I was always amazed how expensive classified ads were. I guess they knew they pretty much had a monopoly for local ads in the pre internet era.
I lived over a decade on the Russian River north of San Francisco. Communities along the river were composed of numerous small plots the size of town lots in The City over a century ago. They’re called “newspaper lots” because the SF papers gave them away with annual subscriptions - after buying the over-forested acreage for a pittance and subdividing. If subscribers failed to pay property taxes, the lots were condemned for re-sale. Nice racket, right?
Modern periodical owners lack imagination. They should go into subscriber-supported real estate.
Something similar: the Klondike Big Inch Land Promotion. It wasn’t really a racket–at least, one got a box of cereal out of it, for the cost of a box of cereal–but there were many legal reasons why no deed holder actually owned a square inch of the Yukon. Chiefly among them:
Well, at least the kids who thought they were owners of a square inch of land in the Yukon had good breakfasts. 
[end hijack]
That’s because paid funeral notices are a relatively recent phenomenon. Obituaries used to be just part of what a newspaper did. The basic facts about the deceased were sent to the local paper, and the obits were all written by a staff member. Depending on the size of the town/paper it may have been that person’s only job. Even as recently as 2000, when my mother in law and grandmother in law died a few months apart that was how it worked. Even when my father in law died a few years later we had to provide the obituary, but it was still published at no charge. Even now the local paper publishes obits that are just basic facts - dates, immediate survivors, funeral time - for no charge. It’s only longer more biographical obits that are paid. And those are clearly labelled “Paid Announcement”
There’s a lot to unpack here, but I want to hit a couple high points:
First, a business doesn’t want to jeopardize a sure thing with a new idea. That means proven revenue streams have precedence, and will likely be protected internally against new business plans which don’t have the same pedigree. It’s safe and logical and sound until you are, as you’ve noticed, a print newspaper defending a decades-old classified section against Craigslist. Kodak did the same thing when it buried its digital cameras because digital cameras would cut into the profitable film business, Xerox did it when it invented the modern computer desktop environment and did absolutely nothing with it because it would threaten photocopiers, and IBM did it when it had the PC in the palm of its hand but refused to develop it into a world-beater because its profitable midrange systems were part of the world what would get beaten by the next-generation PCs. It’s never a good idea, but it’s always an understandable one.
Second, newspaper advertising isn’t the same thing as Internet advertising, and for quite a while, advertisers were convinced it wasn’t as valuable. Simply, newspaper ads don’t track you, and don’t build a profile on you that advertisers can use to target ads to you. Internet ads are based around such tracking and targeting. Advertisers who were concerned about wasting their advertising money became convinced that targeted ads were the only way to maximize their budgets, and newspapers didn’t know how to do that. Newspapers couldn’t do that without turning into websites, at which point their printing presses were deadweight and… well, see my first point about protecting proven revenue streams.
Finally, companies have expertise. Companies have institutional knowledge. Companies know how to do some things better than others. A newspaper company wasn’t a web company in 1995. Web companies were still way-out weirdo crap to most seasoned, reasonable, sober managing editors in 1995, who had decades’ worth of experience telling them that the way to the new millennium was slapping ink on dead trees and selling that and maybe hiring Skippy the New Grad to whip up a web site to remind his layabout slacker friends to buy a newspaper subscription. When you’re starting from negative twenty, you need a running jump just to make it to the starting line.
Are they really? I recall my Mom, in the 1960s, reading the Deaths column in the daily paper. They weren’t technically obituaries–they gave the vital facts–but they were paid funeral notices. That was fifty years ago.
When Mom died, I seem to recall that we had the funeral home place a notice for us in the daily paper. We paid for it, through the funeral fees. As I recall, we could buy up to X number of words for cost $Y; after that, it would cost more. We were within the limit for Mom’s death notice, so it didn’t cost us any more; but the fact remains–her death notice in the newspaper did cost. That was thirty years ago, by the way.
Paid funeral notices in newspapers have been around for years. They’re not a recent pheonemon.
I think funeral notice/obituary practices vary widely by newspaper, but I also think (from contacts I had in the industry) that most daily metropolitan newspapers did them the way I described up-thread: news story obituaries that were free (but the family couldn’t influence much whether there was one or not) and paid funeral notices where the family decides what is said. Some papers provided very simple death notices for free, with just the deceased name and place and date of service (if any) and some didn’t.