in excess of 500 communities.

And here’s another interesting finding from AIM Group. It reports that Craigslist’s traffic peaked in August of last year (~56 million unique visitors that month), but has fallen since then. In fact, monthly traffic has dropped and now plateaued at ~48 million since February.

Why? AIM speculates it’s the result of an “antiquated” user interface, along with a proliferation of “spam & scam” advertising. You start getting a lot of that … and you’re bound to start driving some people away.

Still, it’s pretty hard to argue with profit margins hovering around 75%.