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Warren Buffett says conventional newspapers are “toast”

Andrew Main
Thursday, May 02, 2019

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It’s not exactly hot news that the newspaper industry is pretty much on the ropes globally but when investment legend Warren Buffett announces that most conventional papers are “toast”, as he did a few days ago, it’s worth paying particular attention.

That’s because the Oracle of Omaha spent a fair bit of the last decade swimming against that particular stream, picking up local papers in the US on the assumption that local news is still of great interest to most people.

He’s swung now to the view that it’s the big newspapers that are most likely to survive, such as The New York Times, The Wall Street Journal and The Washington Post, all of which he also reads.

Their big advantage, in his eyes, is that they have devised a digital product and associated business model that will take them well past the end of the newsprint age. The others haven’t, he believes.

His BH Media business has quite a spread of more than 80 publications but the jewels in that dented crown are the likes of The Buffalo News and the Omaha World-Herald, the latter being a brave title in these straitened days.

What seems to have tipped him over the edge into pessimism has been the enormous inroads made by online advertising, not only in the bigger publications but also the smaller local papers.

Buffett’s well-tried theory of buying businesses is that they should ideally have a “moat” around them to discourage competition but geographical coverage, as in the moat once enjoyed by local papers, no longer cuts the mustard.

As any smartphone owner can tell you, if you can pick up a 4G signal even in some more remote locations, you can identify local services, restaurants et cetera without going near the printed page.

In other words, local papers in the US (and Australia) have gone or are going the same way as street directories.

Of course people still want to read local news but the demise of the advertising based model has meant that there’s far less money around to pay the reporters.

Not only that but “It upsets the people in the newsroom to talk that way, but the ads were the most important editorial content from the standpoint of the reader,” Buffett said a year ago, and he’s still saying versions of the same comment. 

That’s a bit harsh, but he should know.

How much less money?   In the US, the Pew Research Centre says that newspaper advertising revenue dropped from $US49 billion to $US18 billion in the decade between 2006 and 2016.

Buffett made his gloomy “toast” reference in an interview with Yahoo! Finance, quite probably as a plug for the fact that the same organisation will be live streaming the Berkshire Hathaway meeting from Omaha, Nebraska, this coming Saturday May 4. (Our Sunday).

Buffett told Yahoo! Finance that in previous years he had estimated newspapers’ chances of survival on the basis of “survival of the fattest”, given that the fattest papers carry the most advertising. There are a lot of skinny papers out there  now.

He’s clearly planning an announcement at this year’s annual meeting about Berkshire’s newspaper operations, which currently cover 30 different markets in the US.

Not that they matter in the Berkshire accounts: Berkshire turned in an operating income of just under $US25 billion, repeat billion, just for the last quarter of 2018.

As Buffett put it in his usual understated way, the newspaper assets “are not of great consequence in the Berkshire Hathaway accounts”.

Buffett has regularly said his company had bought the various newspapers at “reasonable prices”, although in my view there will have to be writedowns at some point, perhaps very soon.

At the 2018 annual meeting, his offsider Charlie Munger said the decline in advertising revenue had happened faster than he and Mr Buffett had predicted.

“It was not our finest bit of economic production,” he told shareholders.

He said they had bought the newspapers “because we both love newspapers” and because US newspapers tend to keep politicians honest.

There are now around 1,300 daily newspapers in the USA, down from 1,700 five years ago.

“We’re going to miss those newspapers if they disappear,” Munger said, displaying more sentimentality than we are used to from Berkshire Hathaway management.

He’s allowed to be a bit nostalgic. He was born on 1 January 1924 so he’s now a sprightly 95.

Berkshire last year effectively conceded it was not set up to actually run newspapers, handing over management of most of them to a specialist called Lee Enterprises, which Berkshire pays $US5 million a year.

Lee will also get a share in the profits, assuming there are any. Lee is based in Davenport, Iowa.

The deal does not include Berkshire’s newspaper The Buffalo News or its television interests. Berkshire bought that newspaper back in 1977, before almost all of the others. More sentimentality, perhaps.

What does this all mean for Australia? In simple terms, we tend to go where the US has already been, and we don’t have the luxury of having octogenarian businessmen happy to throw money at the printed product out of nostalgia.

Kerry Stokes, who runs all the major papers in Western Australia as part of his Seven Media group, is a mere lad of 78 and while he’s a big buyer of Victoria Crosses to donate to the Australian War Memorial, he’s less of an easy touch when it comes to media assets. 

It’s all looking pretty damn bleak.

Perhaps the most apt summary of the Australian newspaper business occurred on the Thursday after Easter, when two pages of Nine Entertainment’s Sydney Morning Herald found their way into an early edition of News Corp Australia’s Sydney Daily Telegraph.

It was a printers’ mixup because the two rival papers now share News’ print works at Chullora, following Fairfax’s decision to close up its printing operations there in June of 2014, since when it has been toll printing at News’ adjacent operation since then.

That’s not to say there’s a merger on the horizon: just that the oldest major newspaper in Sydney has seen fit to close its own biggest print operation as a cost saver. That’s hardly a vote of confidence in the printed version.

Published: Thursday, May 02, 2019

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