SAN FRANCISCO — When Jeffrey Zalles needed a new cashier for his coin laundry in the South of Market district, his help-wanted ad in the San Francisco Chronicle brought just four responses.
So Zalles posted a notice on Craigslist, a San Francisco-based network of websites that specialize in classified advertising. His cyber-ad drew 400 applicants.
Zalles found his cashier and hasn't relied on the Chronicle since, advertising instead on the Internet and the city's array of free papers.
The venerable Chronicle is struggling, and defections by Zalles and other advertisers are a big reason. Classified ads are a big source of income for the Chronicle and the newspaper business as a whole, making up 27% of the industry's revenue, with 53% from other ads and 20% from people buying the paper.
What's more, the Chronicle's circulation is plunging. The paper reported last month that sales fell 16% during the six-month period ended in September -- by far the biggest drop among the nation's 20 largest newspapers. Chronicle executives said much of the decline was caused by their decision to stop offering steep subscription discounts.
The Chronicle's woes are being closely watched around the country as the newspaper finds itself on the front lines of the battle between old and new media. As more consumers get their news from electronic sources and advertising follows them, analysts warn that newspapers elsewhere -- already losing an average of more than 2% of their subscribers yearly -- might join the Chronicle in a steepening fall.
"It's a disturbing harbinger of what may happen with other newspapers as attention turns to the Net," said industry analyst John Morton of Morton Research Inc. in Silver Spring, Md.
The Chronicle's challenges are particularly formidable because San Francisco and nearby Silicon Valley have the most tech-savvy audience in the nation. More than half of the city's homes have had broadband Internet access for more than two years, the highest such concentration in the country.
About 57% of area residents use the Internet for news, compared with 50% nationwide, according to a study by Scarborough Research. Locals seeking jobs or companions are more likely than people elsewhere to use Craigslist and other free ad sites.
During the last 10 years, consumers have flocked to websites created by San Francisco journalists and entrepreneurs -- as varied as the tech-industry news site CNet and the online magazine Salon. The region is at the forefront of a rapidly increasing number of experiments with organized blogging and "citizen journalism."
John Battelle, the former publisher of the tech-centric Industry Standard magazine, is selling ads and providing other services as a self-described "band manager" for popular blogs including BoingBoing and Metafilter.
Craigslist founder and local geek hero Craig Newmark is funding a project by blogger Jeff Jarvis to develop technology for identifying versions of key news stories that readers agree are trustworthy.
"This is a very sophisticated audience," said Chronicle Editor Phil Bronstein. "They are obviously as wired electronically and as into the Web as any region in the country."
During a recent visit to Zalles' laundry, only one of 10 customers was reading the Chronicle, and he wasn't a subscriber. Four were reading from laptops, and all said the Internet was their preferred source for news.
Brian Shire, a 24-year-old computer programmer, said the Internet made more sense for him because he didn't have time for a paper every day and because the sites he visited posted stories that other readers recommended. "I don't go to the Chronicle's website unless something floats to the surface," Shire said. "Maybe if I had more time."
Katy Kavanaugh, a 42-year-old filmmaker, said she checked the Chronicle's website, along with those of the New York Times and the Washington Post, but didn't subscribe.
The Chronicle's decline can't be blamed solely on the Internet. Other factors include tough competition from other Bay Area papers and a cosmopolitan audience that reads national publications such as the New York Times.
But even in an industry plagued by sliding circulation and stagnant ad sales, the Chronicle's $62.5-million loss last year raised eyebrows, given that papers as a whole are three times as profitable as the average company in the Standard & Poor's 500. The Chronicle is owned by closely held Hearst Corp., which won't detail its finances. The loss figure emerged when the company negotiated with the union to reduce staffing levels. An auditor for the union found no grounds to challenge the claim.
Outsiders attribute a large part of the loss to the decline in classified advertising. "Newspaper finances are a three-legged stool: classifieds, display advertising and circulation," said Scott Rosenberg, a former writer at San Francisco's Examiner, who left a decade ago to co-found Salon. "The classified leg has been kicked out, so the stool falls."