Earlier this month, Warren Buffett bought some newspaper titles through his holding company, Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) . This surprised many people, both inside and outside the industry, because the newspaper business isn't what it used to be.
During the last decade, people have increasingly been getting their news from other sources, especially the Internet, which has caused a sharp decline in both the number of papers sold and the associated advertising revenues. The result is that the share prices of the quoted newspaper companies have generally plummeted. Shares in Trinity Mirror, publisher of the Daily Mirror and some 240 regional papers, are down by almost 94% over the last 10 years. Johnston Press, publisher of The Scotsman, has done even worse with a 98% fall. So why is Buffett buying newspapers, and should you follow him?
Earlier this month, Buffett bought 63 regional newspapers from Media General (NYSE: MEG ) in a deal worth $142 million. He followed this up last week by writing a memo to the editors of Berkshire's existing newspapers, in which he stated that he was on the lookout for more.
His argument is that local and regional newspapers still possess a strong moat because they have an effective monopoly over the large-scale distribution of printed news and advertising within their own district. They can build upon this by focusing on the community aspects of their business, but first they must correct their biggest mistake: providing stories for free over the internet. In doing this, they caused many people to lose the newspaper-buying habit or never acquire it in the first place, because we can all pick and choose stories online.
It's no surprise that sales of Japanese newspapers, which have always put relatively little of their content online, have held up well. Many newspapers are now following the example of News Corporation, which has had The Times and The Sunday Times behind a paywall since 2010.
A once-great business
Newspapers -- particularly the local variety -- used to be a good business. The local newspaper was the only place small businesses could effectively advertise their goods and services, and the advertising reached the people who were mostly like to use them: the locals.
But then along came the commercial internet, which produced businesses like eBay and Craigslist that severely damaged newspapers' monopoly on the local advertising market. The newspaper business soon became a license to lose money, and it is no surprise that the shares of newspaper companies with outside interests have done much better than the pure publishers.
If you look at America's two best-known newspaper groups, you'll see that shares in The New York Times Company are down by 87% over the last decade, while the much more diversified Washington Post Company is down by only 44%, thanks to its ownership of other businesses such as a cable television station and a private education company.
In London, the Daily Mail & General Trust (LSE: DMGT.L ) -- supported by its broadcasting interests -- has seen its share price fall by 46% in the last 10 years, while shares in Pearson (LSE: PSON.L ) are up by 37%. Pearson is well-known as the publisher of The Financial Times, but its education and publishing interests are responsible for more than 90% of its sales and profits.
A bit of history
Buffett is very familiar with the newspaper business. One of his first jobs was as a paperboy, running multiple rounds, which set him in good stead for his college days when, as a side job, he supervised 50 paperboys in six counties for the Lincoln Journal.
Berkshire Hathaway has owned a big stake in The Washington Post Company since 1973, and Buffett was a director there from 1974 to 2011. He knows all about local newspaper monopolies, thanks to his role in the circulation war between Berkshire's Buffalo Evening News and the Buffalo-Courier Express from 1977 to 1982, after which only Berkshire's newspaper was left standing, with a newly acquired citywide monopoly.
When newspapers started to give away their only product in the early days of the commercial Internet, they created a generation of users who have become used to viewing their news online for free. I'm not convinced they will pay up once papers start to go behind paywalls.
As to the local monopoly argument, for me the jury is still out. Access to the Internet nowadays makes it fairly easy for local bloggers, and even bulletin-board users, to challenge a local newspaper's monopoly. Microbloggers using services like Twitter and Facebook can also make a big impact if they spread the word effectively when identifying local stories.
When it comes to British newspapers, I'm not a fan of the sector and haven't been for a long time, and a big negative is that Trinity Mirror seems to have many phone-hacking skeletons in its closet. These have only been touched upon by the Leveson inquiry because of the focus on News International's titles.
However, few people make money betting against Buffett in the long term. The short term is another story, and he's had a few high-profile failures in recent times, including a loss of almost $2 billion on ConocoPhillips. Personally, I'll sit on the sidelines for this one!
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