Warren Buffet’s Wealth Increased $10 Billion Last Year, But None Of That Came From New Newspaper Investments -- Indeed, He Is More Negative Than Ever On The Industry’s Fate

Philip Stone March 13, 2007

For the past 15 years Warren Buffet has condemned newspapers as a business with declining growth potential, while at the same time his investments elsewhere have made him the world’s second richest man behind Bill Gates. Buffet added another $10 billion to his wallet in 2006 alone but in his annual letter to his Berkshire Hathaway shareholders he took the opportunity to lay it square on the line that the most newspaper management can hope for these days is to stem the rate of decline.

The very mention of his name ...

The very words “Warren Buffet” when connected to newspaper investments can make markets go wild, the most recent event on Feb.7 when shares in the New York Times Company rose 7% during the day, finally closing up 3.8%, on rumors that Buffett was possibly going to invest.  At the time ftm wrote it was very unlikely, based on Buffet’s comments during the years that he would embark on such an investment and it never came to pass, and since Berkshire Hathaway doesn’t comment on rumors there never was a company statement.

But Buffet has chosen his annual letter to shareholders to expand upon his views on the newspaper business. ftm has followed Buffet’s comments during the years based on his shareholder letter and comments at the time to the media, and he has never minced words in saying why he thinks newspapers are a business headed for the grave – it is just a matter of time how long it takes to get there. His basic theme is that the young are getting their information from the Internet and the old – the ones who do read newspapers – are literally going to their graves already!

None of this kind of negative talk makes people at such organizations as the World Association of Newspapers or the Newspaper Association of America very happy.  To them it is defeatism; just negative talk about a business that is redeveloping itself, becoming multiplatform, indeed adding record readership when print and the Internet is taken together. But to Buffet the proof is in the money coming through the door, and what he had to say this year really seems to hit home. No matter what newspapers do, the 20% plus profit margins of long ago are but a distant memory; they will not return.  And it is not that he speaks without newspaper experience – his company owns the Buffalo News and 18% of the Washington Post Company where he sits on its board.

So, let’s now quote extensively from Buffet’s shareholder letter because in plain English he really does explain where the newspaper industry is coming from and why he foresees margins will only continue to decrease. And with his success, how do you argue with this man’s business acumen?

To set the stage --“When an industry’s underlying economics are crumbling, talented management may slow the rate of decline; eventually, though, eroding fundamentals will overwhelm managerial brilliance. And fundamentals are definitely eroding in the newspaper industry. The skid will almost certainly continue.”

Buffet admits that years ago it was easy to make huge returns in the newspaper business. But the beginning of the end started when towns and cities that had two competitive newspapers suddenly found themselves locked in a war – a war Buffet calls the “Survival of the Fattest.”

“For most of the 20th Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance or politics, newspapers reigned supreme. Just as important, their ads were the easiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets. The great majority of families therefore felt the need for a paper every day, but understandably most didn’t want to pay for two. Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages.   This circularity led to a law of the newspaper jungle: Survival of the Fattest.” (Ed note: That usually translated into the death of the PM newspaper).

“Thus, when two or more papers existed in a major city (which was almost universally the case a century ago) the one that pulled ahead usually emerged as the stand-alone winner. After competition disappeared, the paper’s pricing power in both advertising and circulation was unleashed. Typically, rates for both advertisers and readers would be raised annually – and the profits rolled in. For owners this was economic heaven.”

Buffet noted that as far back as 1991 he warned that the insulated world of newspapers was changing, but he said publishers gave him short shrift. “Newspaper properties, moreover, continued to sell as if they were indestructible slot machines. In fact many intelligent newspaper executives who regularly chronicled and analyzed important worldwide events were either blind or indifferent to what was going on under their nose.” Could he there be thinking of the New York Times Company’s purchase of the Boston Globe in 1993 for $1.4 billion, and on which the Times Company wrote down its value this year to around $600 million, or McClatchy’s purchase of the Minneapolis Star Tribune in 1998 for $1.2 billion which it sold in December, 2006 for $530 million plus $160 million in tax credits, or even McClatchy’s buy of Knight-Ridder last year?

“Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the Internet, had come along first, newspapers as we know them probably would never have existed.”

He noted his Buffalo News is doing well in a bad situation – “nevertheless this operation faces unrelenting pressures that will cause profit margins to slide “-- and it, too, has invested heavily in its online platform as have most other newspapers that accept that if you can’t fight the Internet then you had better join it. But he puts that in brutal perspective, too. “The economic potential of a newspaper Internet site —given the many alternative sources of information and entertainment that are free and only a click away – is at best a small fraction of that existing in the past for a print newspaper facing no competition.”

Probably with an eye on the new ownership in Philadelphia and the various billionaires who want to buy the Tribune Company for its newspapers, Buffet says that he understands how for a local resident ownership of a city’s paper can produce instant prominence, bringing with it power and influence. But he gives those billionaires a lesson in newspaper economics 101:

“Aspiring press lords should be careful; there’s no rule that says a newspaper’s revenues can’t fall below its expenses and that losses can’t mushroom. Fixed costs are high in the newspaper business, and that’s bad news when unit volume heads south. As the importance of newspapers diminishes, moreover, the ‘psychic’ value of possessing one will wane.”

He says Berkshire will continue ownership of the Buffalo News “unless we face an irreversible cash drain.” He says he hopes a combination of print and online “will ward off economic doomsday for newspapers” but as newspapers look for a sustainable business model, “the days of lush profits from our newspaper are over.”

And echoing a point that media luminaries such as Walter Cronkite have been saying recently, Buffet notes newspapers are fundamental to a country’s democracy. “A free and energetic press is a key ingredient for maintaining a great democracy.”

Makes one question out loud what value Wall Street puts on democracy. Then again, with many public newspaper companies not far from their 52-week lows perhaps we already have that answer.

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