Destruction of newspapers and the creation of wealth

Business Insider had a fascinating short article on the inverse relationship between Craigslist and newspaper classified advertising revenues. The primary image is shown below.

It is well-known that the newspaper industry, which exists largely based on advertising revenue, with a supplement from circulation, including newsstand and subscription sales. For example, in 2008, the New York Times Co. earned $910MM in circulation, and nearly double that amount, $1.78BN, from advertising. If one goes back two years, the differential is even more dramatic, with $890MM from circulation and $2.15BN from advertising. The Wall Street Journal, a subsidiary of Dow Jones & Co., has a similar approximately two-to-one ratio of advertising to circulation, for 2006, its last posted year as an independent entity prior to its acquisition by News Corp.

Clearly, the loss of advertising revenues, including classified, has been incredibly destructive to the newspaper industry, and lies at the heart of its financial troubles. From the perspective of the newspapers, this wealth has evaporated, disappeared. Many have lamented this situation, and there have even been discussions of federal bailouts, similar in style, if not scale, to the bailouts of the financial and auto industries under TARP and its variants. However, from the perspective of advertisers, those who have what to sell, this has been an unmitigated success. Look at the numbers above. We will assume, for argument's sake, that more or less the same amount of goods have been sold in 2004 as in 2008. We will also assume that 2004 and 2008 dollars are relatively constant, i.e. we are ignoring inflation. Given that the consumer price index has increased by 14% from 2004 to 2008, according to the Bureau of Labor Statistics, this is somewhat erroneous, but not terribly so. If we add up the total cost of selling goods and services in newspaper classifieds in 2004 was just over $17BN from newspapers and a negligible amount, under $10MM from Craigslist, the total remains approximately $17BN. To be fair, we can also add eBay auctions to round out the numbers, a total of $1.4BN (US-only auctions), the total cost is $18.4BN. Assuming the same number of goods and services were sold via classified ads and auctions in 2008, and we add up the same elements - $12BN in newspaper classifieds, $70MM in Craigslist, and eBay earned $5.6BN from marketplaces, of which approximately half is in the US, then the total is $14.9BN. This is a reduction in costs of 19%. Quite simply, for those doing the selling, this has been an incredible boon.

The above somewhat understates the impact for two reasons.

1. Much of the eBay sales are not those that would normally go through newspaper advertising, thus making the reduction more on the order of $5BN out of $17BN, a savings of over 29%, or just under 1/3.
2. The trend is accelerating dramatically, with forecasts in 2009 of newspaper classified advertising revenues of $8BN, or less than half of 5 years prior, with the Craigslist replacement costs at approximately $90MM.

Ignoring eBay for the moment, in just 5 years, $17BN in costs was replaced with $8.1BN in costs. While the regional monopoly / oligopoly that sold these services (a.k.a. the newspapers) are suffering terribly, for the sellers (a.k.a. the advertisers), and the economy as a whole, this is an incredible boon. In many ways, this is akin to the replacement of manual farm labour with tractors in the early 20th century. Although it was terribly rough for farm hands, the reduction in costs to food purchases (a.k.a. everybody), and the resultant increase in health and welfare, not to mention reduction in poverty and economic growth, cannot be overstated. Although this is on a much smaller scale, the analogy holds nicely.

Sorry, New York Times Company; your loss is everyone else's gain.