Will Craigslist Have to Crack Down?

South Carolina joins other states in calling for tighter Craigslist ad scrutiny, which could threaten Craigslist's low-cost, laissez faire business model

The office of online site Craigslist is seen March 10, 2006 in San Francisco

By Olga Kharif

The pressure is on Craigslist to clean up its act. If the online classified ad site doesn't remove a section devoted to erotic services in South Carolina by May 15, the state's attorney general, Henry McMaster, says he'll open a criminal investigation into the company's executives, including Chief Executive Jim Buckmaster.

McMaster alleges that Craigslist abets prostitution by letting providers of sexual services post ads to its site. If the case goes to court, South Carolina may have a hard time proving Craigslist is acting illegally. The Communications Decency Act of 1996 protects Web sites that feature third-party content. "While the posters can certainly be charged if they are violating state laws, any intermediaries can't be held responsible," says Matt Zimmerman, senior staff attorney at the Electronic Frontier Foundation. "This is very clear."

Still, pressure from South Carolina, other state officials, and possibly part-owner eBay (EBAY) could force fundamental changes at Craigslist, which has become one of the Web's most popular sites in large part because of a no-frills, freewheeling atmosphere that makes it easy and virtually free to advertise for all manner of goods and services—from old bikes to vacation rentals to paid sex. "The ethos of Craigslist is a little bit Wild West, a live-and-let-live mentality," says Peter Zollman, founding principal at classifieds consultant AIM Group. Craigslist is the ninth-most-popular site in the U.S., ahead of eBay, Amazon.com (AMZN), and Twitter, according to traffic-ranking site Alexa, owned by Amazon.

But if McMaster and representatives of other states have their way, Craigslist may need to step up efforts to police postings, likely alienating some users and increasing costs at a site legendary for low overhead. Efforts by minority owner eBay to assert control could force other changes that some speculate might include a sale. That in turn would necessitate major cultural shifts at Craigslist.

vigilance would mean higher costs

Buckmaster, who replaced founder Craig Newmark as CEO in 2000, has long said his priority is making users' lives easier—not making big bucks. Last year closely held Craigslist generated $81 million in sales from recruitment and apartment ad fees, Zollman estimates. That was a 47% jump from 2007, but Craigslist could generate hundreds of millions of dollars a year if it wanted to charge for more postings, Zollman says. "They really run like a community service," Zollman says. "They see no need to make money."

Founded in 1995, Craigslist hasn't had to. The site's design is simple, and it's run by a skeleton staff. As of a year ago, the San Francisco-based site had about 25 employees. Even Newmark answers customer complaints and battles spam. Should states succeed in forcing Craigslist to more vigilantly monitor who's posting what, Buckmaster may need to hire new workers. The company may also need to invest in expensive software that could sift through the roughly 30 million ads posted to the site every month to identify and remove offending content, such as pornographic pictures. If South Carolina's efforts succeed, Craigslist's "business model is going to change," Zimmerman says.

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