When Warren Buffett made the decision to purchase 28 local newspapers for $344 million, he stated, "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." To Buffett, the local paper's monopoly on news means a chance to squeeze out reasonable profits.
For national and global papers, like Pearson's (NYSE: PSO ) Financial Times, The New York Times (NYSE: NYT ) , or The Washington Post (NYSE: WPO ) , Buffett's bullish bet on small-town papers wasn't much of an endorsement. However, just as there is value in local news, there is bound to be value in a position as the preeminent provider of global coverage. And if a business can leverage its leadership in news into other profit centers, the economics of a newspaper could go far beyond what is reported on the income statement.
A white-and-black-and-red-all-over scene
It's no surprise that newspaper finances don't look pretty. Take the revenues from the newspaper segments of a few of the biggest players over the past five years:
|Company||Revenue of newspaper division (millions)|
|The New York Times||$2,440||2,022||1,980||1,952||1,990|
|Pearson (Financial Times)||$1,270||571||643||681||706|
Now, the importance of this newspaper revenue depends on the company. For Pearson and the Washington Post, newspaper divisions represented only 7% and 14% of revenue in the latest year, respectively. The New York Times, in contrast, is a very pure play on a newspaper, with advertising and circulation comprising the heavy majority of revenue.
As bad as the straight revenue and costs of a newspaper have been, they still can provide value well beyond their segment's profit figure -- as long as a company has other segments.
Newspapers, while they may lack money, hold an intangible that few other businesses have: power. The ability to disseminate information, with a respected name, is a great tool that can assist any product or service the parent company sells. While this doesn't mean much for a pure play like the New York Times Company, Pearson and the Washington Post's sprawling empires can take full advantage of this situation. The Financial Times reaches 2 million global readers per day. The Washington Post claims 19 million U.S. readers and 6 million international readers for a monthly average. While convincing advertisers of an audience's value may be difficult, these papers can use their own networks to advertise their other services.
But it's not only advertising that newspapers can take advantage of; it's the brand that a newspaper broadcasts. Newspapers remain the most trusted of all media forms, as they still adhere to journalistic standards at a time when cable news and blogs report the most feeble of rumors. To leverage this trust, a company like Pearson can tie in its educational offerings with the name of the Financial Times.
And, in fact, it's just what they're doing. Pearson is reorganizing, with one of its six business units combining the Financial Times with Pearson's English language education and computer-based testing businesses. With Jeff Bezos' recent purchase of the Washington Post, such brand leverage is a little less obvious. However, Bezos' quote concerning the purchase (one of many) is telling:
It would be doing a disservice to this organization for my motivations to be just a business curiosity. It's much, much deeper than that. Now, I never worked on the school newspaper. There are no journalists in my family. I have a lot of experience with journalists, but always as a subject. But I really do believe ... This may embarrass Bob [Woodward] a little bit, but I watched the Watergate hearings on my elbow, on the living room floor, next to my grandfather -- who didn't turn them off. These things make an impression.
Value beyond the page
The profit lines of newspaper publishing seem like the perfect investment to avoid. However, there is an audience reach and brand value that can be unlocked outside of the typical subscription and advertising revenue. With The Washington Posts' inevitable coziness with Amazon.com, both companies could benefit. With Pearson's reorganization to combine the paper with other segments, the Financial Times brand value can be unlocked. The New York Times, meanwhile, must still continue to tinker with paywalls and legacy costs.
Newspapers investors must be in it for the long haul
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