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‘Google Schmoogle’: the downfall of Yellow Pages; Once directories like the Yellow Pages served a valuable need in most developed economies. They provided basic and inexpensive local advertising, especially for small businesses

‘Google Schmoogle’: the downfall of Yellow Pages

Published 20 June 2014 10:59, Updated 20 June 2014 11:01

John Rice and Nigel Martin

Yellow Pages directories have been appearing on doorsteps across Australia in recent weeks. As often as not, they go straight into the recycling bin. In the world of the internet and e-commerce, the very notion of a book the size of two bricks being the source of valuable purchasing information seems plain silly.

Once directories like the Yellow Pages served a valuable need in most developed economies. They provided basic and inexpensive local advertising, especially for small businesses.

As the internet emerged as the preferred means of accessing such information, the potential for directory owners like Telstra to translate directory information into a valuable online business opportunity seemed promising. As is often the case in the unpredictable world of the internet, it was not quite so simple.

In January 2014, Telstra sold a 70% share of Sensis, its directories subsidiary, to a US hedge fund for A$454 million, only 2.4 times projected 2014 earnings. This is quite a turnaround from the A$12 billion value suggested to Telstra’s Board in 2005. At the time, Telstra’s chief executive Sol Trujillo declined to spin-off the business, suggesting Sensis (Telstra’s directory business) would be “bigger than Google”.

Google Schmoogle?

Indeed, with characteristic ebullience, Trujillo commented in November 2005, “Google Schmoogle”. Contrary to that prediction of sorts, since 2005 Google’s market capitalisation has increased tenfold, to more than half a trillion dollars. Among Trujillo’s many strategic mistakes, his misunderstanding of the relative potential values of Google and Sensis probably takes the cake.

It’s fair to say, however, that Trujillo was not alone in misunderstanding the radical changes in the economics of information over the last decade. These changes have completely upturned the value of directories businesses globally. The investors who bought Telecom New Zealand’s directories business in 2007 for $2.1 billion (at an earnings multiple of 13.6 times) at the height of the private equity bubble have done most of their dough.

Knowledge is Power (and Money)

The 2.4 earnings multiple on the recent Telstra sale suggests two things – that the business is still profitable, but that profits are expected to rapidly erode. How can we explain this sudden, anticipated and precipitous decline in the value of information available through directories like the Yellow Pages?

The economics of information is changing rapidly. Economists George Akerlof, Michael Spence and Joseph Stiglitz won the 2001 Nobel Prize for economics for their seminal work on the economics of information, especially information assymetries between buyers and sellers.

Most famously among the suite of work done by these economists was Akerlof’s 1970 paper “The Market for Lemons”. Like all great academic work, its beauty lay in its simplicity. In essence, buyers and sellers have “asymmetric” information. In the example in his paper, the seller of a used car knows if it is a “lemon”, though the buyer rarely does.

A consequence of Akerlof’s Lemons paper for sellers is that it made sense for them to signal to the market aspects of the quality of their products – by suggesting that they are selling “cherries” (great used cars) and not “lemons” (cars on their last legs). One simple way to do this was through advertising. This was especially useful where the buyer’s knowledge of the seller was limited, as would often be the case for the buyers from small businesses who advertise in directories like the Yellow Pages.

Better information, less asymmetry

The steep decline in the generic, supplier-provided data that is the essence of Yellow Pages has been driven by a set of related phenomena.

First, sites like TripAdvisor have emerged to provide detailed and generally reliable information on services including hotels, tourist attractions, restaurants and the like. Importantly for Yellow Pages, sites such as these are becoming the first place for buyers to visit. As the quantity of collected reviews increase, the value of such sites increases greatly, as they provide a level of information on sellers that static directories cannot match.

Second, the costs of “searching” for information is in steep and terminal decline. Once, buying a set of golf clubs for the best price, for example, required a multitude of phone calls or, worse still, visits to stores with pushy salespeople. Now, finding the best price in the market is a few keystrokes away through Google.

Too late for Sensis?

This begs the question – can the Yellow Pages reinvent itself to be a new portal for information on sellers that will be valuable for buyers, and thus continue to attract advertisers? The answer is probably not. As a late mover into such information provision, it will have an almost insurmountable challenge to build an equivalent body of information in comparison to its competitors. More so, it will be a generalist in an industry full of specialists, the last site visited by buyers and thus the least valuable site for sellers to direct their advertising dollars to.

This makes the 2.4 times 2014 earnings paid in January for Sensis seem about right. Such a multiple suggests that this year’s Yellow Pages might be the last one to lob onto Australia’s front porches. If this is bad news for Sensis, it is good news for the millions of trees that will be saved!

By John Rice, Griffith University and Nigel Martin, Australian National University. John Rice is a member of the National Tertiary Education Union and the Australian Labor Party. Nigel Martin does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations..

 

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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