By now, most people in the news business know that the collapse of classified revenue is the biggest financial threat newspapers face in the short term. But many fail to realize that not only were classifieds hugely profitable, classifieds were the only glue holding general-audience publications in one piece.

It’s one of the many reasons why startups should generally not seek general audiences.

In media that face a scarcity of supply, like broadcast television or highway billboards, things are different. But the central goal of newspapers — amassing a large general audience — is profitable only because a classified section is a snowball: the bigger it gets, the faster it grows.

(Briefly, here’s why. Obviously, every additional classified-section reader makes that section more valuable to advertisers. But because people who use a classified section want more than anything to maximize their selection of products, every additional classified ad makes the section more valuable to readers. It’s a virtuous cycle.)

All this, I’ve understood for a while. Here’s what I didn’t grok until lately: the need to maximize the classified audience used to be a huge centripetal force on news content, pulling coverage toward the center of public life, toward the things everyone shared. The publisher’s objective: maximize the audience. The editor’s marching orders: please everyone in town a little bit.

Meanwhile, there was an opposing, centrifugal force: display advertising. Unlike classified advertisers, most businesses are looking for narrow demographics. They don’t want to pay for a big display that everyone will see. They want to pay for a cheaper display that only the right people will see. The narrower your audience, the less of your marketing budget that you’re wasting.

So: retail ads would seek diversified audiences, classified ads would seek general audiences — and for a while, classifieds would win.

Then the sea change.

These days, newspapers aren’t scarce; a printing press comes free with every Internet connection. For a few years, even the lure of free classifieds on Craigslist couldn’t offset the value of the big audience offered by a newspaper. But one by one, advertisers slipped toward the free service, and the classifieds audience has followed. A tipping point came in 2007, when Craigslist’s growing audience (and that of other listings sites) got big enough to be really valuable.

More or less, this is why the crisis is happening now.

Today, retailers are still looking for niches. Retail advertisers want to push newspapers and other audience-generating businesses away from the center of public life, into all the demographic nooks and crannies.

And today, there are no classifieds to pull us back.

Hint: they’re black and white and read in large but ever-decreasing quantities.

For the moment, newspapers in the smallest markets should probably still be trying to minimize the content that leaks onto competitors’ sites. But in mid-size markets (and, before long, in the smaller ones) papers can keep offering value to classified advertisers by offering a service the big boys don’t: syndication of your ad throughout the Internet. Anybody who pays for a classified should get it listed on all the free sites in addition to the print edition and the newspaper’s Web site.

Three startups called Mpire, vFlyer and Postlets are trying to make this service into an entire business, the
New York Times reports today. (While they’re at it, they check your spelling and suggest an effective layout.)

It’s not clear whether these guys are going to make money for such a relatively simple service. But if newspapers can seed their ads into both the Web-savvy and Web-illiterate markets, they’ll be saving their clients a lot of time.

No time for the staff to do all these postings, you say? Well, I happen to know of three fledgling Web sites who might make great partners for your classified department…