Does Flipboard need to rethink its revenue-share formula with publishers?

It’s like getting dumped on the day of your big promotion. That’s how Flipboard must have felt after two prominent magazines said they were leaving just hours after the popular news aggregator announced a groundbreaking partnership with the New York Times.
The decision by the New Yorker and Wired to unplug their stories from Flipboard, a tool that lets readers “flip” pages magazine-style on their tablets, suggests that while Flipboard has proven itself very capable of delivering readers, its ability to deliver revenue is much murkier.
In a telephone interview, CEO Mike McCue played down the significance of the magazines’ pull-out, calling them “outliers” and suggesting they miscalculated. “I find it ironic that Wired is taking a step backward while the New York Times (s nyt) is taking steps forward.”
The Flipboard quitters: examples or outliers?
The announcement by the New Yorker and Wired, reported by Ad Age this week, caused a mini-stir in publishing circles. A Wired exec also complained about a dearth of advertising for the platform. The two Conde Nast publications indicated they will now keep their content on their own websites and apps and use Flipboard only to display headlines.
The move comes at a time when some publishers are questioning the value of Flipboard, even as the social reader is claiming  more than 8 million users. Unnamed executives told Mashable that the advertising proposition wasn’t adding up and that they feared Flipboard was cannibalizing their readers on other platforms.
Flipboard, which compiles stories based on social media recommendations, lets publishers add full screen ads that resemble those found in a magazine. The aggregator, which says it has thousands of partner publishers and a waiting list of another thousand, takes a cut of the revenue from those ad sales. It has been running four to eight ad campaigns a month, some of which appeared in the Flipboard editions of Wired and the New Yorker.
Build it and advertisers (might) come
Flipboard is steadfast that its platform — stacks of curated content corralled by social media — is the future of news and, based on its popularity, many readers seem to agree.
But despite offering a magazine-like showcase for brands, Flipboard has yet to create a meaningful advertising ecosystem. The company suggests this is because the ad industry is not yet configured for a platform that, in its view, straddles both digital and off-line formats. In an earlier interview, a Flipboard spokesperson said many brands have a “little trial budget” for tablet ads and that they will increase such budgets as they come to understand the platform’s potential.
In an effort to bring advertisers up to speed, Flipboard has invested in a six-person New York team led by Christine Cook, the former Chief Revenue Officer of News Corp’s tablet newspaper, The Daily. Cook’s team is tasked with helping salespeople with lead generation and spreading the word about tablets’ potential.
“They’re working with top agencies and advertisers to educate them about what’s out there,” said McCue.
A spokesperson added, “We support their sales teams with our team in New York. We can help them sell into current advertisers, but many times we bring new advertisers since we often get calls directly from brands interested in Flipboard.”
As for publishers, McCue suggests they are “addicted to ad revenue from banner ads” but that those ads are in a permanent downward price spiral. He says they are better off with Flipboard-style ad campaigns that offer 10 to 15 times the payout of banner ads,  which is “closer to print economics.”
Who gets to keep the money?
So here’s the mystery. If Flipboard is so lucrative (McCue says it is generating millions in ad revenue), why are Wired and the New Yorker taking their ball and going home? Wired’s Howard Mittman told AdAge that advertiser interest isn’t sufficient and that the magazine prefers to engage readers without an intermediary.
Not all publishers are so downbeat. Christine Osekoski of Fast Company says her publication has its first advertiser partner in place for September and that Flipboard will be a very lucrative new revenue stream for Fast Company. She adds that any risk of cannibalization is offset by the chance to introduce Fast Company to new readers.
These mixed messages, in addition to the curious timing of the pullout by Wired and New Yorker, suggests that the issue here may not be Flipboard’s overall viability but instead the company’s formula for dividing revenue.
McCue would not disclose a percentage of the revenue share — he would only say the publishers get more than half and that the formula is the same for everyone. And, for Conde Nast, that may be the problem.
Wired and the New Yorker have been prime ambassadors for Flipboard as a result of their prestigious brands and top-shelf advertisers. But now the two magazines may have grown tired of carrying water for Flipboard and may have decided to make a point by pulling out on the day of the latter’s big New York Times announcement. The decision may also give Conde Nast leverage to negotiate better revenue deals for its other publications that are continuing their Flipboard partnerships. The company, unlike some publishers, is in a position to tell Flipboard it needs Conde Nast more than the other way around.
Flipboard’s Future
In the bigger picture, publishers will be hard-pressed to put the Flipboard genie back in the bottle. As my colleague Mathew Ingram explained in his analysis of the New York Times partnership, a growing number of readers prefer to get their news through aggregators and social media rather through a publisher’s website or app. If publishers walk away from Flipboard, they run the risk that readers won’t follow them back to their old platforms.
What all this means is that Flipboard’s future is not immediately in question — in short, the company’s issues appear to be rooted more in marketing rather than a bad business strategy. The issue appears to be the terms of Flipboard’s partnerships with publishers. It’s a pretty safe bet that by this time next year its one-size-fits-all policy will be replaced with something more granular.
And finally, there is the question of whether Flipboard will seek other revenue streams if publishers insist on taking a greater share of ad dollars . Flipboard said the company is already generating a small amount of non-advertising revenue. Given that McCue said last year that a premium ad-free version of Flipboard is off the table, this revenue may come from readers who sign up for paywall publications they discover on Flipboard.
(Image by Lightspring via Shutterstock)