Last year, Buffett purchased a small Ohama newspaper. This year, at Berkshire Hathaway’s 2012 annual meeting, Buffett told a crowd numbering in the tens of thousands that he’s leaving the door open for future newspaper investments.
I’ve broken down Buffett’s previous railroad investments, so now I’ll try my hand at deconstructing Buffett’s newspaper play. (If you’re in a reading mood, I’ve also deconstructed the economic advantages of “take and bake” pizza chains.)
So the last 10-15 years haven’t been so kind to newspapers. One doesn’t need to be a genius to see that low-cost online media cuts into a newspaper’s edge. Of course, circulation isn’t the only concern for publishers. The real loss is in the high margin business of classified advertising.
A State of the Media report shows classified advertising revenue to be in consistent decline. From 2000 to 2009, revenues from classified advertising fell 70% from $19.6 billion to $6 billion. Classified ads were cash machines; every single inch of a classified section is monetized by ad sales, and the revenues are proportionally larger, given that the ads are smaller.
Selling hundreds of very small ads generates far more revenues than one very large advertisement. Finally, classified advertising pages have very high contribution margin, since no original content is necessary to draw viewers’ eyes.
The reach of classified advertising can’t keep pace with Craigslist, however. And, even if newspaper subscriptions are as widely-distributed as internet connections, it’s tough to beat a free listing online compared with a $15-$40 weekly ad in a local paper.
So how does Buffett intend to generate revenues?
Paying for News
Buffett asserts that strategic investments will be made only in newspapers operating in areas with a strong sense of community. This makes sense – only strong communities will pay $.50 per day to see the scores from Friday night’s high school football game. An AdAge study shows that nearly half of all newspaper subscribers say the main reason they maintain a subscription is local news reporting. So Buffett’s right on the money when it comes to community interest.
He goes further to say that newspapers in local communities could be profitable. But they have to stop competing with themselves by giving news away for free online; he’ll seek to monetize local news online rather than just give it away.
(I’ve always thought Facebook to be the new source of local news. This perspective on Facebook is the reason why I think it has slightly more staying power than the average dot com, but it’s also one of the reasons I’ll never own the stock. An electronic newspaper model at a dotcom price? I don’t think so!)
Losing his touch?
I should say that Warren Buffett’s investing style is very, very old. There are very few practitioners of the strategy today, and many of the names who employed the tenets of value investing are now dead after decades of rock star performance.
As a 20-something asset manager, Buffett invested as if he were a 70-year old geezer, picking up boring predictable businesses with relatively impressive returns on invested capital. One such boring business was the Washington Post Company, which made its debut in Buffett’s portfolio in 1973.
But maybe those old glasses are finally getting the better of him.
This chart shows the relationship between age and a love for newsprint stained thumbs:
Not surprisingly, the rate of change in readership is inversely related to reader age. The older one is, the less likely he or she will stop reading a newspaper. Forty-five percent fewer people between the ages of 18 and 35 report reading a newspaper in 2011 compared to 2000. However, only 12.5% of people ages 65+ have given up daily reading in the same span of time. Those who were 55-64 in 2000 (and who were less likely to read a newspaper than 65+ year olds then) have obviously aged into the older demographic over time.
Is Warren showing his age? Maybe it’s a bet on demographics (older people are wealthier, after all – and there will be more of them!) I think it is, in some way, a political move. Do I think Buffett wants to run the press? No, not really. But I don’t think he ignored a recent campaign finance reform change that would allow for unlimited campaign spending by unions and corporations. Political advertising is obscenely profitable for media firms.
And maybe it is just another end-of-life bet oh so popular with private equity firms like Ceberus, which recently purchased a stake in another declining giant, AT&T’s Yellow Pages phone books. Surely he doesn’t expect large cash flows in perpetuity, does he?
He’ll Make Money
Personally, I think there’s a future for good returns but only in very small areas with that sense of community AND where there is only one local newspaper. Even then, I think you’d want to pay a very small multiple of cash flows – I just don’t see the model 20 or 30 years out. And a clear balance sheet is a must; you wouldn’t want to be in a position where you have to pass on fixed interest costs to fewer and fewer subscribers every year. Ask airlines about long-lived legacy costs.
Baron Rothschild reaped massive profits purchasing securities after Napoleon’s loss at Waterloo, commenting that you should “buy when there’s blood in the streets, even if the blood is your own.” There is no question about the amount of blood on newspaper income statements. Investors do need to spend a little more time to discern between the economics of national news, and the economics of local news, however. The model is very different, as is the opportunity. As obvious as a decline in national newspapers might be, it is mostly irrelevant to the model of local newspapers.
Not to mention, Buffett’s latest deal for 62 newspapers priced at $142 million came alongside a $400 million credit agreement to the seller. The $400 million credit line nets him warrants worth 19.9% of Media General’s share count plus a 10.5% annual return on the $400 million investment. Even if newspapers prove to be a bust; his payback period from interest revenue on the credit agreement is only 3.5 years.
It’s a deal structured for profits all the way around. Newspapers are the icing on top – icing that sure looks like it may prove to be very, very sweet.