By Joseph Morrison
A deal has been announced allowing Berkshire-Hathaway (BRK.A, BRK.B) to acquire the Tulsa World, Berkshire's 28th newspaper along with a print stable that includes 42 additional publications. This is a questionable obsession for Buffett who is known as the premier value investor who only invests in good companies at a good price. This is questionable because it is difficult to see how a company can be good when it is in an industry which is in the tail-end of its lifecycle.
When the Internet proliferated from household to household, the newspaper industry failed to capitalize on this opportunity of a new way to distribute and monetize its product. By the time the industry caught on and attempted to monetize the Internet, the blogosphere and social media were taking hold, rendering the newspaper industry useless. Scarce are the people who would rather pay for news than get it for free. This is not to mention that the Internet changed the consumer's appetites. Yesterday's news is a day late. Now, some of the most iconic newspaper brands are in severe financial trouble. The L.A. Times is preparing to be sold off from the Tribune Co. as it emerges from bankruptcy at a much lower price for which it was purchased. The New York Times (NYT) another iconic brand has seen the share price fall from the June 2002 high of $51.50 to $9.82 as it trades today.
Perhaps the only thing bleaker than the business valuations is the outlook. In 2013, advertising revenue, the lifeblood to newspapers, is expected to be cut by one-third as marketers begin to focus on new marketing streams according to the American Marketing Association. This has already been a problem according to USA Today as decreasing advertising revenue has resulted in newspaper closures, cuts in delivery, cuts in staff, and reduction in pay. A further one-third reduction in this revenue in 2013, which has historically comprised 80% of total newspaper revenue will send the industry into a further tailspin.
The demographics are not looking so good either for this industry. Pew Research shows that the major concentration of readers are in the 65 and up age category. This is problematic on many fronts to the industry. This demographic is generally a fixed income demographic and if expenses need to be cut, expenses like newspapers will be among the first to go. The fixed income nature of this demographic also makes it a very undesirable demographic to advertisers since the size of the wallet is smaller. Additionally, the demographic is one which has a shorter life-span than a younger one. The demographics below that paint a grim picture. The younger the demographic, the less readership with 16% in the 40's category and 6% in the 20's category. That coveted 18-35 key demographic is not there and there are no signs that the newspaper industry will be gaining share in these demographics soon. This is problematic since this will keep the hemorrhage of advertising revenue flowing out the door. Additionally, and most problematic is if the newspaper industry cannot establish a base in this demographic, there will be no one who wants the product.
While the industry faces these grim realities, Warren Buffett keeps buying up newspapers. Mr. Buffett believes he has a plan that works, however. He is avoiding the major market papers and sticking to publications in smaller towns which are part of the community. He believes that subjects such as high school sports and city council meetings will keep the audience and attract the younger demographics. This is an understandable concept. The New York Times will not be attracting a high school quarterback to look at his picture in the paper whereas the local newspaper will.
Warrant Buffett is a billionaire investor who has been on the right side of bets for considerably longer than I have been alive. To many, what he says and does in the investing world is gospel. After all, this article is about his investments, and I really don't think Mr. Buffett cares about mine. Therefore, it is with great trepidation that I call into question these newspaper investments. What Mr. Buffett is failing to consider is the power of social media. High school athletes don't care about newspapers anymore. It's about Facebook (FB) and Google's (GOOG) YouTube exposure. There is much greater pride in getting a thousand likes for an article that is posted on Facebook, and thus scarcely monetized by the publisher, or getting many YouTube views and positive commentary than an article in print media. City councils have their own websites and YouTube channels now. Concerned citizens do not need to go to a meeting or read a recap to know what went on. One could view it streaming or at least a recording the next day online.
Overall, the world has gotten smaller and small towns have gotten to be smaller with that. Social media is the new journalism of the small towns and everyone now can act as unpaid journalists. If an investor wants to make media plays that agree with Warren Buffett, short the firms with big newspaper exposure like News Corporation (NWSA) or the New York Times. However, if an investor wants to invest in news media and beat Mr. Buffett, look towards social media. Facebook is still having monetization issues so perhaps hold off for now but Google has all the components necessary to take advantage of the market Mr. Buffett is attempting to capitalize on.