While newspapers have managed to build sizable audiences online and generate revenues, they have not managed to become profitable. Part of the reason is that users expect free content and services like Craigslist.org have offered free classifieds, making it harder for newspapers to sell listings to merchants and individuals.
Craigslist was founded in 1995 by Craig Newmark. The company started off as a mailing list with SF-based events, the moved online. In 2000 Jim Buckmaster took over day-to-day operations as CEO. Today the company is in 450 communities, and makes somewhere in the ballpark of $20M per year in revenue. The company is profitable with 24 employees.
How much does Craigslist make is not the question bothering analysts, the real question is how much could it make.
We ran some numbers.
Relying on widely available figures, our own estimates and some common sense, we project Craigslist capable of making more than $75M per month from contextual ads alone. Contextual ads are ads that Google runs alongside content.
Google makes money by serving up ads on pages, or pageviews, and obtaining a revenue-per-click (or cost per click, or CPC) everytime someone clicks on an ad (a click through rate, or CTR).
For the record, we advise Craigslist to develop its own contextual ad marketplace, first within Craigslist.org, then with the option to add it to other sites for people who want to drive more traffic to listings, whereby Craigslist would share ad revenue with publishers. This would give Google some competition, which is always welcome, and frankly, sorely lacking.
When looking at contextual advertising revnue, the revenue is equal to:
Revenue = Pageviews x CPC x CTR
In Craigslist’s case, they obtain - according to its own site - 5 billion pageviews.
Here is a range of CTRs and CPCs. We think that Craigslist can earn anywhere from $1 to $1.50 per click pretty easily, and it can obtain CTRs of anywhere from 1% to 1.5%.
If we take the median revenue, or $78M per month, that implies $937M per year. Furthermore, this is only from such contextual ads.
Craigslist, unlike Google, employes 24 employees. Say Craigslist total cost are $10M, then it currently enjoys profit margins of over 50%. eBay, it should be noted, is widely credited with the leanest business model online, with margins of 80-90%. Google has a lot of costs: a lot of computing power and brainpower mean margins of 30%. But if Craigslist adds ads on its site, its profit margin will only go up. We’ll project that Craigslist can maintain margins of 85% as a very conservative metric if it optimizes ads. While the ratio seems overly optimistic, it’s common sense. Craigslist’s costs will not be $150M if it makes $1B in ads, will it? So we are confident that it can earn as much as 85% in profit margins, which is why Google launched Base and eBay bought 25% of eBay from a former shareholder/employee.
At $1B in revenue, and a price/sales ratio of 10, that implies a valuation of $10 billion.
At $1B in revenue, a profit margin of 85%, thus profits of $850M and a price/earnings ratio of 30 implies a valuation of $25-30B.
Measured by traffic, Craigslist is also capable of boasting an impressive valuation, this is the Web after all, eyeballs matter!
When you incorporate all risks and variables, we project a value of $20B to Craigslist. Of course, this implies it begins to optimize ads. But even at $20M in revenues, with some 5B in pageviews, how much do you think Craigslist is worth to other media firms struggling to contain, let alone overtake, Google?
Obviously with $20M in revenues, it’s hard to project anything over than a valuation of $1-2B on Craigslist, even with its lofty pageview/impression volume. But YouTube fetches $1.6B despite its copyright woes and user generated content (thus inability to monetize via traditional advertisers) when it was generating $15M in revenues in 2006 (even though it had the ad inventory bandwidth to do $7.5M per month according to our numbers).
After all, that loud sucking noise newspaper families are hearing is going somewhere, and it’s wherever the house in this video is.
According to its site, only six sites: namely Yahoo!, MSFT, eBay, AOL, News Corp. and Google boast larger audiences. All of those companies have massive valuations. Of course, some of those have other assets, to put it mildly.
Anyway you dice it, we project Craigslist to be a company worth more than InterActive Corp., Amazon.com but less than eBay and Yahoo! Which is interesting, because while Jim Buckmaster and Craig Newmark seemingly never once looked at the bottom line, they have built one of the most breathtakingly profitable enterprises in the history of commerce and communications.
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