Sulzberger 1, Buffett 0
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The New York Times Company (NYSE: NYT) is beating the heavy odds against the survival of a media company in which a core business is newspapers. For 1Q 2012, reports its publisher Arthur Sulzberger, Jr., its diluted EPS from continuing operations was $.09 versus $ .02 the same period a year earlier. Its paywall is working, with paid subscriptions, as of March, at 472,000. A sign of its renewed confidence, it has cut in half the number of free articles readers can access before they have to pay or get shut off. That used to be 20, now down to 10.
In a Google state of mind, the NYT Co's R&D also came up with Ricochet. Essentially, that digital platform facilitates the bundling of any of its content, which an advertiser sees as useful to its commercial messaging, with the actual advertising. That brings together the influence of the NYT brand with the advertiser’s objectives. For example, the NYT could publish articles on cloud computing which happen to reinforce the advertiser’s approach. An early customer has been SAP. In a sense, this mirrors Google’s ability to provide buyers of click ads location on the exact page with a certain keyword or key phrases. With Facebook, ad placement is less precisely targeted since it only is a fit with certain demographics.
An interesting touch in promoting Ricochet is that NYT Co spokesperson Michael Zimbalist, Vice President of R&D, conducts video interviews with print books in the background. Here you can view the Beet.TV tape. That could be delivering the message that advertising with the NYT Co provides the old-line credibility of the print paper of record with state-of-the-art digital.
Unlike Sulzberger's strategic moves, Warren Buffetts’s ongoing acquisition of newspaper properties doesn’t seem promising. The company he heads, Berkshire Hathaway (NYSE: BRK-A) announced on May 17 that in a $142 million deal it was buying the 63 newspapers of Media General Inc. (NYSE: MEG). On that day the newspaper stock fell 3.8% to $3.51. It’s now at 3.54, with a 52-week range of 1.14 to 6.84. Since 2003, the stock has fallen 90%. The newspapers under the Media General umbrella are rarely cited as among the handful which might be around in five years.
Some defend this move as shrewd in that Buffet has also extended a $400 million loan to Media General at 10.5% interest. That isn’t much lower than the $250 million loan Carlos Slim made to the NYT Co at 14% interest. The NYT has paid back that loan. To do so, it sacrificed the dividend, which, given the high interest rate, had been a survival tactic. Obviously, Slim made out quite well. However if Media General folds, the Berkshire Hathaway loan might not be repaid in full or at all. Could this loan not be categorized as "risky," raising additional questions about Buffett's investment judgment these days.
So far, Buffett’s track record in investing in newspapers isn’t anything to write home about. For example, Berkshire Hathaway is the 13th largest shareholder in the Washington Post Company (NYSE: WPO). Its stock price is at 344.56, with a 52 week range of 308.50 to 454.97. Only 15% of its business is newspapers and that declined 8% in the money-losing 1Q, despite this being a presidential campaign year. It is struggling with upstarts like POLITICO and its best days seem behind it. Smelling the vulnerability, the media have started unmasking possible inaccuracies in the Watergate reporting by Bob Woodward. It might not be long before the newspaper loses its special status in journalism.
The Washington Post Co's cash cow education and training provider Kaplan, which accounts for 58% of the business, was down 1Q 11%. The problem is attracting new enrollments at a time when the whole for-profit sector is trying to get back on its feet. Overall, it’s recovering from negative publicity regarding a higher loan default rate and lower employment one for its graduates versus those from non-profit institutions. Also the cost of providing education and training by the for-profit sector is rising in a sluggish economy. Students are resisting. The option of the non-profit low-cost community college could emerge as a major threat to for-profit. In addition, as in the company's newspaper arm, this for-profit business seems to have had its best days behind it. Those were back when its business model observers such as THE ECONOMIST praised as the commercial success story of the 20th century.
Buffett has said that he invests in local newspapers based in locations where there is strong community spirit. However, as many investor experts have been pointing out, local coverage hasn’t panned out for AOL (NYSE: AOL). Company head Tim Armstrong believed, as does Buffett, in a demand for local coverage and created Patch. Investors, reports Gina Smith in WALL STREET CHEAT SHEET, are not happy with the return on the $160 million investment. For 2011, the more than 800 sites, manned by 14,000 bloggers and 1000 journalists, yielded about $20 million in profit.
Among Buffett’s revenue strategies for Media General is erecting paywalls. That assumes readers will pay. Already, though, they can receive local coverage on television for free or as part of the package of programming they purchase through some kind of plan such as cable. To supplement that with a digital subscription to the local newspaper involves a separate pocketbook decision. Also, the flagship NYT covers key local stories. It, for example, was the paper of record for the Cheshire, Connecticut home invasion of the Petit family. That extended from the breaking news about that event throughout the four trials, guilt and sentencing, for the two murderers. A NYT reporter was actually in court for all of that. No surprise, local TV news also made that the continuing lead story. Does the community need a third source for being briefed on a major event?
Not too long ago, Buffett had purchased his hometown newspaper the OMAHA WORLD-HERALD. That could be written off as a sentimental whim which a rich man could afford. However, 63 more newspapers cannot. Armstrong was as passionate as Buffett about local news. Now it is presenting him with investor unrest. To maintain the progress AOL has recently achieved in its turnaround, Armstrong might have to cave to shareholder wishes that he pull out of hyperlocal news coverage. The stock is at 27.48, with a 52-week range of 10.06 to 27.94. Eventually Berkshire Hathaway shareholders might put the same pressure on Buffett. Both will need a face-saving explanation for that about-face. Then, without a Buffett prop, the newspaper industry can continue along the natural path of creative destruction.
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