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A report issued July 19 by the stock analysis firm Veritas Investment Research has led to a sharp drop in the unit price for the Yellow Pages Income Fund, which owns Canadian publisher Yellow Pages Group.

According to this article, Veritas analyzed more than 33,000 pages of YPG Yellow Pages ads from 2003 to 2005 and found the publisher is losing ads at a brisk pace in its major markets.

One response we would have is, "So what else is new?" Most, if not all, major incumbent publishers are seeing erosion in their large market ad base, the result of competition from other publishers, the Internet, the economy, demographic trends and so forth. This is not to minimize the issues, since it is one of the most vexing challenges the directory industry faces. However, incumbents often experience the most precipitous erosion among their smallest accounts, which do not always generate as strong a return on investment as larger accounts. This suggests there may be an opportunity for competitors to target these smaller businesses with a product at a lower price point. It does not necessarily mean those advertisers that remain in the book are not getting a good return for their advertising dollar.

Veritas also calls YPG's acquisitions of classified operators and other directory publishers efforts to mask declines in its core business. Another way to look at it is as prudent diversification.

The Veritas report seems to suggest that YPG has gotten an easy ride in Canada, with too few questions being asked about its underlying business because the blue sky story made everyone more money. This may be a fair point. But the suggestion that core market erosion is a huge revelation is, to us, a bit overblown.

As of this writing, the fund’s unit price is C$14.52, still north of the C$13 Veritas says the security is worth.

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