There has been a flurry of news recently about various newspaper groups being bought and sold. And each time I have gotten some version of the question, "Why would anyone buy a newspaper? Aren't they dead?" That question reflects conventional wisdom about the news industry and, as we all know, smart investors like to take advantage of bad conventional wisdom.
The newspaper business has changed a lot and is certainly much less profitable now than it used to be. But so what? Lots of industries go through ups and downs as technologies and customer preferences change. Name an industry - cars, airlines, energy, retail, accounting, transportation, construction - and the underlying economic drivers look a lot different than they did in the 1980s. That doesn't mean they are "dead" businesses. People want and need the underlying products and services and the industries adapt to be successful in the new world. It is not always a pleasant or pretty transition, but the ultimate winners are the companies that focus on underlying fundamentals and what the future could be, rather than what the past has been.
So, what are the underlying fundamentals of the news industry?
People want and need the product - and the market is expanding: People consume more hard news than ever including young people. The idea that people, particularly millennials, don't consume news is flat out wrong and not at all supported by data. The fact is that when I was young, the "news" was limited to what landed on the driveway in the morning and what was on the 6 o'clock news. The vast (and expanding) availability of news sources today means that consumption is just that much easier. And they haven't completely figured out how to automate reporters yet, so someone has to feed the news beast. Bottom line - core demand for the product is high and expanding.
Consolidation presents a tremendous business opportunity: The industry is highly diffuse. There are currently thousands of independently owned newspapers across the United States and they generally don't compete with each other. Any MBA will tell you this presents a tremendous opportunity to consolidate sales operations ("one call, one bill") and rationalize corporate and back office expenses. This is exactly what has happened in the radio business. The trick will be maintaining unique journalistic and editorial perspectives with each individual paper in order to keep connections to the community. The newspaper in Waco, Texas should probably look and feel very different from a paper in Portland, Oregon, even if they have the same corporate ownership and sales operations. (Personally, I think that radio has gone overboard in the national consolidation of programming, such that there are now too few radio stations that genuinely - and uniquely - reflect the musical and news interests of their individual communities.) Consolidation also allows for greater leverage in negotiating with the major digital platforms and delivery channels.
Inevitably, whenever there is a major news merger, people express concerns about "reduced diversity of voices" in a community. But that is a very 1970s view of the news business. The advent of "One Newspaper Towns" began before the internet, and it is even less relevant now that there are so many online voices. Newspapers are neither "dead" nor "monopolists" - and they certainly can't be both!
Established brands matter a LOT in news: When it comes to news, trust is everything. When a big event happens, people immediately look for information from sources they know and trust. And, newspapers provide the local content that communities can't get anywhere else. Broadcast rarely covers local topics, such as politics, schools and sports. They don't have the horsepower or funding to maintain local coverage desks. Newspapers, on the other hand, have that local connection. The Washington Post's "If you don't get it, you don't get it" or The Buffalo News' "Nowhere but The Buffalo News" promotional campaigns drive the point home that newspapers are able to provide that local coverage that audiences seek and, in turn, ultimately trust.
Establishing that trust is hard - and growing the newsrooms and reporting culture that support it is harder still. This is one area where incumbency has huge advantages. If you could get a great brand at a price that is undervalued by conventional wisdom, why wouldn't you do it?
The print parts still make money: No one thinks that print is the future of the news business. But until you get to the future, the print operations do something very unusual for a content business - they mostly still make money. As you transition a company to a new business model, why would you not want to have some operations that still make money? You can dive into the digital-only pool and build a brand, newsroom and sales operation from scratch, but the money will probably be flowing out the door for quite a long while.
So looking to the future (and not the past), would you have any interest in buying a business where: (i) core demand for the product is growing, (ii) there are large business opportunities for consolidation, cost savings and negotiating leverage, (iii) the brand is established and very valuable, and (iv) it has operations that still make money, and, by the way, (v) you can probably get it for a good price since bad conventional wisdom means that it is undervalued?
Doesn't sound like a bad bet to me.