Is Realestate.com.au an "Intelligent Investment"

There are a heap of investment newsletters about the place, particularly with the sharemarket going beserk. The one I really respect is "The Intelligent Investor" (www.intelligentinvestor.com.au). For those interested in investment, it is based on the Benjamin Graham/Warren Buffett school of value investing.

Anyhow, the latest edition featured a story on realestate.com.au (ASX code: REA) and whether it has merit as a value investment. As it's a subscription newsletter I can't give you a direct link to the story and I'm not going to reproduce the article here (although I think you can get a free trial from their website). The crux, though, is that at the current price they think all of the upside has been built into the share price already, and that the downside risk is huge.This got me thinking - what is the upside of REA?

The company pretty much owns the local real estate classified market at present. However, Fairfax's Domain is doing some really interesting things and in some areas has taken a slight lead (such as deploying recent sale data on a street map). Packer's PBL is now joining the fray with myhome.com.au - slightly delayed and an unknown quantity, but I note another major PBL investment - Seek - is already running ads for the upcoming site. So the local market is heating up, although REA is a great player and has to date been unassailable. Certainly, today, it is the player in this space I'd most like to own.

Locally, the most exciting aspect of the market is that so little of it is currently online, but everyone knows this is THE future of classifieds. Overseas REA is also doing some exciting things, but time will tell how these come off. The market generally loves the acquisitions, but the market loves anything online at the moment. Bring back memories?

The challenge question for The Intelligent Investor was the potential upside of REA. And in truth, I'm not convinced anyone has a good answer for this. Realestate.com.au is a great brand, but possibly not as strong as Seek in the employment space (and less profitable than Seek). I agree with the The Intelligent Investor that there is lots of downside risk to REA and that they can't afford to slip up. But as for the upside...online classifieds in all categories is a great story. Obviously I'm not providing any of this as investment advice, but I'd still rather own REA than any other listed internet play - except perhaps for Seek.

One thing I'd certainly do, though, is take a good look at the market again in 3 and 6 months.

Why is Seek different to Carsales and ninemsn?

So why is Seek different to Carsales and ninemsn.

James Packer has recently completely his astoundingly well-timed and well-structure $4.5b spin-off of some key PBL assets. Into the private equity joint entity goes a raft of goodies, including TV (licences, premises, business), magazines, and some online properties. Specifically, these are the PBL stakes in ninemsn and carsales. The 27% stake in Seek (recently increased from 25%), however, has been kept out and is still fully in the possession of Packer.

There are a number of possible explanations for why this occurred. The one quoted in the Australian Financial Review today (sadly I can't link to it) is that Foxtel and Seek are not controlled and hence were not included. Whilst the facts behind this remark are true, in the world of private equity deal-making anything is possible for the right amount. However, let's assume that for simplicity PBL chose this route. Consider, though, that ninemsn is only 50% owned by PBL, so control is debatable.

Another option is that both ninemsn (heavily) and Carsales (more loosely) are associated with other parts of PBL - although ninemsn and Seek (and Carsales) are also now linked together in marketing deals.

It is still worth considring how Packer is likely to feel about the outcome, and whether Seek has a better business and/or future than the other two. As such, it's worth examining this.

Ninemsn was always going to go. It is inextricably linked to the Nine Network (free to air television) and draws its online content almost extensively from television content. Plus there is the "integrated marketing" opportunity to sell to advertisers. Putting Ninemsn and the Nine Network into separate entities would have required a complex arrangement around licencing, promotion and revenue share, so this decision was logical. In terms of the promise of Ninemsn, this is a dominant local media site that is benefitting from the explosion in online advertising. Packer Snr opportunistically brought ecorp back into the fold a few years ago and Ninemsn has been a jewel since then. It doesn't generate huge amounts of revenue, but the changes is media CONSUMPTION mean that it may well do so in future. Depending on the price CVC paid for it (overall multiple is reported at around 12x for the whole lot), Ninemsn may be a wonderful pickup.

Carsales and Seek make for a more interesting comparison. They're both local, both classifieds, and have both taken on and defeated (for now) traditional print media publishers. Yet one is being put into the vehicle and one isn't. It is possible that Packer preferred to keep both out and was under pressure to include at least one (he is known to love new media but the pressure to include the "controlled" carsales seems to have been strong), but then the question still remains as to who got the better deal with Seek out.

Here are some possible considerations as to why Packer may have the better deal:
* Seek is in a bigger overall market - definitely correct; employment is the biggest of the classified spaces (a fact not lost on the Bassat's when they chose the category)

* Seek has more "vertical integration" opportunities - for example, Seek Learning is within the general space but outside classifieds. This expands AND diversifies revenue.

* Seek is more dominant than Carsales in it's own market - true at present, although competition is online employment is really heating up, especially from News Interactive

* The Seek platform is better for future expansion and line extension - possible but unknown and probably debatable (certainly the online experience is NOT markedly better, as Global Reviews Employment and Car Classifieds Website Benchmarks show)

* Seek has a better management team - They are definitely good but Carsales also has a proven track record so this is less likely to be a factor

* Seek makes more money, and will grow revenue faster than Carsales - it might simply come down to that, as both free cashflow at Seek as well as NPAT are remarkable

The real question that plays on my mind, though, is this: Notwithstanding the last point above, why did the CVC guys let Packer keep Seek out of the mix. Surely it's at least as attractive as carsales and ninemsn, so one can only assume that either they don't really get it, or they were so keen to "partner" with PBL that they accepted these terms.

Either way, one of the two parties is going to be smiling a broad smile in three years time. If I had to make a prediction I'd say there is a real possibility that private equity will become Packer Jnr's Alan Bond, and the Seek component will just be the icing on the cake.

Doesn't One.Tel feel like a long time ago now!

Australian Financial Review ERROR on YouTube

Today the Australian Financial Review reported (as a breakout no less) that YouTube's data costs are $500m a MONTH! I was somewhat surprised, given that the acquisition then pushes Google from widlly profitable into seriously loss-making.

After further research online, it has become clear to me that YouTube's bill is closer to $5m a month. Still not change, but at least not financially crippling for Google.

I wonder if we'll see a correction.

Two More to Add to the 10 Most Influential

I'm doing a radio inverview on ABC tomorrow morning (too early - 6.20am!) about the Top 10 Most Influential Australian sites, and to date I've only made it to 7 (see previous post). Consequently, I've thought long and hard about three more to add. I've come up with 2.

RSVP.com.au - Acquired by Fairfax in mid-2005 for around $40m, RSVP is remarkable partly because it reportedly managed to generate a profit (EBIT) of around $4m last year. This puts it in the esteemed company of the other local classifieds that, unlike many foreign counterparts, actually make money. At the time of the acquisition it was reported (in Fairfax) that they did it with only 25 employees. Even more impressive, in the past 12 months their membership has grown from 600,000 to 800,000 members. RSVP makes it into the top ten partially because of the number of people exposed to it, partially because it is a local player who managed to beat foreign players seeking to establish locally (such as lavalife) and partially because they created the online dating scene in Australia.

Astrology.net - This one is a stretch, not due to its contribution but because it was started by Australians but in the US. However, the founders - David and Kelli Fox - are originally Sydney-siders who moved to California in 1994 to follow the dotcom dream. Astrology.net became the biggest astrology site on the internet, a remarkable achievement. They sold out in 1999 for the princely sum of...US$1m - and 3% of acquirer ivillage.com. At one point that 3% was worth $60m but hey, we were all billionaires once! If only they had actually started the business here, they would have been in the top 3 on my list.

So, to recap the ammended list:
1. Looksmart
2. Hitwise
3. Ninemsn
4. The Banks
5. Qantas
6. SMH/The Age (reluctantly)
7. Seek
8. RSVP
9. Astrology.net (a stretch)
10. Still waiting - hopefully a brand new, global winner the likes of which we haven't seen since Looksmart.

YouTube Generated Around US$100m per Month

As predicted, Google snapped up YouTube for US$1.65m. That means, in its short life of 18 months, the revenue-less company increased its value by around US$100m a month! Not bad.

It will be interesting to see how Google continues this rate of value creation, which is clearly what the market would demand of a public company. I also look forward to Yahoo's official remarks. We've already heard Mark Cuban's comments; he said something like anyone who buys YouTube is a moron (see an SMH blog in the topic here)

In more considered terms, I think Cuban might be on to something (as I've said previously). However, it should be remembered that Yahoo also has a history of overpaying - like it's $5b purchase of Cuban's own broadcast.com in 1999. Hey, a guy's gotta make a living!

Video Killed the Media Star

All anyone seems to talk about now is video. Today, another two announcements emminated from this sector, namely:
- Yahoo7's launch of their online video service
- Rumours that Google is going to buy YouTube for $1.5b

To me, both announcements look equally absurd.

Firstly, Yahoo7. Seven finally seems to have forged a partnership with genuine potential following a couple of failed attempts (most notably AOL7). Yahoo7 has some good content from 7 and Yahoo, plus Yahoo's services, and is shaping up to be potentially compelling. The jury is still VERY much out on the true viability of convergence (particularly free-to-air TV and the internet), but Yahoo7 is a least something with the potential to challenge nineMSN (if only Yahoo Mail had the penetration of Hotmail!)

However, why would you try to compete with YouTube?! I know why Yahoo would like to, and both they and Google are having a red-hot go. But they're failing terribly. Why would a good new opportunity like Yahoo7 want to slot in a service that, realistically, is going to play a weak second fiddle (if not third) to the market leader? Sure it's linked in to their IM, content, etc. but in the end it won't beat YouTube, no chance. And there is nothing worse for a media company than a second-rate new media site whose failure is there for all to see. Indeed, it is this lack of traction in new initiatives that is starting to erode Google's own divine status.

This brings us to YouTube and Google. Mark Cuban, the internet billionaire with the best timing in history, and an outspoken critic of many things, recently added YouTube to his list. However, he's not alone. Essentially, the criticism of YouTube is that it couldn't survive without illegal content and at some point it is going to have the pants sued off it - hence there is no viable business model. Several Wall Street analysts agree and are encouraging listed companies to keep a wide berth.

Google, however, is rumoured to be looking at a $1.5b acquisition of YouTube, rumoured being the operative word. Why?, you might ask. The greatest asset YouTube has is the brand. It may even be as big as Google, and that in itself is worth a fortune for a new media company. Google, too, is sick of losing to YouTube and with $10b+ in the bank this could be a chance to buy a win (take note of what you're up against, Yahoo7).

But even the brand can't compensate for Cuban's criticism, if it turns out to be correct. And herein lies the huge problem with video sites. They are killing traditional media sites by pulling away their viewership (TV is particularly worried). However, because of the nature of both their content and users, it is hard if not impossible to monetise this traffic. So they have the ability to STRIP VALUE from the media sector in general. We are in the early days and media spend here is negligible, but there are serious questions around the viability of the video model.

No doubt at some point a viable model will be created, but without the commercial content it is doubtful that the novelty of watching "uncle sam's pants catch fire" somewhere in Alabama will keep people coming back in the medium turm.

I tend to agree with some of the naysayers at present, unfortunately; this may be another example of a web 2.0 innovation that will never make money in its CURRENT incarnation. But good luck to Google and Yahoo - they're both richer than me so perhaps they know something I don't. Or maybe they see where this is all going, and want to be the first ones to get there.

Wanted: 2845 Online Managers

We at Global Reviews work with more than large 60 companies in Australia and NZ, and over the past 12 months at least 20% of these clients have asked us the same question: "Do you know anyone who might want to fill an online manager/producer role?"

Anaecdotally, the online industry generally believes there is a chronic skills shortage. We've felt it first-hand, as our growth has meant continually employing new people (and it's worse for us - you only need someone good enough to do the job, but we need someone good enough to advise your people how to do the job better!)

And the problem is getting worse. The most pain seems to be in Sydney, but Melbourne and Brisbane are not much better (companies like Wotif.com, Webcentral and Flight Centre are based in Brisbane and demand good online people). Just today, I noticed a big 4 bank ran a large ad in a National daily seeking two more e-commerce people.

But is this just an urban myth being espoused by the self-interested (ie: people in this area)? If you're a digital/online/internet/ecommerce manager, is now really a great time to be in the market? I decided to check australia.recruit.net, a mashup of Australian online recruitment sites, to learn the truth. I searched for Australian ads that included both the words "online" and "manager".

The result - 2845 ads! Online Marketing and Product Managers were the big ones that featured, but certainly there was a wide variety of openings - many sounding very desperate. To provide a comparison, there were 1152 ads for "personal assistant".

So it would seem that the subjective emotions people are feeling with respect to a skills shortage are born out quantitatively (at least prima facie).

I then wondered what Australian universities are doing to address this problem. I went to the UNSW website, because after all the biggest problem is in Sydney, and searched the Faculty of Commerce and Economics. There is no Bachelor of Ecommerce (unsurprisingly), but the only course offered as part of a Commerce degree with any online relevance is "Information Systems and Information Technology" (surprising). I checked the course info for IS & IT and it immediately became clear that this course is heavily skewed towards technical people. Hmmm.

The next place I looked was the AGSM link, who apparently are affiliated with UNSW, but this is focused on MBAs. RMIT in Melbourne does have a course with some e-commerce focus (I know as do some lecturing there), but it hardly seems the norm.

I therefore postulate that:
1. There is a strong demand for anyone with quality ecom/online/digital experience
2. There are not enough people to fill these roles TODAY
3. The demand is likely to increase (and is increasing) as the internet's role continues to grow
4. There is not a strong focus on increasing specialised graduate numbers
5. The problem is going to get worse TOMORROW

My advice is that if you're happy in your current role stay there and enjoy being part of an exciting and rapidly growing industry. But if you're not happy, explore your options. I know at least one company that is seeking quality people, and you are in demand.

And if you're an employer or manager then focus on more than just pay to retain your staff because, from our experience, pay is generally quite similar but what keeps people is an enjoyable enironment and challenging role. The more things change, the more they stay the same.

Zazz.com.au

I saw this article in The Age today: http://www.theage.com.au/news/biztech/online-retailing-widens-its-net/2006/10/02/1159641260883.html

My first thought was: would you buy a used car from these guys? I then realised that at least one of them has sold a heck of a lot more than used cars, namely Melbourne House to Infogrames (subsequently Atari) for millions.

Zazz.com.au is not exactly innovative, but it's a local version of a US concept and is very unusual in Australia. In a nutshell, one product per day is offered - cheaply - and you can take it or leave it. Leaving aside the challenging economics, it's a nice concept and the newest online retail concept to emerge since Wishlist (who really pioneered sustainable if only marginally successful online shopping in Australia).

What I like most about Zazz is that it may finally herald more innovative e-tailing (remember that word) in Australia. We at Global Reviews have been involved in e-tailing since 2000, measuring customer experience, and on the list of biggest online disappointments in Australia online retailing must come close to top. The lack of innovation, combined with Australians' reluctance to shop for tangibles online, has stifled the industry. Compared to the US and UK (and excluding travel), we are nowhere.

So if Zazz is what it takes to get local retailers and entrepreneurs thinking outside the e-tailing box, bring it on. Perhaps one day we can roll out an Australian e-tailing innovation into the US. But it won't be Zazz.

Aussie Response To Anti-Gambling Legislation

If you haven't yet read that George W is about to sign a law effectively banning online gambling in the US, you're internet has been down. The law prohibits credit card and money transfer companies from accepting payments to gambling websites. Without a way to cash out my winnings, why would I gamble?

Unsurprisingly, this uncertainly has seen online gambling stocks caned. PartyPoker, until recently a darling of the LSE, has fallen more than 60%. That's a loss in value of around A$5 Billion!!! And if this law really does prevent US citizens from gambling online, that real value of might be even lower. Already, several large online casinos have pulled up the welcome mat for US customers.

The reason for the law is relatively unclear, and its passage unexpected. To paraphrase the big man himself, I put it down to "shock and awe". Shock at how little the government knows about the passage of money online, and awe at the quantity of cash moving about. This makes governments nervous, particularly those who worry about how laundered money might end up buying a dirty bomb for downtown NYC.

In Australia we do permit some gambling online, but it is heavily regulated and predominantly sports betting. The main Australian player with exposure to the US market is Betcorp (ASX: BCL). It had a similarly catastrophic share price experience and fell more than 55%. It's a pity to see an Australian innovator suffer this fate (although BCL is moving to the London AIM), but in all of the carnage there is a real opportunity.

It is totally unrealistic to believe that US residents will cease gambling online, and equally implausible that companies will cease offering online gambling services to US customers. Instead, one of four outcomes will occur:
1. The law will not be enforced
2. A way around the law will be found
3. The industry will be taken over by organised crime
4. The law will be rescinded.

1 and 4 are both unlikely, given that the law has only just been passed (although 4 might occur as a result of extreme pressure). Option 3 is plausible, but presents no opportunity I want to discuss in this blog!

But option 2, a work-around, is exciting. Some great payment workarounds have met with astounding success online. The most well-known of these is Paypal, which is a way to reduce the risk of paying by credit card online (eventually acquired for a bucketload of cash by ebay).

There are already several Australian companies working in the online payment space, and surely this represents a prime opportunity for one of those to take the lead here. Paymate.com.au is one example, but there are also others below the radar that have developed more high tech solutions.

This challenge represents a prime opportunity for Australian innovation - perhaps in partnership with Betcorp, who may then find themselves global leaders in the online gambling space.

the Chinese have a well-worn curse: "may you live in interesting times". But perhaps Betcorp can take solace in another Chinese saying; in adversity lies opportunity.