I wrote,
"Both H-P and Dell are, for the most part, engaged in the production and marketing of commodity electronic products- desktop and laptop computers, and printers. These types of firms haven't been on my equity strategy's selection lists since 1998. In the interim, the market for consumer computers has evolved to the point that most buyers can select and take home a perfectly adequate machine from a store at any one of as many as four chains (e.g., BestBuy, CircuitCity, Staples, Costco), with competitive pricing pressure providing similar values across the vendors and products.
In such a market, can we really expect either vendor, H-P or Dell, to somehow add sufficient extra value, and be paid for it, to drive its performance to a level of consistently superior total returns over several years? We're talking about producing some of the most common, nearly-disposable electronic devices you can imagine- personal computers and printers.
The competitive environment for its products, and the behavior of its target consumers, have changed to the extent that I don't think the product/market positioning of the firm will sustain consistently superior total return performance anymore.
Instead, the action seems to have moved on to online information and advertising purveyors- notable Google. This is not really a surprise. Over the years, consistent superiority of performance among technology firms has moved up the "food chain," from Intel and Microsoft, to the box makers, then the specialty applications software firms, to the online access and content providers. Now, it's moved beyond the last group, to simply providing tools to find information.
Although Michael Dell may return his firm to profitability and some revenue growth, relative to recent years, I don't think Dell has much potential to reward shareholders anymore."
Today, my partner emailed me a piece containing excerpts from Warren Buffett's annual shareholder letter. It would seem he and I share the viewpoint which I expressed above.
Here is, in part, what Buffett wrote:
"Not all of our businesses are destined to increase profits. When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, "If you want to get a reputation as a good businessman, be sure to get into a good business.") And fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue.
Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed."
In this post, last November, I discussed the odds that Maurice Greenberg or Jack Welch can turn around the daily newspapers they are interested in buying and running. Again, Buffett has come to the same conclusion I did, by writing,
"For a local resident, ownership of a city's paper, like ownership of a sports team, still produces instant prominence. With it typically comes power and influence. These are ruboffs that appeal to many people with money. Beyond that, civic-minded, wealthy individuals may feel that local ownership will serve their community well. That's why Peter Kiewit bought the Omaha paper more than 40 years ago.
We are likely therefore to see non-economic individual buyers of newspapers emerge, just as we have seen such buyers acquire major sports franchises. Aspiring press lords should be careful, however: There's no rule that says a newspaper's revenues can't fall below its expenses and that losses can't mushroom. Fixed costs are high in the newspaper business, and that's bad news when unit volume heads south. As the importance of newspapers diminishes, moreover, the "psychic value" of possessing one will wane, whereas owning a sports franchise will likely retain its cachet."
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