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Understanding the billionaire media gambles

“No grand strategy, no new business models for news will emerge from Omaha. Ultimately, these papers will be closed or sold.”

Our journalism business never ceases to provide surprises and fodder for speculation — that’s what makes this year-end round of prediction posts so much fun and, often, so far off base. For example, none of the Lab’s prognosticators a year ago predicted that one billionaire would toss $250 million into a business that has been dying for years, while another would pony up the same sum to launch an as-yet un-named and largely mysterious “new mass media organization.”

martin-langeveldSo the big question is what will these gentlemen bring to the table besides money — in particular, can they find business models around digital news that have so far eluded everyone else?

As the economy started pulling itself out of the doldrums a few years ago, some like the Lab’s Ken Doctor expected the newspaper industry to undergo broader consolidation — a “roll-up,” in Doctor’s words — of the kind long sought by MediaNews founder Dean Singleton and others. My question at the time was whether it would truly be a roll-up (a consolidation toward strength derived from national network efficiencies and opportunities, like the consolidations in the radio industry) or a mop-up — a sweeping-up of cheap, obsolete assets, with a strategy of squeezing the final years of cash flow out of them.

The expectation was that with easier credit, major newspaper groups might find the financial backing needed to merge, acquire, and swap assets in order to build stronger regional and national groups and to make the necessary R&D investments to build toward their digital future. But with cash still hard to come by, we’ve seen few steps of that kind.

Instead, most of the action in the newspaper business has come from billionaires and near-billionaires getting into the game. They’ve included legendary investor Warren Buffett (whose BH Media Group has picked up 28 local newspapers and about 40 other titles in 10 states for $344 million), money manager and Red Sox owner John Henry (who dropped $70 million on The Boston Globe), greeting-card magnate Aaron Kushner (Freedom Communications including The Orange County Register), and Amazon founder Jeff Bezos ($250 million for The Washington Post).

Are these investments roll-ups, mop-ups, or something else?

Buffett’s real strategy

I think Warren Buffett is really pursuing a mop-up strategy. He says otherwise, of course: “Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.” What else is he going to say? He may actually believe this, and believe that printed newspapers will remain viable for a long time, and may prefer to read news on paper like most people in his generation. But Buffett’s backup strategy is this: He is buying newspaper assets cheap and not investing much into them, in the expectation that even if they lose all value over the next 6 or 8 years, he will have made a decent return on his investment.

Interestingly, this is precisely the strategy that Buffett’s Berkshire Hathaway followed in the 1930s through 1950s, under the control of the Chace family of Providence, before Buffett bought what was left of it beginning in 1962. At the time, he just needed a company — any company — that was publicly traded and easy to get control of to use as a vehicle for his investment strategy. The Chaces had seen the textile business move south; they mopped up in New England, buying mills and consolidating equipment to milk whatever cash could be extracted. (And as it happens, they lucked out more than the luckiest lottery winner, because they retained a minority share after Buffett’s arrival that’s now worth hundreds of millions.) After gaining control of the company in 1965, Buffett continued the textile sector mop-up, finally closing the last mill in 1969.

So here’s Prediction No. 1: Warren Buffett will continue buying newspapers wherever he can do so very cheaply. No grand strategy, no new business models for news will emerge from Omaha. Ultimately, these papers will be closed or sold. It’s a mop-up.

Philanthropic journalism

The other billionaire news tycoons, including eBay founder Pierre Omidyar, are obviously neither rollers-up nor moppers-up. They are motivated by something else. Undoubtedly, they’d love to make some money on their investments. But for most of them, what they are putting at risk is small potatoes compared to their net worth. (In Bezos’s case, his initial Post investment comes to less than 1 percent of his net worth. It’s like the rest of us buying a cheap used car. Conceivably, we might make a buck by selling it later on at a profit — but we really don’t care.)

Here’s why they do it: These folks are motivated by pretty much the same philanthropic impulse that motivated many newspaper barons during much of the 20th century. The barons’ business model was that if merchants wanted to get their messages out, newspaper advertising was pretty much the only game in town. As a bonus, people were willing to pay for single copies or home delivery, which covered all the printing and distribution costs. Profit margins ranged as high as 50 percent. News was at the heart of the “product” (you were not supposed to call it that in the newsroom), but news didn’t pay for itself. News was a gift to the community, a bit of philanthropy on the part of the news barons, just like the museums, libraries, opera houses, and schools built and endowed by others in the moneyed class. The quality of one’s newsroom was a way to flaunt wealth and demonstrate generosity while also enriching the community.

We’re now seeing a 21st-century version of that same philanthropic motivation, probably coupled with some hubris — the kind that says, “Even though nobody else has found a way to make this business work, I can, because I’ve started and fixed a lot of other businesses.”

It’s hard to find a parallel to this phenomenon in other legacy businesses that got disrupted. No tycoons that I know of got into the horse-drawn carriage business, the typewriter business, or the photographic film business once those businesses started their slide. The closest parallel I can think of is railroads.

Railroads were historically prone to boom and bust cycles and wild speculation, and were all pretty much on the ropes in the 1970s due to disruption by cars, trucks, and airplanes. Since then, the industry has done pretty well (on the freight side) and attracted various well-heeled investors, including Buffett (BNSF), Phil Anschutz (Union Pacific), Forrest Mars (Tongue River Railroad), PayPal founder Elon Musk (Hyperloop proposal), Bill Ackman (Canadian Pacific). But it’s not a real parallel, since the railroad business model didn’t really need total reinvention.

Mostly, the media investments by tycoons other than Buffett spring simply from what they see as an interesting, potentially lucrative and very public entrepreneurial challenge, at which they think they can succeed — even if they have no idea, initially, what the solution may be. Basically, they think, if newspapers were a license to print money for 100 years, and if there’s still a huge appetite out there for news, there has to be a way to do that digitally, even if nobody has really been able to figure one out in the last two decades.

And so, Prediction No. 2: We will continue to see some laudable investments in journalism by very wealthy people — but in the near term, we will not see real, transformative business models coming from them. Instead, these investments are laudable simply because, following that philanthropic impulse, they generally add more journalists, improve the product, and make communities happy to have a good newspaper. We’ll probably see some more super-rich people jumping into the game, perhaps acquiring the papers like the Worcester Telegram & Gazette (being split from the Globe by John Henry), and the Providence Journal (being jettisoned by A. H. Belo).

The Omidyar thing

Finally, we come to the mystery that is Pierre Omidyar’s $250 million gamble and his hiring of Glenn Greenwald (effectively acquiring the motherlode of Edward Snowden secrets), along with Laura Poitras and Jay Rosen. Of all the current big-money players, I think Omidyar may have the best prospects.

Thus, Prediction No. 3: Even though nothing much has leaked out about what shape this venture is going to take, I’m predicting that what we’re going to see is a global news system (not a just a website), combining the best features of The Texas Tribune, GlobalPost, and the investigative news networks. There will be news digests if you just want to know what’s going on; there will be personalized news streams if you have a set of niche interests; there will be longform journalism, great photography, and video. The idea will be to build a global community around news that matters. There may be spinoffs like books and events. It will be a for-profit venture, but like Google, Facebook, Twitter, et al, it will not unveil any real revenue strategy for several years. The focus will be to build an audience first.

The best parallel to the “Omidyar thing” is probably Ted Turner’s launch of CNN in 1980 (which only cost the equivalent of around $70 million in today’s moolah, giving an idea of the magnitude of Omidyar’s gamble). CNN was a brand new model, it was global, it was disruptive, and it hired great people. It took five full years to become profitable. So give Pierre a chance — this may take a while.

Martin Langeveld spent 30 years in the newspaper business, 13 of them as publisher at The Berkshire Eagle in Pittsfield, Mass., the Transcript in North Adams, Mass., and the Reformer in Brattleboro, Vermont.

                         
Updating regularly through Friday, December 20
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