Warren Buffett’s Newspaper Purchase

Last week, Warren Buffett, the CEO of Berkshire Hathaway, purchased two dozen small newspapers and their related online properties from Media General, a conglomerate with holdings mainly concentrated in the southeast Unites States. After finalizing the deal, Buffett issued a memo on his view of the acquisition. (The text of the memo is here.)

Buffett is famously the greatest investor alive, and almost as famous for plain-spoken observations about the market, so you’d assume his first public memo about Media General would offer insight into the current state of the newspaper business. The actual text, however, merely makes it clear that Buffett doesn’t understand that business.

He makes much of drops in print readership, but circulation has not been strongly correlated with revenue for two decades now. Print circulation began its decline during the Reagan administration, while newspaper profits increased through the middle of the last decade, reaching their highest point just before the current collapse.

He alludes to the relationship between readers and newspapers half a dozen times in a thousand-word memo; in that same space, he never once uses the words ‘advertising’ or ‘advertisers’. 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.

Without understanding what’s in it for advertisers, an exhortation to “reign supreme in matters of local importance” has no more strategic value than a halftime cheer; if all it took to run a profitable paper was good local coverage, newspapers would not be in this bind in the first place. But good local coverage isn’t enough, because ordinary citizens don’t pay for news. What we paid for, when we used to buy the paper, was a bundle of news and sports and coupons and job listings, printed together and delivered to our doorstep.

People are still happy to pay for reproduction and delivery, of course. We just pay our ISPs now. And we still care about news and sports and coupons and job listings — we just get them from different places, and, critically, money that goes to Groupon or Hot Jobs [correction] no longer subsidizes the newsroom. Ad dollars lost to competing content creators can be fought for; ad dollars that no longer subsidize content at all are never coming back.

Buffett asks his new employees to provide “your best thinking as we work out the blend of digital and print,” but the eventual blend of digital and print is going to be digital. Small town residents of the sort Media General serves tend to adopt technology late, but the future eventually arrives, even in Opelika, Alabama.

These mistakes don’t mean Berkshire Hathaway will lose money on the deal, of course; given the fire-sale price, every one of those papers could close in the next ten years and Buffett’s firm would still make money on interest paid and the underlying real estate. These mistakes do mean that Buffett’s sepia-toned view of the newspaper business, with its references to linotype machines and newspaper-throwing contests, is badly off the mark. For the readers, old habits are not the same as current loyalty. For the advertisers, previous convenience does not translate into planned commitment. For the papers, historical longevity does not imply future resilience.

So here’s a prediction: long before the Berkshire Hathaway warrants expire, many of the papers Buffett has invested in will have reduced both print days and their newsroom staff, and journalists will be writing the “What went wrong with the Media General deal?” story.

The answer to that question is already apparent: Buffett wants to talk like a philanthropist and an investor at the same time, not understanding that the public good and the bottom line have diverged. 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. * * *

Correction: In an earlier version, I had used Career Builder as an example, but as Ben Welsh points out in the comments, CB is jointly owned by newspaper companies. I substituted Hot Jobs as an example of a service that removes revenues from content subsidy entirely.