The following consists of quotations, paraphrases, and summaries of parts of Warren Buffett's letter dated March 1, 2013 to Berkshire Hathaway shareholders. It may be of interest to readers of The Eye.
During the past fifteen months, we acquired 28 daily newspapers at a cost of $344 million. We believe that the circulation, advertising, and profits of the newspaper industry overall are certain to decline. But newspapers continue to reign supreme in the delivery of local news.
News is what people don't know that they want to know. If you want to know what's going on in your town, be it about the mayor, taxes, high school football, there is no substitute for a local newspaper that is doing its job.
Before the world changed, the profits of the only newspaper in its community were certain to be extraordinary, whether it was well or poorly managed. One Southern publisher famously confessed, "I owe my exalted position in life to two great American institutions -- nepotism and monopoly."
Now the world has changed, and people do not rely on local papers for stock market quotes, the details of national sports events, classified ads about available cars, jobs, and homes, or national and international news. But readers will read to the end stories about themselves and their neighbors. Whenever a paper serves the special informational needs of a group with a pervasive sense of community, that paper will be indispensable to that group.
A faulty business strategy, however, can destroy even a valuable product. Papers that give themselves away on the Internet while charging meaningful sums for the physical specimen are everywhere doomed. Papers that adopted a pay model early, like the Wall Street Journal, seem to be doing better than, say The New York Times, which didn't.
The main exemplar so far for local papers is the Arkansas Democrat-Gazette, which adopted a pay format early, and for ten years has retained its circulation better than other large papers in the country. Other local papers have in the last year or so started exploring pay arrangements. Whatever works best -- and it is not yet clear what works best -- will be copied widely.
Papers that do two things will be viable for a long time: (1) deliver comprehensive and reliable information to tightly-bound communities, and (2) have a sensible Internet strategy. Success will not come from cutting news content or frequency of publication. Skimpy news coverage begets skimpy readership.
Berkshire Hathaway's goal is to keep our papers loaded with content of interest to our readers and have those who find us useful pay us appropriately, whether they view our product on paper or on the Internet.
Although we expect modest erosion of cash earnings from our newspapers over time even with a sensible Internet strategy, we still think our papers meet our economic test, because of their low cost of acquisition.
Of course, we will not continue the operation of any business doomed to unending losses. One daily paper we acquired in a bulk deal was losing money before we bought it, and we couldn't find a remedy, so we reluctantly shut it down. But all our remaining dailies should be profitable for a long time to come.
We are therefore open to purchasing more papers of the type we like as long as they are priced appropriately, which means at a very low multiple of current earnings.