Wednesday, March 25, 2009

Role of Classified Advertising in Newspaper Downfall

In the March-April issue of Columbia Journalism Review, and in a subsequent letter to the New York Times, Steven Ross argues that "the recession, not Craigslist, is killing American newspapers."

Craiglist is a strawman, he says, and supports his thesis by pointing out that newspaper classified ad revenue in 1994, nationwide, was $12.5 billion, and increased to $14.2 Billion in 2007. But if he'd chosen a different starting year, you'd see a very different picture. He says he chose 1994 because that was when web advertising was first launched. But Craigslist and other online classified vehicles like monster.com didn't get going until years later. Between 1997 and 2006, newspaper classified ad revenues declined from $16.7 billion to $14.2 billion, according to the Newspaper Advertising Assn., the same source Ross used. That's a 15% decline. And between 2000 (when the online classified world was starting to take off), when the revenues had soared to $19.6 billion, and 2006, the decline is even more pronounced--a 28% decline.

There is no doubt that the recession is accelerating the demise of the newspaper business model, but it was going to happen anyway. Print products are losing both sets of customers, their readers and their advertisers.

Unlike magazines, classified revenue is an important revenue stream for newspapers, making up 20% to 40% of all revenues historically. And that's why newspapers are in more trouble than magazines at the moment. Newspapers have lost classified revenue, and will never get it back (the internet is just a much more efficient medium to find a job, a house, or a car), but they are also losing readers to the internet as well.

The demise of print is happening to newspapers first because of their revenue and profit structure. Not only are classified revenues a big piece of the pie, they are the most profitable portion of the pie, with profit margins as high as 80%. In the mid-nineties, the Los Angeles Times made more profit on its classified section alone, than the entire enterprise. Let me repeat that. The classified sections made money, everything else lost money--they were loss leaders for classified!

Trust me, when a third of your revenue pie is down 30% and continuing to head south, you can kiss that business model goodbye.

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