When I was in New York City last week, I had the chance to meet a number of people in the finance and asset management fields. One discussion I had with a pair of value-oriented investors ties in closely with recent news that Google (GOOG) Almost Bought a Paper. As CEO Eric Schmidt told the Financial Times:

FT: Would you ever consider buying a newspaper; they’re cheap right now?

ES: We’ve actually looked at this and we’re trying to avoid crossing the line between the infrastructure and technology that Google provides and the content that our partners provide. There is a line and we’re trying to stay on our side it.

What stood out to me in the full FT transcript is Schmidt’s positioning of Google as a technology company that (tries to) create advertising solutions for content providers, but one that seems fine with staying removed from creating content itself. This situation is complicated by Google’s seeming lack of success at extending its advertising services beyond the internet, as Schmidt acknowledges radio and print mediums do not offer the same amount of rich data feedback – meaning that essentially, what makes Google’s web-based advertising work so well has proven non-transferrable. The potential implications here in terms of the limits of viable opportunities for horizontal expansion are huge, even though Google’s current earnings multiple of 28x is far off its peak, earnings growth is still expected to accelerate over the next few years.

The conundrum Google faces – it needs good content, and the primary providers of quality content (print media) are struggling – is exactly what we were talking about in relation to the New York Times (NYT). From the three of us, the two divergent views on the NY Times, and major newspapers in general, were:

1. There is immense value in being the first call for newsmakers to reach out to – having a first-class newsroom results in getting leads (or today, leaks) first, which makes the content produced more valuable to end readers.
2. While there is a societal benefit to having critical journalists, it is not something that has been adequately compensated for through subscription revenues. The real value newspapers have had over time (exclusive advertising access to a targeted geographic market) has been eroded by the internet, and no real differentiating factor still exists.

Either way, there is no argument that journalists are providing an important function; the problem remains how to adequately monetize it in print form. Google seems to have been incapable to do that at present, and the existing ad model has driven papers large and small to bankruptcy, the brink of filing, or shuttering their print distribution and going online-only.

One angle that was batted around was whether or not the disappearance of papers, or enough cutting back of their newsroom staffs, would be enough to restore balance to the industry and allow adequate returns for the survivors. Although possible, and even frequent, in other mature industries, newspapers do not seem to fit the mold – at least in print format. There’s a limited distribution range of printed newspapers, and the general problem for even the largest papers is not intra-market competition. Is there any possible upside here?

I view this as a question of how to turn around, or at least minimize, the negative value that the distribution process has. Perhaps going all-online, or transmitting content through an Amazon (AMZN) Kindle-like device is the way to go; maybe the newspapers should take a page out of the banking or soda bottling playbook and split-up the content-generating arm (good bank/valuable intellectual property) and the distribution arm (bad bank/low returns and capital intensive).

A semi-ironic extension of this back to Google is the case of YouTube, which the FT suggests as a money-losing deal (-$600mm this year) that should be written down in value. Although Eric Schmidt argues otherwise, it seems like distributing content is a low-value proposition, be it in print or online. This is why, with a nod to Jim Chanos and his “Twilight of the Gatekeepers” thesis on shorting cable and satellite companies, I’m highly skeptical of something like DirecTV (DTV) trading at over 5x book value, when a company like Disney (DIS) with loads of valuable intellectual property trades slightly over 1x book.

I will be away next week, but would appreciate any reader thoughts on this subject, be it in comments below or via email (jcullen@collegeanalysts.com).

Subscribe to our feed using your favorite service: