The Washington Post has an interesting story today about the online classified advertising market which recorded $3.1 Billion in sales in 2006, while newspaper classifieds have dropped by about $3B in the last five years.

I have written about newspapers dying, needing to focus on hyper-local content, and how craigslist and Monster.com have taken huge market share in classified ads and job listings.

The chart on the left, courtesy of The Washington Post, shows just how dramatic the shift has been, and will continue to be.

I was talking with a respected Venture Capitalist a few weeks ago about several emerging companies in the local directory / search space. One of the partners said "I don't think those companies will generate VC class returns". I responded that this market is far larger than most people realize.

Billions of dollars from small advertisers -Consider that Google generated over $10 Billion in online ad revenues last year, while Yahoo, Microsoft, and others raked in another $10B or more. The vast majority of this revenue came from small advertisers, not the Fortune 500.

I reminded this VC that 7 years ago everyone thought big sponsorships of $10M or more from big companies was the way to monetize web traffic. Remember when Yahoo, AOL, Excite, and Lycos were announcing big ad/sponsorship deals for banner ads? Google turned that model on its head. Most of Google's billions in revenue comes from small advertisers paying 50 cents to $5 per click for a text ad.

Classified ads are the same thing. Most people look at a newspapers and think the big revenues come from the full page display ads from Macy's, Verizon, and other big names, when in fact most of the revenue comes from the tiny classified ads in the back of the newspaper.

The Next Big Thing - Online classified ads, local search, and mobile search are huge markets, with no dominant leader, and lots of opportunity for innovation. New business models will emerge and a new set of leaders will reap billions in profits...pennies at a time.