Having failed to read Warren Buffett’s annual letter to Berkshire Hathaway shareholders the moment it went up online last week (horrors!), I only just learned–thanks to Frank Ahrens in the Washington Post (link via Romenesko)–that Buffett had some interesting things to say about the state of American metropolitan daily newspapers. They were similar to what I wrote in this space a few weeks ago, but since Buffett speaks with a tad more knowledge and authority than I do (Berkshire owns the Buffalo News and is a big shareholder in the Washington Post Co.), let’s hear his version:
[F]undamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue. When Charlie [Berkshire vice chairman Charlie Munger] and I were young, the newspaper business was as easy a way to make huge returns as existed in America. As one not-too-bright publisher famously said, “I owe my fortune to two great American institutions: monopoly and nepotism.” No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits.
The industry’s staggering returns could be simply explained. For most of the 20th Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were the easiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets.
Buffett goes on to say that this sort of chokehold on the flow of information simply can’t be replicated online:
True, we have the leading online news operation in Buffalo, and it will continue to attract more viewers and ads. However, the economic potential of a newspaper internet site–given the many alternative sources of information and entertainment that are free and only a click away–is at best a small fraction of that existing in the past for a print newspaper facing no competition.
Finally, he discusses the prospects of would-be newspaper owners like Jack Welch and David Geffen:
We are likely … to see non-economic individual buyers of newspapers emerge, just as we have seen such buyers acquire major sports franchises. Aspiring press lords should be careful, however: There’s no rule that says a newspaper’s revenues can’t fall below its expenses and that losses can’t mushroom. Fixed costs are high in the newspaper business, and that’s bad news when unit volume heads south. As the importance of newspapers diminishes, moreover, the “psychic” value of possessing one will wane, whereas owning a sports franchise will likely retain its cachet.
After all that, though, Buffett says that, “unless we face an irreversible cash drain,” he’s not selling the Buffalo News.