When Warren Buffett loved newspapers
"The economics of a dominant newspaper are excellent, among the very best in the business world," Buffett wrote in 1984. The Buffalo Evening News, which Berkshire Hathaway owned, was a local monopoly. Its customers lived near each other, a fact useful to local advertisers; it reached a high enough percentage of those customers that advertisers need not spread their spending around; and readers interacted with it if for no other purpose than as a community bulletin board. With that combination of concentration, penetration, and engagement, newspapers owned the ad budgets of auto dealers, realtors, department stores, supermarkets, cinemas, not to mention help-wanted ads. The economics were so sweet, Buffett noted, that content could be an afterthought: "While first-class newspapers make excellent profits, the profits of third-rate papers are as good or better - as long as either class of paper is dominant within its community." People who put out a good paper did so because they wanted to.
The Internet blew that to smithereens, of course. Cable, time-shifting, and now the Web are doing the same to local TV, too.
Can media companies ever regain a competitive advantage?
I'm going to offer two hypotheses, one irrefutable, the other anything but.
Irrefutably: Serious money is made only by someone who has a dominant position in a valuable market. It doesn't have to be a big market. Yertle the Turtle did just fine in a small pond. The key is dominance, which is created by capabilities that others can't match. With this, you can fight off the forces that erode profitability. (Yes, Porter's five forces.)
Arguable: For media companies, content–once the unnecessary stepchild as Buffett said–has become the best path to dominance. The argument against a pay wall boils down to this: If I can get what I want for free, I won't pay for it. The escape from that logic is to attack its premise: Provide something valuable people cannot find elsewhere. In the history of media-newspapers, magazines, television, radio, music, movies, the Web–only a handful of products have been profitable from consumers' payments alone. A few magazines pay for themselves from circulation-Harvard Business Review is one. Some genres-pornography, for example. A few premium cable channels. Books. Many of these have other revenue streams (usually advertising) but don't need them to survive. Everyone else does. Even movies need popcorn. My hypothesis: Today the competition for this secondary revenue is so intense that it's no longer profitable. (Print dollars = digital dimes.) The best media companies should therefore change the math, and focus on consumer revenue.
Which raises five questions
*Can content truly become the basis on which a media company can create a valuable, defensible business? There's increasing evidence that paid-content models work for specialized audiences like those of the Wall Street Journal or Financial Times. If anyone can prove it for more ordinary readerships, it should be the Times, which has led the industry in developing ways to report, analyze, and portray news online and to engage readers in issues. (David Leonhardt's brilliant fix-the-deficit puzzle, for example; see the Times's blogs, from Deal Book to Green; check out its creative formats, from Times Reader to the gorgeous but still-unstable iPad app. Together, the Times and the Journal have unfurled a price umbrella over the rest of the industry. Can others shelter under it? The Times itself will test that when it tries to put the Boston Globe behind a pay wall.
*The flip side: Can media companies still profit by owning customers, reinventing the old Buffalo Evening News model for a wired world? Media economist Jack Myers writes "established media companies with powerful content brands could capture double digit growth if they focused on social marketing and commerce opportunities." They never mounted an effective response to Google and Craig's List. Now they have a second chance with a new form of local advertising. The $25 billion valuation being talked about for GroupOn-four times what Google offered for the company just four months ago-may be insane, but it's proof that there's still gold in local markets, and existing newspaper companies (like McClatchy) aren't going to let GroupOn own the market without a fight. It's also conceivable that media companies will find new ways to monetize their relationship with readers; both the Times and the Journal run wine clubs, for example.
*Can media companies escape from the suicidal race to count clicks? The calculus of profitability is different from the arithmetic of eyeballs; as Erick Schoenfeld pointed out, the Times (UK) appears to have made a smart choice by shedding millions of unprofitable page views, and the Wall Street Journal's former publisher Gordon Crovitz thinks the New York Times stands to get $100 million in new, high-margin revenue. For a while media companies seemed to throw in the towel-magazine companies have let their circulation muscles atrophy almost entirely. Can they rebuild?
*Or does the future belong, not to media companies, but upstream, with the makers of the goods and services consumers buy? Private label media-such as Johnson & Johnson's babycenter.com-command an increasing percentage of the marketing dollar. If you run a media company, what compelling argument can you muster against my disinter-media-ting my marketing spend?
*Finally, and simply: Will you pay for the Times?
