The Time Function Of Profits; Or Why Craigslist Is Doing A Fine Job Maximizing Revenue

from the for-every-action... dept

A few weeks back there was some ridiculous buzz over the fact that Craigslist's CEO apparently flummoxed some Wall Street folks by claiming that the company had no interest in maximizing revenue -- setting off a big debate among folks, including a reporter who went on to call Craig Newmark a "lone nut" who was "threatening the livelyhood of thousands of working men and women." The reasoning was that by failing to "maximize profits" by putting ads on the site, Craigslist was undercutting the classifieds business of lots of newspapers and putting reporters (like himself) out of business. This is bizarre for two reasons. First, the idea that Craigslist is costing newspapers any money is easily disproved. However, even worse, the very premise that the lack of Craigslist maximizing revenue hurts the industry is counterintuitive. If Craigslist were making even more money, wouldn't that suggest that newspapers were making even less? If by not taking ads on their site, Craigslist is leaving money on the table, then shouldn't that be an opportunity for the newspapers to grab it?

The interesting thing, though, is that this story refuses to die -- but with a very odd bent. It originally happened a week and a half ago, yet people keep submitting different versions of it, with the latest being someone anonymous who sent in yet another version, again claiming that Craigslist is not "maximizing revenue." And while even Craigslist's CEO may claim that very statement himself -- we'd like to suggest that both the CEO and those bemoaning the lack of "capitalist instinct" are completely wrong. They're wrong because they're ignoring the "time" aspect hidden in the question about maximizing revenue. When people talk about maximizing revenue, they all too often forget to recognize the time axis -- assuming that there's some finite point in time at which revenue is "maximized" rather than doing so over an extended period of time. Craigslist is tremendously successful by almost any measure. The company is wildly popular, bringing in a ton of traffic with little effort or budget. It does bring in a ton of revenue as well, much more than is needed to support its employees and technology back-end. And, a big part of the reason they're able to do so is because they don't bombard their users with what they don't want.

So, yes, the company could "maximize revenue" in the extremely short-term by dumping a bunch of ads on the site, but it would probably piss off a lot of users, shrink their audience, shrink their value, shrink their reputation... and eventually shrink their revenue. In other words, the short-term effect would be to kill the long-term viability. It should be obvious to anyone that it doesn't make any sense to maximize short-term revenue at the expense of long-term viability, but apparently some bitter Wall Street types and confused journalists haven't quite figured that out yet. Craigslist absolutely is maximizing revenue. They're just doing so in a way that ensures they'll be maximizing it for more than just a quarter or two -- and that doesn't seem so "nutty" at all. And, of course, that's probably a big part of the reason why the company appears to have no interest in outside financing or going public. Wall Street's opinion has no impact on the company at all -- and if Craigslist can better "maximize its revenue" by ignoring the short-term thinking of those bankers, then they're better off for it.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    DavidEzra, Dec 18th, 2006 @ 12:20pm

    I concur ... I absolutely believe that Craigslist is taking the right "strategic" steps. In short, Craigslist is maximizing their revenue / profits.

    It seems that most corporations face what I would call the "Profit Paradox." Or, said differently, "by maximizing thier revenues / profits today, they are sowing the seeds for their own destruction tomorrow." (Its interesting to note how many of the top 100 corporations in 1980 are still in the top 100 corporations today - or even still exist period!)

    I've decided to take the same approach - as Craigslist - with the small business that I'm starting (MobileOX.com). I once heard it said in one of my MBA classes that for every $3 million dollar company that is losing money, somewhere within that company exists a $1 million dollar company that would be quite profitable (after a good "pruning"). Likewise, I believe that for every $1 billion dollar Web 2.0 company (which annoys the crap out of its users due to "pressures" to monitize it with ads, etc.) there exists a $50 million dollar company that people would love (same service, no ads / cyber trash).

    So why could a new startup emege on the scene and take on a $1 billion dollar gorilla. Because of differing business models. One is a "slave" to maximizing today's revenues / profits and consequently, is quite "annoying" to its users. The second also provides the same services, but is less invasive / "annoying" in delivering these services to its users. Although they both have the same offerings, in time, one will ultimately be more attractive to most individuals.

     

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    Anon, Dec 18th, 2006 @ 12:42pm

    Does this apply to Google?

    Why not? Does what Google provide unique in the world? Maybe in terms of quality, but functionally, certainly not. Heck why do you have Ads by GOooo...gle splattered all over your site? Are you not convinced of the readership falling because of the Ads premise?

    Craiglist is free for most advertisers and readers. And try as hard as any other news papers or magazines, there is nothing to beat it. And besides the convenience of searching for ads on the Internet beats the sh*t out of anything that print media ever provided. And there are many print media giants who have understood this and have their own sites up and running now for a long time.

    Your claim for some reason sounds to me like the sh*tty ads from Redmond that claim that their crap OS is cheaper than what can be got for zero dollars.

     

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    MartinE, Dec 18th, 2006 @ 12:44pm

    Very good point about them taking a longer term view. Wall Street doesn't have any interest in long term profits- they work off of quarterly reports. That why they were so 'shocked' by the craiglsist way.
    I think you're wrong about the newpapers though. Locally (Rochester, NY), when Craigslist started here there was a huge drop off in classified advertising at our Gannett paper and those ads have not returned. Its easy to gauge if you have the habit, as I used to, of reading the help wanted ads each Sunday. We went from four pages to less than half a page.
    The company I work for, BlueTie, no longer buys newspaper employment ads.
    Classifieds, which is all craigslist really is, were the cash flow that kept papers running and they are going away.

     

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    misanthropic humanist, Dec 18th, 2006 @ 1:03pm

    slowly wins the race

    Yep, look at the history of Google. Who here was an early adopter who remembers googling with a text only browser back in the early 90s? For as long as I can remember Google seemed like nothing but another GNU type "open" service that existed purely to benefit its users, then suddenly ...Wham! it became the biggest thing on the planet overnight. If Sergey and Brin had a crock of gannet shareholders holding their beaks open from day one they never would have gotten off the ground. It takes time for real value to accrue.

     

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    Petréa Mitchell, Dec 18th, 2006 @ 1:03pm

    Another example

    Disneyland fans watched this same thing play out in the late 90s/early 00s when Paul Pressler was the head of the Disney parks division. Pressler was from the retail world, and his thinking was all about maximizing dollars generated per visit and per square foot.

    So the focus of the Pressler years was on adding store space and cutting costs. This meant practically no new attractions, especially none of the "E-ticket" headline variety; peeling paint; deferred maintenance (which ultimately killed someone); and a generally degraded park experience. Which of course led to fewer visits, and thus more pressure to wring money out of every one...

    It's been 4 years now since Pressler left for the Gap, and in the meantime, the subsequent management has reversed the neglect and started opening new rides... and now we're finally back to Disneyland having more visitors than it knows what to do with again.

     

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    Haggie, Dec 18th, 2006 @ 1:27pm

    Maximizing revenue is like good looking women. Some women look good with zero effort. They roll out of bed (hopefully yours) looking like a model. Other women look good, but you can tell that alot of effort went into it. They do look good, but they don't wear it as comfortably as the natural beauties AND they hate the natural beauties because it comes so easy for them.

    CL is a "natural beauty". It is maximizing revenue but it is so comfortable that it appears to not even try. Some people recognize the beauty in that, other people are bitter because they work so hard and make so much effort but they still can't outshine CL or even hope to be consider in the same league.

     

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    William, Dec 18th, 2006 @ 1:32pm

    nothing

    Ads pay for quality. I'm willing look at them if i know it means that i will see quality content. I watch NBC TV shows on there websit sometimes and listen to streaming music over the web and they are Ad supported. There is nothing wrong with advertising and Craig not having at least some of those google ads. He might as well take eight million dollars and set it on fire. It's just stupid.

     

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    Haggie, Dec 18th, 2006 @ 1:54pm

    Re: nothing

    It's not throwing $8 mill away, its building a product and brand that customers know and trust that will reap many times that $8 mill over its lifetime because of customer loyalty and brand.

    If you would trade the image for $8 mill, you might as well trade it for $20-30 mill and cover the whole damn site with ads (except that you never make that $20-30 mill because everyone ends up leaving your ad-riddled website).

    Citysearch is a perfect example of what happens when a website starts down the slippery slope of trading brand and image for one more ad dollar.

     

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    PhysicsGuy, Dec 18th, 2006 @ 2:43pm

    i'd just to comment on the title. very clever. :)

     

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    innerdaemon, Dec 18th, 2006 @ 7:45pm

    ebay pressure

    I wonder with all the growth problems ebay is facing whether they will force craigslist to go public or sell out

     

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    misanthropic humanist, Dec 19th, 2006 @ 2:04am

    Re:

    "They do look good, but they don't wear it as comfortably as the natural beauties AND they hate the natural beauties because it comes so easy for them."

    And then there's the likes of SCO and Disney - a thousand hours of plastic surgery, three sex change ops and 8 hours in the bathroom with an industrial sized drum of hair remover and they still quite obviously men in drag.

     

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    Enrico Suarve, Dec 19th, 2006 @ 5:09am

    Its all da man

    Whenever a post like this comes along there’s always one person who says it and this time it sounds like it’s going to be me

    This is a problem inherent in the system...

    The stock market in general doesn't give a bats shit about the long term viability of a company, only that it tries to get as much profits as possible in the short term

    Simple fact is that if Craigslist adopt an aggressive advertising policy that increases their net worth over night there will be a lot of very happy traders out there making money selling off their stock at an inflated price

    If over time the company does lose custom and viability as they clearly think they will do what do the traders care? They are no longer investors and have moved on

    Most of the system is about short term gains and to hell with the consequences - kudos to Craiglist for not being in that particular rat-race

    The fact that this is the self same system that is at the heart of western culture is one of the reasons we are fucking our planet over for tomorrow to live in a junkies paradise today

    NB - yeah I know that some investors out there are interested in the dividends and long term payouts but given the way I see so many companies going for short term gains and long term loss makers I refuse to believe they manage to have enough of an impact

     

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  13.  
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    Anonymous Coward, Dec 19th, 2006 @ 4:19pm

    I think the newspaper people actually _do_ realize that what Craigslist is doing will enhance its long-term viability. That's what they really upset about. They would love to goad Craigslist into cutting its own throat for short term profits and this recent publicity campaign with its convoluted logic is just an attempt to encourage that.

     

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