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The Craigslist Tsunami That Pummeled Newspapers and Saved Consumers $5 Billion

NEW YORK ( TheStreet) -- When Craigslist began to roll into metro areas in 2000, newspaper publishers responded with equal parts bewilderment and indignation: How could a Web site offer classified advertising without charging for its services? Within months, publishers reacted rationally enough, lowering their classified rates 20%, anxious to defend turf that accounted for 40% of revenue.

About a year into the Craigslist invasion, publishers made another seemingly rational decision: they raised subscription prices to compensate for the loss of classified advertising. Yet higher subscription had the adverse effect of accelerating the decline in total subscribers, further damaging the "multi-sided" market that newspapers had long enjoyed, matching buyers and sellers of everything from cars and furniture to real estate and household services.

In a new study that analyzes management reactions to Craigslist, a consummate "disruptive competitor," two professors analyze the actions of more than 1,000 U.S. newspapers from 2000 to 2007 to breakdown the response to an attack on a longstanding business model.

The research by Robert Seamans of New York University's Stern School of Business and Feng Zhu of the Harvard Business School paints a picture of companies that tried to stop a cascading leak by moving around buckets. While the relatively comfy world of newspaper publishing was all but destroyed, consumers enjoyed a windfall; savings of about $5 billion they otherwise would have handed newspapers.

"We were most surprised by how immediate and dramatic of an effect Craigslist's entry had on the classified ad side," Seamans said in a phone interview from Orlando earlier this week where he was attending a management conference. "It seems newspapers were pretty quick to realize the threat posed by Craigslist and responded by lowering classified ad rates."

But Craigslist disrupted more than just classified advertising.

As the three-year study shows, publishers' decision to raise subscription rates caused total circulation to tumble, a decline that only recently has showed signs of stabilizing. With fewer people receiving the newspaper hard copy, buyers of higher-priced display advertising began to clamor for lower rates, arguing that they were reaching fewer eyeballs. Which they were. So, they got those lower rates.

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