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Newspaper industry's assets represent investment bargain

Mr. Warren E. Buffett

Berkshire Hathaway

Omaha, NE

Dear Mr. Buffett:

I don't make a habit of corresponding with directors of the Washington Post Co. — it's not normally a great career move. However, your recent comments about the folly of investing in newspapers hit close to home. I hope you won't mind my offering a different view.

There's no denying the newspaper business is in a bad way. Now that one of the world's shrewdest investors has declared that he wouldn't buy a paper "at any price," the prospects of these papers has become even grimmer.

I have to say I was surprised by your remark, and not simply because of your lifelong love of the newspaper business. As a "value" investor, you surely must acknowledge that this is the opportunity of a lifetime as far as newspaper investing is concerned. For close to nothing, investors can pick up some of the most respected regional brands in the news business, along with their (shrinking) lists of advertisers and subscribers.

I realize, of course, it is easy to conclude that buying a paper would simply be buying the right to "unending losses," as you put it at the Berkshire Hathaway annual meeting.

From an investment standpoint, the better way to look at these properties is to think of buying all of them. In a single stroke, and with a relatively modest amount of money, a strategic buyer could assemble a national syndicate with millions of readers capable of achieving the economies of scale that have, for the most part, eluded our badly fragmented industry.

There are lots of ideas floating around for what this new model might look like. Here are mine:

• A daily tabloid offering high-quality local, national and international news and opinion aimed at serious news consumers that on weekdays could be read in an hour. Revenue would come from a limited amount of high-priced display advertising and a daily price roughly equal to a small Starbucks coffee. Local pages would be produced by a modest local news staff, with national and international pages from the syndicate.

• An advertising-supported tabloid aimed at casual readers given away weekdays for free at subway stops and street corners.

• A partly free, partly paid Web site that carries the local banner with a full offering of local content and advertising, but operates from a single national platform.

I've done a quick back-of-the-envelope pro forma that suggests such a syndicate could be profitable and offer a decent return. I realize it's not the typical Berkshire Hathaway investment. But surely it presents an interesting opportunity for an existing news organization looking for scale or scope, or a private-equity firm working with a network of local limited partners.

There is a lot that remains uncertain in our industry, and it may take a decade to shake out, but eventually the news business will again be stable and profitable, with a handful of global companies providing English-language content through whatever channels customers choose. My hunch is that one of those survivors will be the outfit that had the guts and the good sense to roll up big-city newspapers at today's fire-sale prices.

Respectfully,

Steven Pearlstein

Newspaper industry's assets represent investment bargain 05/17/09 [Last modified: Sunday, May 17, 2009 4:30am]
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