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Summary:

Is Warren Buffett’s recent acquisition of the Media General chain a brilliant gamble, or an indication of his faith in the long-term prospects of newspapers? Clay Shirky argues it is neither — he says Buffett misunderstands some fundamental things about the business he has bought.

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There’s been a lot of attention focused on Berkshire Hathaway billionaire Warren Buffett’s recent $142-million purchase of Media General and its 63 newspapers — and that’s not at all surprising, since he seems to be the only one interested in buying newspapers rather than selling or closing them. But is his acquisition a brilliant financial gamble, or an indication of his faith in the long-term prospects of printed community newspapers? Media theorist and author Clay Shirky argues that it is neither: in fact, he says, Buffett misunderstands some fundamental things about the business he is buying into, and is therefore taking on a much bigger challenge than he probably realizes.

In a memo to the staffers at Media General’s newspapers after the deal was announced, Buffett — who also owns his home-town newspaper, the Omaha World-Herald, and the Buffalo News — said that he has always loved newspapers, in part because his father and mother met while working at the Daily Nebraskan in 1924, and because he used to deliver them. And he reinforced to the troops his commitment to the future of local journalism, and his view that newspapers like the ones he bought have a bright future. As he put it:

Though the economics of the business have drastically changed since our purchase of The Buffalo News, I believe newspapers that intensively cover their communities will have a good future. It’s your job to make your paper indispensable to anyone who cares about what is going on in your city or town.

Hometown boosterism isn’t enough

But as Shirky notes in his criticism of Buffett’s move, cheering on the local news coverage of his community newspapers doesn’t really have anything to do with the fundamental business issues that confront those publications in a digital age. This advice from the billionaire, Shirky says “has no more content than a halftime cheer,” because if all it took to run a profitable newspaper was good local news coverage, then newspapers like the Media General chain and plenty of others wouldn’t be in the kind of trouble they are to begin with.

And Media General’s stable of papers are clearly in trouble: according to the former CEO, publishing revenues at the media company have fallen by more than 50 percent over the past five years, but the costs of printing and distribution have remained the same. That same kind of math has driven newspaper owners such as Advance Publications and Canada’s Postmedia Network to stop printing some of their newspapers on specific days of the week, as well as instituting layoffs and erecting paywalls in an attempt to bolster revenue.

Buffett’s letter makes it sound as though managing the relationship between reader and newspaper is the most important thing, Shirky says, but this is not the case:

Reading the letter, you’d never know that papers make most of their money from companies, not citizens, and have done for the better part of two centuries. It is disruptive competition for ad dollars, not changing reader engagement, that has sent the industry into a tailspin.

Shirky isn’t the first one to argue that Buffett doesn’t understand what it happening to newspapers: I tried to make a similar argument recently after the octogenarian investor made some comments about the virtues of paywalls (which I expect he is planning to implement at some or all of his new papers). Buffett said that the problems newspapers were facing were in part a result of “giving away their product at the same time they are selling it” — in other words, the decision not to charge for online news.

But as Shirky and I have both pointed out, this misunderstands the business newspapers are in. The reality is that newspapers have never sold the news to readers — readers pay for the distribution platform on which that news is printed, i.e. the paper itself and the packaging involved. And the subscription price of a newspaper and circulation revenues in general have historically only accounted for a small proportion of a media company’s overall revenue. In most cases, the bulk of that revenue comes from advertising.

Newspaper consumers have never paid for the news

The real business of a newspaper has been to aggregate content — news, but also comics and horoscopes and classifieds and lifestyle tips — as a way of capturing the attention of readers, and then sell that attention to advertisers. And the problem for newspapers, both hyper-local and national, is that advertisers are no longer as interested in that arrangement as they used to be. Much of the attention that they seek to monetize has gone elsewhere, to websites and services like Facebook — especially the attention of younger readers with disposable income.

It could be that Buffett sees the future of local newspapers as one in which readers cannot access anything without paying for it, and hopes that the strength of connection those papers have with their communities will convince large numbers of people to sign up for a paywall — thereby turning each paper into a tiny version of The Economist or the Wall Street Journal. But without some kind of turnaround in both print and digital newspaper advertising, those businesses are likely to be much, much smaller than they are now.

Shirky’s prognosis is fairly grim. He says Buffett is just a short trip away from the same kind of decisions that Advance Publications has been forced to make:

A newspaper used to be both a profitable business and a public service, but this was just an accident of the competitive (or rather uncompetitive) media landscape. His commonsense approach to saving papers won’t work, because there is no longer any commonsense business model for a former monopoly that is still seeing its revenues erode faster than its costs.

Shirky notes that Buffett will still likely make money on his investment, since he bought the newspapers at fire-sale prices, and they have a number of valuable assets such as the real estate their offices sit on. And perhaps Buffett will surprise everyone and find a magic recipe for success, some combination of print/digital and paywall/advertising that will ensure his papers will remain healthy or even grow. But his comments about the fundamental nature of the business he has acquired shouldn’t fill anyone with confidence.

Post and thumbnail images courtesy of Flickr users Kevin Lim and Fortune Live Media

  1. Great perspective. Its important to keep reminding people who pay attention that its not the quality of the product produced by professional journalism, its how to keep paying for it.

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  2. And Rupert Murdoch dosen’t make any money from the WJS or any of his other newspapers either. Newspapers bring them political influence (and hopefully break even). Maybe Buffett got tired of only Neo-Cons making up the news.

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  3. As pointed out, Buffett has bought at a fire sale price and the real-estate these papers sit on probably covers the price paid. Warren is a genius and hasn’t lost a thing with age.

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  4. & what Clay doesn’t understand is as interface and hypervideo/hypertext/hypersound make the storyline cubic… The newspapers are starting to understand this. More importantly advertisers and marketers are understanding the revelation that Facebook and Twitter is like throwing $$$ out the window. The numbers don’t really transfer to purchase. Context in a Storycube is much closer to purchase. The people who thought news would be created by citizens are starting to realize.. That is a dumb model/idea.

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  5. Warren Buffet is not known to invest in failing ventures and he does not mix business and charity

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  6. A strong relationship with consumers will lead to advertising dollars. Buffett understands this. My money is on Warren.

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  7. Conversely, I guess you don’t see that companies like AOL/Patch are losing money hand over fist by giving it all away for free, right? Printed community newspapers will be around for a while because they still make a ton of money compared to their digital counterparts and it’s unlikely that some new technology will come along anytime soon that will replace the portability of the printed product.

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  8. not quite right. the traditional business of newspapers wasn’t to “aggregate” content, but to report, something social media sites dont do and don’t replace. the big myth is that facebook and twitter somehow replace journalism–you had better hope that’s not true.

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  9. What’s missing here is understanding that a newspaper can be profitable with a 5-10% margin. Advance Publications was banking on 27% which is now unrealistic. Buffet has also just bought a vehicle in which coca cola, geico and other Hathaway products can now advertise cheaply in. Methinks you’ve missed the synergy…..

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  10. Mark’s comments are illuminating. Digital-only news sites like AOL/Patch aren’t gaining traction since digital advertising doesn’t generate enough revenue to support them. Print is an important ingredient that must be considered.

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  11. Buffet’s first significant investment was in a dying sector. The Berkshire-Hathaway Company was a textile manufacturer in the NorthEast and Buffett entered the picture when that business was evaporating. Buffett took control of the company, squeezed its margins, and bled the business dry until there was nothing left to gain. Then he closed the factory. In the meantime, he used the profits to invest more profitably elsewhere. I doubt he misunderstands the “new” reality of newspapers.

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  12. Good call Clay! I agree, it seems like a bad buy. The only way to make new, online publications work is to dramatically decrease the costs – which no newspaper has ever done.

    That said, maybe WB just wants the real estate. You never know.

    (PS: logging in with LinkedIn/Twitter doesn’t work)

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  13. The quote below contains 2 false assumptions that do not support your arguement: 1) The Media General chains are providing “good local” news coverage [Is this true???] & if it is true, is it the same kind of “good local coverage” Mr. Buffett speaks of. 2) You miss the likelyhood that the deterioration of Media General’s papers is due to some “other” factor(s) when you say, “then newspapers like the Media General chain and plenty of others wouldn’t be in the kind of trouble they are to begin with”.
    You must first have a real understanding of why Media General’s papers have been deteriorating before you can speak more credibly to this topic. By proping your arguement on thin air you have not substantively expressed that you know what you are talking about when it comes to Media General. If you’d like to learn more about Media General try googling Amit Chokshi.
    (Shirky says “has no more content than a halftime cheer,” because if all it took to run a profitable newspaper was good local news coverage, then newspapers like the Media General chain and plenty of others wouldn’t be in the kind of trouble they are to begin with.)

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  14. Sorry, but C. Shirky had a few pseudo-theories of is own that have flopped. One of them was the so-called “free” internet; another, that micropayments would never work… He still claims that his “theories” hold; however, it is only becasue he excludes (and often ridicules) all the arguments and data to the contrary while changing his definitions of “free” or “micropayments.”

    Same with his “real business of newspapers.” Who said that Buffett bought news + paper? He purchased local brands and relationships/engagement of their loyal users, very much the same way Facebook or Silicon Valley VCs buy UU and pageviews generated by some apps. They do not buy computers or programming tools used to create the apps, do they?

    To claim that newspapers are just distribution channels is also self-serving. What is Facebook or Twitter if not distribution channels often with links back to… newspapers content. According to some studies, 55% of tweets carry links to news and information websites.

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  15. Do you not think that advertisers – priced out of the highly competitive and sought after digital world – may realise their monies are best spent locally where they can actually capture an audience. Not everyone wants to read international news, nor will every website be as big and important as MSN, NYT or Facebook, so advertisers may choose to go local. Users will always be local, so there is the matchup.

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  16. Newspaper brands, especially local ones have a close relationship with their customers and advertisers that Mr. Buffet clearly understands. Fundementally newpapers have always been about generating and curating news content around which people and audiences aggregate that attract the attention of advertisers. His decision to invest and instructions to focus on generating the best content are based on these truths. The issue is one of distribution to which the impact of the mobile channels and devices may indeed provide a solution. The opportunity is that publishers do need to stop thinking so much about advertising revenues and realize that they are now information service providers that need to focus on information products and services that they can sell to their loyal customers and brand advocates.

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  17. Ranjit Khanna Monday, June 11, 2012

    Great post, keep up the good work!
    The site for getting advice on raising money for charity is http://www.find-funds.co.uk/

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