Buffett's nose for good news

On a day where the compact launch of two Fairfax papers punctuates media uncertainties, Warren Buffett's annual shareholder letter details a positive outlook for newspapers.

It's a big day for newspapers in Australia, as the launch of the compact version of The Sydney Morning Herald and The Age prompts more than a little nostalgia and fear for the future.

And so how nice to hear from the world’s most successful investor, Warren Buffett, that there’s life in the old girl yet.

In his annual letter to shareholders, released last Friday, Buffett devoted an entire section to explaining his decision to over the past 15 months buy 28 daily newspapers at a cost of $344 million.

Buffett’s purchases come despite a long and firmly held view that the circulation, advertising and profits of the newspaper industry are "certain to decline”.

With the migration of advertising online, where the price paid for ads is in the order of 2 per cent of print ads, it is inevitable that media company profits will decline over the long run. As Buffett observes, revenues from "help wanted” classified ads have plunged more than 90 per cent in the past 12 years.

And Buffett is realistic about the future: "Berkshire’s cash earnings from its papers will almost certainly trend downward over time. Even a sensible internet strategy will not be able to prevent modest erosion. At our cost, however, I believe these papers will meet or exceed our economic test for acquisitions. Results to date support that belief.”

Buffett’s letter offers three crucial insights into the future of newspapers. If newspapers are to survive, they must be locally focused, of high quality and paid for.

Buffet’s newspapers are mostly small metro dailies, often the only paper in town.

As Buffett writes: "Newspapers continue to reign supreme...in the delivery of local news. If you want to know what’s going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbours will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.”

Secondly, as Buffett writes, news needs to be of high quality, produced by well trained journalists. "We do not believe that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership.”

Aside from this simple warning against excessive cost cutting, Buffet makes a more subtle point about the quality of news and what, indeed, news is, in the final accounting.

"News,” writes Buffett, "is what people don’t know that they want to know”.

In the world of 'choose your own adventure' web-surfing, that inevitably ends up in a never ending cycle of LOL cat clips, Brittany Spear’s boob pics and Oscars write-ups, Buffett is reminding us about another role that newspapers play – that of curator.

An often overlooked job of journalism is story placement. In newsrooms around the country, teams of editors and journalists sit down a couple of times a day to decide a story’s merit . To decide, out of all the billions of events that happened today, which is the most important for readers to know.

We know that time is scarce, and you want your news up-to-date, readable and pre-sorted for you. In today’s fast paced world, this role of curator has never been more important. To repeat Buffett: "News is what people don’t know that they want to know”.

Buffet’s is a sharp-eyed, realistic look at the future of media around the world. But I can’t help but see in it a call for a "back to the future” strategy for media.

In the golden days, advertising could be relied upon to pay the entire cost of producing a newspaper. "Readers rode their coat tails,” Buffett observes.

But the ads weren’t just a distraction for readers, but often the very news they were seeking – and therein lay the value.

"The ads themselves delivered information of vital interest to hordes of readers, in effect providing even more 'news'. Editors would cringe at the thought, but for many readers learning what jobs or apartments were available, what supermarkets were carrying which weekend specials, or what movies were showing where and when was far more important than the views expressed on the editorial page.”

The sincere hope of journalists is that newspaper revenues will reach some new equilibrium point, able to support quality and informed journalism in this country.

Given the seriousness of advertising revenue declines, some form of 'user pays' system is also inevitable. But here’s the rub. Newspaper consumers in this country have never paid the true cost of journalism. The cover price, dear reader, isn’t enough to keep the copy boys in salary, let alone the highly paid editors.

Newspapers have, since their inception, been cross subsidised by the advertising – the 'classies', the job ads, the car ads, the house ads. And those are now available for free on the web.

You see, fellow journalists, we’re actually in the information business.

And it’s time to clip the ticket, not just from readers, but from advertisers too.

I believe the future of journalism depends on developing a revenue link between online ads and purchases.

Newspapers must evolve to become more like Apple’s iTunes store. At a fundamental level, what do newspapers have? Eyeballs. What do advertisers want? Sales.

Every time a newspaper reader sees an ad and clicks through to purchase that product, there should be a kickback for the newspaper. Ads should increasingly be tailored to the subject matter covered in the paper. That’s not advertorial. It just makes business sense that there’s no point distracting a person reading about university fees with your ad for a brand new Volkswagen Golf.

Apple has made a living as a successful technology company, but also by successfully exploiting its captured audience. If you have an iPhone, you have likely signed up to iTunes, entering your credit card as you go. Purchasing becomes a matter of one easy click.

You see it, you want it, you buy it.

And the nasty details of money and credit card details are no barrier to you having it. One click and you’re done.

Media companies, like News and Fairfax, need to get in on the game.


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