The Investor's Consigliere

Google and the (Bright) Future of News

Very interesting Atlantic article by James Fallows.

Newsweek is for Sale; The Economist and The Week are Not

The Washington Post Company has announced it will sell Newsweek. CEO Donald Graham, who did not go to auctioneer school, said "we don't see a sustained path to profitability for Newsweek." The destruction of Newsweek's profitability, notes the article, is part of a larger trend: TV Guide, Businessweek, and Reader's Digest all met a similar fate.

Meanwhile, the article implies, The Economist and The Week, the latter founded by Felix Dennis (if I remember correctly, it was the only title he kept when he sold off his publishing empire), are profitable, as are popular titles like US Weekly and People. Obvious question: why?

The article gives the standard qualitative answers for the decline of publications like Newsweek: the fragmentation of audiences, the rise of cable and internet news and the speeding up of the news cycle, increasing political polarization, loss of advertising rate base, etc.

My project for myself, however, is to try to answer these questions more quantitatively, the way our BMMT Dream Team would do it. I would construct historical income statements for each of the magazines mentioned, both the failures and the successes, and figure out why specific line items went south and how. The name of the game in evaluating magazines is predicting operating margins (leverage and asset turnover don't mean that much), which means predicting the return on investment of a given investment in expenses. In other words, don't think of income statement expenses as expenses; think of them as capital expenditures, as investments undertaken to produce a return, in the form of revenues. The higher the gap between operating expenses and the revenues they produce, the higher your return on investment.

As always, figuring our the right metrics would be key. My gut feeling is that, for all the talk about dead trees and trucks, printing and distribution costs do not play a huge role in determining which magazines succeed and which ones fail. In fact, I would speculate that the general interest publications--the ones that are failing--pay less per unit to print and distribute because of economies of scale. My sense is that the main cost differentiator is the labor involved in putting the thing together in the first place.

Therefore, my sense is that the relevant metrics for these publications is:

a) circulation revenue per journalist/editor man-hour, and

b) advertising revenue per journalist/editor man-hour.

Figuring out which magazines do well on those two metrics and why is the key to evaluating magazines. Remember, Newsweek is not failing because of lack of revenue: $165.5 million is a lot of money. It's failing because its cost structure is too high for its revenue.

In this framework, a magazine can succeed either by keeping the numerator high or the denominator low. Some educated guesses:

The Week does not gross anywhere near Newsweek's $165.5 million; its subscription price is not high and its advertising pages don't command a premium. But it is so inexpensive to produce that its revenue per man-hour is high enough to produce profitability.

The Economist probably pays its editors and journalists a premium (not a huge one though;  remember they are not allowed to have bylines, so they never acquire brand value of their own. They can't influence policy at their organizations the way, say, Thomas Friedman and Maureen Dowd did when they complained about their op-eds being put behind a paywall), but because of its enviable demographics and its niche audience of business subscribers, those journalists and editors are extremely productive: they combine to produce more revenue per man-hour than any other magazine.

People Magazine and US Weekly are like The Week: they are just extremely cheap to produce relative to the revenue they earn. The labor involved in putting them together is just very productive.

Newsweek is failing because it's stuck in the middle: its subscription price is comparable to that of US Weekly or People, its advertising rates are comparable--but it just costs way more to produce than US Weekly and People. It probably costs about as much per unit to produce as The Economist, but cannot command the same per-unit subscription and advertising revenues as The Economist. Stuck in the middle.

All of this begs two questions:

1) Before the general interest weeklies got stuck in the middle, they were extremely profitable. Why was that? Maybe a topic for another post.

2) Taking Richard Stengel at his word, why has Time Magazine managed to remain profitable even as it's subject to the same forces affecting Newsweek. Maybe there is only enough circulation and ad revenue to go around for one general interest weekly magazine to prosper, and Time is slowly draining it away from Newsweek.

The only problem with my little project is that it's extremely difficult to create an income statement for an individual magazine. The information is very hard to come by. If anyone has any insight into getting this information, please let me know.

Ryan Seacrest Financial Times Profile

Read it here.

Once upon a time media personalities enjoyed ratings shares that are unheard of today: people like Ed Sullivan, Perry Como, and Johnny Carson in his prime could count on something like 1/3 of the country tuning in to see them every time they did a show. As media fragmented, many predicted that the age of the mega-celebrity would end, to be replaced by a long tail of niche celebrities.

It hasn't quite worked out that way. There are plenty of niche celebrities, but the mega-celebrity has not gone away. In his unassuming way, Ryan Seacrest is one of them. Through his various television, radio, and digital projects, he gets more regular face time with more Americans than any other person, with one possible exception.

And no one does a better job monetizing celebrity than Seacrest. Unlike many of his mass media peers, he recognizes that he is, at the end of the day, in the advertising business. His job is to generate advertising return on investment for marketers by aggregating audiences and associating his personal brand with the brands of others.

Net-a-Porter: a New Media Success Story

This article about the sale of Net-a-Porter appeared in the back of Friday's WSJ Marketplace section.

What a new media success story. In 2000 Natalie Massenet was a fashion journalist with an idea to sell luxury clothing over the web. There were many doubters and haters. Fashion journalists were not supposed to do such things. They were supposed to be fashion journalists, which meant they were supposed to produce the words that went in between all those lucrative advertisements.

Fast forward to today. Those advertisements are not so lucrative any more. But well-executed online retailing in a specific niche is (see Amazon, Zappos, etc.). Once of Massenet's great insights was that she did not completely leave the journalism businesses, she just transferred it to a different platform. From the WSJ article:

Lately, however, the big luxury brands have made digital retailing a higher priority, having recognized that shoppers are increasingly willing to buy very expensive products on the Web. But selling $1,000 dresses online is different from hawking groceries or second-hand books: Customers want an editorial element, a guiding hand to replace the in-store salesperson and signal what's in style, which is where Net-a-Porter has carved out its niche.

The Web site, which says it has been profitable since 2004 and reported sales of about £120 million for the fiscal year ended Jan. 31, has established itself as an interactive shopping fashion magazine, publishing 52 weeks of editorial content each year alongside its designer clothes sales operation.

"It's just as much a magazine as it is a store," said Ms. Massenet in an interview. "That really has served us well, because when you're online you lose the offline experience of walking into a store."

I doubt that Net-a-Porter is being studied in journalism schools, but it should be. I believe it represents one of the futures of the media business. The definition of "journalism" will become much more fluid, and the basic skillset of journalists, with a little adaptability, will continue to be in demand.

Update: Mrs. Massenet has been reading her Investor's Consigliere. Maybe. Here she is in today's Financial Times:

"I think there will be an increasing convergence between content and commerce . . ."

Aggregator Economics

This article about Hulu in yesterday's NY Times contained the following interesting excerpt:

Mr. Kilar [Jason Kilar, Hulu's CEO] points to his company’s new profitability as evidence of the success of Hulu’s business model — collecting various types of video in one place and making it free, supported by ads. Revenue topped $100 million in 2009 and could reach that number this year by early summer, he said.

“Aggregation works for consumers,” he said. “It makes it easier to find and discover and enjoy premium content, and it works for advertisers, because with that aggregation you get greater reach.” 

Once upon a time aggregators were called middlemen, and if they happened to be the wrong race or religion they often faced physical risk from those on either side of their middleman function. "We break our backs growing the crops but the grain wholesalers make all the money" and "Why, if that merchant doesn't make any of the goods he sells, does he make so much money?" were (and in some corners still are) common refrains.

The answer is in Kilar's succinct description of the double-barrelled economics of aggregators. A successful middleman aggregator offers consumers low searching costs to find a given product, be it food, dry goods, media, whatever. It correspondingly also offers suppliers the cheapest per-consumer exposure to their products, even if they have to share actual or "virtual" shelf space with other suppliers. As a middleman aggregator grows it benefits from economies of scale, which improve both barrels of the business model.

As the article notes, Viacom has taken its shows off Hulu. It's the equivalent of a fashion designer refusing to supply its clothing to a department store and opening a standalone boutique instead. It will be interesting to see whether Viacom sticks to this strategy or capitulates and returns its content to Hulu or another aggregator.

Some of the best moats in business, in media but elsewhere too, are middleman aggregators of one sort or another. Google is the ultimate in modern media, Wal-Mart is the ultimate in modern retail. Before Google it was monopoly newspapers, which aggregated news and ads for readers at low cost, and aggregated consumers for advertisers at lowest costs. Before Wal-Mart it was the urban department store.

Even buildings can be aggregator middlemen. The Chicago Merchandise Mart, the jewel in the crown of the Kennedy family's business interests for over half a century, aggregated wholesale goods buyers and suppliers from all over the country. The Brill Building in New York aggregated buyers and suppliers of music.

If you can spot a middleman aggregator moat in its early stages you can make a lot of money. The key is to look at Kilar's two metrics: low discovery costs for buyers and high reach for suppliers.

Oprah Winfrey New York Magazine Profile

An interesting look at the world's greatest entertainment entrepreneur and the cable industry.

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. 

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. 

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.