Peter Kann's Thoughts On Newspapers

This past weekend's Wall Street Journal carried an extended editorial by the chairman of Dow Jones, part of NewsCorp, Peter Kann. Kann is a longtime Journal man, and his editorial contains so much historical perspective on the sector that it almost qualifies as an in-depth strategy piece.

Pity, really, because that sort of piece is almost nonexistent in today's Journal, post-Murdoch.

But, I digress.

The headline of Kann's article, "Quality Reporting Doesn't Come Cheap," has, as its main purpose, to belatedly lecture all of us on how the demise of newspapers will hurt society, because no other entity reports raw news anymore of similar "quality."

Kann meanders through the past, noting how newspapers were advised by "bright young managers" to give away electronic copies of their print editions. Long story very short, in a decade, print circulation fell disastrously, without an offsetting revenue stream from online sites.

Kann is quick to note that the Wall Street Journal, alone among US newspapers, has always charged for access to its online paper, beyond the day it is published, and ruminates that, perhaps if the NY Times, Washington Post, and a few others, had gone along with this, the entire industry would have followed, and they'd all be in great shape now.

But these passages, near the closing, reveal Kann's emotionally-tilted "analysis,"

"The reason any of this matters has little to do with the plight of newspaper publishers or even with the future of newspapers. The real threat is to the future of news—informative, relevant, reliable news of the wider world around us. And that is disappearing as newspapers, whose reporting staffs still produce most of the news, no longer can afford to do so. As their news budgets and staffs continue to shrink, the key question is what can fill that gap?

Television does not begin to fill it. To the extent broadcast networks ever tried they now have abdicated to so-called cable news channels. These, in turn, now devote most of their resources to covering celebrities, crimes and sundry social trivia and to prime-time programming that pretends to be analysis and informed opinion while mostly offering the spectacle of extremist heads yelling at each other. There are few resources and even less commitment to covering significant news beyond floods and fires.

The Internet is not filling news vacuums either. There are hundreds upon hundreds of online sites and blogs that claim to provide news, but virtually none of them even pretend to pursue the traditional news role of newspapers, which is to invest in professional staffs dispersed around a community and across the country or the globe to cover, analyze, and only then comment on, events. Actually, all they do is comment.

As to all the free online editions of our newspapers, their business model does not begin to cover the cost of significant news reporting. So the online editions with growing audiences—largely cannibalized from print audiences—rely on the poor print editions for almost all the news they give away.

Sadly, there is less and less of that, and the ultimate loser, of course, is the public."

I actually don't agree with Kann's diagnosis of cable news. On national topics, it is more timely and possessing of greater impact than print journalism. As I wrote about a year and a half ago, on the occasion of NewsCorp's purchase of Dow Jones,

"The reality is that print is a dead, bygone medium. The CBS franchise program, 60 Minutes, breaks tons of stories. How? By using television, not print. Do you think for a moment that the same program, as a print medium, could ever have lasted? Not a chance.

What Murdoch understands is that by marrying the Dow Jones assets and brands, particularly The Wall Street Journal, to his existing multimedia empire, he will enable those brands to actually create more value while doing even more investigative journalism.

The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.

No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities."

Print media simply can't deliver the same punch that a live cam feeding a cable news channel's programming, then residing on its website, can. Nobody said newspapers can't continue to serve a very local function in society. But in the era of ubiquitous cable news, YouTube, video on cell phones, and the internet, print just can't compete on national news stories. And if it has superior opinion and analytical pieces, then it has value, and product, but it's not news reporting.

However, earlier in his piece, Kann slipped this little nugget in,

"If publishers were at fault here for chasing ever larger audiences, editors and even reporters all too often were complicit. The list of modern journalistic flaws and failings is long, but surely includes the blurring of traditional lines between news and opinion and news and entertainment, predatory pack journalism, an undue emphasis on conflict rather than context, pessimism and cynicism (as differentiated from appropriate skepticism and criticism), social orthodoxy, elitism, flea-like attention spans, and more. Yes, the traditional newsprint medium was becoming less appealing, but its messages also were becoming less enlightening."

As a business person and strategist, once I read that paragraph, the rest of Kann's editorial became largely moot.

You see, what Kann unwittingly did, with these admissions, is essentially prove that poor management led to print news' downfall. The publishers made bad revenue strategy choices. The editors got carried away slanting the news, dumbing it down, and treating their customers as if they were morons.

Now, they complain that, having gutted their own product of much of its past value, nobody will pay for it.

Well, boo-hoo, Peter. You print guys did it to yourselves, and you got what you deserved. Newspapers are dying for a reason. Their operators lost sight of their strengths, screwed up their strategies, then lay weak and helpless in the face of advancing new technlology- cable news.

By the way, I doubt a Glenn Beck would find a supportive home in print, or have anything like the reach and punch he now has. And, yes, he actually reports news. And then also mixes it with analysis.

But I can't honestly say I believe, as Peter Kann does, that print could in any way rival the impact of well-honed video news and opinion programs now available to the viewing public- for free.

The Daily Show Mocks The New York Times

This video says it all. No deep analysis of economics, changed media consumption behaviors, etc., is really required to 'get' the newspaper sector's problems. Just watch this hilarious, scathing and mocking clip about the NY Times.

Sent to me by a friend, it's a piece from the Daily Show, which I don't watch, lampooning the Old Gray Lady, which I don't read.

Ironic that Stewart sticks it to this liberal publishing icon. I can't figure out why the Times agreed to even allow this story to be done, and collaborated, too. I kept thinking I was watching a comedy sketch, but I believe the Times staffers are real.

Another Boneheaded Union Speeds Its Own Demise

According to Tuesday's Wall Street Journal, the Boston Globe's union employees rejected, by a 277-265 vote, management's package of wage cuts calculated to keep the paper operating.

I guess that means that just 7 employees will likely be responsible for delivering a death blow to the ailing, aged newspaper.

After years of being the subject of various celebrity investors in late 2006, the Boston Globe doesn't seem to be attracting any more white knights to peel it off of the New York Times Corporation.

What do you suppose those 7 union employees don't get about what is happening to daily newspapers in even large US cities, let alone smaller ones? They have been the victims of Schumpeterian dynamics for at least a decade.

Craigslist help give the sector a big, final push by thinning advertising revenue after basic economics and television news had gutted afternoon editions and newspapers several decades ago. Even if a few of the big dailies survive, you have to wonder how much they will still rely on printed editions, rather than online publication.

I laughed when I read this passage at the end of the Journal piece, quoting Guild (union) president Dan Totten,

"Globe workers and the New England community understand that the quality of The Boston Globe- an institution so vital to the life and culture of the region- depends on the fair treatment of the men and women who work so hard to produce it."

Talk about clueless! If the paper was so damned 'vital,' it wouldn't be having such profitability problems, or would have been sold or spun off by now.

What's In The News?

As I read the Wall Street Journal, one of my three major news sources (along with The Economist and CNBC) this morning, I found myself strangely unmoved.

The headlines read,

"How Wall Street Stoked The Mortgage Meltdown," "Exxon, Conoco Exit Venezuela Under Pressure, and "As Competition Rebounds, Southwest Faces Squeeze."

None of them seemed all that interesting, relevant, or surprising to me.

We own Goldman Sachs in our equity portfolio. It's up more than 9% year-to-date, and has recovered some of its recent losses, which were only about 4% in total. I honestly don't think the sub-prime mortgage mess is either going to seriously harm Goldman, the financial services sector as a whole, or the economy.

Will some less stable, diversified funds suffer large losses as lots of that paper is truly "marked to market?" Yes. But it's unlikely to cause some sort of panic, much less a recession or "market meltdown." Last week and a few days this week saw equity investors worrying over this potential outcome. However, as time passes and nobody goes bankrupt, investors seem to be settling down.

How about Exxon and Conoco? Well, we don't own them. Instead, we own OxyPete, Allegheny Energy, and El Paso gas. They're all doing very well, thank you for asking. Occidental is up 24% this year, while the other two have returns of roughly 17% year-to-date. Evidently, none are affected by the Venezuelan mess.

I'm curious to read the article, of course. But I think it's rather obvious what the script is going to be. Does anyone else recall Libya in the late 1960s, when US oil firms were summarily ejected via nationalization?

Lastly, there is Southwest Airlines. Some years ago, our portfolio selection process actually picked Southwest. It was a rarity, as I have commented on the low barriers to entry in this sector. The first paragraphs of the Journal's piece tell you all you need to know,

"For years, Southwest Airlines managed to fly above the industry's storm clouds, trouncing rivals with a hard-to-match formula of low costs and low fares. Now it's facing a painful role reversal.

Its revenue growth has slowed, its costs are mounting, and its resurgent rivals have torn key pages out of its playbook.

"The threat to our future is real," says CEO Gary Kelly.

Don't say I didn't warn you- here, here and here, in these prior posts, in fact. In the last post, I observed,

"What seems to sound the death knell for these regional carriers is their eventual desire for passenger and revenue growth which requires them to outgrow their original, self-contained market segment of travelers. Just because an airline wishes to profitably continue its growth does not mean it should, or will, happen. Thus, Southwest’s dilemma.

It is pushing for growth while its total returns over the last five years are already penalizing its shareholders.

Hard as it may be to accept, many companies simply run out of profitable market segments in which to grow, and then their days of consistently superior returns are over. Airline total return performances seem to reinforce this conclusion with stunning regularity. So much for learning by example, or even from their own mistakes."

It would appear that I have, once again, predicted the outcome of another firm's strategic moves.

The airline industry is so beset with low barriers to entry and shared facilities that it does not take a genius to realize that long term, consistently superior total returns are very unlikely. Southwest had its run some years ago, in terms of consistently superior total return performance. Now, however, that is over.

As the Yahoo-sourced chart on the right demonstrates (click on it to see a larger version), Southwest Airlines has been flat for five years, and plunging recently. My rationale for this, as expressed in the post which I quoted above, seems to have been dead on.

I guess it's a good thing I am not an editor for a media publication, because my sense of "news" is probably very different than the average persons. I didn't find any of the three Journal pieces all that compelling. Yet, clearly, it's important and useful that the stories are reported.

Perhaps I would add a considerably greater amount of analysis. But, then, it would resemble some sort of, well, real analysis. Then again, maybe it's better to get in-depth analysis from a more objective source, such as a media publication, than a sell-side brokerage firm which you know is biased.

On Murdoch's Bid for Dow Jones

There was a very interesting piece in Monday morning's Wall Street Journal. It detailed the Ottaway's and retired Wall Street Journal executive Peter Kahn's opposition to Rupert Murdoch's offer of $60/share to buy Dow Jones.

On the surface, it appears to be a rather complex situation.

On one hand, Kahn, Ottoway et. al. sound antiquatedly quaint in defending journalistic integrity and independence. That's the sort of thing we used to hear from broadcast newsrooms, before cable television put them under.

In this case, blogging and cable TV have pressured print journalism. Why else the tie-up between CNBC and the WSJ?

Further, as a letter to the editor in today's Journal noted, the Bancrofts and The Wall Street Journal are all for capitalism, until it comes home to roost at their poorly-performing, partially publicly-held company. In that case, however, they argue for morals, standards, and eschew the same free market winds that they claim must blow throughout the economy.

For the record, the closing price of Dow Jones Inc. rose from $36.33 on April 30th, to $56.20 on May 1st. That's a 55% increase in the market price, nevermind Murdoch's promise of $60, which would be a 65% increase in the value of the stock. On an economic basis, it's clear that the time has come for someone else to create value with the Dow Jones stable of assets.

The nearby Yahoo-sourced chart of the Dow Jones stock price, versus the S&P500 Index for more than thirty years, tells a sorry tale indeed. The media firm has barely managed one-third the return of the market over this time, and has been flat for the last five years and declining over the last seven years.

On the other hand, there is the argument of journalistic independence. Critics say Murdoch will sell out the vaunted Journal staff that has won Pulitzer's for covering investigative stories in China. Kahn was reported to be concerned that, under Murdoch, the WSJ would not have earned those two Pulitzers for covering stories critical of China and its government.

Now, that sounds like something to consider. Kahn pointed to Murdoch's many actions calculated to placate the Chinese, so that his BSkyB service could beam into the country. He is reputed to have eliminated BBC from the satellite service, cancelled Chris Patten's last book deal, and sold the South China Morning Post, all to remove material offensive to the Chinese government.

Such accommodation worries Kahn.

At first, it worried me, as well. Do you force private equity to afford such ethics? Can Dow Jones afford this, on behalf of its shareholders, independently? Or is this something capitalism will simply cost out and, if necessary, eliminate as too expensive? Trusting someone else to do the investigative reporting and write the needed criticisms of China.


Then, while discussing this issue with my consultant friend, S, I stumbled upon the real answer. Murdoch's answer, actually.


The reality is that print is a dead, bygone medium. The CBS franchise program, 60 Minutes, breaks tons of stories. How? By using television, not print. Do you think for a moment that the same program, as a print medium, could ever have lasted? Not a chance.


What Murdoch understands is that by marrying the Dow Jones assets and brands, particularly The Wall Street Journal, to his existing multimedia empire, he will enable those brands to actually create more value while doing even more investigative journalism.


The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.


No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities.

The likely best outcome for the Journal and the rest of Dow Jones' media assets is to join a modern, global multimedia entity which can leverage their values further than is possible currently, while affording investment in them to retain their current competitive attributes. More than anyone else in media, Murdoch fits this description.


The crocodile tears over a potential loss of editorial independence and a standalone media presence are misplaced. This is about a too-small, old media company which has failed to properly take advantage of its best brands to create shareholder value. It's time for the Bancrofts to put up or sell. Either commit to investing in Dow Jones to enable it to consistently earn superior returns and realize its brand values, or sell it to someone who can.

Warren Buffett Seconds My Views on Dell, et. al.

Yesterday, I wrote about Michael Dell's return to lead the company he founded, and the likelihood that he will return it to consistently superior total return performance.

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."

It's nice to be in the philosophical and intuitive company of someone so well-regarded as Warren Buffett.