Why Warren Buffett is investing in newspapers
They say newspapers are dying. Really? Then why is Warren Buffett buying them by the dozen?
The influential 20th century economist John Maynard Keynes once wrote that he changed his mind when the facts changed. Warren Buffett – one of the world’s wealthiest businessmen – is obviously a fellow believer because he has certainly changed his tune on the future of newspapers in the space of a couple of years. He’s gone from permafrost bear in 2009 to an almost raging bull in 2013. But don’t expect his admirers in the media and among analysts to highlight this change of heart.
Back in 2007 he started saying that newspapers were dying, and again in 2008, while in 2009 at the AGM of his company, Berkshire Hathaway, Buffett was positively negative, saying their future appeal was all but terminal. “For most newspapers in the United States, we would not buy them at any price. They have the possibility of nearly unending losses… I do not see anything on the horizon that sees that erosion coming to an end. Twenty, 30 years ago, they were a product that had pricing power that was essential,” said Buffett. “They have lost that essential nature.”
Now that’s pretty negative. But Buffett has left that view behind, his opinion swinging 180 degrees, judging by the stepped-up pace of newspaper purchases in the past year or so, with Berkshire Hathaway (of which he is primary shareholder, chairman and CEO) spending close to $400 million (around R3.5 billion) buying newspapers across the US. That’s despite more newspaper closures, falling ad revenues and sales, and general doom and gloom from the industry and advertisers.
But his change of heart wasn’t noted in the many stories at the time, from the New York Times, the Wall Street Journal or any other prominent newspaper around the world. They simply reported his recent purchases and comments about why he was buying newspapers again.
Buffett’s reversal of opinion has echoes of other certainties about how some things were inevitable (such as the death of music by download, the collapse of movies caused by television, and the death of radio as a result of long-playing records, TV and the digital age). Much of that gloom has emanated from newspapers and journalists themselves, and much of it has been misplaced. For example, we learned recently that the music business grew in 2012 for the first time in 13 years. This came as a surprise because the comfortable assumption was that the internet, iPods, downloads etcetera had condemned the analogue music business, especially CDs.
But just as vinyl isn’t dead (but the cassette tape is), so too is it certain that music generally will be around in one form or another. The same applies to radio (TV was supposed to kill it) and cinemas. Newspapers and TV (free to air and subscription) are also on the endangered species list for analysts, journalists – who should know better – and many investors.
The future of newspapers remains clouded around the world. They have been slimming down, closing or moving online in the US, UK and Germany. In Australia, papers have been shrinking and heading online with the Sydney Morning Herald and the Melbourne Age leading the way in Fairfax’s current survival plan. In the US, one newspaper group in the Midwest went bust last month for the second time in three years. The mighty New York Times and Financial Times are being downsized and reshaped for the digital world. And soon we will see the real condition of the newspaper empire Rupert Murdoch built – it won’t make happy reading or be nice – when his newspapers and other publishing assets (with some pay TV assets in Australasia tacked on) are set free to fight the trend on their own.
But the mixed outlook for analogue newspapers doesn’t mean they will disappear sooner or later. In one way or another, capable owners and managers will emerge to give hope and ideas for their continuation.
And that’s where Warren Buffett comes in. Judging by his recent comments, he’s probably now the world’s leading ‘bull’ on newspapers. In the past 18 months, his Berkshire Hathaway investment group acquired 63 newspapers, including 28 daily newspapers for $344 million to add to the long-time holdings in papers such as The Washington Post and the Buffalo News, among others. The bulk of the buys were from Media General.
But one of those papers, The News & Messenger in Manassas, Virginia, was closed at the end of last year with the loss of 105 jobs. Then, Buffett replaced that with a daily paper in Tulsa, Oklahoma, for an undisclosed amount, to add to his growing empire.
So Buffett’s doom-laden views in the depths of the global financial crisis and the onslaught of the internet, advertisement slowdown and recession in 2007-09, culminating in the ‘never ever’ comments at the AGM that year, now seem very distant.
His latest commentary to shareholders was: “Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbours will be read to the end.
“Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents… Charlie [Munger, vice-chair of Berkshire Hathaway and Buffett’s business partner] and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible internet strategy will remain viable for a long time.
“Now the world has changed. Stock market quotes and the details of national sports events are old news long before the presses begin to roll. The internet offers extensive information about both available jobs and homes. Television bombards viewers with political, national and international news. In one area of interest after another newspapers have, therefore, lost their ‘primacy’. And, as their audiences have fallen, so has advertising. (Revenues from ‘help wanted’ classified ads – long a huge source of income for newspapers – have plunged more than 90% in the past
“Even a valuable product, however, can self-destruct from a faulty business strategy. And that process has been underway during the past decade at almost all papers of size. Publishers – including Berkshire in Buffalo – have offered their paper free on the internet while charging meaningful sums for the physical specimen.
How could this lead to anything other than a sharp and steady drop in sales of the printed product? Falling circulation, moreover, makes a paper less essential to advertisers. Under these conditions, the ‘virtuous circle’ of the past reverses.
“The Wall Street Journal went to a pay model early. But the main exemplar for local newspapers is the Arkansas Democrat-Gazette, published by Walter Hussman, Jr. Walter also adopted a pay format early, and over the past decade his paper has retained its circulation far better than any other large paper in the country. Despite Walter’s powerful example, it’s only been in the last year or so that other papers, including Berkshire’s, have explored pay arrangements. Whatever works best – and the answer is not yet clear – will be copied widely.
“Berkshire’s cash earnings from its papers will almost certainly trend downward over time. Even a sensible internet strategy will not be able to prevent modest erosion. At our cost, however, I believe these papers will meet or exceed our economic test for acquisitions. Results to date support that belief.”
The top stocks into which Berkshire has invested include Amex, Coca-Cola, Posco, Proctor and Gamble and Wells Fargo. The largest media holding is around $1.15 billion worth of US satellite broadcaster, DirecTV. Berkshire also has around $652 million invested in John Malone’s Liberty Media, and smaller amounts invested in Gannett (a big US newspaper and TV company and owners of USA Today), Media General (from which Buffett bought 63 papers last year), Lee Enterprises, and, of course, nearly
$600 million invested in the Washington Post where he is the biggest shareholder. The papers in Buffalo and Omaha are owned outright. Six percent of IBM is his only significant technology related stock (worth more than $13 billion). He doesn’t own shares in News Corp, Comcast or Disney (he used to), because of governance concerns and issues with board and management performance.
This new-found optimism about newspapers (compared to his views in 2009) will see Buffett top of the call lists for bankers looking to sell The Boston Globe, New York Times, LA Times and possibly Chicago Tribune for the Tribune Co, which is coming out of bankruptcy. Rupert Murdoch and his new News Corp have been rumoured as possible buyers of some of these papers. Superficially Buffett and Murdoch have similar views about the future of papers, but Buffett’s is solely financial, while Murdoch’s is financial and political. Murdoch loves newspapers for the influence they have on governments, or used to before the News Corp board forced the company to split itself in two. Buffett would never think of that. n
Glenn Dyer is a business and media commentator for Crikey.com.au, an online provider of Australian news, analysis, insider gossip, reviews and prescient tips about politics, media, business, the law, culture and international affairs.