Craigslist Fuels Online Classified-Ad Surge

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Unlike newspaper classifieds, which charge for every ad placement, Craigslist has historically only taken fees from real estate brokers and job recruiters in certain cities. Last November, the San Francisco company also began charging for erotic-services ads and donating the proceeds to charity. Craigslist subsequently eliminated the erotic-services category after state attorneys general complained the site encouraged prostitution.

Community-Driven Mentality

By charging for more types of ads in more cities, or by raising existing rates, Craigslist "could triple or quadruple revenue and do absolutely no harm to their business," says Peter Zollman, AIM Group's founding principal. Yet Craigslist executives "think like a community organizer," not a business, Zollman says. Still, he estimates the company has increased revenue by almost 50% each year since 2005, when AIM Group estimates it generated $14 million to $16 million.

Certainly, part of Craigslist's appeal is in its community-driven mentality. In that way, Craigslist is mirroring the growth of eBay, which has also lured millions of buyers and sellers, especially in the late 1990s and early part of this decade, says Scot Wingo, CEO of e-commerce consultant ChannelAdvisor. By expanding to local markets and offering a simple-to-use site, Craigslist has attracted many people who might have sold their used couches and record players on eBay years ago. "EBay got out-eBayed," says Wingo.

Little wonder eBay wants in on the classified-ad party. The company has been moving to outpace Craigslist abroad. EBay's Gumtree site is popular in Britain, and Kijiji—while a distant second in the U.S.—has taken off in Canada. "They've realized Craigslist has got the U.S. locked up, so I think their strategy is to outflank them internationally," says Wingo.

Old Media: Trying to Change

Newspapers are likely to defend their admittedly dwindling local-ad turf, too. "When you get challenged by incremental competition, you tend to do a better job of innovating your own offering," says Mort Goldstrom, vice-president of advertising for the Newspaper Assn. of America, a trade group. He points to recent advances by such print publications as The Miami Herald that offer specialized online services to job recruiters.

Old Media and eBay will need to work a lot harder and innovate much faster, though, to retake much of the ground now lost to Craigslist.

Douglas MacMillan is a staff writer for BusinessWeek in New York.

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