A business which previously did not exist

At the time of writing; January 2006, Internetworldstats.com estimates the World’s internet population at just over 972 million users. Thus, 15 % of the World’s population are on-line.

So, some time in early 2006, the above figure will break 1 billion. And the remaining 85 % leaves significant room for further growth. It is our belief that the underlying growth rate in Internet users will be robust in most of the world for a long time to come. In much of the developed world, usage per user will be a more important factor as the room for penetration growth decreases. This, though, is not the central point of this opinion piece. The sheer number of Internet users, however, is.

The Encyclopaedia Britannica defines a market as a means by which the exchange of goods and services takes place as a result of buyers and sellers being in contact with one another, either directly or through mediating agents or institutions. For a perfect market to exist a number of conditions must apply; two of the more central is atomicity (a large number of small buyers and sellers) and perfect information.

Online classifieds greatly enhances these two factors primarily because of two of its properties; its ability to bring a large number of buyers and sellers together, and its ability to reduce spatial, temporal and directional limitations on information (unlike in a newspaper with a given number of pages, marginal cost of adding information to an ad is low; and there may be feedback opportunities: buyers and sellers may rate each other, thus enhancing transparency). The Internet benefits both buyers and sellers by reducing friction and making markets more efficient.

For these reasons (others include convenience, the opportunity to be fickle, and – for some goods – the opportunity to be relatively anonymous) most observers predict that an increasing share of trade will move on-line. All this is well-known, and most publishers have begun to feel this impact on their print classifieds revenue streams.

The above illustration is an exempt from Morgan Stanley’s 2004/08 Internet Themes, and makes two important points. One is the decline of print classifieds, which should be cause for concern to all that rely on these revenues. But the other point is equally, if not more important: the total number of classified ads has grown enormously, from 148 million listings in 1997 to 622 million in 2003. And certainly more – and probably much, much more – today.

We believe that online classifieds is a new business, which will be much more valuable than print classifieds ever were.

That includes value to buyer, value to seller, and – perhaps most interestingly in this respect - value to the provider.

Aside from the benefits discussed above – which mainly go to reducing transaction costs – online classifieds provide ‘perks’ like convenience and fun. Ads can be searched and sorted easily and presented appealingly. Interesting ads can be stored on a personal area, rather than circled on a newspaper page in a drawer. And ads that are interesting for other reasons than intent to buy – be it for dreaming, pass-time or wanting to know what your property is worth, can be browsed with ease and free of charge.

The latter point – entertainment – is of greater value to providers than to buyers and sellers.

Studying usage patterns of Finn.no reveals a few interesting points: traffic is at its most intense on Monday mornings, right after people return to (perhaps uninspiring) work after the weekend. There is a good deal of traffic on boats and yachts during the winter months. And viewings on Rolls-Royces and Jaguars suggest that these cars would be among the most traded, which of course they are not.

Window-shopping has long been entertainment in the bricks-and-mortar-shop world, and has probably been a motivation for much of the reading of printed classifieds, so it should come as little surprise that it is also a popular pass-time online. The importance of this, of course, is that is attracts traffic, and keeps people on your site, thus making it an attractive place to advertise not only cars, houses, jobs and all kinds of merchandise, but also to place advertising for related (or unrelated) products and services. For instance, as is the case in print, it is attractive for sellers of e.g. home insurance to advertise among real estate listings. For many providers – not only those who charge nothing for placing an ad – product ads are the most important source of revenue. Most observers, ourselves included, believe that today too little advertising spending goes to online advertising considering how big a portion of time spent consuming media that is actually spent online. This should change as the impressive ROI of online advertising spending becomes more well-known.

The estimates on how big the online classifieds market will be vary among researchers. Research agencies like Forrester and Jupiter agree that growth will be strong; that better bandwith will be an important driver; and that the Western European online classifieds market will be worth somewhere between €1 Bn and €2 Bn in 2010. These, however, are estimates focusing on the traditional ‘big three’ markets of real estate, cars and jobs. We believe that there is another development that needs to be taken into account, not only when estimating the online classifieds market, but also when choosing how to approach it.

The emergence of online classifieds has changed how people buy and sell as well as what is bought and sold.

Much attention has been given to the migration of real estate, cars and jobs ads from print to online. Understandably so, as these were the most important classifieds markets to many newspaper publishers and so were the areas where migration was first felt. As we have argued that online classifieds reduces transaction costs, it follows logically that some trading in these three verticals has taken place that would otherwise not. But it is not here – in making people trade in their cars more often – that the effect of the reduction in transaction costs is most obvious.

It is in what is traded. The reduction of advertising cost – in many cases to zero – has led to the advertising, sale and purchase of items that were too cheap to defend the purchase of a newspaper ad in the past, and thus were stored away, thrown away or given away. This makes society more economically effective; moving goods from those who value them little to those who value them more. It also generates traffic and ad revenues, and in many cases listings revenues, to the marketplaces where this trade takes place.

Also, this largely C2C-dominated vertical, ‘merchandise’, has proven itself to be a very attractive e-business enabling solution for small and mid-size businesses. eBay gets more than twice as much revenue from SMB customers than consumers, according to Morgan Stanley estimates. Yahoo! makes more than five times more from SMBs than from consumers. The marketplace becomes more attractive to buyers, who get more choice, and smaller vendors who reach an on-line audience which they could not afford to attract themselves.

The above discussion touches upon some of the reasons we believe that newspaper publishers should treat online classifieds as a tremendous opportunity, not as a threat. Some of the business that is currently on-line is business that the newspapers to little extent attracted anyway – it was carried out on lamp posts, bulletin boards and in shops. In the businesses that newspapers dominated, there is opportunity to create much more value for your advertisers and your readers. This huge new market is one where newspapers are well-positioned; they have for the last couple of centuries been the most important and trusted source for information, above all local information. And of the world’s Internet population at time of writing, some 800 million are not registered eBay users.

It cannot be said often enough: Do not aim to defend your old market. Aim to win the new one.

So, why does a company like FinnTech care how its customers approach online classifieds? Surely it shouldn’t matter, as long as you choose us as your supplier?

Well, firstly it matters because we want you to succeed, and we believe that the chance for success is much greater for players that embrace this development than for players that regard it solely as a threat. We pride ourselves on the success of our licensees. If you fail, then so have we.

Secondly, we think the probability for you choosing us is greater if you approach online classifieds with a certain level of ambition. We do not offer the cheapest solution on the market. But we strongly believe that we offer the best by far.

Morgan Stanley Internet Themes 08/2004; Jupiter Research “European Broadband Access Forecast, 2005 to 2010; Forrester Research “European Classifieds’ Cross-Channel Struggle”, FinnTech’s own research.