By Frank Ahrens
Washington Post Staff Writer
Saturday, March 3, 2007
In his annual letter to his company's shareholders, Warren E. Buffett-- the world's second-richest person and the largest shareholder of The Washington Post Co. -- wrote that "fundamentals are definitely eroding in the newspaper industry" and warned that "the skid will almost certainly continue."
Written in its typical folksy style, the letter is Buffett's 2006 overview of his company, Berkshire Hathaway, and its many holdings, which include Geico insurance, manufacturing units and utilities.
The company reported a $17 billion gain in net worth -- 18 percent growth -- in 2006, largely because "Mother Nature, bless her heart, went on vacation," Buffett wrote. His insurance companies made huge payouts after the hurricanes of 2004 and 2005.
Buffett often includes in his letters brief history lessons on his business segments. In addition to owning 18 percent of The Post Co. -- Buffett sits on the board -- Berkshire also owns the Buffalo News, and Buffett opined on the newspaper industry.
"When Charlie [Munger, Berkshire Hathaway's vice chairman] and I were young, the newspaper business was as easy a way to make huge returns as existed in America," Buffett wrote in the letter, which was released Thursday.
"As one not-too-bright publisher famously said, 'I owe my fortune to two great American institutions: monopoly and nepotism.' No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits."
As early as his 1991 letter to shareholders, Buffett recounted, he warned of looming problems in the industry: For the first time, he wrote then, newspapers no longer held a monopoly on news and information.
In today's economy, Buffett wrote: "Simply put, if cable and satellite broadcasting, as well as the Internet, had come along first, newspapers as we know them probably would never have existed."
Average daily newspaper circulation in the United States has declined each year since 1987. At The Post, print advertising revenue decreased 4 percent in 2006 from the year before.
And for newspapers that have pinned their revenue hopes on their Web sites, Buffett had a sobering prediction: ". . . the economic potential of a newspaper Internet site -- given the many alternative sources of information and entertainment that are free and only a click away -- is at best a small fraction of that existing in the past for a print newspaper facing no competition."
Buffett, in addition to his overview of the newspaper industry, touched on his potential successors. He said the Berkshire board had identified three candidates to replace him as chairman should he die suddenly. Buffett said Berkshire also needed candidates to take over his duties as chief investment officer of the company.
Buffett wrote that he would look for a younger man or woman of sound temperament, who will stay at Berkshire for several years and who is "genetically programmed to recognize and avoid serious risks, including those never before encountered."
In typical fashion, Buffett concluded: "The good news: At 76, I feel terrific and, according to all measurable indicators, am in excellent health. It's amazing what Cherry Coke and hamburgers will do for a fellow."
Berkshire owns 8.6 percent of the Coca-Cola Co.