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Minyan Mailbag: What's the Product?

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Old habits die hard.

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Hi Vitaliy-

Thanks for the article "
Newspapers Look Flimsy in a Digital World." It's hard to disagree with the general thesis, for sure, and I know Buffett reportedly asked rhetorically not long ago as a way of saying he didn't see value there, if the Internet existed 100 years ago, would anyone ever have started a newspaper?

That said, there are two potential ways the stocks get vindicated: First, the financial engineers at LBO shops who are willing to lever up the slowly (for now) declining cash flows in hopes of raising margins and making an exit in a few years. And, second, buyers of trophy assets. The latter issue points to why the name-brand publishers - mostly Dow Jones (DJ) and New York Times (NYT) - trade at premiums. (Washington Post (WPO) is really supported by the Kaplan business.) Just look at the absurd bidding war by moguls with too much money for New York magazine recently. This mag hasn't turned a profit in its history and ego buyers went nuts for it. (Wasserstein won.)

The other reason for the premium (for now) is that these papers rely on national, branding-oriented ads that are less susceptible (for the moment) to being overtaken by Google or Craigslist than are the classifieds that smaller papers rely on. I'd also note that the WSJ and NYT are among the handful of media outlets to have either a lot (DJ), or at least some (NYT), success in getting people to pay for content. If the WSJ.com's 700,000 subs overtake the Journal's 2 million readers at 1.2 million in a couple years, this company has huge problems. If it happens at 1.6 million in six years, then we have a decent new business model.

The key point is to figure out whether the distribution mechanism (a pile of inky paper on the porch every morning) is the product, or whether the information and analysis itself is the product. I think you can guess what I think is the answer, though I concede that it's a huge challenge to escape the information commodity trap. It's simply necessary to be smarter, broader and deeper than news.yahoo.com. Easier said than done. But the need for powerful, deftly edited, properly synthesized content only gets greater with info-proliferation.

One amusing side note on paper vs. electronic distribution: Barron's readership is quite elite in wealth and education, but quite set in its ways. Every time we remove a statistic or feature from the print version to save space and put it online for free, we hear loud, urgent complaints. Some oddballs want the ink on their fingers and the paper on the toilet tank, apparently.

Hope all's well-

MInyan Michael Santoli

MM,

Thank you for a great response - that could be a Barron's article in itself. I'm sorry I could not reply sooner, I was traveling.

I agree old habits die hard and that is largely why the newspaper industry did not go away when a more efficient way of delivering information came around. One thing is for sure, Barron's is not read because it breaks news; it is read for its GREAT editorial content.

That was a great comment by Warren Buffett, and he is right. Another reason why the newspaper industry was slow to respond to the changing landscape is that it did not have to, as it could mask the problems of (slowly) declining circulation by raising prices. Well, they can raise prices only so much.

Best regards,

Vitaliy

No positions in stocks mentioned.

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