In the nature of any business, whenever more competitors enter a business, the economics of that business tends to deteriorate. Newspapers are still highly profitable, but returns are falling. The size of the audience for network TV is declining. For years, cable TV was thought to operate in its own world, but that’s changing. Few businesses get better with more competitors – if you can find one, sell everything and buy this sort of business.
The outlook for newspapers is not great. In the TV business, a license from the government was essentially the right to a stream of royalty. There were basically three highways to people’s eyeballs, and companies like P&G, Ford, Gillette, and GM would pay a significant amount of money to be get on those highways and advertise their products to a mass audience. But as the ways to get in front of people’s eyeballs increases, the value of those highways goes down.
World Book used to sell 300,000 sets per year in the mid-1980s, each for $600. Then the Internet came along; it didn’t require printing or shipping, and people became less willing to pay for World Book sets. It doesn’t mean that it’s not worth $600. But competition has eroded returns.
So if you were looking at newspaper publishers as possible investments, what would you use as a margin of safety?
What multiple should you use for a company that earns $100 million per year whose earnings are falling by 5% per year rather than rising by 5% per year? Newspapers face the prospect of seeing their earnings erode indefinitely. It’s unlikely that at most papers, circulation or ad pages will be larger in five years than they are now. That’s even true in cities that are growing.
But most owners don’t yet see this protracted decline for what it is. The multiples on newspaper stocks are unattractively high. They are not cheap enough to compensate for the companies’ earnings power. Sometimes there’s a perception lag between the actual erosion of a business and how that erosion is seen by investors. Certain newspaper executives are going out and investing on other newspapers. It’s hard to make money buying a business that’s in permanent decline. If anything, the decline is accelerating. Newspaper readers are heading into the cemetery, while newspaper non-readers are just getting out of college. In other words, as the older population dies out, the younger population does not take over the readership of the newsprints. The old virtuous circle, where big readership draws a lot of ads, which in turn draw more readers, has broken down.
Charlie and Warren think newspapers are indispensable. Warren read four a day. Charlie reads five. They couldn’t live without them. But a lot of people can now. This used to be the ultimate bulletproof franchise. It’s not anymore.
Charlie used to think that GM was a bulletproof franchise. Now he’d put GM and newspapers in the “Too Hard” pile. If something is too hard to do, they look for something that isn’t too hard. What could be more obvious?
It may be that no one has followed the newspaper business as closely as they have for as long as they have—50 years or more. It’s been interesting to watch newspaper owners and investors resist seeing what’s going on right in front of them. It used to be you couldn’t make a mistake managing a newspaper. It took no management skill—like TV stations. Your nephew could run one.