Buffett: The Importance of Management

Cap Cities vs. CBS

I put one business in here, CBS versus Cap Cities in 1957, when my friend Tom Murphy took over Cap Cities. They had a little bankrupt UHF station in Albany. They ran it out of a home for retired nuns. And it was very appropriate because they had to pray every day. At that time CBS was the largest advertising medium in the world: $385 million in revenues whereas Cap Cities had $900,000 in revenues. Cap Cities made $37,000 a year and they paid my friend Murph $12,000 a year. CBS made $48 million pretax. Cap Cities was selling for $5 million in the market and priced on the come, while CBS was selling for $500 million.

Now, if you look at the two companies, Cap Cities has a market value of about $7 billion and CBS has a market value of about $2 billion. They were both in the same business, broadcasting. Neither one had, certainly Cap Cities didn’t have, any patents. Cap Cities didn’t have anything that CBS didn’t have. And somehow CBS took a wonderful business that was worth $500 million, and over about 30 years they managed a little increase – peanuts – while my friend Murphy, with exactly the same business, with one little tiny UHF station in Albany, (bear in mind that CBS had the largest stations in New York City and Chicago) and my friend Murph just killed them. And you say “how can that happen?” And that’s what you ought to study in business school. You ought to study Tom Murphy at Cap Cities. And you also ought to study Bill Paley [who was the CEO] at CBS.

We have a saying around Berkshire that “all we ever want to know is where we’re going to die, so we’ll never go there.” And CBS is what you don’t want. It’s as important not to do what CBS did, and it is important to do what Cap Cities did. Cap Cities did a lot of things right, but if CBS had done the same things right, Cap Cities would have never come close.

They had all the IQ at CBS that they had at Cap Cities. They had 50 times as many people, and they were all coming to work early and going home late. They had all kinds of strategic planners, they had management consultants. They had more than I can say. Yet they lost. They lost to a guy that started out with a leaky rowboat, at the same time the other guy left in the QE II. By the time they got into New York, the guy in the rowboat brought in more cargo than the QE II did. There’s a real story in that. And you can understand broadcasting, so it’s really worth studying what two people in the same field did, and why one succeeded so much and one failed.

I couldn’t resist kicking in the last page: the only public offering Cap Cities ever made, back in 1957 which raised, as you can see, $300,000. And this was when they were going to buy the station in Raleigh/Durham. The only public offering of stock the company’s every made (aside: they sold us a block of stock when they bought ABC). And if you look very carefully you’ll see that the underwriting commission – they took two firms to get this sold – the total underwriting commission was $6,500 bucks.

Source: Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students,Spring, 1991