We’ve just stumbled across these thoughtful comments on the future
of media made by Warren Buffett and his vice-president Charlie Munger –
regarded as two of the world’s smartest investors – at the recent
Berkshire Hathaway AGM in March:


Q. Do you think that the media business has become permanently less profitable due to new technology?

WB:
People will always want to be entertained and informed. But people just
have two eyeballs, and there are only 24 hours in a day. Fifty or sixty
years ago, media for most people consisted of the local movie theatre,
radio, and the local newspaper. Now people have a variety of ways of
being informed faster (if not necessarily better), and have more
entertainment options, too. But no one has figured out a way to
increase the time available to watch entertainment.

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.

The
outlook for newspapers is not great. In the TV business, a licence from
the government was essentially the right to a royalty stream. 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.

Q. If you were looking at newspaper publishers as possible investments, what would you use as a margin of safety?

WB: What multiple should you 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. I don’t see it. 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.
The old virtuous circle, where big readership draws a lot of ads, which
in turn draw more readers, has broken down.

Charlie and I think newspapers are indispensable. I read four a day. He
reads five. We couldn’t live without them. But a lot of people can now.
This used to be the ultimate bulletproof franchise. It’s not any more.

CM:
I used to think that GM was a bulletproof franchise. Now I’d put GM and
newspapers in the “Too Hard” pile. If something is too hard to do, we
look for something that isn’t too hard. What could be more obvious?

WB: It may be that no one has followed the newspaper business as
closely as we have for as long as we 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.