Major portals, Internet companies and analysts stressed the need to develop local content online and sell advertising to small businesses in every town across America. And for the first time, Internet publishers were able to enter the local classified advertising market--a space worth tens of billions of dollars to the newspaper industry.
But despite the initial allure, many Internet companies found it difficult to tap local markets. It proved expensive to develop unique content and support sales teams in every major city. Because of these burdens, many companies weren't able to break in, and many burned out.
"It's an interesting and tortured history," said Aram Sinnreich, senior analyst at Jupiter Media Metrix. "We saw a lot of money spent, a lot of money wasted, and a lot of consolidation. And the end result was that the newspapers retained a large percentage of classified ad dollars."
Today, online newspapers still maintain the lion's share of the classifieds business through joint ventures. But as consumers have latched on to the ease of surfing through thousands of listings online, Net companies have sprung up to meet the growing demand.
Newspaper publishers and Internet companies alike have managed to offer advertisers an easy way to buy local ads online for multiple cities, showing online classifieds to be a bright spot in an otherwise dim advertising industry.
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.
Tough times in the beginning
Early on, many Internet companies tried but failed to break into local markets. One example comes from Microsoft, which launched a local city guide called Sidewalk in April 1997. It established an editorial staff in several U.S. cities to write reviews and culture features; it also hired a sales team to sell ads.
Gartner analyst Denise Garcia says that as Internet usage continues to grow...many industry decision-makers are taking another hard look at online classifieds.
In recent years, Ticketmaster expanded the franchise of Sidewalk and its own CitySearch guides, but it largely ignored the local ad and classifieds market. Instead, it opted to use the online guides to drive event-ticket sales--a decision that analysts say may have been shortsighted.
"Sites like CitySearch ruined their opportunity with classified advertising; they never took it to the next level because for local newspapers it's a huge revenue source," said Denise Garcia, an analyst at Internet research firm Gartner.
Newspapers make about 30 percent to 40 percent of their revenue from classifieds. Although online classifieds generate significantly smaller revenue, the market is growing quickly.
Old guard jumps in
To claim some turf online, Knight Ridder, the nation's second-largest newspaper chain, founded a national network of city and regional Web sites called Real Cities. But like many online companies, the unit struggled when the advertising market soured. In July the company laid off 68 employees, or 16 percent of its work force, as part of a reorganization aimed at achieving profitability by 2002.
Another early flameout was US West-backed DiveIn, a city directory in 10 cities including Seattle, Portland, Los Angeles and Denver. The interactive unit of the phone carrier launched the service in March 1997, only to close shop a year later.
Excite@Home, a company that recently filed for bankruptcy protection, also ventured into the classified market through its acquisition of technology company Classifieds2000. Analysts say that other major portals--including Yahoo and Lycos--have entered the classified local market but haven't reaped rewards from their endeavors.
Exception to the rule?
Analysts point to AOL Time Warner's Digital City, however, as an exception to the rule. The network of local Web sites features entertainment and leisure information, such as restaurant reviews and event listings. In June 2000, America Online agreed to buy out the Tribune's stake in its Digital City network, giving it complete ownership.
The company has had more success than other content sites partly because of its paying relationships with consumers, Jupiter's Sinnreich said. At one time, the company's personals area was its more popular region in terms of the time people spent online. But he said it is hard to estimate the worth of the market to the company.
With a downturn in online advertising, many Internet companies are reevaluating its potential.
"The problem is that online media has come to an impasse with national advertising and they need to find new avenues to stay afloat," Sinnreich said. "Subscriptions are being revisited, local advertising--any way for a media company of expanding."