Is There a Facebook Lesson in Buffett's News Grab?
John-Erik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Could Warren Buffett have chosen a more appropriate time for his latest contrarian move?
On the eve of the heavily hyped Facebook (NASDAQ: FB) IPO, Buffett made some smaller headlines by investing in -- gulp! -- newspapers. That’s right. The Oracle of Omaha was investing in what’s essentially viewed as yesterday’s news when tomorrow’s was just hitting the market.
To some investors, it seemed proof that Buffett, at 81, is officially out of touch. I’m not about to start second-guessing an investing legend.
How smart an investment Media General’s (NYSE: MEG) newspapers will be for Buffett’s Berkshire Hathaway (NYSE: BRK-B) remains to be seen. But it provides investors looking at the more chic social media companies like Facebook with an opportunity to reflect on appropriate cautionary tale.
In a lot of ways, Facebook faces the same problems newspapers do. They both get plenty of eyeballs on them everyday. Their mission -- at least in a business sense -- is to translate those eyeballs into sustainable advertising revenue. That’s something few businesses outside of Google (NASDAQ: GOOG) have been able to figure out.
Many seem to believe that Facebook’s 900 million users are a guarantee that the company will make money.
If you’re in that group, it might be instructive to look back at the newspaper industry for some historical lessons.
It was not that long ago that newspapers looked at the web as the industry’s Holy Grail. The web gave newspapers a way to boost advertising revenue while steering readers to a medium that required no expensive newsprint, no ink, no press operators or delivery boys.
Readers indeed embraced it. They turned to their web browsers for news and canceled their annual subscriptions. All went as planned -- except that the advertising revenue never materialized. Indeed, advertisers saw that the web ads were not working and were not worth paying for.
Sound familiar? Maybe that’s because General Motors recently said just that about its Facebook advertising. GM (NYSE: GM) -- Facebook’s third-largest advertiser -- pulled all of its paid advertising from the social media site.
Or because this survey showed that four of every five Facebook users have never followed ads through Facebook to buy anything. Possibly even more troubling was the finding that Facebook’s users are spending less time on the site.
Waning user interest combined with ineffective advertising platforms won’t spell success for Facebook or any other media business, social, news or other.
More eyes, less cash
Newspapers are getting more readers on their web offerings than in the past. A recent Newspaper Association of America survey showed an increase of 4.4 percent over the previous year. That brings America’s online newspaper audience to 113 million. At the same time, The NAA was preparing statistics on online ad revenue. It dropped by 7.3 percent.
The takeaway: More online users do not translate to more advertising revenue.
No good model
By the time newspapers realized the web was no cash machine, they were in a pickle. Now, readers expected their news for free on the web (much the same way Facebook users expect their access to the site). And advertisers found better places to spend their money on the web (i.e. Google, Craigslist).
Not only was the web not the Holy Grail, it was a huge drain -- a drain on paid subscribers and an even bigger drain on advertising revenue. What followed were some dark years for the news business, with only a glimmer of light still far off in the tunnel. It’s been more than a decade now, and newspapers and other news outlets still haven’t figured out a sustainable model. Although, as Buffett’s buys show, some have figured out ways to be profitable.
Growth needed, fast
With Facebook selling at nearly 90 times earnings -- even after plunging 40 some percent from its opening day high -- it must figure out a way to significantly grow its advertising revenue at a time when both users and companies like GM are claiming it ineffective.
With that background, is an investment in the social media giant really any less a risk than Buffett’s bet on mostly small-market newspapers?
A Morningstar analyst predicted that Facebook’s numbers are bound to disappoint for at least the next year to 18 months as it tries to figure the ad puzzle out. Newspaper chains may not have explosive earnings potential. But a shoring up of local advertising, combined with some additional paywall revenue could be the foundation for ensuring profitability out into the near future.
The time isn’t now
It would be foolish (small f) to argue that Facebook is doomed to failure. I wouldn’t recommend betting against the stock with a short position. It certainly may figure out how to monetize its 900 million users and generate consistent profits. There are many bright minds in that organization.
But it seems even more foolish to assume that time is now -- or anytime in the immediate future.
John-Erik koslosky owns shares of Berkshire Hathaway (NYSE:BRK-B). He also works for a newspaper, but not one being bought by Warren Buffett. The Motley Fool owns shares of Berkshire Hathaway and Facebook. Motley Fool newsletter services recommend Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.