Content Bridges

Centro's Real Cities Signals Online-Only Ad Push, Fueled by Technology

Today's announcement that Centro is taking over the Real Cities Network isn't really an exclamation point. It's more like a period, marking movement between eras. Centro has brought local news websites significantly more revenue over the past several years. Real Cities, on the other hand, was a vestige of Knight Ridder (KR Digital, specifically, in this case) and one of spare parts that McClatchy acquired when it bought the KR papers.

In essence, Centro -- which has become an even more important revenue source as it brings online-only national advertising to local sites -- eliminates some of the noise of the local marketplace in taking over Real Cities. Real Cities repped about 1800 websites in its network. Most of them are also working with Centro, which targets local sites of all kinds -- daily newspaper, broadcast, alt weeklies + -- in delivering local and regional audiences to advertisers. Centro does gain relationships with advertisers, maybe more than 100 new ones, considering that many of them were duplicated.

"It's a scale play," says Centro CEO Shawn Riegsecker.

There is still noise to be sure -- lots of networks and exchanges out there, and the Tribune-Gannett-Hearst-led QuadrantOne still trying to find its footing. But today's announcement sets up 2009 as an intriguing year, focusing acutely on online-only advertising. On the one hand, we've got the newspaper consortium focusing on the adoption of the Yahoo ad platform (starting in September and rolling into at least 1Q next year). On another, we have a new combined Centro/Real Cities. Shawn Riegsecker says his company is growing at a 45% YOY level, even with major declines in General Motors and ATT spending, caused by economic and structural shifts.

Online-only growth is what newspaper companies need.

Tribune reported quarterly earnings yesterday, and said digital revenues had dropped 4% YOY. That's because of classified upsells of course. They produced now-seen-to-be-illusory 25-35% annual growth rates in good times, and now they are dragging online revenue -- the old bright spot in newspaper revenue reports -- down into negative territory. Tribune was the fourth company, after Lee, Belo and Scripps to go negative in the second quarter in digital revenue, with those above the line gasping for positive air.

McClatchy proudly announced in its earning call that it was approaching 50% in the level of online revenue that was online-only -- not upsells. Gary Pruitt's gang isn't alone. 2008 has seen a profound mindshift, accompanied by much hiring and staff re-training, all aimed at making this transition. Unfortunately, it's another case in which the newspaper industry is reacting late, after things have turned, well, officially negative. But it's the right move.

We can all see that McClatchy's move is another in a series of the Pruitt Strategy, enunciated clearly as emerging (!) out of the current mess as a "smaller, more efficient company". He pulled off the sale of the Star Tribune at what turned out to be a good time, got out of Shop Local (long a non-performer), is busy having other companies print his papers (Boise, Bellingham) and now is getting out of the Real Cities Network game.

Here, we can see a survival strategy getting into place. Focus on what you are good at: local content production and local sales. And....importantly use other people's technology. That's the other clear message from the Centro takeover of Real Cities: ad technology is key.

Tribune's 2Q: Three Numbers Stand Out

There's little intrigue in Tribune's second quarter earnings announcement. As the company says, "Our publishing results are, for the most part, in line with industry trends, which remain consistent with what we reported in the first quarter." Such consistency, unfortunately, is not something you want to be a part of.

All the print numbers are now trending down:

• Advertising revenue generally: -15%
• Classifieds revenue: -26%
• Circulation revenue: -2%
• And the kicker, online revenue: -4%, as Tribune becomes the fourth company (after Lee, Belo and Scripps to announce a first-in-modern-history reversal of online revenues fortunes)

Even broadcast nudged up only a bit, at +2%. Overall operating revenues down: -6%

Ouch. Ouch. Ouch. Ouch. Ouch. Ouch.

But I think there are three other numbers that tell Tribune's larger story, going forward:

• -2%. That's the operating cash flow from continuing operations. As cash flow declines, Sam Zell's flexibility at moving the pieces on the New Tribune chessboard decreases. If, as it looks, ad fortunes will be worse 3Q than 2Q (based on June looking worse than the quarter as a whole for some of the news companies), cash flow will further decline.
• $161 million: That's the cash and cash equivalents being held by the company. It's a cushion without much stuffing.
• $12.5 billion: That's how much debt the New Tribune is still holding.

The last number is still the biggest one too. I think of the New Tribune as owning a row of townhouses. It has taken out one big mortgage of $12.5 billion to pay for the townhouses. Its plan is to sell off the townhouses, or the land under the townhouses, one by one. That's what it did by selling Newsday to Cablevision, a deal that recently closed. The money from that sale -- $589 million -- helped to pay off a debt payment of $807 million. ( It also needed a loan against receivables, always a later resort, of  $218 million to make that payment.)

So now there is one less townhouse -- Newsday -- producing cash flow to help pay down future debt payments. But the $12.5 billion total remains.  You don't need to be a real estate man to do the end-game arithmetic.

For Tribune, this is a game of months. Each sale -- Bud Selig buddying up with Mark Cuban's $1.3 billion valuation of the Cubs may solidify the next one, and reinforce Zell's superior deal-making skills, if not timing, after pulling off a Newsday auction -- buys just that, months.

It's the combination of those three numbers -- overall debt, small cushion and decreasing cash flow -- that will have even a riverboat gambler like Zell looking for an exit.