Newspaper businesses are under attack. In both the US and UK circulation continues to plunge while readers – and advertisers – keep moving online. Meanwhile legal judgments are making it easier to sue the press for “breaches of privacy”. No wonder embattled media mogul Rupert Murdoch thinks print papers will only survive for another twenty years. Indeed, one American study reckons that within five years there may be only four papers left in the US.
In this context, Warren Buffett’s decision to buy Media General, which owns 63 local papers in the US, may seem odd. Does he know something that everyone else doesn’t?
How newspapers got into this mess
The Internet is usually blamed for the woes of the printed word. However, the newspaper industry could have handled things better. In the United States, a lack of national competition combined with local monopolies has meant that papers have had a captive market for both readers and adverts. This has made them lazy. It also led to a large amount of waste and duplication – some parochial city papers have overseas bureaus.
So the rise of edgier media such as the Internet and cable TV has hit conventional papers for six. Many have been forced out of business while others are on the brink of going bust.
On both sides of the Atlantic, papers have rushed to put all their content on the web for free. But, with some notable exceptions such as the Daily Mail’s website, this has not been a great success so far. That’s largely because people do not like to pay twice for the same product. And while total online advertising spending has overtaken print, print rates per page are still higher. Combine lower online rates with the lack of subscription income and you have a profits double-whammy.
Can the industry fight back?
The industry is finally starting to realise that it can’t survive solely on online advertising. The Wall Street Journal worked this out a long time ago and has successfully limited most articles to subscribers for years. However, it was only when the Financial Times and the Times started charging for content, that other papers started putting up ‘paywalls’. Although few rivals follow the Times’ ‘blanket wall’ model, it is clear that papers are getting more serious about making money from their product. Sure there are thousands of bloggers and tweeters giving away their opinions for free but the quality of 99% of this type of online content is low. That still leaves the conventional press with an advantage.
JP Morgan still thinks that “for the industry overall, the impact of print declines is likely to outweigh any digital benefit”. However, they also think that, “consumers are willing to pay a premium” for content that adds value.
The wave of cost cutting in the US has also helped put papers’ finance on a better footing.
Are there any investment opportunities?
The most obvious place to start is with financial news. It’s clearly valuable and time sensitive, and seems to be doing well. Indeed, when digital subscribers are counted, the FT’s daily circulation has gone up by nearly half over the last twelve years. In the US, the Wall Street Journal’s sales and adverting revenues went up by 12% and 11% respectively. But what to buy?
News Corporation (Nasdaq: NWSA), which publishes the WSJ, is too diversified to count as newspaper play. In any case, on a PE of 15.8 and a yield of 0.85%, it’s not cheap enough. Pearson (LSE: PSON) owns the FT and has a 50% stake in the Economist; it also has a price/earnings (PE) ratio of under ten and yields 4%. However, it mainly makes its money from learning materials, so isn’t really a pure media play.
The major British newspaper companies, such as Daily Mail and General Trust (LSE: DMGT) and Trinity Mirror (LSE: TNI), are poor value; they are making tiny profits and will also be badly hit by the regulation that is expected to follow in the wake of the Leveson enquiry into phone hacking.
However, there are two US companies that are worth looking at if you don’t mind taking a risk.
The New York Times (NYSE:NYT) has a powerful brand. Although it is still making a loss, its paywall, which allows readers to look at ten articles a month, has been a success. Indeed, use of its paid-for digital offerings is growing quickly. With the shares well down over the last few years, it could even become a takeover target.
Gannett Company (NYSE:GCI) is a collection of local newspapers, TV stations and the mid-market USA Today. It is one of the few firms of its type to remain profitable, trading on a PE ratio of seven and a yield of 6%. Its decision to finally put up a pay wall in February should help it reverse falling sales. Again this is a punt for the more adventurous investor.