One of the great mysteries of our time concerns the question of what will happen to newspaper classifieds. This is a real estate issue and also a matter of great social importance.

If you have any sense at all you want newspapers to succeed. Whether you agree or not with a particular editorial or column, or a slew of them, you want newspapers to be pesky, insightful, irritating, questioning and curious; you want reporters and columnists -- as the old expression goes -- to afflict the comfortable and comfort the afflicted.

You want these things because societies without vibrant newspapers are places where you don't want to live. Since there is no other institution with the resources to what newspapers do, or should do, it's in everyone's benefit to assure that newspapers remain strong and vital.

To have big newsrooms, however, you need revenues from subscriptions and circulation. Unfortunately, newspapers are taking a beating on both fronts.

The Newspaper Association of America reports that classified ad revenue amounted to $16.6 billion in 2004 -- down from $19.6 billion from 2000. Corrected for inflation the situation is far worse: Newspapers would have to have taken in $21.5 billion in 2005 to equal their 2000 classified revenues.

Real estate ads are crucially important to local papers. In 2004, real estate classifieds amounted to $4.2 billion, about a quarter of all classified ads and roughly 10 percent of total newspaper revenues. The oddity of real estate classified spending is that it's up while circulation is down, meaning the cost per impression has risen.

In 1985, says NAA, daily distribution reached 62.8 million copies. By 2004, daily circulation stood at 54.6 million -- a loss of better than 8 million subscribers. During the period from 1985 to 2004 the U.S. population increased by 34.2 million people. In effect, market penetration declined substantially.

Now comes research from Borrell Associates -- a national research and consulting firm that tracks local Internet advertising and crafts strategies for media and web sites -- which suggests that newspapers will face a huge loss of real estate ads.

In its study, Online Real Estate Advertising: 2006 Update, Borrell says that:

• In 2001, $11.2 billion was spent on real estate advertising -- and only $396 million (3.5 percent) was spent online.

• In 2005, $11.7 billion was spent on real estate ads -- but this time $1.7 billion (14.7 percent) was spent online.

• For 2010, Borrell sees total real estate ad spending dipping to $9.6 billion -- but $3.1 billion (32.1 percent) will be spent on the Web. Corrected for inflation, that $9.6 billion actually represents far less spending than $9.6 billion would have bought this year.

(A free copy of the Borrell report's executive summary is available online by pressing here.)

"Toward the end of 2005," says Borrell, "the nearly rotten started looking truly rotten. As home sales slowed down and the inventory of unsold homes grew, the Internet became the most-used method of selling a home -- beating out even the old-faithful yard sign. The $11 billion spent on total real estate advertising stagnated, growing less than four percent over the past four years, while the available advertising inventory -- the number of existing homes for sale on the market -- rose 41 percent in the last 12 months. That metric alone is enough to stop a real estate advertising executive dead in his or her tracks."

At this point the argument will be made that newspapers are shifting to online publication and distribution, thus they will capture some or much of the newly-emerging online classified revenue. This is likely to be both true but not true enough.

Many metro newspapers are print monopolies. They're able to increase ad revenues even in the face of declining subscription levels because there's no practical alternative.

But what's true of local metro areas is not true online. On the Web no one has a monopoly. Successful sites are already in place plus new and potent competitors are launched each day, thus there is no way to force up prices. In fact, the usual Internet trend is to drive prices to zero.

One theoretical way to solve the declining sales problem -- and you can bet that great minds are working on the matter -- would be for newspapers to adopt a new revenue model. Rather selling ad space and exposure, newspapers could become licensed brokerages and charge referral fees. Since referral income is potentially far greater than ad revenues, such a strategy offers a wisp of logic.

Newspapers, in a sense, could become local "print portals" seeking a piece of every "lead" they provide.

In practice though, if newspapers charge referral fees or have subsidiaries that do, then brokers will instantly seek less-costly alternatives to cut expenses. Brokers will use online sites that charge only ad placement fees; develop their own sites (think of MLS, franchise, company and individual sites); use specialty services (think of Realty Times' Market Conditions Reports); use sites that charge by the click (think of Google); and use sites that charge little or nothing (think of Craigslist).

What will happen in the future?

The old days of local print monopolies and 20 percent annual profits are dead. If newspapers are smart -- and they usually are -- they will combine print and online ads into a single fee schedule. This will allow them to leverage their remaining local monopoly into something that offers advertisers more than other localized online ad sites can provide. Lastly, expect newspapers to inter-connect data so they can present huge numbers of ads for many metro areas.

For more articles by Peter G. Miller, please press here.

Published: September 19, 2006

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .