In 2005 Fortune magazine published a piece by Adam Lashinsky called Burning Sensation, which described the threat craigslist posed to newspapers. But it didn't ignore the threat that other tech companies posed to craigslist:

"Even as Craigslist flexes its considerable muscles, the disruptor is facing the challenge of disruption... eBay has started Kijiji, a classified business for non-U.S. markets that can only be described as Craigslist-like. Netscape co-founder Marc Andreessen is behind a company called Ning, whose software includes an application called Anytown Marketplace that can build online classified sites. The biggest threat, as usual, is Google. It has introduced Google Base, where users can upload anything — e.g., "49ers tickets for sale" — into its searchable database... Google's technological prowess — and money — mean it can add features in weeks that Craigslist has contemplated for years."

Three years later the story was still the same. "Nimble start-ups like Kijiji and Oodle are challenging Craigslist's long-standing reign as the undisputed leader in web classified ads," announced Time. The story, "Taking Aim at Craigslist," by Anita Hamilton, had this to say:

In the U.S., Kijiji has become the second most trafficked, general-purpose classified site just one year since it launched.... Even as lesser rivals fall by the wayside — Microsoft's Windows Live Expo is shuttering on July 31 — newcomers such as Kijiji and Oodle are gaining real traction. Better designed and marketed, these upstarts are reshaping a long-stagnant sector of the web.

These were predictions about the future from the past. Now, we're actually in the future. How did things turn out? Here are the most recent traffic results from Comscore.

Obviously, craigslist is killing Kijiji, despite the fact that Kijiji has the marketing and technical support of one of the sector's most powerful companies behind it. And when I looked on Google Base today I didn't see a single local, person-to-person classified listing. Meanwhile, after five years in business and more than $20 million in venture funding, Oodle's listings and traffic remain minuscule.

Craigslist, though huge in traffic, is small in every other way: small in staff, small in features, small in technical ambition and relatively small in revenue. But it has resisted attack from larger, better funded and more profitable competitors. In this post I'm going to try to explain how small beats big in this market.

First, let's turn the question around, and list some assumptions about the way things are supposed to work. Why does big usually beat small? Over time, a bigger and richer competitor is going to produce more new features, engage in more aggressive marketing, reward intermediaries more generously, influence and exploit government regulation, and engage in legal conflicts that tax the resources and attention of its rivals. Also, of course, a bigger firm can often simply buy out a smaller competitor.

Big businesses fail all the time, and new startups arise. But the destiny of these new entrants, if they succeed, is to become big. I had coffee a few weeks ago with an entrepreneur who advises venture capital firms, and he mentioned that one of the clear cut reasons for declining to invest in a startup is when the founders say proudly "we want to stay small."

There is a desperate inventiveness to entrepreneurs as they struggle against the suffocating weight of a better capitalized foe. The more they flail, the more they sink. Even their successes hurt them, by drawing attention to the money to be made. If they focus on new features, they are lost, as their competitor goes faster. If they advertise, they are doubly lost: This is also an arms race, but with mostly ersatz weapons. If they match lawsuit for lawsuit they are lost for a third time, because even if they have enough cash to retaliate for a while, legal conflicts cannot be outsourced in their entirely, and hassle of the proceedings distracts them and worries them until they begin to find tempting the prospect of a remunerative capitulation. So the entrepreneurial saga ends: crushed, corporatized or sold.

Craigslist's competitors have used every asset of bigness. Oodle, with its $20+ million in venture financing, has focused on playing nicely with others, sharing its revenue in exchange for referrals. Google Base offers sophisticated technical features. And eBay – well, eBay has tried just about everything: features, marketing, investment in craigslist and even a lawsuit. All have failed.

The first explanation of how craigslist beats eBay is that craigslist's uncompromising simplicity has the effect of making new features seem pointless. The site's pages load instantly, and you don't have to create a user account. CEO Jim Buckmaster and founder Craig Newmark have insisted craigslist's main assets remain convenience, speed, the ethic of a "level playing field" and no ads aside from the listings themselves. The desires of technically sophisticated users for clever features are always deprecated. A side effect of this decision is that craigslist avoids competing in a new-features arms race with eBay, Google or this year's venture capital favorite. Users, accustomed to instant loading, a familiar interface, and a lack of friction in posting and responding, are less vulnerable to being seduced by the next neat thing.

There is an annoying lack of features on craigslist. But features, in this scenario, may actually be bugs. Or, as a prospector in a remote part of Canada once told me proudly, showing off the crude diesel motor on his boat: "What's not there can't break."

To be sure, heavy marketing, the purchase of smaller competitors and legal action have produced growth for eBay's Kijiji. Buying the leading classified sites in countries where craigslist never had a presence, it became a global player. Buying 25 percent of craigslist from an ex-partner of Craig Newmark, it gained access to a portion of craigslist's revenue, along with the ability to harass the company as a shareholder. Traffic results show that Kijiji is losing, for now. But traffic is ticking upward, and were they to stay in the game, they might well be able to bully their way to an advantage, just as a heavier, stronger wrestler, through patience and the force of gravity, can eventually wear down a more skillful opponent. Once the advantage turns, the end is swift.

But in this case, Kijiji is facing an additional threat, one that marketing and consolidation can't fix. Craigslist's ultimate method of holding its lead against a competitor is so counterintuitive that it seems like something out of a fairy tale. It grows stronger through dieting. Online classifieds can be managed with great efficiency; there is a lot of value being created at very little expense. Since craigslist doesn't do any marketing, rarely adds new features, keeps the staff small, and, most importantly, since its owners have decided not to maximize revenue, there is basically nothing to do with all that value but leave it to the users, in the form of free service. By doing so much for so many for so little, craigslist starves the entire sector for cash.

The error eBay is making can be seen clearly in this slide from their presentation to investors last spring. The slide gives eBay's estimate for the total value of the global online classifieds market. As you can see, eBay believes this market is huge: $17 billion in 2008, growing to $22 billion in 2010.

And here is the slide that shows eBay's revenue from classifieds in 2005 and 2008. Again, seems like good news.

If both the trends in these slides continue as described, 10 years from now eBay will have a $10 billion revenue stream in a $60 billion dollar market. That's something worth fighting for. Finally, here's a slide that shows all the ways eBay plans to "monetize" the classifieds market; in other words, where that $10 billion will come from. They've got countless ideas about how to make users pay: fees for listings, percentage of sales, premium placement, ads on top of ads.

But now apply some common sense and a calculator. Craigslist earns a fraction of what eBay does from classifieds listings. And craigslist, with its proven approach, its dominance of the U.S. market and its relatively new commitment to spread around the world, will have a lot more influence over the market price for this sort of service than eBay will. What is this price today? Craigslist serves about 50 million unique users per month. It brings in an estimated $8 million in monthly revenue. This gives each user an approximate monthly "value" of about $0.15. (There are other ways to do this sort of crude estimate, but all of them point to the same conclusion.) In this thought experiment, if the entire adult population of Europe uses an online classified marketplace every month, the total European online classified market is still worth less than $750 million. Add the entire adult population of the United States, Canada and Mexico, and you barely top $1 billion. And that's the total market size in terms of revenue, not earnings, seen through the lens of Craigslist.

Meanwhile, what other things do eBay executives have to occupy their attention? With its subsidiary PayPal, eBay is competing in the 600 billion online payments market, and with its subsidiary Skype it is competing in the $1.4 trillion online communications market. How much attention are they going to have for the battle over local online classifieds, when there is a company of only a few dozen people willing and able to serve almost the entire market, at a price that is almost free? For a company of eBay's size and ambition, a fractional share of $1 billion market rounds down to zero. As long as craigslist can support its 30 employees on "merely" an estimated $100 million in revenue, there simply isn't enough cash in this space to keep a giant-sized competitor interested over the long term. When I first saw Jim Buckmaster talk, in 2004, he described his strategy in three words: unbrand, uncompete and demonetize. His victory over eBay illustrates the paradoxical power of demonetization.

Tomorrow: The difference between niche and small.

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