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Should you buy Fairfax Media?

Fairfax Media (ASX: FXJ) is finally making moves that make sense in a 21st Century economy. Fairfax was basically ruined by a myopic board and management in the early years of this century, when they refused to join forces with companies like Seek (ASX: SEK), Carsales (ASX: CRZ) and REA Group (ASX: REA). These three companies are the main reason that Fairfax is now a shadow of its former self.

Possibly the only reason to buy shares in Fairfax is to gain exposure to its Domain business. Domain.com.au is Fairfax’s (less successful) answer to realestate.com.au, and although it is clearly second best, the business is valuable because real estate advertising, in general, is lucrative. Because it is second best, it is usually the more expensive properties that are advertised on Domain. This is because in essence all properties must be advertised on realestate.com.au, but agents usually only advertise on other sites when the potential commission is large.

Having comprehensively failed to secure the number one position in car sales, real estate or job advertising, Fairfax is at least making a serious effort to maintain Domain’s number two position. Earlier this year the company made the positive step of installing Antony Catalano as the CEO of Domain. Mr Catalano was previously the CEO of Metro Media Publishing, a start-up that damaged Fairfax by taking a large chunk of its suburban advertising revenue, before merging with Fairfax in 2012.

On Wednesday, Fairfax announced that it has strengthened its Domain business with the purchase of Property Data Solutions, a company that provides data subscriptions via its PriceFinder service. The acquired company has more than 5000 subscribers, and will be combined with Fairfax’s similar service, which is called Australian Property Monitors. Better yet, the new entity, APM PriceFinder will be run by the current CEO of Property Data Solutions, Tom White.

Fairfax has been a disastrous investment over the last decade, primarily because management have failed to understand that they must use their older brands to build new (and more lucrative) internet businesses.

The new Domain combines advertising with a subscription service that provides pricing data. This means that it looks a lot more like the number three real estate website, onthehouse.com.au. The number three website is owned by the eponymous Onthehouse (ASX:OTH), and has managed to compete because it combines pricing data with a search function.

I had previously entertained the view that Onthehouse might eventually overtake Domain and become the second-best real estate website. The latest developments make that a bit less likely. Personally, I’m not sure the market can sustain three real estate websites, and with Domain under the guidance of Catalano, I won’t yet be buying shares in Onthehouse, despite the company’s relatively strong cash flow.

Foolish takeaway

There have been rumours that Fairfax might eventually sell Domain, by far the most desirable business it owns. Given that the company recently sold Stayz, which is similar to Wotif (ASX: WTF), this is a fair proposition. Potential investors should not forget that Gina Rinehart is a major shareholder of Fairfax, and has stated her displeasure with the editorial line of the organisation. Ms Rinehart has also fought the company in court on numerous occasions.

Although I’m interested in the Domain business, I’d be more interested in investing in Fairfax if there were a few internet entrepreneurs on the board of directors, and on the share registry. I’m not willing to buy shares until I’m sure the company will retain the Domain business.

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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.

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