Editor's comment: Does Warren Buffett believe rumours of print's demise have been exaggerated?
Two years ago legendary US business mogul Warren Buffett appeared to dismiss the newspaper industry as a busted flush. Now he is spending $200m to buy his local paper. The Drum's editor Gordon Young looks at the reasons behind this eye-catching deal. Warren Buffett's decision to buy his local newspaper, The Omaha World-Herald, has certainly raised a few eyebrows. Only two years ago, the world's most successful investor and Sage of Omaha seemed to write off the industry when he said the market 'would face years of unending losses' and that he 'would not buy US newspapers at any price'. When it comes to newspapers, Buffett knows what he is talking about. In 1977 he bought the Buffalo News, which he still owns, and he is a shareholder and board member of the Washington Post. But he argued, since making these investments, that many large local newspapers have lost the monopolies which were once a license to print money as a result of the boom in online publishing. So has he now changed his position again? Is he saying newspapers should be back in vogue as an investment opportunity? Or is this deal simply a rare lapse where his heart has got the better of him? The answer is probably no on both counts. This is a man that rarely changes his mind, and rarely lets his emotions get the better of him. To understand the logic one has to understand what is really happening in the world of regional newspapers. While circulation and ad sales are in decline, the market - particularly the regional market - is not the basket case it is often presented as. Most regional groups still generate profits. In fact the real doom and gloom is not about the fundamentals of the newspapers themselves, but more to do with their corporate structures. Over the last couple of decades, fuelled by cheap credit, most independent groups were snapped up by large PLCs who could offer a return to shareholders through economies of scale and the centralisation of key departments. And this highly-geared model seemed to work as long as advertising revenue continued to expand, credit was cheap and share prices remained high. But this strategy has turned out to be no more than an unsustainable Ponzi Scheme. As soon as newspaper advertising declined, so did the share prices, which secured much of this debt. With the short term demands of investors to think of the industry has been cutting cost to maintain margins as ad revenues declined. This has led to a vicious cycle where sales falls accelerate as quality drops, which in turn has led to further cuts. The bottom line is that this sort of corporate structure - which is all about short term results and shareholder dividends - is no longer appropriate for the regional industry. What newspapers need is proprietors who will take the long view. This industry does have a future, but it needs to start investing its diminishing profits in its products to at least slow the decline long enough to develop new business models which will secure its long-term future. In other words what it needs is investors like Warren Buffet who is well known for his long-term outlook. if you put an investor like Buffett together with a strong newspaper group - which has not got itself mired in debt - then given time there is still lots of money to be made in this market.