If you've been reading the Wall Street Journal recently, you've seen that newspapers are hot topics.
A flurry of acquisitions involving John Henry, Jeff Bezos, and even Warren Buffett has the print world buzzing. But wait a minute; I thought the newspaper industry was dead? And if newspapers are dead, why is everybody buying them?
Each of these purchases was made for a different reason, but in the end I think that newspapers are still sells.
Buffet buying newspapers
In Buffet's 2012 shareholder letter, the famed investor said that his conglomerate Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) spent $344 million in purchasing 28 newspapers. This surprised many investors because Buffett has long predicted the demise of the print newspaper industry. So why did Buffett buy the papers? He did it because he still sees profit in certain areas of the market, mainly small local operations.
Buffett himself said it best when he explained in the letter:
"Newspapers continue to reign supreme in the delivery of local news. If you want to know what's going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job. A reader's eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. 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."
I think Buffet is spot on. Still, Berkshire's deals aren't an indicator that the newspaper industry is coming back. Yes, there is still potential on the local market, but big market newspapers like the New York Times (NYSE:NYT) and the Washington Post (NYSE:GHC) still have plenty of problems that should worry investors.
Bezos takes the Post
Recently, the Washington Post Company announced that Amazon CEO Jeff Bezos bought the Washington Post's newspaper segment for $250 million. Bezos made the purchase with his own cash and Amazon is not involved.
The deal seems a little out of the blue, especially considering the Post's dismal decade. The newspaper has seen a decline during the past decade, with circulation down 39% from 769,000 in 2002 to just 472,000 in 2012. The Post's revenue decreased 31% over the same period, and operating income went from a $109 million profit in 2002 to a loss of $53.7 million in 2012. Not a pretty picture, but Bezos is confident he can use his Internet genius to transform the Post into a more digital newspaper that brings old and new journalism together.
Meanwhile, the Washington Post Company (name change pending) is left with a variety of assets, including cable systems, TV stations, and Kaplan Education. The Post got rid of one failing asset, but it still has Kaplan to worry about. The education segment is struggling along with many other textbook providers due to a shift away from print and into tablets and other digital media. Even without the bleeding newspaper, the Post is still a sell.
The Times takes a loss on the Globe
Recently, the New York Times announced that it would sell the Boston Globe to Red Sox principal owner John Henry. The move comes at a time when the Times is focusing on profitability and cutting off assets unrelated to its core. Henry paid just $70 million for the Globe, a stinging blow for the Times since it purchased the Globe for $1.1 billion back in 1993.
It is unclear as this point what Henry intends to do with the Globe, but at only $70 million it had to be a difficult offer to refuse. Along with the Globe, Henry also acquired various assets in Times Co's New England Media Group, including Boston.com and the Worcester Telegram & Gazette.
I like what the Times is doing: focusing on their core publication. Immediate goals for the paper include increasing circulation revenue in its core market New York and opening subscription options at different price levels. The Times is moving in the right direction, but the newspaper market isn't. As such, the Times is a sell.
The decisions of these three men don't translate to the average investor for a couple of reasons.
First, Warren Buffett's taste for local newspapers is much different from his negative view of big time public newspaper companies. Second, I think Bezos and Henry's purchases largely came because of extremely low price tags, not because the buyers are incredibly excited about the prospects of the newspapers.
If you're worth billions of dollars ($26 billion in Bezos' case), you can afford to spend $250 or $70 million on a risky investment. For the rest of us, newspaper companies are sells.