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Saturday, 20 May 2006
Buffett: Newspapers are "a business in permanent decline"
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.