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Why Warren Buffett is Giving Up on One of His Favorite Businesses

By Jeremy Bowman - Feb 2, 2020 at 3:00PM

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The Berkshire chief is finally bailing on newspapers. Here's what it means.

Berkshire Hathaway (BRK.A 1.66%) (BRK.B 1.71%) CEO Warren Buffett has long been a fan of newspapers, but now it seems that even the Oracle of Omaha has seen the writing on the wall.

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.

Warren Buffett at Berkshire's annual shareholder meeting

Image source: Motley Fool.

Extra, extra

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. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Berkshire Hathaway (B shares), Facebook, and Salesforce.com. The Motley Fool recommends The New York Times and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$452,697.25 (1.66%) $7,395.26
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$301.55 (1.71%) $5.08
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$121.68 (2.39%) $2.84
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$180.50 (1.70%) $3.01
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$143.55 (2.07%) $2.91
The New York Times Company Stock Quote
The New York Times Company
NYT
$33.74 (-3.74%) $-1.31
Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$189.89 (1.69%) $3.16
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$122.65 (2.36%) $2.83
Lee Enterprises, Incorporated Stock Quote
Lee Enterprises, Incorporated
LEE
$19.39 (0.10%) $0.02

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