Sunday, March 4, 2007

2006 Berkshire Letter Review, Part 2: Newspapers Are No Longer Good Businesses

One of the investments Buffett has long been known for is newspapers. He loved the business models of newspapers for a long time because they worked as mini-monopolies which served people their local news and made plenty of money from advertisements. One of his most successful investments was The Washington Post Company, which sold for about $150 a share in 1991 and recently topped out at about $1,000 a share in 2005.

According to Buffett (p. 11), "fundamentals are definitely eroding in the newspaper industry... The skid will almost certainly continue."

Buffett admits he first saw indications of the coming decline of the newspaper's monopoly-like business model back in 1991, when he said in his shareholder letter "the media businesses... will prove considerably less marvelous than I, the industry, or lenders thought would be the case only a few years ago."

The reason for the decline of the newspaper is the availability of information through other channels, in particular cable TV, sattelite broadcasting and the Internet.

Buffett hopes that "some combination of print and online will ward off economic doomsday for newspapers," and said that Berkshire's Buffalo News unit will work to develop a sustainable business model, but ends his discussion conclusively, saying "... the days of lush profits from our newspaper are over."

A lot of books written about Buffett talk about how great the newspaper business is, and how much he loves it. That information is no longer correct, and if you're an investor looking to emulate Buffett's style, you might want to look elsewhere when picking stocks to invest in.

Of course, none of this is news to most people. There has been plenty of press around the troubles newspapers have been facing recently. The real significance is the fact that Buffett devoted a page to this Epitaph of the industry. To be clear- Buffett isn't selling the companies. He thinks they can continue to make money, but he no longer finds the industry fundamentals to be as favorable as they used to be.

Take a look at income statements for Dow Jones (DJ) the aforementioned Washington Post (WPO) or Gannett (GCI) to get a sense for how the industry has suffered from competition from other forms of media. Look at steps some of the companies have taken to try to adjust to the needs of their current audiences. It's clear that the party is over.

No comments: