Buffett's watchwords: risk, digital, globalize


CHICAGO -- In tumultuous times like these, challenged media players on both sides of the digital divide -- including the formidable likes of Google and News Corp. at either ends of the spectrum -- should be asking questions along the lines of "What would Warren Buffett do?"

Buffett's reputation as perhaps the most astute investor of all time is rooted in his uncanny ability to perceptively read companies, trends and markets -- all skills which media players of every kind must master if they are to succeed in technology's fantastic free-for-all.

Buffett's letter to his shareholders in Berkshire Hathaway's 2006 annual report, issued last week, is as good a place as any for the salient instruction for media, entertainment, Internet and telecommunications players. Buffett sees lost fortune in some traditional media (such as newspapers), promise in more aggressive globalization, more difficult economics ahead and a fundamental need to assume greater risk in order to reap any rewards. He's earned the right to say so and to be heeded.

A diversified investor who prides himself on supporting companies he can easily comprehend, and whose products and services he can use (which explains why he is heavy on domestic retailers and light on Internet operators), Buffett generated $17 billion in new net worth just last year. His media holdings have been instrumental and curious. Buffett had a strategic and financial hand in the Walt Disney Co. merger with what was Capital Cities/ABC in the mid-'90s. But the only media he supports these days are the Washington Post and the Buffalo News, even though he concedes that the survival of newspapers depends on their skillful online extensions and applications, which certainly could be said of all traditional media.

Implicit in Buffett's rambling remarks and overriding investment strategy is the absolute need for more aggressive but intellectually tempered risk-taking, global expansion and the embrace of digital interactivity. There is an urgent need for new, more accurate, qualified user metrics and business models, as well as for a more skilled and savvy sense of potential global opportunities and pitfalls.

Certainly the recent global stock market volatility serves to remind us just how irretrievably interconnected we all are and underscores the risk of failing to understand and embrace emerging and existing foreign markets. At the same time, Buffett, intentionally or unintentionally, artfully reminds us that local connections and needs are the most potent of all forces.

Despite early returns from easy first brushes with Internet content distribution (Disney and NBC Universal each expect to exceed $700 million in digital revenue this year), Buffett and other experts warn there is much to be learned -- and quickly -- about unlocking value creation in the developing global digital broadband marketplace.

Like a wise uncle, Buffett urges media players to take a hard look at newspapers' grim recent lessons (to which he devotes considerable space tin his letter) by taking a pragmatic look at the economic truths of their businesses and to immediately make necessary adjustments. Sometimes, you have to look back to move forward. "When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance," Buffett writes in the annual report.

Newspaper properties' longtime resistance to change and unwillingness to consider themselves as anything but "indestructible slot machines," as Buffett describes them, bares a striking resemblance to other traditional media players. "Many intelligent newspaper executives who regularly chronicled and analyzed important worldwide events were either blind or indifferent to what was going on under their noses," Buffett writes. "Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. The fundamentals are definitely eroding ... the skid will almost certainly continue."

Is anyone in broadcasting and other challenged traditional media paying attention?

Merrill Lynch analyst Jessica Reif Cohen recently questioned how much of Viacom's anticipated $500 million in digital revenues this year will be incremental given that increased digital advertising appears to be displacing advertising from their traditional networks, "which are no longer showing meaningful growth."

Likewise, a Bernstein Research weekend note addressed the troublesome schism in consumer reach measurement on various media platforms and devices that ultimately will play havoc with -- as well as redefine -- values, revenues and profits. For instance, one of the most dramatic examples of transformational metrics that has a direct impact on media company financials is the attempt to quantify DVR usage as part of television networks' extended reach. Such seemingly rampant shifts in audience consumption outside the realm of the traditional television screen "could be a potentially negative influence on the ever-resilient flow of dollars into television advertising," Bernstein's Michael Nathanson writes.

In that everywhere-in-the-world market that flows through the home to all points outside the home, there is boundless revenue and profit growth for any company that can redefine and refocus its businesses. It would appear that the likes of Google, Microsoft, Apple and even Barry Diller's InterActiveCorp. already comprehend that and are leveraging their products and services across the Internet and international platforms by providing increasingly predictable and quantifiable results there.

With a relative high reliance on advertising revenues and a relative low% of global funds generated from outside the U.S., media, entertainment and even Internet companies have a lot of potential new growth to explore and pursue. The U.S. media players with the largest assets stakes abroad are News Corp. and GE Global Media and Communications, each at about 30%. Clearly there is plenty of room to grow.

The time has come for companies interested in real growth to hitch their stars to the Internet and international wagons that suite their interests and needs. The flip side of that is suffering along with and sustaining the volatility, like the continuing adjustments being made in China's fledgling equity market that sent U.S. indices plunging last week. Buffett would say that is the risk one must take to offset shrinking and uncertain profitability. Is anyone out there in Big Media land listening?