Has the newspaper business hit bottom? Could be.
One encouraging sign came in April when a group of Philadelphia business leaders bought the Inquirer and Daily News for $55 million. Just six years ago, the same two papers sold for $515 million.
Newspapers still make money – not as much as they did before the Internet started giving them competition for advertising, but enough to be attractive investments if the price is right.
And now Warren Buffett has entered the game on a large scale by acquiring 63 papers from Media General, including the Winston-Salem Journal and the Richmond Times-Dispatch.
In The Vanishing Newspaper (p. 43 of the second edition), I suggested that a newspaper earning a 6 or 7 percent operating margin could be just as socially useful as one earning the traditional 20-40 percent. The problem, I said, is that there is no smooth way to get from double-digit margins down to less than 10 percent. But now it’s happening.
There would be publishers willing to operate at that level, I predicted, if their investment is low enough. With the right price, they can get the same return on investment that previous owners enjoyed from much larger investments.
I illustrated the point with a parable about a goose that lays a golden egg every day. A buyer would pay a price for that goosed based on its production.
Now imagine a buyer who acquires such a goose only to find that its production drops to one golden egg per week. That person is going to be disappointed, but it’s still a pretty good goose. And this second owner can find a third person who will happily pay a much smaller price based on the lower production rate: a happy publisher with a normal retail-level margin.
Warren Buffet is that third owner. He has access to more data than I do, and it looks like he is betting that the slide in newspaper earning power has leveled out. The Internet has done all the damage it can, and papers still make money. His return on investment will enable him to cheerfully support product improvement and the public service functions of a good newspaper. Let’s hope he’s right.