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.
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.
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.