In 2011, the great Warren Buffett was testifying before the Federal Crisis Inquiry Commission. Asked about studying a business, he responded:
"The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10%, then you've got a terrible business." Buffett went on to say that pricing power was more important than good management.
If you look at the successes that Buffett and his vice chairman Charlie Munger have had, it was often when they bought in to franchises such as Coca-Cola, Gillette (now part of P&G), The Washington Post (decades ago), and even Wells Fargo (recent bad publicity notwithstanding).
There are many wonderful businesses with pricing power. Apple comes to mind. Would you buy another brand of laptop if Apple raised the price by $75. In most cases, I would think not. Single malt scotches, high end wines, Titleist golf balls, and Starbucks are there as well.
But what of our world, media? Does pricing power still exist? With legacy media, I would say not really. Throughout the 70's to the 90's, the major TV networks moved prices up in line with the business cycle but they always seemed to get a bit more than the rate of inflation or GDP growth. When the dot.com bust hit in early 2000, they still did fine as people became gun shy about online options and loaded more money in to network TV. After a while, people admitted they put money there because they did not know where else to allocate it. So, some networks had declining ratings and actual audience delivery but saw prices per unit rise.
Today, the game has changed. Social media is changing the media landscape so increases for traditional media are far more muted than in prior years. Many digital options are working and they can prove it.
A radio broadcaster from the Midwest told me recently that his rates are lower than they were 25 years ago. I gently reminded him that his ratings are lower now and he came back by telling me that "90% of our local advertisers cannot read a rating book. They now have moved to digital options." Some clever radio operators in larger cities are seeing their digital business ellipse their traditional commercial billing significantly.
Legacy media will survive if the players evolve. Even if the property looks the same, the revenue is likely to come from what a few years back, we would be calling unconventional sources.
If you would like to contact Don Cole directly, you may reach him at firstname.lastname@example.org