Author: Mark Fletcher

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.

The Age publishes a piece today by Graeme Samuel, chairman of the ACCC (Australian Consumer Competition Commission). Samuel yesterday delivered a speech, “Granddad, what’s a newspaper?: the next media revolution“ which is the basis for the article. While considering the government’s recently announced media changes from a regulatory perspective, Samuel discusses, in brief, the considerable changes in how consumers access news and information. This is where I find the speech most interesting.

We don’t hear too much about the coming changes in how we will access news and information in Australia. All media outlets spin the challenges of convergence, disruption – call it what you will – to suit their purposes. Samuel does not have such a conflict. While publishers and broadcasters have management and financial resources necessary to modify their business plans in response to the changes, it’s at the small business end, particularly newsagencies. Where the impact could be greatest due to lack of planning.

Even though it may be outside his brief, I would like Graeme Samuel to deliver his speech to newsagents. It would serve as an important wake up call. The core business of newsagencies is changing. Slowly at present and maybe for a few years yet but change it will. The speed of change will pick up with time. Smart newsagents see this already and are evolving their business models They are merging home delivery territories. Others are morphing their retail businesses to a new level. Those not so smart expect publishers and other suppliers to take their hand if there is to be any change.

The newsagent channel consists of 4,600 retail outlets and around 3,500 distribution points. I’d guess that there are around 60,000 employees – 30% full time and 70% casual. In an average newsagency between 40% and 60% of revenue comes from newspapers and magazines. The infrastructure has a cost which is barely covered by today’s revenue. Any dilution of that will hit hard unless the lost revenue is replaced. This is what most newsagents cannot see. The do not understand the need to grow traffic from non newsagent and magazine seeking consumers.

I am not advocating any form of protection for newsagents. They exist in a deregulated world and are free to make their own decisions. However, with so many unaware of the impact of technological change someone in authority needs to tap them on the shoulder and suggest they look beyond a few steps in front. This is where Samuel could play a role. Given the involvement of the ACCC in the deregulation of the distribution of newspapers in 1999 they would be an appropriate body to educate newsagents.

The ACCC could assist newsagents in one key area: the magazine distribution model has not changed since prior to deregulation. This model sees newsagents provided low volume titles – those outside the top 200 – on inequitable terms. Supermarkets, petrol outlets and convenience stores refuse to carry these titles because they would not deliver an adequate return. The ACCC could look at the economic model in the context of the deregulation it facilitated and determine if the deregulation changes left newsagents with a magazine supply model which is anti competitive for them.

In the meantime one can only hope that newsagent associations and others will promote the Samuel speech to their members.

Courtesy of Paid Content is this story by James Pearce about an interview with Jack Matthews, the new head of Fairfax Digital. An interesting is somewhat shallow (for obvious commercial reasons) insight into their plans. His comments about newspapers and how they need to confront the challenges of online competitors are refreshing for someone employed by a newspaper publisher. I’d like to hear Jack Matthews speak with newsagents (maybe at the national conference on Hamilton Island later this month???) because he seems to tell it like it is. The interview underscores the importance of the digital strategy to Fairfax and this is at odds with the “our newspapers are our focus” mantra newsagents hear from publishers. While I agree newspapers have a future, digital is where the real action is. Newsagents investing hundreds of thousands of dollars (if not millions) in their retail and distribution businesses need to know more of what Jack Matthews knows. The interview can be heard here.

Newspaper publishers are devoting more and more newsprint to the disruption to their businesses brought about by technology – the Internet and mobile access. Yesterday the Australian Financial Review devoted two pages in their marketing section. (I can’t link because the stories are available to subscribers only.) It will be interesting to revisit some of these articles in five and ten years. On the one hand the publishers are all telling us it is business as usual while they invest hundreds of millions of dollars in online plays. If I were them I’d be making the same investment and I’d be more open about the future prospects of newspaper sales based on over the counter sales data.

Out of yesterday’s coverage was this quote from David Kirk, CEO of Fairfax, when discussing online classified advertising: “We need to be realistic. There are some forms of classified advertising that work better on the internet, such as low-end jobs and general merchandise trading.” He goes on to say that newspapers have responded. Well, some would call it a response. Taking newspaper classifieds and putting them online is not a response. The offerings do not compete with the innovative online advertising players. Newspaper online classifieds are too expensive. Newspaper publishers need to view their online portals as entry points with the data they gather being accessed from a myriad of sites and locations. This is where they can make money – from gathering content rather than by being the exclusive distributor.