The new board is heavy on entertainment industry veterans and includes former Yahoo and News Corp. exec Ross Levinsohn, former News Corp exec Peter Liguori, former Walt Disney exec Peter Murphy and entertainment attorney Craig A. Jacobson, along with Tribune Co. CEO and Los Angeles Times publisher Eddy Hartenstein and Bruce Karsh and Kenneth Liang of Oaktree Capital Management, which owns 23 percent of the new company. The Chicago Tribune notes that Liguori is expected to be named CEO in coming weeks, replacing Hartenstein.

According to the Chicago Tribune:

“Before cash distributions and new financing, a 2012 analysis by financial adviser Lazard valued the broadcasting assets, including the TV stations, WGN-AM 720, CLTV and national cable channel WGN America, at $2.85 billion. Other strategic assets, such as online job site CareerBuilder and cable channel Food Network, are worth $2.26 billion.

Tribune Co.’s newspaper holdings, including the Tribune, Los Angeles Times and six other daily publications, have withered to $623 million in total value, according to Lazard.”

News Corp. CEO Rupert Murdoch, Warren Buffett and Aaron Kushner have expressed interest in buying Tribune Co. papers.

Photo courtesy of Shutterstock / Steve Broer

As newspaper owners like Newhouse-owned Advance Publications try to stem the cash flowing out of their businesses by shutting down the presses, there are a number of ways to look at their decision. On the one hand, it can be seen as an attempt to manage the much-needed transition from a print-based business to a fully digital one. Media analyst Jack Shafer, however, sees it another way: he suspects that many newspaper companies are in the liquidation business — in other words, they are simply squeezing as much value as they possibly can out of their properties before they discard them. As sensible as this may seem from a financial point of view, however, it misses the larger opportunity that the web represents.

Shafer’s liquidation idea is based in part on a theory advanced by author Philip Meyer, in a 2004 book called “The Vanishing Newspaper: Saving Journalism in the Information Age.” Meyer described what he called the “squeeze scenario” a newspaper owner might use if they wanted to get out of the business but didn’t want to sell — either because they couldn’t find a buyer or didn’t want to accept a low price. In a nutshell, that owner would jack up the price of his product (as many newspapers have been doing) while at the same time cutting back on the content and the quality of the product by laying off staff, shutting down expensive features like investigative reporting, etc.

Unless you are reinvesting, you are in liquidation

While this has the short-term effect of improving profit margins for the publisher, Meyer argued that over the longer term this would amount to liquidating the main asset of a newspaper: namely, the goodwill associated with the brand. According to Meyer’s analysis, this goodwill makes up about 80 percent of a newspaper’s overall value — and particularly the value that allows newspapers to attract orders of magnitude more advertising than would normally be dictated by the amount of time that consumers spend reading them, something that was made obvious by a chart that former internet analyst Mary Meeker used in a recent presentation about media advertising.

In his post on the liquidation theory, Shafer notes that newspaper owners who are executing this strategy likely won’t describe themselves as doing this — for obvious reasons, since it would make them look cruel — and may in fact protest that they are doing the opposite, or that they have no choice. But as he puts it:

Sellers of newspaper goodwill might protest that the financial losses they’re absorbing constitute a serious investment in the newspaper’s future, that they’re harvesting nothing. But don’t be fooled. If you’re winding your company down with no strategy to wind it up, you’re burning goodwill even if you don’t acknowledge it.

Liquidating a company in this fashion is something that professional “vulture fund” investors often do in damaged industries (such as the railway business, the traditional telecom industry, and so on). That is, they acquire assets cheaply and then squeeze as much value out of them as possible until they are virtually worthless. In fact, it’s the kind of thing that investors like Berkshire Hathaway billionaire Warren Buffett are very good at — which raises questions about what Buffett’s long-term strategy is in buying newspapers. He claims that he is committed to the industry for the long haul, but what exactly does he mean by that?

Without a strategy for adapting to digital, newspapers are lost

One of the things that makes it hard to cheer for Buffett, or for Advance Publications — unless you are a die-hard devotee of print for print’s sake, of course — is that neither has advanced a plausible strategy for making the transition from print to digital. Buffett has said that he doesn’t see the point in shutting down the printing presses a few days a week, as both Advance and Canada’s Postmedia are doing, and in fact he sees this is a step backward. So then what is his strategy for moving his community newspapers online as print declines?

Advance, meanwhile, has said that it plans to invest more in digital as it cuts back on staff and stops printing every day. But those promises have been noticeably vague, and the evidence from places like Ann Arbor and Seattle — both of which lost their daily newspaper in recent years — doesn’t exactly fill anyone with confidence. One of the prominent themes in criticisms of Advance from people like actor and New Orleans resident Harry Shearer is that Nola.com, the company’s online portal, is lackluster at best and embarrassing at worst when it comes to doing actual journalism.

In order to avoid the accusation that they are just liquidating the goodwill of a generation of readers (and advertisers), newspaper owners need to at least have a plan for reinvesting some of those proceeds in the digital end of their business. The best-case scenario is that they re-engineer their papers the way John Paton has at Digital First Media, by putting the web first and print second — and by hiring or promoting people from within who understand the challenges and opportunities of an online media business. In my view, they also need to think less about how to erect a paywall and more about how to benefit from what Guardian editor Alan Rusbridger calls “open journalism.”

But the bottom line is that without some kind of strategy, as I tried to point out in a recent post, an online newspaper becomes simply another voice among thousands of other digital information sources — and that too will result in the eventual liquidation of goodwill, whether its owner wants to admit it or not.

Post and thumbnail images courtesy of Flickr users Shironeko Euro and George Kelly

There’s been a lot of attention focused on Berkshire Hathaway billionaire Warren Buffett’s recent $142-million purchase of Media General and its 63 newspapers — and that’s not at all surprising, since he seems to be the only one interested in buying newspapers rather than selling or closing them. But is his acquisition a brilliant financial gamble, or an indication of his faith in the long-term prospects of printed community newspapers? Media theorist and author Clay Shirky argues that it is neither: in fact, he says, Buffett misunderstands some fundamental things about the business he is buying into, and is therefore taking on a much bigger challenge than he probably realizes.

In a memo to the staffers at Media General’s newspapers after the deal was announced, Buffett — who also owns his home-town newspaper, the Omaha World-Herald, and the Buffalo News — said that he has always loved newspapers, in part because his father and mother met while working at the Daily Nebraskan in 1924, and because he used to deliver them. And he reinforced to the troops his commitment to the future of local journalism, and his view that newspapers like the ones he bought have a bright future. As he put it:

Though the economics of the business have drastically changed since our purchase of The Buffalo News, I believe newspapers that intensively cover their communities will have a good future. It’s your job to make your paper indispensable to anyone who cares about what is going on in your city or town.

Hometown boosterism isn’t enough

But as Shirky notes in his criticism of Buffett’s move, cheering on the local news coverage of his community newspapers doesn’t really have anything to do with the fundamental business issues that confront those publications in a digital age. This advice from the billionaire, Shirky says “has no more content than a halftime cheer,” because if all it took to run a profitable newspaper was good local news coverage, then newspapers like the Media General chain and plenty of others wouldn’t be in the kind of trouble they are to begin with.

And Media General’s stable of papers are clearly in trouble: according to the former CEO, publishing revenues at the media company have fallen by more than 50 percent over the past five years, but the costs of printing and distribution have remained the same. That same kind of math has driven newspaper owners such as Advance Publications and Canada’s Postmedia Network to stop printing some of their newspapers on specific days of the week, as well as instituting layoffs and erecting paywalls in an attempt to bolster revenue.

Buffett’s letter makes it sound as though managing the relationship between reader and newspaper is the most important thing, Shirky says, but this is not the case:

Reading the letter, you’d never know that papers make most of their money from companies, not citizens, and have done for the better part of two centuries. It is disruptive competition for ad dollars, not changing reader engagement, that has sent the industry into a tailspin.

Shirky isn’t the first one to argue that Buffett doesn’t understand what it happening to newspapers: I tried to make a similar argument recently after the octogenarian investor made some comments about the virtues of paywalls (which I expect he is planning to implement at some or all of his new papers). Buffett said that the problems newspapers were facing were in part a result of “giving away their product at the same time they are selling it” — in other words, the decision not to charge for online news.

But as Shirky and I have both pointed out, this misunderstands the business newspapers are in. The reality is that newspapers have never sold the news to readers — readers pay for the distribution platform on which that news is printed, i.e. the paper itself and the packaging involved. And the subscription price of a newspaper and circulation revenues in general have historically only accounted for a small proportion of a media company’s overall revenue. In most cases, the bulk of that revenue comes from advertising.

Newspaper consumers have never paid for the news

The real business of a newspaper has been to aggregate content — news, but also comics and horoscopes and classifieds and lifestyle tips — as a way of capturing the attention of readers, and then sell that attention to advertisers. And the problem for newspapers, both hyper-local and national, is that advertisers are no longer as interested in that arrangement as they used to be. Much of the attention that they seek to monetize has gone elsewhere, to websites and services like Facebook — especially the attention of younger readers with disposable income.

It could be that Buffett sees the future of local newspapers as one in which readers cannot access anything without paying for it, and hopes that the strength of connection those papers have with their communities will convince large numbers of people to sign up for a paywall — thereby turning each paper into a tiny version of The Economist or the Wall Street Journal. But without some kind of turnaround in both print and digital newspaper advertising, those businesses are likely to be much, much smaller than they are now.

Shirky’s prognosis is fairly grim. He says Buffett is just a short trip away from the same kind of decisions that Advance Publications has been forced to make:

A newspaper used to be both a profitable business and a public service, but this was just an accident of the competitive (or rather uncompetitive) media landscape. His commonsense approach to saving papers won’t work, because there is no longer any commonsense business model for a former monopoly that is still seeing its revenues erode faster than its costs.

Shirky notes that Buffett will still likely make money on his investment, since he bought the newspapers at fire-sale prices, and they have a number of valuable assets such as the real estate their offices sit on. And perhaps Buffett will surprise everyone and find a magic recipe for success, some combination of print/digital and paywall/advertising that will ensure his papers will remain healthy or even grow. But his comments about the fundamental nature of the business he has acquired shouldn’t fill anyone with confidence.

Post and thumbnail images courtesy of Flickr users Kevin Lim and Fortune Live Media

Here’s why the deal makes a lot more sense than it appears:

A “three corner pool shot”

This week’s deal makes Buffett’s company, Berkshire Hathaway, the proud owner of the Richmond Times-Dispatch and 62 other daily and weekly papers in Virginia and the South. Most of the titles, like The Goochland Gazette and The Bland County Messenger, have small circulations in the range of 5,000 – 25,000.

The Oracle himself explained the deal this way:

“In towns and cities where there is a strong sense of community, there is no more important institution than the local paper. The many locales served by the newspapers we are acquiring fall firmly in this mold and we are delighted they have found a permanent home with Berkshire Hathaway.”

Buffett can wax sentimental all he wants but he is still the same hard-nosed businessman who was tough enough to stick it to Goldman Sachs. Like any of his deals, this is all about money.

“This deal is like a three corner pool shot that accomplishes several things at once,” says Ken Doctor, a media analyst.

Doctor notes that the deal includes an enormous loan and credit line to the newspapers’ former owner, Media General, in which Berkshire Hathaway will earn 10.5 percent. Buffett’s company also obtained stock warrants that will likely pay out handsomely as Media General works on becoming a full-time broadcasting company.

But what of the newspapers themselves? Doctor says that Buffett got them for a steal, noting that they sold on average for about $2 million a pop — or the price of an expensive home in each of the towns where they’re printed.

Small town papers make money

The story of the catastrophic decline in newspapers has been driven by metropolitan papers like the Washington Post  (on whose board Buffett sat for years) where ad rates plummeted while readers embraced digital alternatives.

The experience of small towns and counties has been different. In these places, a lack of print and online competition has allowed newspapers to hold onto some of their traditional monopoly power.

“In these communities, the local paper is the sole source of everyday news — from high school sports, local events or obituaries,” says Gordon Crovitz, former publisher of the Wall Street Journal and founder of digital subscription service, Press+.

This lack of competition has not only meant a slower decline in their print operations, but also a longer time period to make the transition to digital. While some metropolitan papers have rushed in a panic from one ill-advised paywall strategy to another in an effort to stay alive, smaller papers have had the luxury of a wait-and-see approach. In the meantime, digital subscription strategies have become more refined.

Crovitz claims that 70 publications have recently jettisoned the “free online” offer for print subscribers in favor of charging 25 percent and then letting readers opt-out of the digital part of the package.  He says that 90 percent of the customers elected to keep paying more.

What all this means for Buffett is that he can treat his newspaper fleet as a longer term investment that will pay off in three to five years. Most of the papers will likely deliver a modest profit from print while Berkshire Hathaway coaxes them into a digital strategy in which a growing share of revenue comes from subscription rather than ads (Doctor predicts subscription-based revenue will soon rise from 30 to 50 percent). The company can then cut away many of the printing, distribution and other legacy costs associated with newspapers.

Buffett being Buffett

Going into the newspaper business is a strange proposition for most investors but not for Buffett. This week’s purchase is consistent with a number of his investment mantras, including sticking to what he knows.

Buffett knows this business well from owning the Buffalo News and sitting on the board of the Washington Post, but also has more personal experience in the industry such as using $5000 from his savings as a paper-boy to launch Berkshire Hathaway. He also claims to read five newspapers a day.

Buffett also has a history of squeezing value out of traditional or troubled industries that scare off many investors. In recent years, for instance, he has bet big on airlines, autos and railroads.

There is also the question of scaling. According to Doctor, Berkshire Hathaway has long excelled at finding large scale efficiencies and the company now has enough newspapers (it also has six Nebraska papers in addition to the Omaha World-Herald) to make that happen.

Finally — and this is only speculation — some might wonder if Buffett, who has been close to the Obama Administration, might enjoy owning dozens of media outlets in swing states Virginia and North Carolina in an election year.

Join us for paidContent 2012: At The Crossroads on May 23 in NYC to discuss these issues and lots more.

In a staff e-mail Monday posted by AllThingsD, Thompson stressed that a board investigation is ongoing, said he was cooperating and added:

In the meantime, I want you to know how deeply I regret how this issue has affected the company and all of you. We have all been working very hard to move the company forward, and this has had the opposite effect. For that, I take full responsibility, and I want to apologize to you.

There was no explanation of how he wound up credited with a computer science degree from Stonehill College when it didn’t offer the program until after he graduated. Or why he didn’t correct an interviewer in 2009 when she mentioned the degree.

Thompson’s e-mail went out a few hours after Daniel Loeb, the head of hedge fund Third Point, issued his latest broadside: a demand for Yahoo to turn over documents related to Thompson’s hiring, the appointment of Patti Hart to the board, and the vetting of the director candidates Yahoo chose over Loeb and most of his slate. Hart was the head of the search committee; she also has been accused of misrepresenting her own undergraduate degree.

This came after the board — as expected — ignored Loeb’s Monday deadline for firing Thompson and having Hart resign. Issuing that kind of ultimatum was like double-dog-daring the board not to do anything by then. No doubt, they would prefer not to do anything that comes off as a response to a proxy battle but it’s too late for that now.

Meanwhile, the process has become the message. The longer the board takes to do or say anything concrete, the less there is to recover.

Not about the degree

Let’s get something straight. This isn’t about where Scott Thompson went to school or what degree he earned there. Those things mattered before Thompson had a track record of success and at various points they likely helped him get jobs. That isn’t what gets you a mid-career gig as CEO at a public company.

But a computer science degree provides a kind of street cred, especially when you’re dealing with engineers and developers.

When @jason asked me on his show what I knew about the new Yahoo! CEO, 1st thing I said was “he has a CS degree.” Turns out, not true! wow

— Marshall Kirkpatrick (@marshallk) May 5, 2012

And even if the kind of unearned degree being claimed doesn’t matter, claiming it and letting it stand does. The first e-mail I opened Monday was from a CEO bemused by Thompson’s failure to meet the problem head on. Demand Media CEO Richard Rosenblatt tweeted something similar over the weekend:

@sdkstl @karaswisherI agree Scott Thompson’s biggest issue is how he responded; fess up, apologize and ask for mercy

— Richard Rosenblatt (@demandrichard) May 6, 2012

then followed Monday:

@karaswisher if I was him I would grudgingly resign for the good of the thousands of yahoo employees who can’t handle any more drama

— Richard Rosenblatt (@demandrichard) May 7, 2012

When the subject came up during Warren Buffett’s three-hour stint on CNBC, the oracle of Omaha said:

“If I thought as a director, if I thought that an officer had consistently misstated some fact to me, I think I would probably do something about it. We actually had that one time. If you can’t trust the people you’re working with, you’ve got a problem.”

And that’s the real issue.

What next?

If Thompson resigns, is fired for cause or takes a suspension, Yahoo doesn’t have to reach far for interim leadership. The safest bet: CFO Tim Morse has been part of Thompson’s re-org plans and was interim CEO after Carol Bartz was fired. He could step in again. The board, which is in its own state of transition as four members leave and up to five come on, would face the same question as Jeff Bewkes following the short reign of Jack Griffin as CEO of Time Inc. — go inside or try again with an outside candidate. Ross Levinsohn’s name has been raised a few times as a possible internal successor. Rich Riley, the EMEA head who Thompson picked to head the revenue side of the Americas in the new re-org could get a look.

Doing anything permanent before the new board is fully in place would be repeating a mistake. Lucy Marcus thought it was wrong for the outgoing board to pick a CEO.

Berkshire Hathaway released a statement on Wednesday that it is in the process of acquiring the flagship Omaha World-Herald as well as six other Nebraska daily papers and several weeklies.

“The World-Herald delivers solid profits and is one of the best-run newspapers in America,” said Buffett whose company also owns the Buffalo News and is the largest holder of Washington Post (NYSE: WPO) stock.

Buffett explained his view of the purchase and the industry to the World-Herald:

“It’s not a crazy price. It certainly is not a bargain price,” he said. “I was willing to pay more than I would have for some papers I don’t feel have as good of a future.”

He said that the newspaper industry has obviously been going through many challenges in the digital age. But he said the Buffalo News has dealt with its problems and is profitable, as is the World-Herald.

“I think newspapers . . . have a decent future. It won’t be like the past. But there are still a lot of things newspapers can do better than any other media. They not only can be sustained, but are important.”

Buffett has in the past questioned the direction of the newspaper industry, including its decision to give away content. He has also called the Buffalo News holding “not totally rational” and told a shareholder meeting in 2009 that he wouldn’t buy most US newspapers “at any price.“

But he seems to have overcome these misgivings as Berkshire Hathaway will pay $150 million in cash and take on another $50 million to acquire the Nebraska papers. According to the CEO of the Omaha World-Herald Company, the acquisition will allow it to escape a restrictive ownership structure which has forced the company to continually reacquire controlling share interests from outgoing employees.

The World-Herald story added that the financial wizard still reads five newspapers a day and that he has a sentimental attachment to them. Buffett says his parents met at a Nebraska student newspaper and that the $5,000 he earned as a paper boy formed the basis of the investment that eventually grew into Berkshire Hathaway.

Buffett release

The news instantly sent the stock down sharply although it has been climbing back. Not only has Buffett, 80, been considered a linchpin of the board, Berkshire Hathaway is the company’s largest institutional shareholder with 1.7 million shares, nearly 24 percent of the shares as of Sept. 30, 2010 and his departure could signal a change. Buffett doesn’t own any shares directly.

Buffett has been a staunch supporter of newspapers — Berkshire Hathaway also owns the Buffalo News — and a firm realist at the same time. At the 2009 Berkshire Hathaway annual meeting, he said he would not give up newspapers personally but “we would not buy them at any price. They have the possibility of going to unending losses.” He encouraged the Grahams’ diversification.

The other members of the 11-director board include Graham, his niece Katharine Weymouth, publisher of the Washington Post; Barry Diller, chairmen of IAC; (NSDQ: IACI) and Lee Bollinger, president of Columbia. The board met today.

In today’s announcement, which dovetailed with an increase in the WaPo dividend, Graham and Buffett each stressed that the flow of advice doesn’t have to stop because he’s retiring from the board. That’s undoubtedly true. (I’ve confirmed that Buffett will act as an informal adviser, not a paid consultant.)

But the news unleashed an instant flood of speculation, including a suggestion that Buiffett is trying to distance himself from regulatory investigations of the company’s Kaplan division over its student loans. But Buffett isn’t leaving until May — and there’s no real way for even a former director to distance himself from decisions made during his tenure, particularly when he has been on hand for the last 15 years.

One of the first announcements to pop up fits in with the content focus Armstrong is stressing, although it’s not an owned-and-operated operation: AOL is teaming up with A Squared Entertainment LLC, a new company founded by children’s programming vet Andy Heyward and Amy Moynihan, to distribute “purpose-driven” entertainment for kids featuring — seriously — animated versions of Warren Buffett, Martha Stewart at age 10 , supermodel Gisele Bündchen, and the late Carl Sagan. The series will be done as seasons of three-five minute webisodes that will premiere on AOL. AOL also will help distribute the shows online “leveraging the power of social networking.” No, I don’t think this means we should be on the watch for Baby Bebo but you never know. [Update: Buffett and Stewart made cameo appearances at the Dulles All Hands, setting off a volley of tweets from staffers.]

Due this fall: Secret Millionaire

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