The $142 Million Hathaway Bet

A couple of contrasting occurrences in our online world give pause for thought. First, the new media darling Facebook tripped over its tail and slipped 24% in the first few days of trading. In other news, the great Warren Buffet shelled out $142 million for the 63 newspapers that comprise Media General.

Facebook is at the very bleeding edge of valuation at more than 20 times earnings (even with the recent slip), whereas Buffet paid just about 1.6 times earnings for the storied franchise that is Media General.

Given his famously strong track record at squeezing every inch of value out of his properties, there is no doubt Buffet will earn his money back and make a decent profit in a year or so… certainly faster than Facebook will.

The nightmare that publishers face is the delta in value between the ad revenue share they command and the time spent with that media. As long as the difference remains, publishers will continue to experience downward pressure.

Meanwhile, given the fire sale price that Buffet paid for Media General, Facebook could have bought the entire publishing industry with the value it has lost in the last few days.

Traditional media have much higher manufacturing and distribution costs and have substantially lost their strangle hold in all except the smallest of markets. Media General has been much better than many at reducing costs and making the switch from print dollars to online dimes and is now generating about a third of its revenue from online sources. They do have a strong presence in many of the smaller markets where print is still king, so those at least are promising indicators.

I hate to question the wisdom of the great Berkshire Hathaway (and it’s hard to know when to catch a falling knife) but Buffet’s acquisition is not a bet I would have placed. The paradigm is broken, the fixed overheads are high and Buffet is in danger of finding himself in the position of the legendary King Canute who was so convinced of his own powers that he attempted to tell the tide not to come in. We will see if he ends up with wet feet.

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