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THE WEEKEND INTERVIEW (Wall Street Journal)

Zen and the Art of Classified Advertising
Craigslist could make $500 million a year. Why not?

BY BRIAN M. CARNEY
Saturday, June 17, 2006 12:01 a.m. EDT

SAN FRANCISCO--By almost any measure, Craigslist is a phenomenal success. It is the seventh-most-popular Web site in the world, according to the people who measure these things. The free online-classifieds site has become the nightmare of newspaper executives everywhere it launches a list. While it does not release financial statements, no one doubts--and its chief executive does not dispute--that it is comfortably profitable and has been so since 1999, about the time most other children of the dot-com boom started running out of cash.

All the same, no one really questions that Craigslist could be bigger--much, much bigger. The company took in a relatively paltry $25 million or so in revenue last year, while its peers among the Internet's top 10 raked in billions. Since its founding, Craigslist has been aggressively passive (newspapermen might say passively aggressive) about monetizing its huge audience and user base.

There are no banner ads on Craigslist, just the postings of its users, most of which are put online free of charge. CEO Jim Buckmaster takes some pleasure in calling Craigslist a "trailing edge" technology company. Its Web site is stubbornly minimalist and text-heavy, with row after row of blue underlined hyperlinks and nary another color or graphic in sight. One industry analyst has estimated that Craigslist could generate 20 times that $25 million just by posting a couple of ads on each of its pages. If the estimate is to be believed, that's half a billion dollars a year being left on the table. What kind of company turns up its nose at $500 million? That's what I'm here to find out.

 

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jim buckmaster Mr. Buckmaster greets me at the door of his Spanish-style townhouse in San Francisco, where he and his better half, Susan Best, offer me a home-cooked lunch--mostly leftovers, I'm informed--and Sunday-afternoon Bloody Marys. The Bloody Marys are excellent and their rented home relaxed and inviting. I put the question to Mr. Buckmaster: Google has turned unobtrusive text ads into a multibillion-dollar revenue stream. And posting a Google-type ad or two next to its search results wouldn't cost Craigslist users one thin dime. So why not cash in?

"In the big Internet boom, thousands of companies were set up," explains Mr. Buckmaster, who also counts himself as CFO and COO of the company. "With the exception of us, pretty much all of them were set up with the primary objective being to make a lot of money." And yet, he continues, "Almost all of those businesses went under and never made any money. Even businesses like Amazon still haven't made any money. They are still, over their entire lifetime, net negative. Here we are, we've been in the black since 1999--six or seven years."

Although Mr. Buckmaster is a man who speaks sparingly--even reluctantly--he is given to occasional, and somewhat turbid, outbreaks of jargon-laden speech. Such as this, offered here merely as a sample: "I do think that the Internet is a spectacular tool for any information business--newsgathering and other journalistic enterprises are essentially in the information business. Another aspect to it that gets reported on is drawing the lines within the Internet itself with respect to content generators and various kinds of aggregation and search tools.

"Where does the revenue end up in those kinds of scenarios over time? I think you'll see the lines will move from side to side in terms of where the revenue lands among the various players in the information economy, which is still very young."

But then, perhaps sensing he's opened the spigot too wide, he stops as suddenly as he started, lapsing back into a laconic state with a self-deprecating, "If that makes any sense."

Mr. Buckmaster figures that Craigslist employs 21 people, and starts to count them on his fingers. It never brought in venture capitalists with their grand designs and exit strategies. "We didn't want to have those voices at the table," he says. So Craigslist has remained beholden to no one--except, as Mr. Buckmaster constantly intones, its "users," who pay nothing for the privilege of posting or searching the millions of pages of apartment listings, moving sales and personal ads that make up the Craigslist ecosystem. "If it's not something that users are asking for," he says, "we don't consider it." The money that does come in comes from businesses posting in just two categories of classifieds in three cities--job listings in San Francisco, New York and Los Angeles and, this week for the first time, brokered apartment rentals in New York.

Craigslist's obstinate insistence on giving away what newspapers have made their bread and butter has gotten the company a lot of media attention. Many newspaper executives see something sinister in Craigslist's near-total lack of avariciousness--Are those guys communists? Do they hate newspapers? These critics would prefer to see Craigslist try to make an honest buck off the ads its users post. If the company charged something, after all, it might be possible to compete with them on price. But it's hard to compete with free when you have reporters to pay and printing presses to run.

But allowing most users to post without charge is an easy call in Mr. Buckmaster's book. "We're much more comfortable charging companies than charging individuals," Mr. Buckmaster says. "Businesses are better equipped to afford a small fee and businesses can pay for fees out of pre-tax dollars where on average users are less able to pay a fee and they have to pay in post-tax dollars." Giving users something free and denying money to the government at the same time? This man is no commie. What's more, he runs a lean outfit. "There are big advantages to focusing exclusively on user wants and needs as we do, and blocking out everything else. That's one of the ways we keep our staff small and our operations simple."

As for the banner ads, "It's not something our users have asked us for," Mr. Buckmaster deadpans, his 6-foot-8-inch frame slumped in a leather chair in his living room and his eyes fixed on some distant point out the window. It turns out this is something of a mantra for Mr. Buckmaster; what Craigslist's users want, they tend to get. No more and no less.

The decision to charge for apartment listings from brokers in New York City is illustrative of the company's approach. The New York site gets hundreds of thousands of apartment postings every month. Many of these are duplicates, posted over and over again to keep them at the top of an ever-growing pile. The search results on Craigslist are generally displayed in reverse chronological order, so the most-recent listings, the theory goes, get looked at first. This has created a never-ending and accelerating pile-on, to no one's benefit.

A fair number of the remaining ads are baits-and-switches--bogus listings that attempt to draw in potential clients with promises of what pass, in New York at least, for obscenely low rents. (In most of the rest of the country, these "teaser" rents would more likely be viewed as usurious.) No other city in the country, according to Mr. Buckmaster, has anything like this kind of problem with its rental ads, although Boston is a distant second. So two years ago, Craigslist's eponymous founder and self-styled "customer-service representative" Craig Newmark initiated an online discussion about how to improve the quality of apartment listings in New York City.

After much debate, the solution that was settled upon was to charge $10 per listing, with a discount for high-volume customers--although at least some Craigslist users suggested the reverse, namely that the price go up on a sliding scale, rather than down, given that the highest-volume posters are also, presumably, the biggest trouble-makers. Craigslist expects the fee to cut the number of listings by 90%. I quickly run through the numbers in my head and offer Mr. Buckmaster the results. Even if the average price, after discounts, turns out to be $5, that's still $2.5 million a year in extra revenue, a 10% bump that represents nearly pure profit. Not too shabby, right?

"Well, the revenue aspect is really an afterthought," Mr. Buckmaster insists, with a Zen-like calm. A seven-figure afterthought. I'd like to have that kind of afterthought, I think to myself. Mr. Buckmaster appears, at times, to be almost queasy about "revenue." Later in the interview, he said: "If I look across the Internet at the big Internet companies, there's a large proportion of their staff that are devoted in various ways to trying to maximize revenue. Those employees I don't think are delivering much bang for the buck to the end user."

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This week, Craigslist increased the number of cities it serves in the U.S. by 50%, to 300. More than 10 million users visit its sites every month, looking for housing, furniture, romance and "missed connections"--a feature that allows users a second chance when they suspect they just missed meeting that special someone.

In "Missed Connections," users post messages for people they may have seen from afar, hoping for a second chance at striking up a conversation, or even a relationship. One recent example read: "You were heading east--crossed over 5th, I was walking south on 5th, we were somewhere in the 40s . . . maybe 44th? Anyway, it was 7 p.m. and I never do this, and you probably will never see, but if you think you are the guy i'm talking about send a msg . . . let me know what you were wearing . . ." They're longshots, but as Mr. Buckmaster points out, "Americans love longshots." And unlike a lottery ticket, the ads are free.

This week's expansion means newspapers in 100 more cities will be looking over their shoulders, waiting to see whether Craigslist is about to eat their lunch and get nothing in return beyond the satisfaction of serving its ever-growing community of users. So, what about the newspaper industry, Mr. Buckmaster? Is Craigslist out to destroy it or not?

"The Internet at large, and free classifieds in particular--and even beyond that, Craigslist free classifieds in particular--certainly pose challenges to the newspaper industry as far as being able to raise their profitability over time." Many in newspaper publishing would consider that an understatement. But Mr. Buckmaster is sanguine: "The demise of the newspaper has been overstated." Phew. I expel a nervous chuckle of relief. In Mr. Buckmaster's view, newspapers would be better off being a little more Craigslist-like: Go private, eschew Wall Street's demands for continually "goosing profitability" and give your readers what they want. Much trouble in the world comes, in Mr. Buckmaster's view, from losing sight of that essential goal.

After we've retired back to the living room for coffee, Mr. Buckmaster allows that the world is perhaps not quite that simple. When asked whether there's a Craigslist model that other companies could emulate, the unflappable Mr. Buckmaster, his eyes once more fixed firmly on the horizon out the window, waxes lyrical for a moment: "It's unrealistic to say, but--imagine our entire U.S. workforce deployed in units of 20. Each unit of 20 is running a business that tens of millions of people are getting enormous amounts of value out of each month. What kind of world would that be?"

Before I have time to object, Mr. Buckmaster comes back to our world. "Now, there's something wrong in the reasoning there," he admits. "You can't run a steel company in the same way that you run an Internet company"--more points for understatement. "But still, it's a nice kind of fantasy that there are more and more businesses where huge amounts of value can flow to the user for free. I like the idea, just as an end-user, of there being as many businesses like that as possible." As an end-user, I suppose I do, too. But there are no free lunches, even if Craigslist--and the meal Mr. Buckmaster and Ms. Best provided for me--sometimes seem to come close.

Having taken advantage of their hospitality for the better part of an afternoon, I stand to take my leave, but my hosts insist on driving me back to my hotel. Once there, we say our good-byes and, belatedly, a thought occurs to me--an afterthought, perhaps. If Craigslist does what its users ask of it, and Craigslist doesn't need or seem to want all the ad revenue it declines to collect, maybe we, as end-users, should ask them to post some banner ads and give us the money instead.

There's something wrong, I suppose, in that reasoning. But I like the idea.

Mr. Carney is a member of The Wall Street Journal's editorial board.