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Alan Kohler
Alan Kohler is one of Australia’s most experienced commentators and journalists. Alan is the founder of Eureka Report, Australia’s most successful investment newsletter, and Business Spectator, a 24-hour free business news and commentary website. He also hosts Inside Business, a half-hour Sunday programme on the ABC, is the finance presenter on the ABC News - and producer of the nightly graph (or two).
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Fairfax runs the growth gauntlet

Fairfax's first-half results revealed its dearth of growth assets since the sale of Trade Me. While there are great digital growth acquisitions out there, it had better hurry because the others will be after them too.

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On Fairfax’s first-half earnings call last month, Citi’s Justin Diddams asked Fairfax chief executive officer Greg Hywood about the $477 million cash on hand that was possibly burning a hole in Fairfax’s pocket. Diddams pressed Hywood to outline what the group had planned for this money – in particular in the area of acquisitions and product development – however Hywood was light on detail.

The question raised by Diddams is still a relevant one. Fairfax’s first-half results were steady. Cost containment across the period was promising and debt reduction was significant. Hywood mused that “no one cuts to greatness”, yet detail around how Fairfax would continue to grow was light.

The intrigue around Fairfax’s investment plans for 2013 is especially fuelled by reduced growth in previously high growth areas such as digital and transactions, and significant macro pressures facing metro newspapers, meaning the Fairfax of the future is likely to look different to the Fairfax of the present. In addition, Fairfax splashed out $50 million for Sydney based firm Netus and its leaders Daniel Petre and Alison Deans in order to bolster its “digital firepower”.

Part of what enabled the Netus transaction was the sale of Trade Me – Fairfax’s best example of a high-growth, large scale asset. The sale of Trade Me did wonders for Fairfax’s balance sheet but has left it without a consistent good news growth story. The big question for 2013 is how Fairfax will use its improved balance sheet and significant cash on hand to find the next Trade Me like success story, and what areas it may seek to do this in relative to its current business.

One area to expect investment this year is within the Domain real estate business. Domain is a distant second to market leader REA Group but experienced a 14 per cent revenue uplift in the first half of fiscal 2013. This outperformed the overall classifieds market, which according to IAB figures compiled by PriceWaterhouseCoopers saw 9 per cent growth over the same period, yet was still below REA Group who delivered 21 per cent growth at its domestic operations. However, like paid search, the real estate classifieds market is a large one, and being number two can be lucrative. REA’s $144 million revenue in the first half is significantly larger than Fairfax’s total digital classified revenue of $43.5 million, and REA’s gains in display media and listing depth surely have Fairfax thinking it can follow a similar path. Expect continued development of the Domain business from all angles; increased consumer marketing spending, a stronger trade push, continued development of the product across platforms – in particular mobile, and a more aggressive approach to both content and display advertising within the real estate sector.

The other classifieds bright spot is the Stayz business. Stayz was up 13 per cent in the first half, whereas the total transactions business was only up 5 per cent – making it likely that Stayz is the sole contributor to classifieds growth. Given Fairfax bought Stayz for just $12 million in 2005, that's an impressive return on investment. The short-term rental space is an increasingly interesting one, which continues to grow in volume. Short-term rentals are also now moving beyond holiday specific rentals and into the territory of hotels, with companies like Air BnB developing a marketplace for people to sublet entire houses or just individual rooms. This emerging area must be of interest to Fairfax, either through a joint venture, acquisition, or an extension of the Stayz business. Fairfax’s audience scale and asset base would make this a smart strategic area and would offer a new revenue stream that could utilise the same infrastructure as the current Stayz business.

The Netus acquisition could open the door for Fairfax to follow Conde Nast’s example from the US and invest spare cash in new areas. In 2010, Conde’s parent Advance established a $500 million fund to find new investments. It has made investments in video platform Visible Measures, learning provider Kno and enterprise marketing company Unified. Hearst – another traditional media powerhouse – has followed a similar strategy, investing in Los Angeles start-up/e-commerce incubator Science, purchasing digital agency iCrossing and male focused video site UGO. Fairfax could utilise Netus in terms of bringing to Australia emerging technology and business models from overseas, or look to acquire high potential businesses that could see relatively quick benefits from Fairfax’s current infrastructure and assets. Emerging e-commerce platforms such as Appliancesonline.com.au, Aussie Farmers Direct and Shoes of Prey are three immediate local businesses that come to mind that could see benefits from the Fairfax audience.

A key part of the Fairfax of the future is The Australian Financial Review group and what that will look like in three to five years. First-half results painted a clear picture – ad revenue flat, circulation marginally up and costs still high. The future of the AFR is not going to be solved via paid subscriptions, the group needs to dramatically decrease its cost base and lower its reliance on advertising revenue by finding new ways to add value to its audience. One could argue the brand of the AFR is all about helping its readers in their jobs or their career, so the area of exhibitions, conferences and industry specific titles could be a way to do this. Sydney based media and advertising publisher Focal Attractions would be a nice addition to the AFR group – it brings with it an innovative model which delivers quality content at high volume but low cost, it's profitable and lean, and has built out a strong business in the area of conferences, events and high-yield professional development. Boardroom Radio is another potential opportunity that offers new revenue streams and a lean operational model that could perhaps be applied to the rest of the AFR group to reduce operating costs to the levels required.

Whatever Fairfax decides to do it will surely face some competition. Between Fairfax, Seven West, Southern Cross Austereo and Ten there is $1 billion cash on hand to invest in growth opportunities. Add to this mix cashed up companies like Telstra (who have just given marketing head Mark Buckman responsibility over its media division) and the new News Limited publishing group (which will have $2.5 billion in funds to invest when it commences mid year). With the advertising market flat the search will be on for complimentary new assets that can fuel the sector's growth.

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