Saturday, June 2, 2012

Warren Buffet & Media General: Budding Press Lord or Media Baron?

A few weeks ago came the announcement that Warren Buffet was buying newspapers through his investment firm, Berkshire Hathaway.  Media General had owned 63 newspapers, primarily in small markets across the southeast U.S. (it also owns major market Tampa Tribune, but that paper was not included in the sale).  The newspapers will be folded into BH Media, a subsidiary of Berkshire Hathaway, leaving Media General a primarily broadcasting media company.  BH Media had also acquired the Omaha World Herald Company earlier in the year, which included the Omaha World Herald and six smaller papers in the region, and had picked up the Buffalo News in an 1977 deal.
  At first, the newspaper world treated this as good news - some arguing that this confirmed the economic vitality of print newspapers, and others hoping (or fearing) that the move was more political than economic - that the purchase was to give a platform for support of President Obama's re-election.  So the unasked question was whether Buffet was seeking to play the role of Press Lord or Media Baron.
  While both terms are widely used to describe individuals who own substantial news outlets, there is an important connotative distinction.  The title of Press Lord tends to be associated with those who are in it for the money primarily.  The classic example was Al Neuharth and Gannett, where editors and publishers of acquired papers were reportedly told that Neuharth and corporate didn't care about editorial policy or political endorsements, as long as the paper kept profit margins above 20% and regularly funneled cash to the corporate vaults.  On the other hand, William Randolph Hearst was the epitome of the Media Baron, who saw his papers as his megaphone, and regularly dictated coverage and editorial policy.
  The acquisition of the Media General titles was unexpected, particularly since Buffet had made dire predictions about the state of the U.S. newspaper industry, and in 2009 had said
"For most newspapers in the United States, we would not buy them at any price. They have the possibility of going to just unending losses."
More recently (last week, actually), Buffet call the idea of free news an "unsustainable model."  In a letter to the editors and publishers of the new acquisitions, he stressed the need to focus on becoming the primary source for locally important information, as well as the need to find a viable paywall strategy for the digital side.
  On the other hand, the newspaper industry is not monolithic, and smaller papers have remained profitable according to the Pew State of the News media reports.  In commenting on the Media General purchase, Buffet said that "(i)n towns and cities where there is a strong sense of community, there is no more important institution than the local paper."  Buffet also indicated that he was open to similar opportunities to acquire papers -  "I think the economics will be ok, but it will be nothing like the old days."  With an average price per newspaper of slightly more than $2 million, it certainly looks like Berkshire Hathaway didn't pay a premium for the titles.
  Ken Doctor wrote in his Newsonomics blog that the purchase is in line with other recent print newspaper deals, where value was determined less by the actual value of newspaper operations than by the value of affiliated assets (like real estate).  In this case, he feels that what's driving the deal is the perception that while no longer a cash cow, these smaller newspaper operations are likely to continue generate just enough profit to pay off its low-interest acquisition debt, leaving Buffet free to capitalize on two other aspects of the deal - ownership of all the real estate owned by the newspapers, and the opportunity to acquire almost 20% of Media General below market value (should the broadcast market prove more lucrative than print).
  Others have also suggested that Buffet's motives for the acquisition - if based on economics and business prospects - reflects a fundamental misunderstanding of the news business, and particularly the condition of the papers he's bought.  A former Media General CEO indicated that publishing revenues had fallen by more than 50%, while distribution costs were on a static or upward trend.  And historically, advertising has been the fundamental source of funding for news - in most print markets, subscriptions and sales basically pay for the distribution channel.  Erecting a pay-wall isn't likely to replace the consequent loss in advertising revenues in the long term.  Furthermore, the chance that newspapers will retain a monopoly on local news that will enable them to charge for it directly is even slimmer, with all the opportunities presented by the Internet and new media, in increasingly competitive open markets.
  Still, even those critical of the idea that the move reflects a rebirth of newspaper markets and profits indicate that in the way the deal is structures, Buffet is unlikely to lose much in the long term.
  So, it looks like this isn't a typical "Press Lord" at work, which has fueled the speculation that a liberal billionaire (and Friend of Obama) might be interested in buying 63 newspapers (in swing states) for other reasons.  While Buffet's letter to the acquired newsrooms promised editorial independence, he's not likely to say anything different before the FTC approves the deal and it finalizes (probably in late June).  And even if Buffet did see himself as a Media Baron supporting a political cause, he's likely to have seriously overestimated the influence of local newspapers in modern political coverage, debate, and elections.  It's not likely to stop him from trying, and it will be interesting to see if there are any changes in coverage and endorsements in the upcoming election.

  If Buffet's goal was to be Press Lord or Media Baron (rather than seeing the acquisition as a low-risk gamble on local newspapers), I suspect that he's going to be greatly disappointed with his new acquisitions.

Sources -  "Warren Buffet's Berkshire Hathaway buys Media General newspaper group",
Berkshire Hathaway Media Group: Financial Engineering Makes the Deal,  Newsonomics blog.
Why Clay Shirkey is right and Warren Buffet is wrong,

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