OPINION: Investors seeking rich returns know where the rivers of gold are flowing.
As much as the media loves writing about itself, in doing so it often fails to recognise the real story.
The most recent example came late last month, when coverage of a high-profile media merger overlooked the lesson for every business about technology change.
The deal making headlines is the proposed merger of Melbourne-based Southern Cross Media with Perth-based Seven West Media: a move one publication described as a “blockbuster” (which it isn’t).
What the transaction does demonstrate, though, is the need for management to be constantly alert to the way new technology can make or break a business.
The internet is what changed the way media functions in Australia because it enabled international competition to enter what was once an industry protected by the country’s isolation.
The challenge today comes from artificial intelligence (AI), which has the potential to affect every business; creating winners and losers in the same way the internet upended the media.
Knowing how much to invest in AI is the first critical question for company directors. If AI is ignored, it invites a similar outcome to what happened at once-big media companies, which failed to understand the power of the internet and lost control of their core business.
Property, car and job advertisements were once the rivers of gold for Australian newspaper publishers; protected by a technology advantage in the form of owning the printing presses capable of producing products that pleased advertisers and readers.
It worked well for decades.
The rivers are still running, but the gold is flowing into the pockets of other owners.
There is also the way the internet has created opportunities for small rivals with lower cost structures able to deliver a high-quality and tightly focused service to targeted markets.
Television and radio have also been hit by technology change, such as cable delivery of services, and the ability of international operators to stream programs. Social media has piled on more pressure, sucking advertising dollars out of the local broadcasting sector.
To fully understand what’s happened in the media, and to see what might happen to companies that ignore AI, it’s worth considering why it was incorrect to describe the Seven West and Southern Cross merger as a “blockbuster” deal.
The key word in analysing the transaction is materiality (size), because neither company is significant in a national context. Seven is slightly bigger, with a stock market value of $223 million, while Southern Cross is valued at $203 million.
In the stock market pecking order, Seven is the 774th biggest company. Southern Cross is 796th. And while the merged business has a notional ASX value of $426 million, it will still only rank around 578th, which is not particularly relevant for most investors.
The flipside of the story is to realise the rivers of gold can now be found in companies such as Seek (a preferred site for job hunters), REA Group (property classifieds) and CAR Group (the name says it all).
Seek is valued at $10.1 billion. CAR Group is valued at $14.1 billion. REA Group is valued at $30 billion.
Collectively, the three internet-based companies are valued at $54.2 billion.
Another issue adds insult to injury. Some investment banks ignore legacy media, instead recommending online opportunities such as Seek, CAR and REA, because that’s where the money is.
Playing the market
WESTERN Australia’s mining industry is taking a step back in time as China tries to force down the price of iron ore, starting with a reported ban on some grades produced by BHP.
But that’s not the only change blowing through the resources sector.
For the past 20 years or thereabouts, iron ore has been sold at prices set on exchanges in Shanghai and Singapore. Before that, prices (and volume) were set in company-to-company deals during the so-called ‘mating season’ of miners and steel mills.
Whether China can revive the old system and achieve a lower price is uncertain, but there is greater certainty in another significant shift as buyers of minerals and metals look for ways to ensure future supplies.
The change is a variation of a Japanese manufacturing system called ‘just in time’, which calls for parts used in a factory to be delivered as required rather than stored on site.
The new approach to commodity buying is called ‘just in case’ and stems from a realisation it might be unwise to assume the raw materials needed in a manufacturing process will always be available.
Chinese bans on the export of rare earths is an example of how just-in-case management is spreading. And Australia is a likely beneficiary, especially as US and European manufacturers look for non-Chinese sources of supply.
