One of our country's greatest forefathers, Benjamin Franklin, started his career as his brother's apprentice, printing the third newspaper to appear in Boston (and the fourth in America) in the 1700s. The newspaper had a higher level of quality, was the first to feature essays and letters from readers, and was the most expensive paper in the colonies. It only folded after repeated run-ins with the government. (Remember, this was before the First Amendment.)
One of our greatest investing idols, Warren Buffett, started his career (at least as a child) as a paperboy. He invested $10 million in the Washington Post (NYSE: WPO ) in 1973, bought the Omaha World-Herald last year for $200 million, and most recently spent $142 million to scoop up a bunch of smaller papers from Media General.
Some argue that Buffett's big newspaper purchase demonstrates that he is stuck in the past. But have things really changed since Franklin's time?
While the economics of news have changed, the fundamental qualities haven't. Quality journalism creates value, and whether wrapped with ads or put behind a pay wall, as long as that value exists, people will pay for it. Foolish colleague Jeremy Bowman argues, "The major threat to newspapers that charge for online content is from free providers such as blogs, community Listservs, and more established free new media sources such as AOL's (NYSE: AOL ) Huffington Post, not to mention classified ads being siphoned off by websites such as Craigslist, which has drained a key source of revenue for local papers."
But that free content comes at the expense of quality, and there are still consumers who would rather pay for quality content over blogs and repackaged summaries. Take the findings of Salon.com's editor-in-chief, Kerry Lauerman. Salon tried the aggregation strategy: "We monitored Twitter and Google for trending topics, and dispatched an intern to cobble together our own summary, posted it quickly, then prayed to the Google gods that the effort would win, if only briefly, their favor." But after results proved poor, Salon decided to spend more time on fewer articles. With 33% fewer posts from a year ago, it has attracted 40% more traffic -- similar to how Franklin's paper bested its competitors on quality.
A better market position
The economics of newspapers are actually a blessing on Buffett's purchase. Franklin's paper had competition, and new papers were a constant threat. Unlike then, the moat around current local papers is substantial: It's unlikely that new papers will open up to compete, local news brands have been established for years, and these papers can be a monopoly on local quality content.
As Buffett says, "I believe newspapers that intensively cover their communities will have a good future ... no one has ever stopped reading when halfway through a story that was about them or their neighbors." While a large player like The New York Times (NYSE: NYT ) has added 500,000 digital subscribers over the past year, unless it begins to cover your local school board candidates, local papers are well-positioned to use their legitimacy for monopolistic coverage -- whether it's on newsprint or Nooks.
No sign of senility or nostalgia
As Franklin wrote in Poor Richard's Almanack, "One good husband is worth two good wives; for the scarcer things are, the more they're valued." As quality news becomes scarce, it will only increase in value.
For Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) , these investments will not "move the needle in terms of Berkshire's economic value." And how could they for a $200 billion company? But what they do give Berkshire is another investment in sustainable competitive advantages -- and, as sentiment for newspapers goes these days, at a discounted price.
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