MediaBlog reader and Buffalo Rising co-founder George Johnson tipped us off to these interesting remarks by Warren Buffett and Charlie Munger during the shareholder Q&A at the recent Berkshire Hathaway 2006 shareholders’ meeting. Here are the two relevant shareholder questions:
Do you think that the media business has become permanently less profitable due to new technology?
WB: People will always want to be entertained and informed. But people just have two eyeballs, and there are only 24 hours in a day. Fifty or 60 years ago, media for most people consisted of the local movie theater, radio, and the local newspaper. Now people have a variety of ways of being informed faster (if not necessarily better), and have more entertainment options, too. But no one has figured out a way to increase the time available to watch entertainment.
Whenever more competitors enter a business, the economics of that business tends to deteriorate. Newspapers are still highly profitable, but returns are falling. The size of the audience for network TV is declining. For years, cable TV was thought to operate in its own world, but thatís changing. Few businesses get better with more competitors.
The outlook for newspapers is not great. In the TV business, a license from the government was essentially the right to a royalty stream. There were basically three highways to peopleís eyeballs, and companies like P&G, Ford, Gillette, and GM would pay a significant amount of money to be get on those highways and advertise their products to a mass audience. But as the ways to get in front of peopleís eyeballs increases, the value of those highways goes down.
World Book used to sell 300,000 sets per year in the mid-1980s, each for $600. Then the Internet cam along; it didnít require printing or shipping, and people became less willing to pay for World Book sets. It doesnít mean that itís not worth $600. But competition has eroded returns.
CM: Itís a rare business that doesnít have a way worse future than it has a past.
WB: The thing to do was to buy the NFL when it was first organized. There are now more ways than ever to transit events; value can be extracted from them in different ways.
If you were looking at newspaper publishers as possible investments, what would you use as a margin of safety?
WB: What multiple should you for a company that earns $100 million per year whose earnings are falling by 5% per year rather than rising by 5% per year? Newspapers face the prospect of seeing their earnings erode indefinitely. Itís unlikely that at most papers, circulation or ad pages will be larger in five years than they are now. Thatís even true in cities that are growing.Source: Matt Stichnoth notes from the annual meeting on Bankstocks.com. For more, see: Fat Pitch Financial’s Ultimate 2006 Berkshire Hathaway Annual Meeting Guide
But most owners donít yet see this protracted decline for what it is. The multiples on newspaper stocks are unattractively high. They are not cheap enough to compensate for the companiesí earnings power. Sometimes thereís a perception lag between the actual erosion of a business and how that erosion is seen by investors. Certain newspaper executives are going out and investing on other newspapers. I donít see it. Itís hard to make money buying a business thatís in permanent decline. If anything, the decline is accelerating. Newspaper readers are heading into the cemetery, while newspaper non-readers are just getting out of college. The old virtuous circle, where big readership draws a lot of ads, which in turn draw more readers, has broken down.
Charlie and I think newspapers are indispensable. I read four a day. He reads five. We couldnít live without them. But a lot of people can now. This used to be the ultimate bulletproof franchise. Itís not anymore.
CM: I used to think that GM was a bulletproof franchise. Now Iíd put GM and newspapers in the ďToo HardĒ pile. If something is too hard to do, we look for something that isnít too hard. What could be more obvious?
WB: It may be that no one has followed the newspaper business as closely as we have for as long as we haveó50 years or more. Itís been interesting to watch newspaper owners and investors resist seeing whatís going on right in front of them. It used to be you couldnít make a mistake managing a newspaper. It took no management skillólike TV stations. Your nephew could run one.
I read this article, and then I diverted to read through the postings on the BuffaloRising blog. One of the things that sifted its way to the forefront as I finished reading the last post there was: newspapers are not recognizing the global nature of news circulation and, therefore, missing an opportunity to truly fill a niche ó the local.
One of the main complaints about Buffalo rising was that it is too easily scooped by the local cable/TV reporting and that it relies on AP and other feeds for a great deal of its content; and they are really weak on investigative reporting. Global and International news is a commodity that local papers tap into. But global and international news organizations do not necessarily tap into the local. What if the local papers concentrated on being as thoroughly local as possible and developed in-depth content that the sound-bite oriented TV reporting can only do once in a while, one telecast at a time.
The local stories in so many local papers are more gossip than news, and that can change. It seems to me that every story, no matter how mundanely local, has levels of complexity and depth that can be explored. There are always issues in a community, dialog to be had, consciousnesses to raise. ďNew mediaĒ can play a big part in that and still make newsprint profitably worthy of its ink.
Let the global & international news agencies do their schtick, and let the local papers get the local responses and consequences of global & international events on the community, rather than just relay a feed in addition to constant and quality investigative reporting on all thing local.
I’m a little confused. Are you saying that Buffalo Rising relies on feeds from AP and other sources?
All of our content is original. Our local public radio sponsor provide 3 links to category specific audio, but other than that, all the content is produced by staff or community contributors.
And all of our content is hyperlocal...even the Warren Buffett story as his company owns the city’s paper of record.
My main point was really not at all about Buffalo Rising. I could (and probably should) have left out reference to Buffalo Rising altogether and just focused on the issues that were raised in the blog posts where Buffalo Rising was merely a convenient setting. I have no data to know one way or the other whether any of the insinuations from the posts is true, and I did not mean to imply that they are true or to validate any of them. I believe you have quite adequately cleared up any confusion my post may have engendered.
So, let me try again ...
In this forum, the topics are about citizen journalism and related issues. I, for one, do not believe that newspapers need to be in permanent decline. They appear to have a declining trajectory because of the nature & quality of their content, their business model, limited sources (not leveraging citizen journalism to the degree possible), and their depth (generally skimming the surface of issues that would really only interest the local but not to the degree that would satisfy the marketís interests). There are ways for papers to capitalize on the virtues that electronic media cannot easily satisfy (now), but they are apparently not adapting easily or willingly for a variety of suggested reasons.
too long essay,but good
I like to read long essays. So there.
Buffett knows what he is talking about here.
Mr. Buffett is a genius at investing but I disagree with him that newspapers are a business in permanent decline, it’s unfortunate he has joined the sky-is-falling club. Contrary to conventional wisdom, said the World Association of Newspapers earlier this month, newspaper circulation is growing and new newspapers are being launched at a remarkable rate. Even in North America and Europe, where negative assumptions (such as Mr. Buffett’s) about the industry are widespread, both circulation and the number of new titles have increased, according WAN’s latest World Press Trends.
I would suggest to Mr. Buffett that the problem of U.S. newspapers is not of a declining industry, but rather of an industry that has failed to adapt to societal changes. The customers (our readers) no longer want what we give them in the way we give it to them. If our corporate “suits” and newsroom managers continue to believe that change is about restructuring and about design, Mr. Buffett’s prediction will come true. Change now is about culture, innovation, mentality and adapting to what society is demanding of us.