Classifieds turn into Net's cash cow

People are increasingly logging on to the Internet instead of circling newspaper ads in their hunt for jobs, cars or even a date, turning the classified industry into a potentially lucrative online business for newspaper publishers, technology providers and Internet companies.

Classifieds are not a revolutionary new business, but they are turning out to be the perfect complement to the Internet, offering consumers convenience and community with improved search and service. The growing momentum for this dull but dependable advertising staple points to a possible recipe for the future of dot-com success: Take an old idea, and do it better online.

"Classifieds are booming because it's the perfect application for the Internet," said Jim Nail, senior analyst at Forrester Research. "If people are searching for something specific with hundreds of thousands of listings, it's hard to find what you want in a newspaper. The search functions on the Internet" improve the chore.

The numbers, while still small, are compelling. Revenue from online classifieds spiked 176 percent from $205 million in the first six months of 2000 to $564 million for the same period this year, according to industry trade group the Interactive Advertising Bureau (IAB) and consulting firm PricewaterhouseCoopers.

In the same time frame, the Internet ad market overall posted its first decline after years of double- and triple-digit growth. The U.S. market dropped by 7.8 percent to $3.76 billion in the first half of 2001, according to the IAB.

Revenue from online classifieds is still only a drop in the bucket: Newspapers draw an annual $20 billion in classified sales, and the overall industry is worth about $60 billion yearly. In addition, the U.S. recession has caused a downfall in classified advertising offline and on, largely from a cut in job listings, the sector's biggest moneymaker, followed by real estate and auto ads.

Despite economic factors, online classifieds have remained on an uphill climb partly because of consumers' widespread adoption of the Internet and the convenience of scouring want ads electronically. As a result, online portals, niche Internet services and online publishers all are in fierce competition for the ads.

Industry executives point to eBay as confirmation of the economic value of classifieds online. Jupiter Media Metrix analyst Aram Sinnreich said the company is essentially in the business of brokering relationships between consumers and businesses. eBay recently signed a groundbreaking deal with the Florida's St. Petersburg Times and the Minneapolis-St. Paul Star Tribune to bridge online with offline classifieds. Through the deal, eBay will tap the sales force of its print partners in exchange for delivering massive distribution online.

In November, Yahoo announced a commitment to bolster its online classifieds, with plans to expand listings for jobs, cars, homes and personals. The America Online and Microsoft Network Internet services have also staked claims to classifieds by partnering with the top dog in employment listings, Monster.com, which is owned by advertising and marketing company TMP Worldwide. In November, AOL Europe signed a deal with Monster.com to reach job seekers in Britain, France and Germany.

Efforts by the major portals such as Yahoo will run in direct competition with niche classified sites such as AutoTrader.com for cars, Match.com in personals and job site Monster.com. Yahoo has said it wants to enhance its classified business in-house or through acquisitions.

Meanwhile, the IAB plans to set up a committee on classifieds because of growing interest in the market by members, the group's CEO, Greg Stuart, said in an interview. IAB members include Yahoo, Microsoft and AOL.

"It's increasingly relevant to our membership and a growing area of importance as?online publishers explore multiple revenue streams to support their business," Stuart said.

In the papers
Because job listings are the meat-and-potatoes of classifieds, comprising an estimated 50 percent of revenue in the sector, newspaper publishers have long been threatened by competition from Internet companies such as Monster.com. To compete, some publishers have banded together.

Last year, Tribune Interactive partnered with Knight Ridder to purchase CareerPath and combine it with another acquisition, CareerBuilder. Knight Ridder owns such publications as the Detroit Free Press, The Miami Herald and The San Jose Mercury News. Earlier this year, the partnership bought rival Headhunter.net for $200 million in an effort to compete more aggressively with online rivals.

"The mission is to close the gap on Monster," David Hiller, president of Tribune Interactive, said in recent article on the Newspaper Association of America's Web site. The Tribune owns 13 newspaper-affiliated Web sites, including Chicagotribune.com and LATimes.com.

The good news for the company is that its online classified revenue so far is up 40 percent in 2001, according to Hiller. That revenue accounted for 70 percent to 75 percent of total sales for the interactive division. In contrast, classified revenue is down 16 percent at Tribune's newspapers on a pro forma basis for the first nine months of 2001.

Still, the company has a formidable competitor in Monster.com, whose traffic is nearly triple that of its closest rival, JobsOnline, according to Nielsen/NetRatings. This month, Monster.com parent company TMP Worldwide reported a rise in third-quarter earnings despite the economic downturn, partly because of its jobs site. The company said that although employers have cut hiring, it still garners a larger piece of the pie in online employment ads. The company makes most of its revenue by collecting fees from employers.

In addition, it said that traditional recruitment services fees and commissions fell 5 percent, while its fees from its interactive division, which includes Monster.com, rose 38 percent.

The Newspaper Association of America has formed its own line of defense against Monster.com and others by building a classified marketplace for its 100 member papers. The association partnered with technology provider AdStar to offer advertisers an electronic marketplace to buy ads in one place for papers across the country, online and off.

For its part, AdStar has reaped the benefits of such deals. It reported that third-quarter revenue increased 78 percent to $640,000 from $360,000 for the same period in 2000, with a net loss of $243,000, or 4 cents per share, compared with a loss of $999,000, or 34 cents per share, for the same period in 2000. The company expects to become profitable next year.

Looking for profits
Classifieds have also proven a savior for some beleaguered online newspaper publishers, which are challenged by poor ad sales and competitive pressures from national news sites.

Deb Ward, online classified manager of SFGate, the online affiliate of the San Francisco Chronicle, said the company introduced a small fee for online classifieds in 2001, and the money generated from those sales has helped to make up for losses in overall advertising sales on the site.

"Due to the state of the economy, especially in the recruiting space, we won't see a big growth this year. But it's been a saving grace," she said. Classifieds comprise 50 percent of the site's revenue.

Don Marshall, director of communications of Washingtonpost.Newsweek Interactive, said that its job listing site, Washingtonjobs.com, has been the division's biggest single source of revenue this year. Classifieds comprise about 50 percent of the online division's sales. Newspaper classifieds typically account for between 30 percent and 40 percent of revenue. A sign of the company's success came when it licensed its job Web site technology to Cox Newspapers in a deal worth seven figures.

At midyear, the company said revenue from classifieds would be up about 40 percent year over year in 2001. But since the Sept. 11 tragedy, it expects that number to fall off.

"Many newspaper companies would say that classifieds are extremely important to the bottom line. For us it's been the success of our jobs site," Marshall said.

Newspaper publishers say their Web efforts have an edge over major classified sites because of local history and loyalty.

"Classifieds is our business to lose. But the brands and the history is the competitive advantage for us," said Randy Bennett, vice president of electronic media at the Newspaper Association of America. "Clearly newspapers see online as an important piece of their franchise because it provides a significant marketing opportunity for newspapers."

About 20 percent of the Internet population, or 13 million people, use the Web to look for a job. Analysts say online classifieds will continue to grow in popularity as broadband, or high-speed Net access, catches on and improves consumers' ability to surf the Web. Adoption of wireless devices will also give consumers the mobility they need while on an apartment or job hunt, for example.

The lure for consumers is found in the ease of using the Internet. For example, online classifieds let consumers search and sort listings based on criteria such as price and location. They also allow providers to create user profiles so the providers can send e-mails to consumers based on their searches or update ads in real time. Advances in rich-media technology also give an added dimension to a home or car listing.

But increased competition in online classifieds could lead to more results-based pricing similar to a trend in the advertising industry in which marketers pay for the performance of the ad rather than its placement, analysts say. For example, an employer may only pay for a qualified lead in such an environment.

"If anything, the Internet lends itself to classifieds very well, and over time this will be a growing format because it offers distinct advantages over its print brethren," said Pete Petrusky, PricewaterhouseCoopers' director of new media.