The Hypergene MediaBlog drew my attention to a report about the shareholder Q&A at the recent Berkshire Hathaway shareholders’ meeting where Warren Buffet (Chairman) and Charlie Munger (Vice Chairman) answered two questions relating to newspapers. Their answers are interesting in the context ot the considerable space which Australian newspapers devote to talking about the future of newspapers. I’m reminded particularly of the recent interview with Ron Walker, Fairfax Chairman. I’d prefer to see more realistic commentary from newspaper publishers about the future of print product compared to their online offerings.
Here’s how Buffet and Munger responded to the two 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 that’s 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 people’s 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 people’s 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 didn’t require printing or shipping, and people became less willing to pay for World Book sets. It doesn’t mean that it’s not worth $600. But competition has eroded returns.
CM: It’s a rare business that doesn’t 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. It’s unlikely that at most papers, circulation or ad pages will be larger in five years than they are now. That’s even true in cities that are growing.
But most owners don’t 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 companies’ earnings power. Sometimes there’s 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 don’t see it. It’s hard to make money buying a business that’s 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 couldn’t live without them. But a lot of people can now. This used to be the ultimate bulletproof franchise. It’s not anymore.
CM: I used to think that GM was a bulletproof franchise. Now I’d put GM and newspapers in the “Too Hard†pile. If something is too hard to do, we look for something that isn’t 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 have—50 years or more. It’s been interesting to watch newspaper owners and investors resist seeing what’s going on right in front of them. It used to be you couldn’t make a mistake managing a newspaper. It took no management skill—like TV stations. Your nephew could run one.
My interest is in the newsagency channel where there are close to 5,000 independently owned small businesses investing in a future built around newspapers. I accept (and hope) newspapers will be around for decades to come, there is no doubt that consumer habits are changing. This will impact the supply chain and that’s where there are consequences for newsagents. While publishers owe newsagents nothing, the reality is that they control much about newsagent operation. This means they have an obligation to be more transparent about their plans so that newsagents, in turn, can make more informed investment decisions.
