Warren Buffet's comments on the Newspaper industry - "the underlying economics are crumbling"

The excerpt below is from Warren Buffett's annual shareholder letter. (See the letter in its entirety at Berkshire Hathaway's website.)


"Not all of our businesses are destined to increase profits. When an industry's underlying

economics are crumbling, talented management may slow the rate of decline. Eventually, though,

eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago,

"If you want to get a reputation as a good businessman, be sure to get into a good business.") And

fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits

of our Buffalo News to decline. The skid will almost certainly continue.

When Charlie and I were young, the newspaper business was as easy a way to make huge returns

as existed in America. As one not-too-bright publisher famously said, "I owe my fortune to two

great American institutions: monopoly and nepotism." No paper in a one-paper city, however bad

the product or however inept the management, could avoid gushing profits.

The industry's staggering returns could be simply explained. For most of the 20

th 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.

11

The great majority of families therefore felt the need for a paper every day, but understandably

most didn't wish 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.

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. (Interestingly, though papers regularly –

and often in a disapproving way – reported on the profitability of, say, the auto or steel industries,

they never enlightened readers about their own Midas-like situation. Hmmm . . .)

As long ago as my 1991 letter to shareholders, I nonetheless asserted that this insulated world was

changing, writing that "the media businesses . . . will prove considerably less marvelous than I, the

industry, or lenders thought would be the case only a few years ago." Some publishers took

umbrage at both this remark and other warnings from me that followed. 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 noses.

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.

In Berkshire's world, Stan Lipsey does a terrific job running the Buffalo News, and I am

enormously proud of its editor, Margaret Sullivan. The News' penetration of its market is the

highest among that of this country's large newspapers. We also do better financially than most

metropolitan newspapers, even though Buffalo's population and business trends are not good.

Nevertheless, this operation faces unrelenting pressures that will cause profit margins to slide.

True, we have the leading online news operation in Buffalo, and it will continue to attract more

viewers and ads. However, 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.

For a local resident, ownership of a city's paper, like ownership of a sports team, still produces

instant prominence. With it typically comes power and influence. These are ruboffs that appeal to

many people with money. Beyond that, civic-minded, wealthy individuals may feel that local

ownership will serve their community well. That's why Peter Kiewit bought the Omaha paper

more than 40 years ago.

We are likely therefore to see non-economic individual buyers of newspapers emerge, just as we

have seen such buyers acquire major sports franchises. Aspiring press lords should be careful,

however: 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, whereas owning a sports franchise will likely retain its cachet.

Unless we face an irreversible cash drain, we will stick with the News, just as we've said that we

would. (Read economic principle 11, on page 76.) Charlie and I love newspapers – we each read

five a day – and believe that a free and energetic press is a key ingredient for maintaining a great

democracy. We hope that some combination of print and online will ward off economic

doomsday for newspapers, and we will work hard in Buffalo to develop a sustainable business

model. I think we will be successful. But the days of lush profits from our newspaper are over."