Craig Newmark testified on Thursday that he regretted getting into bed with auction site eBay (EBAY) almost as soon as his head hit the pillow. The founder of Craigslist, the online classified site that has decimated large chunks of the newspaper industry, sold 28% of his company to eBay in August 2004. Within months, he recounted, eBay began to pull back on its promises, causing him to regret the decision.

During the negotiations more than five years ago, Meg Whitman, who was the CEO at the time, told Newmark that eBay would be happy to sit back as a minority shareholder for several years and use Craigslist as its exclusive venue for classified ads. Yet, shortly after the deal closed, eBay pushed for a bigger piece of the company and acquired an online classified company outside the United States. Both Whitman and company founder Pierre Omidyar testified that eBay was clear about its intentions.

The lawsuit, filed by eBay against Craigslist, involves the size of the former's minority stake in the privately held, relatively low-tech and highly popular classified site. eBay claims that Newmark diluted its share to 24% through a "self-dealing" scheme to issue more equity.

Imagine being an executive at The New York Times Company (NYSE: NYT) waking up to read in one of your own papers that another company will offer free online classifieds. This time its is Facebook, with 22 million registered users, making the offer.

While the move may trouble News Corp's (NYSE: NWS) MySpace and online classified operations like Monster (NASDAQ: MNST), the real victims of any success by the Facebook venture will be the newspaper companies. They are already watching their classified ads move to online real estate, job, and car sites. The newspapers own some of these, but can't give the advertising away. It would undercut their entire business model of migrating readers and paid advertising to internet sites.

It is also difficult to see how the new product works for Facebook. While it may bring in new users and keep current users glued to their screens while they look for jobs, free is free. If there is a knock against social network sites it is that they cannot make money on their huge traffic bases.

Facebook may do some damage to the newspaper industry, but it is also giving itself a paper cut.

Douglas A. McIntyre is a partner at 24/7 Wall St.