Buffett fingered media’s financial woes


It’s not that financial wizard Warren Buffett said that newspapers and broadcasters would run into trouble – it’s when he said it. He wrote it in a letter to shareholders of Berkshire Hathaway way back in 1992. His views were based on the difference between a franchise and a business.

Jack Shafer unearthed the comments in a recent article for internet magazine Slate.

Buffett said that to qualify as a franchise a business must be blessed with three things: something desired; something with no close substitute, and the absence of pricing regulation. The presence of the first two coupled with the absence of the third means the corporation will be able to set its price and customers will pay it.

He said a company with an ironclad trademark such as Coca Cola is one such franchise. Big city newspapers used to qualify because of they tended to have limited or no true local competition; and the license needed to engage in television or radio broadcasting provided scarcity and allowed fat margins. True franchise status, he said, was nearly foolproof – it could survive periods of incompetent management since the core business was so strong.

Back in 1992, it was clear to Buffett that effective new competitors had moved into the turf of both print and broadcast and removed the second plank of his franchise formula. And more were on the way. This had the effect of gradually reducing newspaper and broadcasting to the more standard business model. The margin of error was gone, and in that environment, incompetent leadership could be exposed.

RBR/TVBR observation: The margins generated by the media have usually been the envy of most other business categories. And many intelligent people still see promise in traditional media. But if the media isn’t able to count on fat margins as in the past, it’ll have to learn to do something new. Compete. Really compete. That actually won’t be such a new thing for veterans in radio, which we don’t believe ever had quite the same market power as television was capable of achieving.

What we’re living with now are companies saddled with mountains of debt accumulated in the belief that the fat margins would go on forever. You may or may not want to call this incompetent leadership, but it certainly falls into the category of incompetent crystal ball reading, and it possibly explains why Warren Buffett is Warren Buffett and we are not.

Editor’s note: Now if you want a real mind trip, read what a young executive had to say about radio when it was real radio and see how it compares to what Buffett was forecasting. Was Radio then a franchise and back then as was local TV news a franchise? Read  A reflection on Las Vegas