Problems with the newspapers business

Newspapers were once considered excellent businesses. In fact, the legendary investor Warren Buffett's investment track record has been well served by the several US newspaper stocks that he picked during the 1970s. Much has changed since then.

Internet vs. newspapers
The single biggest game changer for the newspaper industry in the US has been the internet. Consumers increasingly get information from the internet. That moves prospective advertisers, newspapers' main source of revenue, online. The problem for the newspaper companies is that advertisers pay much lower rates online than they do in print.

Newspaper companies are trying to tackle the issue by increasing their presence on the internet and by cutting cost. Some cost cutting measures by US newspaper companies include:

• Reducing the size of the printed page.
• Shifting away from less profitable circulation.
• Outsourcing of functions like telemarketing, customer service, financial back office functions and even printing.
• Consolidating operations and closing unprofitable divisions.

Warren Buffett's take on newspapers
Buffett himself recently said, "Twenty to forty years ago, they were essential to customers and advertisers. They had pricing power, but they've lost their essential nature--essentiality has eroded. Erosion accelerated dramatically, and it won't end based on anything on the horizon. We do not see anything to reverse it. They are essential to advertisers only as long as they're essential to readers."

The Indian scenario
Indian media is generally considered to be a sunrise industry. It is set to benefit from the low ad-spend ratio currently, growing consumer class, young population, low media penetration and increasing spending power.

However, given the universal reach of the internet, Indian newspaper companies face the same structural shift as their US counterparts. In fact, internet advertising in India grew by 59% from Rs 3.9 bn in 2007 to Rs 6.2 bn in 2008. Most Indian English newspapers now compete with internet portals. Most of them have internet portals themselves.

The only saving grace is that the internet is not a big factor for regional newspapers yet in India, given the poor internet penetration levels. Moreover, growing levels of literacy also helps. Hence, we see regional newspaper companies post strong readership growth rates. For the time being at least, targeting the rural segment seems to be the best bet for newspaper companies in India.