This was originally written in response to this: http://www.reinventingclassifieds.com/2008/07/11/an-open-letter-to-craigslist/.

There is a fundamental economic law at work here: more competition means lower profits. Less competition means higher profits. For many years, newspapers operated in what economists would call an environment of monopolistic competition. Monopolistic competition is defined as a market in which there are only a few providers of a particular good or service, and these providers offer highly differentiated versions of these products. This contrasts with pure competition, in which there are numerous providers of a good or service, all of whom offer more or less the very same thing. Like corn farmers, for example. If you have a lot of competitors all of whom offer the very same product or service as you do, then you are working in an industry that has been commoditized. Corn is a commodity. So are classified ads.

Newspapers aren't the only providers of news in a market - there are tv stations and radio stations, too, but the kind of news offered by these competitors all differ significantly which is what makes the news market one of "monopolistic competition". While we like to think of news as the central product of a newspaper, the actual driver of revenue was (and is) the distribution system. Newspaper companies distributed a bundle of goods through their distribution system that included news, classified ads and inserts, among other things. The distribution system used by the newspaper was expensive, hard to replicate and served as a barrier to entry from other competitors quite nicely until sometime in the mid-nineties when a new distribution system became available rendering all those barriers to entry as leaky as a sponge...and the competitors all came flooding in. And more competition means lower profits. It is as unavoidable as gravity.

The moral of the story is this: you can partner all you want with craigslist, but that won't change the basic economic environment in which you operate. If I'm a corn farmer, I could contact all the other corn growers and we could decide to sell each other's corn in each other's farm stand but that would have absolutely no impact whatsoever on the market price of my corn. The only way that we could effectively improve the profitibility of the corn business would be to become a corn cartel and artificially limit the supply of corn. This would be illegal of course, so that won't happen, either.

My first "new media" job was to put The News & Observer's classified ads on the Web. I'm sure we weren't the first to do this, but we were one of the first. At that time, our print classifieds probably reached 150,000 homes during the week (I have no idea how many of those households actually looked at the classifieds, though) and our classified department had about 200 employees. I just looked it up: craigslist.com has about 24 employees and reaches millions of unique visitors (with 3.35 BILLION page views in October).

Craigslist.com represents a distribution system for classified advertising that is orders of magnitude more efficient than the distribution system employed by newspapers.

I can't find the exact figure, but I know that craigslist reaches at least 2.5 million unique visitors per month (probably many more than that). Let's be generous and say that The N&O reached 300,000 unique visitors per month back before we first put the ads online. If we consider payroll costs alone, then craigslist is almost 70 times more efficient than a print newspaper (it's actually a lot more efficient than that, because I'm ignoring a lot of costs and employees in other departments that make classified advertising possible).

Are newspaper classified ads 70 times as good as craigslist.com ads?

Newspapers should make as much money from classified advertising for as long as they can while at the same time not suffering from the delusion that they will make money from them in perpetuity. They won't.

Instead of looking back, you should look forward and ask yourself this: how can I use the Internet to provide the most useful, interesting news and information possible, in the most efficient way possible? Embrace efficiency; the old margins aren't coming back. The best long-term strategy for making money is to be a better news organization because quality news, especially local news, is not a commodity - it is a unique and valuable asset that people need.