Buffett is essentially quitting the print news business as Berkshire is selling its newspapers to Lee Enterprises for $140 million as reported by The Wall Street Journal. The sale follows an agreement in 2018 when Berkshire hired Lee to manage all of its newspapers except for The Buffalo News, and comes after years of declining revenue and profits in its news business, which included 31 daily and 43 weekly papers. According to the Journal, Berkshire's newspaper business finished 2019 with $373.4 million in revenue and $14.9 million in net income.
As part of the deal, Berkshire will lend Lee $576 million at a 9% interest rate. The transaction isn't material for a company the size of Berkshire, but considering Buffett's longtime fondness for the industry, it's worth taking a closer look at why he's finally stepping away, since Berkshire almost never sells its operating businesses.
Buffett delivered newspapers as a kid and is an avid reader of several daily papers. As an investor, he's argued for much of his career that newspapers function as a local monopoly, especially when there's only one major paper in a given city or community.
In many ways, that was true. Local newspapers once enjoyed a highly profitable classified ad businesses in the days before Alphabet's (GOOG 2.36%) (GOOGL 2.39%) Google, Facebook (META 1.70%), and Craigslist took over. Back then, newspapers were also better able to maintain their subscriber base since they faced less competition, especially from the kind of free outlets that populate the internet.
Berkshire did well as a major shareholder in the Washington Post Company for decades, but Buffett has recognized the long decline of one of his favorite industries.
In an interview with Yahoo! Finance last April, Buffett said the industry had gone from "monopoly to franchise to competitive to toast." He also believes that most newspapers will disappear eventually, but national publications like The New York Times (NYT -3.74%), The Wall Street Journal, and The Washington Post were likely to stick around.
Where the monopoly has gone
It's no secret where the once-thriving newspaper ad business has gone. Google and Facebook now dominate digital advertising and have the monopoly-like margins to prove it. Google posted a 28% operating margin in its most recent quarter, while Facebook just turned in a 42% operating margin in its fourth quarter.
While Alphabet and Facebook have combined market value of $1.5 trillion, The New York Times Company is worth just $5.3 billion. The stock has rallied during the Trump years as the current administration has given the news business a boost, but the company has only grown revenue 5% through the first three quarters of 2019, showing that the transition from print to digital is a long slog.
Buffett is right about his assessment of the news business as local newsrooms continue to shrink and prestigious outlets like The Washington Post and Time have become trophies for billionaires like Amazon's Jeff Bezos and Salesforce's Marc Benioff. However, he's at least a decade too late to this conclusion.
Had he had the presence of mind to recognize the fate of newspapers earlier in the curve, and that their purpose and ad businesses were being replaced by Google and Facebook, Berkshire could have made a killing. Alphabet is up 2,760% since its 2004 IPO, while Facebook has gained 428% since it debuted on the market in 2012. Buffett's traditional bias toward print media and against tech stocks may have prevented him from seeing that earlier.