Case 5 - Buffet Investment in Newspaper

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Warren Buffett and his Newspaper Investments
The steady erosion of newspaper industry profitability had been among the biggest
headlines of the decade. So why, on June 6, 2012, were investors waking up to the news that
legendary investor Warren Buffett’s Berkshire Hathaway – which already owned the Buffalo
News (since 1977), the Omaha World-Herald, and a 27% stake in the Washington Post
Company -- was placing yet another bet on the newspaper industry?
That was the day shares of Lee Enterprises popped 16% after word that Berkshire
Hathaway had taken a 3.2% stake in Lee, the publisher of 48 daily newspapers including the St.
Louis Post-Dispatch and the Billings Gazette in Montana. Just weeks before, Lee had refinanced
its debt, after previously filing for bankruptcy in December 2011.i
This was not the only Buffett investment in the newspaper industry. In May 2012,
Berkshire had paid $142 million for almost all Media General’s newspapers including the
Richmond Times-Dispatch, as well as a 16.9% stake in its media company through purchase
warrants.ii
What could possibly be motivating someone who had achieved great wealth through
shrewd investments to place capital in an industry notable for being a dinosaur with high costs?
An industry noted for losing revenues to digital advertisers with lower costs, and to other content
providers who could deliver news more quickly to people on portable devices? With newspapers
such as the Rocky Mountain News shuttering operations and big city media companies such as
Tribune Company filing for bankruptcy, what did Buffett see that others had missed?
These questions were troubling Chris Taylor, president of Industry Dynamics, a strategy
consulting firm Buffett had hired to advise him on how to boost the value of his newspaper
investments. It was December 17, 2012, and Taylor was just two months away from delivering a
presentation to the Berkshire Hathaway board.
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ineffective management.
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Warren Buffet and His Newspaper Investments
Before the presentation, he needed insightful answers, backed by deep research, to the following
questions:
· Which newspaper industry segments had the highest profit potential? Why?
· What were the key competitive requirements for market share gains in the most attractive
segments?
· Compared to industry leaders, where did Lee Industries stand?
· What should Berkshire Hathaway do to boost their financial performance?
Buffett had already hinted at the rationale behind his recent newspaper investments. As
recently as 2009, he had told Berkshire Hathaway shareholders he would not buy a newspaper at
any price.
But in a May 2012 letter to the publishers and editors of all Berkshire Hathaway daily
newspapers, he described himself as a newspaper “addict” who planned to buy more papers in the
future. While less certain how to make papers profitable in the digital age, he was confident that
in certain cities, newspapers would thrive.iii
The letter highlighted two key points. First, that local content in tightly knit communities was
irresistible to readers. His letter urged publishers and editors to make sure they “fill [their] news
hole.” He also told them that maintaining readership depended on covering local stories,
particularly local sports.
Moreover, Buffett hinted that the most profitable newspapers were full of local content in
small communities with a deep history. “Strong interest in community affairs varies inversely with
population size and the number of years that the population has been in residence. Therefore, we
will continue to focus on small and mid-sized papers in long-established communities.”
Second, Buffett was not happy with the newspaper industry’s initial approach to the Internet.
According to his letter, “We must rethink the industry’s initial response to the Internet. The
original instinct of the newspaper industry then was to offer free in digital form what they were
charging for in print. This is an unsustainable model and we want your best thinking as we work
out the best blend of digital and print that will attract both the audience and the revenue we need.”
He explained in a New York Times interview that he expected a subset of daily papers in the
United States would figure out how to balance print and online operations, and he would apply
that insight to all papers in his stable.
As he told the Times, “I do not have any secret sauce. There are still 1,400 daily papers in the
United States. The nice thing about it is that somebody can think about the best answer and we
can copy him. Two or three years from now, you’ll see a much better-defined pattern of operations
online and in print by papers.”iv
Buffett summarized his interest in local newspapers in small communities rather than in big
cities as follows, according to the Times. “In Grand Island, Nebraska, everyone is interested in
how the football team does. They’re interested in who got married. They’re maybe even more
interested in who got divorced. If you live in South Central Los Angeles, you’re not interested in
who dies in Beverly Hills.”
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Newspaper Industry Background

By the time Buffett began doubling down on newspaper industry investments, the industry
was in a dire state. According to the Congressional Research Service (CRS), the newspaper
industry was “suffering through what could be its worst financial crisis since the Great
Depression.”
Advertising revenues [had] plummeted due in part to the severe economic downturn,
while readership habits [had] changed as consumers turn to the Internet for free news and
information. Some major newspaper chains are burdened by heavy debt loads. Between
2008 and early 2010, eight major newspaper chains declared bankruptcy, several big city
papers shut down, and many laid off reporters and editors, imposed pay reductions, cut
the size of the physical newspaper, or turned to Web-only publication. v
Circulation levels reflected this decline. For example, as illustrated in Table 1, between
2001 and 2011, the number of daily newspapers fell 5.9%, daily newspaper circulation shrank
20.1%, and circulation revenues declined 8.2%.
Table 1. Newspaper Circulation 2001 to 2011
Total Daily Newspapers Daily Circulation Circulation Expenditures

(000) ($000)
2001 1,468 55,578 $10,783,078
2002 1,457 55,186 $11,025,896
2003 1,456 55,185 $11,224,362
2004 1,457 54,626 $10,988,651
2005 1,452 53,345 $10,746,901
2006 1,437 52,329 $10,548,344
2007 1,422 59,742 $10,294,920
2008 1,408 48,597 $10,086,957
2009 1,387 45,653 $10,066,783
2010 N/A N/A $10,049,361
2011 1,382 44,421 $9,989,065
Source: Newspaper Association of America, September 4, 2012, http://www.naa.org/Trends-and-
Numbers/Circulation/Newspaper-Circulation-Volume.aspx.
As the industry began to improve in 2010, some newspapers began to achieve better
financial performance. However, advertising dollars continued to fall, and the industry had not
found a way to replace them. For example, until the 1990s, newspapers depended on advertising
for about 80% of revenues. Even after investing in technology and attracting millions of online
readers, only about 10% of overall newspaper advertising dollars came from the Internet by 2009.
This figure climbed to 13.4% by 2011.
Moreover, the decline in the industry created concerns that civic and social life might
decline. Fewer newspaper reporters were covering state capitols and city halls, and the number of
states with newspapers covering Congress full-time fell from 35 in 1985 to 23 in 2008.
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Predictions for the future of the industry implied there was not enough revenue to support
all the newspapers. For example, Vin Crosbie, a Syracuse University professor and consultant,
predicted that of the 1,400 daily newspapers in the United States, only 700 would be left by 2020.
Industry History
The newspaper industry had always gone up and down. The 1830s marked the debut of
the daily, thanks to creation of the penny press – low-priced papers sold for one cent by street
vendors rather than through prepaid subscriptions. Through the remainder of the decade,
newspapers grew in profit and influence along with the rise of yellow journalism in the late 1800s.
The Great Depression nearly brought the newspaper industry down. The collapsing
economy and competition from the emerging radio industry caused newspaper advertising
revenue to fall 45% from 1929 to 1933, and it was still down 20% in 1941. Hundreds of newspapers
shuttered or suspended operations, and 33% of salaried newspaper workers got the boot.
Newspapers’ pain was radio’s gain. Radio was the only media segment that saw advertising
go up during the Depression, and the rise of TV threatened them both. By the 1960s, television
had become a more popular source of information than newspapers, and TV networks had
grabbed the lion’s share of national advertising.
The 1960s marked the beginning of several decades of newspaper industry consolidation
wherein chains acquired family-owned papers. Between 1960 and 1980, Gannett bought 57 of
them. By 1977, 170 newspaper groups owned 66% of America’s 1,700 daily papers. From 1969 to
1973, 10 newspaper companies went public, including the Washington Post, New York Times, and
Times Mirror.
Industry Structure: Concentration in Local Markets
The demise of the family newspaper company led many towns to have only one newspaper.
While this gave newspaper owners a local monopoly, the lack of competition raised concerns
about weakening media’s role as the public’s watchdog. In 1910, about 60% of cities had
competing daily papers, a percentage that dropped to 21% by 1930 and a mere 2% by 1971.
Some local papers around the country tried to combat economic stress by pooling
advertising and circulation operations with help from a partial exemption to antitrust laws
through the Newspaper Preservation Act of 1970. The Act allowed certain newspapers to combine
financial functions but maintain separate newsrooms.
Only a few of the 25 to 30 such agreements survived the forces eroding the industry. The
Seattle Post-Intelligencer, Minneapolis Star Tribune, Rocky Mountain News, and Tucson Citizen
--papers that were part of joint operating agreements -- closed, declared bankruptcy, or moved to
Web-only production by 2009.
Despite consolidation, shareholder returns plunged after 2000. Return on equity for
major newspapers declined from an average of 22% in 2000 to 10% in 2008, while cash flow
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margins peaked at 29% in 1999 and stood at a mere 13% in 2008 with large differences among
papers.
By 2012, there were about 1,400 daily newspapers in the United States and thousands of
community papers that usually published once or twice a week. Big newspapers such as the Wall
Street Journal, USA TODAY, and the New York Times had national print readership in excess of
a million, and the top 50 papers had around 33% of circulation.
Industry Revenue: Sources and Drivers
Total newspaper industry revenues plunged due to a decline in paper advertising, a decline
in circulation, and the growing Internet audience that generally paid no subscription fee and
yielded lower advertising rates.
Between 2003 and 2011, print advertising revenue fell at a 9.2% annual rate. During the
same period, online advertising revenue rose at a 13% rate and represented 10% of total industry
revenues by 2011, a sizeable increase proportionally from the 3% of total that it accounted for in
2003. However, at this same time, subscription revenue declined at a 1.2% annual rate from $11.2
billion to $10.0 billion.
Table 2. Newspaper Industry Revenues 2003 to 2011 ($ in millions)
Print Advertising Online Advertising Total Industry Ad Revenue

Revenue Revenue
2003 $44,939 $1,216 $46,156
2004 $46,703 $1,541 $48,244
2005 $47,408 $2,027 $49,435
2006 $46,611 $2,664 $49,275
2007 $42,209 $3,166 $45,375
2008 $34,740 $3,109 $37,848
2009 $24,821 $2,743 $27,564
2010 $22,795 $3,042 $25,838
2011 $20,692 $3,249 $23,941
Source: Newspaper Association of America, March 14, 2012, http://www.naa.org/Trends-and-
Numbers/Advertising-Expenditures/Annual-All-Categories.aspx.
In the traditional revenue formula for newspapers, 80% of revenues came from retail,
classified, and national advertising, while subscriptions and newsstand sales accounted for the
other 20%. This advertising model formerly generated healthy profits, paying for expensive
foreign, investigative, and other reporting, and it held down subscription and newsstand prices.vi
The combination of Internet news and the recession delivered a one-two punch to
newspaper industry revenues. Total advertising revenue at daily newspapers fell 44% from $49.4
billion in 2005 to $27.6 billion in 2009. The Pew Center’s Project for Excellence in Journalism
estimated that about half of this drop in advertising was due to the poor economy that forced
advertisers such as auto dealers to shut down their businesses and other retailers to cut back.
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Small community newspapers such as Lee’s were able to withstand the profit-draining
trends washing over the industry. For example, community papers suffered a relatively small
18.7% revenue decline in the first quarter of 2009, far better than the 28.8% plunge bigger papers
suffered.
Newspaper analyst John Morton estimated that roughly 1,000 small daily papers with
fewer than 50,000 subscribers remained profitable. Morton argued that these smaller players
enjoyed three advantages over larger players: they depended less on classified ads, their markets
were less complex, and they tended to build tighter relationships with readers and advertisers.
The University of Missouri-Columbia survey of weekly community papers located in

markets of 25,000 or fewer found that consumers were more loyal to their brand, preferred the
dead-tree version, and were less likely to get their news online.
Advertising was only part of the newspaper industry revenue narrative. The rest of the
story included declines in print circulation and a surge in online news. For print circulation, from
2001 to 2008, daily papers fell by 13.5%, and Sunday editions sagged 17.3%.
Meanwhile, more people were consuming content online at no charge. For example,
comScore estimated that in May 2010, top newspaper Web sites received 123 million unique
visitors. Nielsen Online calculated that in 2009, the biggest news Web sites, in descending order,
were Yahoo News, MSNBC Digital Network, AOL News, CNN.com, and NYTimes.com.
Industry Costs: Sources and Drivers
The biggest sources of cost in the traditional newspaper industry were salaries,
production, and distribution. Traditional general-interest print newspapers spent about 52% of
total costs on production and distribution – 20% to production, 18% to raw materials such as
newsprint and ink, and 14% to distribution. The remaining 37% of costs split with 15% to editorial
expenses, 13% to promotion, and 9% to administration.
Table 3 summarizes the revenue and cost structure of the average newspaper in 2010.
Table 3. Newspaper Industry Costs by Category in 2010
Revenue (%) Cost (%)

Advertising Core 75% 37%
Retail 42%
Promotion 13%
Classified 25%
Editorial 15%
National 8%
Administrative 9%
Subscription and Newsstand Production & Distribution
25% 52%
Production 20%
Distribution 14%
Raw materials 18%
Source: H. Vogel, Entertainment Industry Economics, 2010, p. 371.
Newspapers cut costs by reducing print newspaper size, eliminating staff, or trimming the
number of days each week print deliveries went to subscribers. In 2008, for example, daily papers
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cut newsroom staffs by 11% or 6,000 full-time workers, more than any year since 1978. In 2009,
another 5,200 jobs were slashed. These cuts pared total newsroom staff by 25% from its 2001
peak of 56,400. This trend continued through the first eight months of 2010 with 2,200 workers
at U.S. newspapers getting laid off or taking buyouts.
Impact of the Internet on the Newspaper Industry

Revenue Impact
The Internet forced newspapers to find a way to be competitive. According to Gordon

Prichett, Babson College professor and Lee Enterprises board member since 2002, Internet
advertising revenues as a percent of total revenues rose in 2011 from 2% to between 13% and 20%
for the industry. For Lee Enterprises, the figure was around 15%.vii
Nevertheless, Internet advertising was not making up for the loss in print advertising
revenues. For example, combined newspaper print and online ad revenue was $27.6 billion in
2009, $24.8 billion from print and $2.7 billion from online advertising, down roughly 44% from
$49.4 billion in 2005.viii
Prichett believed Buffett’s attitude toward investing in newspapers had grown more
bullish since 1997. As Prichett explained, “Fifteen years ago, Warren Buffett was not excited about
prospects for the Buffalo News, but now he thinks it’s great that Berkshire Hathaway owns it and
the other newspapers. He thinks he bought the shares at depressed prices, and the managers of
these newspapers will find a way to stay competitive and maintain reasonable margins, though
below their historical level near 30%.”ix
Prichett suggested Buffett might win, even if newspapers failed to return to their previous
level of profitability, because Internet advertising purveyors would compete to acquire them.
According to Prichett, “If [local newspapers can’t find a way to be competitive], there will be an
incentive for Google, Microsoft, and Yahoo to acquire [local newspapers] in the next five to 10
years as they try to create local content. And if this occurs, it’s possible that multiples will be
somewhat restored from their previous low values. What they would be purchasing is ‘feet on the
street’ – journalists.”
If the newspaper industry was going through one of its many historical troughs to be
averaged out later by cyclical peaks, then Buffett’s timing for bullishness looked shrewd as
measured by investors’ methods to value newspapers. Prichett suggested current newspaper
valuations were at earnings multiples of 4X to 8X, noting they had improved recently but were
low compared to the 12X to 18X during their heyday.
One of the most significant challenges for newspaper industry executives was to boost
advertising revenues despite the growing predominance of advertising on Web versions of their
content. The threat to revenues from Internet-related advertising was significant because,
according to Prichett, advertising rates for newspaper ads were higher than those for online ads;
if more than 50% of advertising revenue came from online, a newspaper would lose money by
maintaining current cost structures.
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Prichett suggested one way newspapers could augment lower online advertising rates was
by charging a subscription fee to consumers who accessed their online content. He explained,
“The good news about online is that thanks to the Wall Street Journal, in the last 12 to 18 months
newspapers saw that they could start charging readers for online subscriptions. If Lee can get
them used to paying $5 now, we may be able to charge more later as readers become accustomed
to being charged for online content.”
In small communities such as Bozeman, Montana, and Glens Falls, New York, people
wanted to read local news. Prichett noted the Glens Falls PostStar of July 20 ran a front-page
story about a Lake George man doing a summer internship and a local victim of a Nigerian
scammer. In short, local papers wrote about what most interested residents living within a 30- to
45-mile radius.
Prichett also mentioned that newspapers had improved profits by analyzing statistics
about different segments of a local customer base and tailoring content to each micro-segment.
Prichett did not disclose Lee’s efforts in this direction.
According to Prichett, producing local content was costly for Google or Yahoo. Newspapers
owned by Lee Enterprises and Media General could tailor content to specific customer segments,
boosting readership and ad revenues to generate funds to cover the marginal cost of producing
segment-specific editions.
Prichett believed it critical for newspapers to give advertisers an accurate count of the
number of newspapers people actually bought because advertising rates were based on that
number. If a convenience store in Glens Falls bought 30 newspapers and sold 20, the next time a
delivery person brought another batch of fresh newspapers, the convenience store was supposed
to return the 10 unsold copies to the delivery person. Thus, a newspaper could obtain an accurate
count of actual purchases and set advertising rates accordingly.
The newspaper industry had lost significant revenues particularly in classified advertising,
and also in real estate and automobile listings. Among the biggest competitors were Angie’s List,
Craigslist, and various online automobile advertising sites. Prichett did not see Groupon as a
significant long-term threat to newspapers because it did not bring loyal customers to merchants;
instead it boosted temporary restaurant volume from customers who paid discounted prices and
never returned.
Impact on Operating Performance:
As noted earlier, the Internet altered the economics of the newspaper industry. The cost
of producing and distributing content dropped as did the amount content providers could charge
for advertising. For example, online advertisements often sold for half the price of print ads.x
Operating cash flow margins had been improving slightly. For example, for the year
ending September 30, 2012, Lee’s operating cash flow margin eked up from 22.4% to 23%. Lee’s
problem was that it had assumed too much debt to acquire Pulitzer in 2005. But Lee reduced costs
and lowered financial expense to $83 million in fiscal year 2012, down from $120 million a year
prior to its December 2011 pre-packaged bankruptcy filing.xi
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On working with Internet companies, Prichett noted Yahoo had shared a joint venture
with Lee for a number of years. He did not believe an Internet company would want to hire local
journalists, but he thought it might possibly acquire a company like Lee Enterprises and let
managers there handle hiring and motivation of local journalists.xii
Comparing the revenue and cost structures of Lee and online media-services-provider
TheStreet, Taylor realized an online-only strategy was not necessarily a profitable bet.
As shown in Table 4 below, in 2011 both Lee and TheStreet generated a 14% operating loss
but for different reasons. Lee generated 71% of revenue from advertising and 24% from
subscriptions, whereas TheStreet generated 69% of revenue from subscriptions to premium
content and 31% from advertising.
Although TheStreet saved the 8% of revenue Lee spent on newsprint and ink, it exceeded
that lower cost in the form of higher compensation and digital operations costs.
Table 4. Lee Enterprises and TheStreet: Revenues and Costs as a Percent of

Revenue (2011)
Share of Revenue (%) Lee Revenue and Cost The Street Revenue and
Structure (% Rev) Cost Structure (% Rev)
Subscription revenue 24% 69%
Advertising revenue 71% 31%
Total revenue 100% 100%
Costs and Expenses
Compensation 40% 45%
SG&A 57%
Newsprint and ink 8% 0
Other 31% -
Operating income/(loss) (14%) (14%)
Source: Analysis of 2011 10Ks, www.sec.gov.
The lower rates on digital advertisements may have caused TheStreet to focus more
heavily on premium subscriptions. A quarter-page advertisement in a print newspaper generally
cost about $10 per 1,000 consumers. On the Internet, a so-called skyscraper ad up the side of the
screen, or a large banner ad across the top of a screen, ran between $5 and $8 per 1,000 viewers;
and some national display ads cost less than $1 per 1,000.xiii
Online advertising rates were dropping due to a growing number of content Web sites, a
worsening economy, and more sophisticated advertisers who could track consumers who viewed
or clicked on an ad. For example, display ad prices dropped nearly 50% from the end of 2007 to
the end of 2008.
Some advertisers were integrating forward, building their own online advertising sites.
Consumers now had access to online circulars such as Coupons.com, RetailMeNot.com, and
Coupon Cabin (couponcabin.com). Regal Entertainment Group, the top U.S. movie chain, told
investors in 2009 it had cut advertising per screen from $13,000 in 1999 to $3,000. Movie
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customers were getting more movie and show-time information online, with newspapers a second
or third choice.
The decline of traditional media advertising was expected to continue. IBM Global
Business Services projected revenues for traditional media, such as newspapers, radio, and
television, would drop from 47% of the advertising market in 2002 to 32% in 2012.
New Sources of Content
New media made content available to readers, thanks to low entry barriers and the rise of
the citizen blogger. New sources of content were becoming available on a variety of wireless
devices including netbooks, phones, the iPhone and iPad, and Amazon Kindle e-readers.
Foundations were funding some news organizations focused on investigative reporting

that was published online. Examples included ProPublica (ProPublica.org), Kaiser Health News,
and Voice of San Diego. GlobalPost, a for-profit enterprise focused on international reporting,
relied on advertising, syndication to newspapers, and paid membership.
Search Engines Driving Traffic
Although newspapers were slow to seize the online market, Google, Yahoo, and others
generated tens of billions in advertising by using excerpts from online newspaper content and
key-word search.
Newspapers argued that search engine advertisers used copyrighted material unfairly.
Internet firms countered that their models fell within standard copyright law and provided an
essential service to newspapers, since their Web site links directed millions of readers to
newspaper home pages. They also pointed out that newspapers could easily block content from
other sources that aggregated news through simple computer code.
Some newspapers including the New York Times and the Wall Street Journal adopted
business models requiring people to pay for access to some or all content on their Web sites. For
example, the Wall Street Journal provided general access to only part of its Web site. It had more
than a million paying online subscribers and provided newspaper subscribers access to its online
subscription site. The Associated Press, a non-profit cooperative of about 1,400 newspapers,
contracted to sell full stories to Internet firms including America Online, Google, and Yahoo.
«58!® ?SSSS8s
New York Times had implemented a pay wall that generated about $117 million in
annual revenue. By August 2012, the 530,000 paying subscribers to its digital editions had each
forked over $220 per year.xiv
Strategic Responses by Selected Newspapers

Newspapers responded to the double-edged sword of the Internet using various
experimental approaches. The most successful appeared to be a hybrid of print and paid
subscriptions to online content.
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Hybrid of Free and Paid Content
The Wall Street Journal used the most successful example of the hybrid approach. The
WSJ received at least 15 million monthly visitors and with weekly circulation of 2.1 million
remained the largest print newspaper.
The WSJ sold annual subscriptions to its online version for $225. Its ability to attract
paying users -- it had 552,288 digital subscribers as of March 2012xv -- was partially attributable
to business customers who needed access to the information to do their jobs. Professional
application of this content sometimes meant that these online users could deduct their
subscriptions as a business expense or that their employers would pay for the subscriptions.
Subscription vs. Story-Based Micropayment
Meanwhile, the New York Times struggled with different business models,xvi finally
settling on a strategy of giving online readers 10 free stories monthly before requiring them to pay
$220 a year. The Times launched the pay wall on March 28, 2011, and by August 2012, it had
530,000 paying subscribers.xvii
The number of digital Times subscribers was expected to exceed the number of print subscribers.
In August 2012, Barclays analyst Kannan Venkateshwar estimated the number of digital
subscribers would surpass the number of print subscribers by April 2014.xviii
Although the cost of serving digital subscribers was relatively low, the loss of subscription
revenue was expected to be considerable in light of the big difference between annual subscription
rates: $730 for paper and ink vs. $220 for digital.xix
What Content were People Willing to Pay For?
These examples suggested people were willing to pay for at least two kinds of content:
branded general interest and professional. The success of the Times pay wall implied people were
willing to pay for general interest content as in the online version of the Times because of the
strength of its brand, derived from the quality of its journalists. Professionals were also willing to
pay for access to content, such as in the Wall Street Journal online, that was critical to their jobs
and for which employers paid to keep them informed.
However, people were not necessarily willing to pay enough for an online-only newspaper to make
it profitable. A case in point was News Corp.’s iPad-only newspaper, the Daily, launched with
much fanfare in February 2011. The Daily never came close to breaking even, losing a total of $60
million before News Corp. shut it down in December 2012. The Daily employed 150 people at its
peak and charged subscribers about $40 a year.xx
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Berkshire Hathaway
Berkshire’s Interest in Media Properties
Berkshire Hathaway bought its first newspaper, the Buffalo News, in 1977. Buffett’s view
on newspaper investing appeared to fluctuate widely depending on public valuations of
newspapers compared to his estimation of their prospects.
In 2009, he told shareholders he would not buy a newspaper at any price; but by 2012, he
had moved aggressively into newspapers, buying 63 papers and revealing his 3% stake in Lee.xxi
His strategy with the Buffalo News was to delay buying the latest printing presses but to
invest in local news. Berkshire could not stop slumping profits at the News. In 2011, the paper
earned a profit of only $9.3 million, the first time profit had fallen below $10 million in 25 years.
During the 1980s, annual profit had averaged $55 million.
The industry revenue decline did not skip the News. Since 2009, nearly 100 full-time
union jobs had been cut from the newsroom as well as from the classified, accounting,
bookkeeping, and circulation departments. Workers who survived got mere 1% raises.
The News held a big share of the Buffalo market, despite a drop in circulation to about
150,000 daily copies and 230,000 on Sunday. According to Media Audit, 70.9% of area
households read or viewed the Buffalo News, a figure which represented the second-highest
market penetration of any news organization in the United States.
Lee Enterprises
After Berkshire Hathaway’s June 2012 investment, Lee continued to scramble. On

September 10, Lee announced an agreement to sell the Escondido, California, North County
Times to a real estate developer for $12 million.
This was a low price that hinted at how much Lee had overpaid for two big acquisitions:
Howard Publications in 2002 for $750 million, and Pulitzer in 2005 for $1.5 billion in cash and
$2.2 billion in debt.xxii
Lee reported a loss of $13 million for the six months ending June 24, 2012, although this
figure showed improvement over its $138 million loss for the previous year. Lee revenues fell 3.9%
during the first half of 2012. Advertising revenue was down 4.3% to $239 million, while
circulation revenue inched up 0.6% to $136 million. xxiii
Lee’s digital revenue rose 10% in the quarter ending June 24, 2012. Vice President of
Strategy Greg Schermer explained his confidence that Lee was making progress with its Internet
strategy. “The newspaper industry is no longer fighting against the Internet. A consortium of
leading newspapers that runs an online advertising service, Classified Ventures, is doing well.
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More generally, the industry is no longer fighting religious wars against the Internet. It is
more focused on giving people what they want via their selected media.”xxiv
Schermer pointed out that newsprint was 20% of the cost structure of a newspaper. Eliminating
that cost by putting news online was not reduction enough for advertising rates to make up the
difference.
Print advertising rates and profits are much more attractive than online ones. But at Lee,
the company has cut back costs enough so it can serve all readers who still insist on getting
print news. It is much easier to pick news stories in a smaller town. Towns with
populations between 45,000 and 120,000 are easier for editors to understand and to pick
stories that will capture their attention. In big cities, there are so many groups of people
with different interests that editors don’t know what kind of content will appeal to them.
Despite the overall negative results, some investors were optimistic about Lee’s prospects
because of Buffett’s investment. Berkshire had gained a stake by acquiring $85 million of Lee’s
junior debt, giving Berkshire 49% of Lee's junior debt, 9% of its total debt, and 6.2% of Lee's
outstanding shares.xxv
Lee’s free cash flow had plunged 40% from roughly $100 million in 2011. Based on the
higher interest rate expense of its pre-packaged bankruptcy, investors expected Lee to generate
$60 million in free cash flow.xxvi
Investors anticipated this $60 million coupled with proceeds from “non-core papers”
would help Lee pay down debt. They estimated that Lee’s valuation (free cash flow to market
capitalization of more than 75%), and the slower-than-industry-average rate at which its
newspaper revenues were declining, made it an attractive investment.xxvii
Investors were also optimistic about prospects for a new leader of Lee’s digital business. They
believed transferring Mike Gulledge from vice president of publishing to vice president of sales
and marketing would expand revenues from digital sources, despite the 21% erosion in circulation
to 37,310 at the Billings Gazette, which he had run from 2000 to 2011.xxviii
Ultimately, the value of Lee depended on its ability to sell more newspapers either by
“increasing circulation or by selling
p
off non-core newspaper publication operations.”xxix
Lee Enterprises Attractiveness to Berkshire Hathaway
Although Lee was not a blue chip company and the newspaper industry was declining,
Berkshire had acquired its stake at a price Buffett likely considered below Lee’s potential value
when it was reducing debt and lowering costs.xxx
Given the low acquisition cost, Berkshire had many options to increase Lee’s value. It
could sell unprofitable large-metro-area newspapers such as the St. Louis Post-Dispatch and the
Arizona Daily Star, then invest the proceeds to build local newspaper quality and online
revenues.xxxi
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Decision and Recommendations

Taylor was struggling to decide what specific advice to offer Buffett. As he prepared to meet
with his team to discuss how to develop, analyze, and make a case for strategic options for
Berkshire Hathaway’s newspaper industry investments, he tapped some questions into an email
to his team on his iPad:
· Could Lee find a way to make up lost revenue from the growth of online users? (Table 5
below compares Lee revenues and net income from 2003 to 2011 to those of the New York
Times.) If print revenue continued to decline, could Lee make it up from other sources?
· Could Lee transition its print customers online? Would current print customers move and
pay for an online edition in sufficient numbers to enable successful and profitable online
publication?
· If so, could Lee cut its operating costs enough to offset the lower subscription revenues?
Which operating line items could Lee trim and by how much?
· Could Lee sell enough online advertising to offset the resulting drop in print advertising?
· Or, as in November 2012 with the Manassas News & Messenger that Buffett got in 2011
as part of his Media General acquisition,xxxii should Lee shut down some of its unprofitable
operations?
As Taylor considered how to address these questions, he looked for models. He considered the
strategy of much larger but profitable Gannett (Table 6). Its combination of profitable
newspapers,xxxiii lucrative online substitutes for classified print advertising (referred to as its
Digital Segmentxxxiv), and gold mine of broadcasting propertiesxxxv earned a net margin of 11.4%.
Lee lacked the capital (Tables 7 and 8) to replicate Gannett’s business mix, but its strategy
suggested possible options.
Meanwhile, on December 14, Berkshire Hathaway expressed interest in bidding on another

local newspaper, the Morning Call, with daily circulation of 84,000 and based in Allentown,
Pennsylvania. The bankrupt Tribune Co. was currently auctioning this paper. xxxvi
Taylor drummed the table nervously with his pen as he considered how to direct his consultants
to come up with compelling ways to enhance Lee’s value to Buffett.
14
MARCH
Table 5. Lee Enterprises and New York Times:

Revenues and Net Income 2003 to 2011 ($ in millions)
Lee Enterprises Lee Enterprises New York Times New York

Revenue Net Inc. Revenue Times Net Inc.
2003 $647 $78 $3,230 $303
2004 $643 $83 $3,160 $265
2005 $819 $71 $3,230 $243
2006 $1,120 $71 $3,290 ($568)
2007 $1,120 $80 $87
2008 $1,030 ($881) ($66)
2009 $842 ($123) $2
2010 $781 $46 $108
2011 $756 ($147) $2,320 ($40)
Source: MSNMoney, Accessed October 28, 2012, http://investing.money.msn.com/investments/financial-
statements?symbol=us%3aLEE.
Table 6. Gannett Revenue, Operating Income, and Capital Expenditures by

Business Segment 2009 to 2011 ($ in millions)
2009 2010 2011

Newspaper
Operating revenue $4,292 $4,051 $3,831
Operating income $516 $647 $478
Capital expenditures $45 $37 $40
Digital
Operating revenue $586 $618 $686
Broadcasting
Operating revenue $631 $770 $722
Source: “Gannett 2011 10K,” sec.gov, accessed December 15, 2012,
http://www.sec.gov/Archives/edgar/data/39899/000119312512072714/d258830d10k.htm.
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Table 7. Lee Enterprises Income Statement Highlights 2008 to 2011 ($ in

millions)
2008 2009 2010 2011

Revenue $1,029 $842 $781 $756
Cost of revenue $26 $72 $54 $59
Gross profit $503 $770 $726 $697
SG&A $293 $339 $316 $299
Other operating expense $1,029 $589 $316 $477
Total Operating Expense $1,322 $928 $632 $777
Operating income ($819) ($159) $94 ($80)
Interest expense $71 $75 $63 $53
Net Income ($880) ($123) $460 ($147)
Source: “Lee Enterprises Income Statement,” Morningstar, accessed December 15, 2012,
http://financials.morningstar.com/income-statement/is.html?t=LEE&region=USA&culture=en-US.
Table 8. Lee Enterprises Balance Sheet 2008 to 2011 ($ in millions)
2008 2009 2010 2011

Cash $23.46 $7.91 $19.42 $23.56
Total current assets $153.78 $118.11 $121.62 $123.82
Property, plant, and equipment $292.83 $262.97 $235.4 $212.04
Goodwill $627.02 $433.55 $433.55 $247.27
Intangibles $701.18 $603.35 $558.14 $495.51
Total Assets $2,016.37 $1,515.61 $1,440.12 $1,158.25
Long-term debt current portion 0 $1,079.99 $1,000.93 0
Total Liabilities $1,860.85 $1,492.01 $1,383.29 $1,259.59
Retained earnings/(accumulated deficit) ($112.14) ($225.3) ($179.19) ($326.06)
Shareholders’ Equity $155.52 $23.6 $56.82 ($101.35)
Source: “Lee Enterprises Income Statement,” MSNMoney, accessed December 15, 2012,
http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=us%3Alee&stmtView=Ann.
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MARCH 2014
Endnotes
i“Shares of Lee Enterprises Surge After Buffett Buys Stake,” Reuters, June 6, 2012,
http://www.nytimes.com/2012/06/07/business/media/shares-of-lee-enterprises-surge-after-
buffett-buys-stake.html?_r=1&ref=business.
ii Reuters, Ibid.
Warren Buffett, “Warren Buffett's letter to publishers and editors,” May 23, 2012,
iii
Omaha.com, http://dataomaha.com/documents/warren-buffetts-letter-to-publishers-and-
editors#read-buffett-s-letter-to-publishers-and-editors.
ivChristine Haughney, “Newspaper Work, With Warren Buffett as Boss,” New York Times, June
17, 2012,
http://www.nytimes.com/2012/06/18/business/media/newspaper-work-with-warren-buffett-
as-the-boss.html?ref=business&pagewanted=print.
vSuzanne M. Kirchhoff, "The U.S. Newspaper Industry in Transition," CRS Report for Congress,
September 9, 2010, http://www.fas.org/sgp/crs/misc/R40700.pdf. Content under the titles
Industry Background, Industry History, and Industry Structure is drawn from this source.
viHaughney, Ibid. Content under the titles Industry Revenue and Industry Costs is drawn from
this source.
vii Peter S. Cohan, interview with Gordon Prichett, July 20, 2012.
viii Haughney, Ibid.
Prichett, Ibid. Content from this endnote continuing to the title Impact on Operating
ix
Performance is drawn from this source.
x Haughney, Ibid.
xi “Lee Enterprises reports results for fourth quarter,” SEC.gov, November 12, 2012,
http://www.sec.gov/Archives/edgar/data/58361/000005836112000035/earningsrelease2012q
4-good.htm.
xii Prichett, Ibid.

xiii Haughney, Ibid. Content through the first three paragraphs under the title Search Engines
Driving Traffic is drawn from this source.

xiv Peter Kafka, "The New York Times Reports a Digital Success Story," All Things D, August 6,
2012, http://allthingsd.com/20120806/the-new-york-times-reports-a-digital-success-story/.
17
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MARCH 2014
xvNeal Lulofs, “The Top U.S. Newspapers for March 2012,” Audit Bureau of Circulations,
accessed October 28, 2012, http://accessabc.wordpress.com/2012/05/01/the-top-u-s-

newspapers-for-march-2012/.
xvi In 1996, the New York Times charged overseas users $35 a month for access to its site and
discontinued this charge in 1998. In 2005, it launched Times Select, charging $49.95 a month to
read popular columnists online and eventually attracting 220,000 subscribers. The New York
Times canceled this in September 2007 after widespread criticism.
xvii Kafka, Ibid.
xviii Kafka, Ibid.
xix Kafka, Ibid.

xxDaniel Bates, “Rupert Murdoch's iPad-only newspaper The Daily closes after less than two
years,” The Daily Mail, December 3, 2012, http://www.dailymail.co.uk/news/article-
2242283/Rupert-Murdochs-iPad-newspaper-The-Daily-closes-years.html#ixzz2F2dNOQUT.
xxi Haughney, Ibid. Content under this section title is drawn from this source.
Saibus Research, “Lee Enterprises Needs to Sell More Newspapers,” SeekingAlpha,

xxii
September 19, 2012, http://seekingalpha.com/article/875041-lee-enterprises-needs-to-sell-

more-newspapers.
“Lee Enterprises reports results for third fiscal quarter,” Thomson Reuters, July 17, 2012,
xxiii
http://finance.yahoo.com/news/lee-enterprises-reports-results-third-130202486.html.
xxiv Peter Cohan interview with Greg Schermer, July 12, 2012.
xxv Saibus Research, Ibid.
xxvi Saibus Research, Ibid.
xxvii Saibus Research, Ibid.

xxviii Saibus Research, Ibid.
xxix Saibus Research, Ibid.
xxx Saibus Research, “Lee Enterprises: We Can See Why Buffett Tried To Keep It A Secret,”
Seeking Alpha,
August 8, 2012, http://seekingalpha.com/article/789421-lee-enterprises-we-can-see-why-
buffett-tried-to-keep-it-a-secret.
xxxi Saibus Research, Ibid.
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MARCH 2014
xxxii Tom Jackman, “Manassas News & Messenger and InsideNoVA.com, top Prince William
news sources, closing down,” TheWashingtonPost.com, November 14, 2012,

http://www.washingtonpost.com/blogs/the-state-of-nova/post/manassas-news-and-
messenger-and-insidenovacom-top-prince-william-news-sources-closing-
down/2012/11/14/e2f8bde2-2e7b-11e2-89d4-040c9330702a_blog.html?hpid=z4.
xxxiii In 2011, Gannett’s publishing segment noted the following in its 10K: “82 U.S. daily
publications with affiliated online sites in 30 states and one U.S. territory, including USA
TODAY, a national, general-interest daily publication; USATODAY.com; USA WEEKEND, a
magazine supplement for publishing companies; Clipper; Gannett Healthcare Group; and
Gannett Government Media. The publishing segment also includes Newsquest, a regional
publisher in the United Kingdom with output through 17 paid-for daily publications and more
than 200 weekly publications, magazines, and trade publications. The publishing segment in the
United States also includes about 500 non-daily publications, a network of offset presses for
commercial printing, and several smaller businesses.”
Includes Gannett stakes in CareerBuilder, PointRoll, ShopLocal, Reviewed.com, and Planet

xxxiv
Discover, according to its 2011 10K.
xxxv At the end of 2011, Gannett broadcasting properties included 23 television stations and
affiliated online sites in markets with more than 21 million households covering 18.1% of the
U.S. population.
`
xxxvi “Buffett interested in buying Tribune's Allentown newspaper,” Reuters, December 14, 2012,
http://www.chicagobusiness.com/article/20121214/NEWS06/121219853/buffett-interested-in-
buying-tribunes-allentown-newspaper#ixzz2F8Ia2Vv2.
19

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BAB155

Warren Buffett and his Newspaper Investments

Newspaper Industry Background

Table 1. Newspaper Circulation 2001 to 2011

Total Daily Newspapers Daily Circulation Circulation Expenditures

Industry Structure: Concentration in Local Markets

Industry Revenue: Sources and Drivers

Table 2. Newspaper Industry Revenues 2003 to 2011 ($ in millions)

Print Advertising Online Advertising Total Industry Ad Revenue

The University of Missouri-Columbia survey of weekly community papers located in

Industry Costs: Sources and Drivers

Table 3. Newspaper Industry Costs by Category in 2010

Revenue (%) Cost (%)

Impact of the Internet on the Newspaper Industry

The Internet forced newspapers to find a way to be competitive. According to Gordon

Impact on Operating Performance:

Table 4. Lee Enterprises and TheStreet: Revenues and Costs as a Percent of

New Sources of Content

Foundations were funding some news organizations focused on investigative reporting

Search Engines Driving Traffic

Strategic Responses by Selected Newspapers

Hybrid of Free and Paid Content

Subscription vs. Story-Based Micropayment

What Content were People Willing to Pay For?

After Berkshire Hathaway’s June 2012 investment, Lee continued to scramble. On

Lee Enterprises Attractiveness to Berkshire Hathaway

Decision and Recommendations

Meanwhile, on December 14, Berkshire Hathaway expressed interest in bidding on another

Table 5. Lee Enterprises and New York Times:

Lee Enterprises Lee Enterprises New York Times New York

Table 6. Gannett Revenue, Operating Income, and Capital Expenditures by

2009 2010 2011

Table 7. Lee Enterprises Income Statement Highlights 2008 to 2011 ($ in

2008 2009 2010 2011

Table 8. Lee Enterprises Balance Sheet 2008 to 2011 ($ in millions)

2008 2009 2010 2011

Performance is drawn from this source.

xii Prichett, Ibid.

Driving Traffic is drawn from this source.

accessed October 28, 2012, http://accessabc.wordpress.com/2012/05/01/the-top-u-s-

xix Kafka, Ibid.

Saibus Research, “Lee Enterprises Needs to Sell More Newspapers,” SeekingAlpha,

September 19, 2012, http://seekingalpha.com/article/875041-lee-enterprises-needs-to-sell-

xxvi Saibus Research, Ibid.

xxvii Saibus Research, Ibid.

xxix Saibus Research, Ibid.

xxxi Saibus Research, Ibid.

news sources, closing down,” TheWashingtonPost.com, November 14, 2012,

Includes Gannett stakes in CareerBuilder, PointRoll, ShopLocal, Reviewed.com, and Planet

Discover, according to its 2011 10K.

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