The Investor's Consigliere

Howard Stern Contract Renegotiation

Interesting WSJ article about Howard Stern and his upcoming contract renegotiation.  Basically he can either re-sign with Sirius satellite radio or go back to terrestrial radio.  The article floats the idea of some kind of internet streaming but I don't think the technology is there yet--most people listen to Howard in their cars, not on their desktops.

My guess is he re-signs with Sirius but for less than five years (the better to see where technology goes) and less than $100 million per year.  Sirius has more leverage than it did four years ago now that it doesn't have to worry about another satellite competitor, but it doesn't have THAT much leverage.  Terrestrial radio still has enough money to pay Rush Limbaugh $400 million over eight years.  The other thing is that, as a super high-fixed cost business, Sirius can ill afford to give up significant subscribers. 

Charlie Munger Slate Essay

Charles Munger of Berkshire Hathway writes a sobering parable.  This may be the main disagreement between him and Warren Buffett.

Disclosure: Long Berkshire Hathaway.

One Future for Media: High-Value Journalism

Warren Buffett was once talking to Bob Woodward, the legendary Washington Post journalist.  Woodward asked Buffett the famous question: "How do you do it?"  And Buffett answered: Bob, there's really no difference between an investigative reporter and an investor; an investor is just an investigative reporter of companies and what they're worth.

I was reminded of that story when I read about two recent media acquisitions.  The first is Morningstar's agreement to purchase Footnoted.org, a blog founded by a business reporter named Michelle Leder, which became a premium subscription service, which made it an attractive acquisition.  Some background here and here.  The second is Pearson's (publisher of the Financial Times) acquisition of Medley Global Advisors, an economic policy consultancy.

I expect to see more of these kinds of deals.  The way to get rich in media is to earn high profit margins, and there are only two ways to earn high profit margins: either produce a product that customers are willing to pay a high price for relative to what it costs to deliver it, or be a low-cost producer.

The two deals are good examples of high-value journalism.  If your job is to gather information, analyze it, and organize it into some kind of story, then per the Buffett anecdote you are a journalist.  If you can find someone else to pay substantial money for your journalism (because they think they can make money from it and the journalism you provide is scarce), then I suppose you can call yourself something else--an analyst, a consultant--but you're still a journalist, as Buffett considers himself.  This is good news for journalists, because it shows there is an underappreciated fluidity to the job description. 

I wrote that the second way to earn high margins in media is to be a low-cost producer.  I hope to address that in a future post.

Disclosure: Long Berkshire Hathaway

 

Google's Broadband "PR Stunt"

Lots of articles about Google's plans to offer ultrahigh-speed broadband access in selected communities.  Here is one.

The consensus seems to be that Google doesn't plan to spend a lot of money, but instead wants to force others to spend a lot of money to improve broadband internet access nationwide.  Which would be good for Google.

It will be interesting to see what other things Google does to maximize its return on investment here.  One modest prediction:  Google will focus its new effort on states like Wyoming, North Dakota, South Dakota, and Montana, low-population density states which are not well served by existing broadband.  More importantly, however, they have more United States senators per capita than other states, so a dollar spent on a politically popular effort would go further there. 

Time Horizon Matters: New York's Real Estate Families

I liked this article. 

Turnabout is Fair Play: Guess Who Ran a Super Bowl Ad?

I just blogged that Pepsi isn't running a Super Bowl ad.  But guess who just did?  Here's what the CEO had to say (here too).

Why would this internet company decide to advertise on T.V.?  The opportunity cost relative to advertising on the internet is not high, as the company already gets a lot of free advertising there.  Plus the Super Bowl audience likely allows the company to reach more internet naifs/future users at lower cost than any other way of spending ad money.

It's also interesting that the product being advertised is in many ways the product that least needs it:  plain old search, which is a monopoly enjoys high market share. 

I really liked the ad; it was minimalist, easy to understand, and moving in a kind of mystical way--"look at the power of search technology to expand your knowledge and change your life."  Does anyone associate Yahoo search or Bing with any of that?  That's one component of the moat.

Pepsi and Facebook

I'm not sure this news got much notice, but one day we may look back on it as a turning point:

For the first time in 23 years, there will not be an advertisement for Pepsi during Super Bowl next weekend. Instead, PepsiCo, the soft drinks maker, which in previous years has wowed audiences with dazzling spots featuring Cindy Crawford and Britney Spears, is going online.

With a major digital campaign that features its own website and a heavy presence on Facebook, PepsiCo is betting that a more interactive approach will resonate with consumers in the always-on age of social networking sites.

I often fall into the trap of analyzing media companies from the point of view of a consumer of media.  I consume a lot of media, so that's how I naturally think.  But it is a trap: the truth is I'm not really a consumer of media.  The true "consumers" of media, the ones that pay most of the bills, are the advertisers.

At the end of the day, advertisers are investors.  They have scarce resources to spend on advertising and they want to maximize the return on what they spend.  If spending $20 million on carnival barkers promises the best return, that's what Pepsi will spend it on.  If spending $20 million on Super Bowl ads promises the best return, that's what Pepsi will spend it on.

In this case, Pepsi has decided, for the first time, that $20 million spent online promises the best returns, in terms of the number of people reached, their demographic attractiveness, and the likelihood of converting them into Pepsi drinkers.  It's potentially a very big deal: Super Bowl ads have historically enjoyed tremendous pricing power, and now at least one company thinks it can do better elsewhere.

So the thing to keep my eye on is advertisers, the true consumers of media.  The expected return on investment to an advertiser, relative to the alternatives available, is what will  ultimately determine the revenue of most media companies.  And then, if the cost structure required to deliver that advertising is low enough--an independent question--you have a good business.