Berkshire Hathaway 2006 Annual Meeting Audience Question # 28

Any time you get more and more people competing in any given area, the economics will generally deteriorate

Warren Buffett:

Number 1.

Audience Member:

OK. First, my name is Egil Dahl. I’m a retailer from Norway. I would like first to thank you gentlemen for the opportunity to come here and ask two of the best businessmen in the world a question.

My question is regarding the media and entertainment business. Do you think that the nature of newspapers, magazine, television, and maybe movie and music business as well, are about to change permanently and become less predictable because of new technology and internet?

And the second part is, if not so, do you think that some of these businesses represent good purchases at the moment because the market thinks so? Thank you.

Warren Buffett:

Well, people are always going to want to be entertained and they’re going to want to be informed and some mix thereof. But, you know, we only have two eyeballs, and we only have 24 hours a day.

So if you go back 50 or 60 years and think about how people got informed or entertained then, the choices were far fewer. You had the local movie theater, and you had the radio, and you had newspapers.

And as the years have gone by, what technology has done is opened up a huge variety of ways of being informed faster, certainly.

And whether it’s better or not depends on who you ask.

And certainly entertained in way many more forms, many that are free. And it hasn’t expanded the time you have for entertainment or for acquiring knowledge.

And any time you get more and more people competing in any given area, generally, the economics deteriorate.

And the economics have deteriorated for newspapers, although they’re still enormously profitable in relation to tangible equity employed, but they do not have the same economic prospects, if you look at the future stream of earnings, that it looked like they had 20 or 30 or 40 years ago.

And television, again, the margins have been maintained surprisingly well, but the audience keeps going down and… for any given means of distribution.

So, that has to erode economics over time. Cable was thought to operate pretty much all by itself, and the telecoms come in.

And very few businesses get better because of more competition. They like to talk about it, you know, but it… you know, the idea…

I had one friend in the newspaper business. And I think Charlie used to tease her a bit by saying that her idea of a competitor was a corpse laid out on a slab with a toe twitching, you know. And the… it is not a better business when more people compete.

So I think that, generally speaking, the economics of media businesses do not have a great outlook, I mean, compared to… like I say, they’re enormously profitable now, in returns on tangible assets.

I mean, it’s a business… you know, a license from the federal government became a royalty stream on huge amounts of money.

I mean, there were only three highways between… electronic highways… between Procter & Gamble and Ford Motor and the eyeballs of several hundred million people, and those three highways could make a lot of money when there were only three highways.

But you keep building more ways to… for the P&Gs, or the Gillettes, or whomever it might be, or Ford Motor, or General Motors… to get to those eyeballs, and you decrease the value of the highways. It’s not complicated.

So, I think you will see… it’s hard to imagine those businesses having great prospects in aggregate.

We owned the World Book. We still own the World Book. We were selling 300,000 sets a year or something like that in the mid ’80s. It’s a very valuable product. It sold for $600 or thereabouts, and it was worth it.

But the problem became that you could get that same information, or a good bit of the same information, you know, very, very cheap through the internet.

And you didn’t have to cut down trees. And you didn’t have to run paper mills. And you didn’t have to hire United Parcel Service to deliver a very bulky package.

And it isn’t that the product we have isn’t worth the money; it’s that people have lots of other alternatives. And that’s true in information and entertainment in a big, big way, and it won’t stop, in my view.


Charlie Munger:

Yeah. It’s simplicity itself. It will be a rare business that doesn’t have a way worse future than it had a past.

Warren Buffett:

Give them the bad news, Charlie.

The thing to do was to buy the NFL originally or something like that.

I mean, you know, there still is only… you know, there are certain primary events, but it’s the people who transmit them… there’s more ways to transmit those events, and so the value gets extracted in a much different way.

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