The flipside to Flipboard fever

The venture capital flowing to Flipboard shows the confidence investors have in media platforms, but it's still unclear if they actually provide any real benefit to content creators.

The news that Flipboard closed another $50 million round of funding this week, bringing its valuation to $800 million, is further evidence of where venture money is flowing in regards to media.

The social news app has now raised in excess of $160 million over the past three years and claims user numbers of around 85 million. An impressive takeup, but surely given the volume of funds raised, it’s time for the service to start demonstrating the beginning of meaningful revenue potential.

The service, like many other US media ‘disruptors’, has focused on a ‘build audience first, then monetise’ approach. Large venture capital rounds finance all this luxury, which allows the service to continue to plough money into development and not worry too much about revenue.

It’s a smart strategy in terms of valuation as well – it can often works against start-ups to focus on revenue early, as many investors place value on future potential rather than demonstrated results.

The same week that Flipboard came close to a $1 billion valuation, the new venture from the founders of technology news website, All Things D, did the same. Kara Swisher and Walt Mossberg partnered with Dow Jones to operate their website and events business, but decided to part ways with Dow Jones and move the business under a new name across to NBC Universal.

Reports suggest that across advertising and events, All Things D generates $14 million a year in revenue and $5.5 million in profit. Even with these results, reports suggest NBC Universal invested in the business at a $25-$35 million valuation. At best a 6x multiple.

Now, All Things D is a niche business, whereas Flipboard is a mass platform, but it does show that investors are willing to bet more liberally on platforms rather than content creation. It’s the same thing we see with Spotify and the music industry. Spotify is valued at close to $6 billion, despite relying solely on the product developed by the record labels and their artists. Record labels are not considered by investors to be as exciting investment prospects, despite their significant value to services like Spotify, YouTube and VEVO. Case in point – when analysts hypothesised about the prospect of Sony Corporation selling off its music assets, it believed that they would be worth close to $5 billion – based on annual revenue in excess of $5.5 billion and operating income of $450 million. In 2012, Spotify generated $576 million in revenue and incurred a $77 million loss, but ultimately is valued at a price higher than the total Sony Music business.

The fact that Flipboard is edging close to a $1 billion valuation without a demonstrated business model outlines the appetite for platform plays. Flipboard founder Mike McCue has stated that Flipboard's primary goal is to help publishers make money from their original content via advertising. Flipboard then wants to take a clip of that advertising revenue. How that will work is unclear. Will Flipboard become an advertising vendor itself? Or will it want the content creators to sell the ads themselves and share the revenue with Flipboard?

Many publishers and content creators are now moving away from the idea of letting a third party handle their commercial dealings and advertising sales, preferring instead to take back these relationships and develop closer, more integrated relationships with key advertisers and agencies. The exception appears to be with video, with content creators on the whole working with YouTube and benefiting from their massive user and ad sales reach. However, Flipboard doesn’t have nearly the reach of YouTube. Despite its claimed 85 million users, tracks its average daily users at under 3 million globally and monthly users at 4.5 million. Many of Flipboard’s content suppliers would be generating those sorts of numbers to their owned and operated platforms, raising the question of the ultimate incremental benefit for publishers and content creators of these services.

Whatever the model ends up being, now is probably the time for Flipboard to start outlining what it is. Three years ago Flipboard was proclaimed a revolutionary new ad unit, but to date nothing revolutionary has been unveiled. The likely exit for investors is an acquisition – Flipboard has strategic potential for cashed up larger companies such as Apple, Facebook, Twitter and Google – all of which could comfortably drop $1 billion on a speculative bet or slot the service into an already lucrative value chain.

Ben Shepherd is a media and technology consultant. He can be found on LinkedIn and on Twitter.

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