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Craigslist Fuels Online Classified-Ad Surge

Use of online classified ads is surging, thanks mainly to Craigslist. Almost half of all adults who use the Internet in the U.S. now rely on classified sites, according to a study released May 22 by the Pew Internet & American Life Project. That number has more than doubled since 2005, when only 22% used online classifieds, and has increased faster than almost every other online activity covered by the researcher, including online banking, travel booking, and shopping on e-commerce sites like (AMZN).

Craigslist gets the vast majority, or 93%, of traffic to classified listings sites, with about 46.5 million visitors in April, according to comScore (SCOR). The next largest competitor, eBay (EBAY)-owned Kijiji, had only 3.9 million visitors that month. San Jose-based eBay owns part of Craigslist. Pew found that 62% of 25-to-44-year-olds have used Craigslist and similar sites, more than any other age group. Internet users with a college education and a household income of at least $50,000 are most likely to use online classified sites.

Fresh evidence of the surging popularity of Craigslist revives questions about the company's reluctance to make money from online ads—say, by charging ordinary users fees for classified ad placement. It also provides context for the friction between minority owner eBay and Craigslist over increasing competition between the two companies and Craigslist's unwillingness to have eBay exert greater board control.

Moving Beyond Metro Areas

More people are using Craigslist in part because the site has stepped up its expansion beyond major metropolitan areas such as San Francisco. While city and suburb dwellers are most common on Craigslist, according to Pew, the site has more than tripled the number of regions it supports since 2005. There are now nearly 350 U.S. cities or regions with their own local listings, up from around 90 four years ago. Residents of Shreveport, La., and Pueblo, Colo., for example, now have their own communities of buyers and sellers on Craigslist. "The growth in usage of online classifieds is largely a channel shift," says Forrester Research (FORR) analyst Sarah Rottman Epps. She says Craigslist has lured consumers away from classified ads in print newspapers, but also from online shopping sites like eBay, which struggles to compete with the no-frills, hometown interaction the classified site enables. That's no coincidence, says Epps: "A lot of the decisions they make seem to be more driven by what's in the interest of consumers, rather than what's in the interest of their business."

No kidding. Compared with the losses in classified ad revenue suffered by the newspaper industry over the past decade, Craigslist's profits are paltry. In 2008, newspapers made just under $10 billion in revenues from classifieds—a sharp drop from the peak of $19.6 billion in 2000. By comparison, Craigslist took in $81 million in revenue last year, according to the estimates of Altamonte Springs (Fla.)-based classifieds consultant AIM Group. "It's not that 10 billion [dollars] have shifted online necessarily," Forrester's Epps says. "It's that value has evaporated overnight."

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.

MacMillan is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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