A new study co-authored by a media research firm and a Harvard Business School professor claims that real estate print classifieds are falling victim to "disruptive technology."

In other words, print media is losing market share to the disruptive technology of the Internet. Internet media sites are making it more attractive for agents to post their listings than in print classifieds. The Internet is less expensive, provides a detail-rich environment to show photos and other listing information as opposed to a few well-chosen words, and it enables consumers to contact the agent directly via e-mail.

But newspapers failed to get wide-spread relationships with agents or their MLSs, and other new media companies came in between to serve their needs.

“Newspapers provide a terrific value to home sellers, but unfortunately the Internet is undercutting the daily newspaper in price, reach and features,” says Gordon Borrell, CEO of Borrell Associates. “That, combined with real estate professionals’ growing perception that the Internet represents a goldmine of leads, is causing more of them to experiment online.”

Borrell’s report, co-authored with Clark G. Gilbert, a Harvard Business School professor, is part of a series of studies on the newspaper industry’s response to the Internet. Borrell’s previous report, “Real Estate Classifieds: Big Changes Ahead,” which was introduced in a Realty Times feature story. That report showed that consumers like newspaper sites online, but the newest study shows that newspapers may not have embraced the Net soon enough, nor tailored their business models to accommodate classifieds online in a meaningful way.

Disruptive technology was first described in a 1997 business best-seller, “Innovator’s Dilemma,” by Clayton Christensen. It is basically how new technologies can disrupt core business, and how companies deal with disruptive technology is the difference between their survival and failure.

Explains Peter Conti, Jr., a partner in Borrell Associates, "Disruptive technology impacts core business in three phases. Phase one is the destruction which starts in new markets. In Phase two, the established industry begins to experience slower growth. Phase Three is when disruption fully attacks the established industry by serving its core customers and creating crisis."

Conti believes that print classifieds are at Phase two against the Internet right now.

Why haven't the newspapers reacted sooner to the threat of the Internet? Neither did a lot of other smart companies.

Conti describes Kodak and how it reacted to the disruptive technology of digital photography.

"How did Kodak react to digital photography, and then when they did get involved?" says Conti. "It was to support their core business, but they couldn't separate what was a new fast growing business from their core business. They spent a fortune trying to save their core business. Today, Kodak is not the largest seller of digital cameras, by a long shot. They weren't paying attention. They tried to put in digital developing kiosks, and you were supposed to go in with your digital disks and print out your own photos, but that was trying to prop up a dying business. It didn't allow Kodak to look ahead to new business."

The three biggest categories of classifieds are online recruitment (help wanted,) cars and real estate.

"Newspaper revenues from help wanted dropped 45 percent last year," says Conti, "and they have not recovered. Once the economy recovers, people are going to take a hard look at getting back into spending what they used to spend for help wanted because they have found more economical, efficient ways to find help."

So how have the newspapers responded so far to the threat of the Internet?

"The newspapers are trying to shore up the classified business by taking the same model and putting it online," explains Conti, "but that is a low-margin business online. Online, everybody can aggregate, and real estate listings are difficult for newspapers to get their hands on. Real estate classifieds are already the slowest-growing segment and has been from 1995 to 2000. Our theory is when things tighten up in that market then the real estate professionals will look for the most efficient ways to market homes and there are better efficiencies out there."

Says Professor Gilbert, “The most disturbing thing is that newspapers now appear to be focused on replacing their high-margin business of print classifieds with the lower-margin business of online classifieds. If that’s all they’re doing with their online operations, we’d suggest that they shut them down tomorrow. The more important segment to tap is the area of new growth that the Internet has made possible, populated by new customers altogether.”

The customers that visit Realtor.com. HomeAdvisor. Homes.com. IDX sites. VOWs. MLS public sites. The list goes on.

"Many of the firms (brokerage firms) have announced that they will look at spending for print next year," says Conti. "NRT is reducing its budget for print. That's the first-ever drop in newspaper spending for the firm. Meanwhile, they are tripling what they spend on Website development this year."

So what can newspapers do to compete? Some newspapers are already taking action, like the Orange County Register which has a publishing agreement with the Southern California MLS. Conti says that about 15 percent of newspapers have similar arrangements.

"You have to look at multiple strategies and your relationship with local real estate associations," advises Conti. "It will be many years before we have a consensus among real estate professionals as to what to do. In some regions like the northwest, they will never work with a newspaper. But then in Fredericksburg, VA the MLS and paper have a good relationship and the paper has worked hard to turn the attitudes around. It's no secret that newspapers and real state professionals aren't best of buddies. They each feel that there is a shifting now that the Web has become so important and the MLS is made for the Web, and Realtors won the rights to it. It is causing a lot of tension and it will require some give and take. Our strategy is if you have a good relationship and you can bring something to the MLS, and work with them and assist them to put information online, that is great."

"When disruptive technology comes in, there isn't a good revenue stream based on the same old stuff," he continues. "The newspapers who don't get the MLS are going to lose customers because they are going to demand access to information. So they have to think about what they can do with FSBOs, and new construction, and foreclosures. They overlook these markets. There isn't good aggregation there yet, but if there were, you would have a competitive model and competition to the MLS. A newspaper doesn't want to cannibalize itself. It may be more cost effective so now when the newspaper looks at real estate, they have to think what is going on for the future and start thinking about building a new business for real estate online."