J.P. Hannan has over 15 years experience in the media and entertainment sector of the investment community. He sits on the Board of Directors for both the Asian Media Group, LLC, and Regent Communications, Inc. In short, you could say that he has some familiarity with both investments and the broadcast industry. This makes his response to Warren Buffet’s most recent annual letter to Berkshire Hathaway shareholders both fascinating and credible.
Via Seeking Alpha:
Of the “Great Ones [investments]”, Mr. Buffett says he and his longtime partner, Charlie Munger, “look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.”
This description triggers Hannan’s thought process since it seems to describe the radio industry perfectly in his eyes. He notes that many financial analysts, such as Jim Cramer, have called it a “dead industry,” and focus on the lack of topline growth. Hannan then proceeds to address Buffet’s four benchmarks for acquisition of a new company and put them in context vis-a-vis the modern radio industry:
To address Mr. Buffett’s first required quality, radio is a business that is very easy to understand. One would be hard pressed to find anyone in the United States or any other developed nation that did not understand the concept of a radio broadcast. The business model is simply to aggregate as many listeners as possible within a targeted demographic and then use that audience to sell an advertisement to an appropriate client for the highest rate possible. While it can be a challenging model to execute effectively, it’s definitely not rocket science.
Favorable long term economics was the next criterion mentioned by Buffet. He mentions that he looks for enduring companies rather than those which exist in a continuous state of flux which can play havoc with investments. While people like Cramer pointing at radio’s stability throughout its tenure in the media landscape and calling it archaic and obsolete, Hannan wonders if more conservative investors like Buffett might not view those qualities as being signs of stability and “enduring.”
Buffett’s third requisite is management, although not in the way most people tend to think of the issue when it is brought up. In this instance, it means a company that does not need incredible managers to show profitability, but can continue on without huge losses if it is suddenly deprived of a member of its team. Buffett says that he tends to avoid companies with “Superstars,” because the reputation and profitability are often centered around said “superstar,” rather than the company itself.
This further expansion of his concept of a great business also hits radio’s button. One of the things I’ve always enjoyed about working in the broadcasting business is that there truly is no one person in a local station that is the “most important” person. Radio is a collaborative effort that requires great on-air talent and program managers, aggressive and well connected ad sales people, smart promotion minds, and skilled engineers that keep the signal transmitting. Every position in a radio station is equally as important as the next, and while a great manager is needed to keep it all together, there are lots of talented managers out there to do it.
Hannan then comes around to the fourth criterion, price:
This presents a tremendous buying opportunity for savvy investors with long term outlooks. Billions of dollars of market capitalization has evaporated across the industry this past year alone, and to a long term value investor a better time to buy has not been seen in recent memory.
Seems like a sound investment to me!