As you boarded your flight that day, perhaps you didn't realize you were in the market for a garden statue that looks like Bigfoot. But, as the plane doors close, you curse the FAA regulation that bans electronic devices from being used during takeoff and landing. How do you entertain yourself for these interminable 30 minutes? The inflight magazine? The emergency safety instructions card? How about the SkyMall magazine? Yes, the SkyMall magazine will do. And that's when you find yourself considering whether you need the The Garden Yeti.
On almost all US flights, you'll find SkyMall magazine in the seat-back pocket in front of you. This magazine is a catalogue filled with whimsical products that are available for sale. None of these products are things you strictly "need". They're not even products that a reasonable person could anticipate wanting until they've seen it -- a baseball bat shaped pepper grinder, a vacuum cleaner to catch flies, an alien butler drink tray, a helmet that promises to regrow your hair using lasers.
Having entertained ourselves by thumbing through the SkyMall catalogue hundreds of times in our lives, but never having purchased anything, we were curious. How does the business of SkyMall work?
As we were researching the economics of the SkyMall business model, a darker story emerged. SkyMall recently merged with a newly formed company called Xhibit Corp, a company that trumpets itself as a "cloud" marketing software company, but in reality makes its money from dubious sources. With even a small amount of research, this company, Xhibit, raises all sort of red flags.
Has SkyMall, a quintessential piece of Americana, fallen in with a very bad crowd?
The Economics of SkyMall
Every year, 650 million passengers have the opportunity to peruse through SkyMall on their flight. According to a survey commissioned by the company, over 70% of passengers read SkyMall on every flight.
The company has negotiated deals with most major airlines in the United States to be their exclusive product catalogue partners. This covers 90% of passengers on US flights. Most SkyMall customers are exposed to the products via the in-flight magazine, but they can order the products using the catalogue or through the website, SkyMall.com.
For most of its history, SkyMall has been a private company so its financial information is not well disclosed. However, in 2009 its website generated approximately $80.5 MM in revenue, and it was the 185th largest e-commerce website by revenue, according to the Internet Retailers Top 500 ranking. In interviews, company officials have stated that 60% of the company sales come through the website (the rest through the catalogue) so we can estimate that the company does about $130 million in revenue per year (website + catalogue).
The company was started in 1989 by Robert Worsley. Worsley's original plan was that passengers could use the "Airphone" (a phone that used to be located on the back of most seats) to call SkyMall and when they landed, their purchases would be ready for them to pick up. Customers could buy name brand merchandise from retailers like Land's End, as well as SkyMall-branded products like luggage.
This initial business model was a bit of a disaster. The company had to have warehouses near the airports full with all the products in case someone bought something. When a purchase was made, it would have to be quickly transported to the gate. And it seemed no one really wanted SkyMall branded-luggage. By 1993, the company was losing $6 million per year.
Around this time, the company pivoted to a more capital-efficient model. They wouldn't carry any products, they'd just be a magazine where other companies could advertise. These companies would either pay a flat advertising fee or pay SkyMall a percentage of each transaction. The companies that advertise in SkyMall would be responsible to "drop ship" their products directly to the customer. SkyMall would be an advertising company in the vein of Google or eBay rather than an e-commerce company that held inventory like Amazon.
Today, when you see a product advertised on SkyMall, the company selling the product is paying handsomely for the opportunity. A full page placement in SkyMall costs $129K per issue (3 months) plus a 6% transaction fee. Or, you can opt to pay a 5% transaction, a smaller advertising fee, and an additional profit share with SkyMall. SkyMall sells space by the full page, half page or quarter page. The cheapest option, a quarter page, costs $41K per issue. Below are the monthly rates to buy space in SkyMall (it's required you buy three months at a time).
Taking a percentage of each transaction and an advertising fee has been a durable model for SkyMall. According to company President Christine Aguilera, they get approximately 100 requests a week from prospective companies to have their products featured in SkyMall. In order for this business model to work, SkyMall needs to continue to be carried on nearly every domestic flight to maintain its access to this captive audience of travelers. It's not disclosed how large these fees are, but in 1999 (their last annual report), it was only around 5% of revenues.
Over its corporate history, SkyMall has been owned by various private equity firms who have passed it amongst themselves. Most recently, SkyMall was owned by Najafi Companies, a Phoenix based private equity firm that was best know for buying Network Solutions in 2003 with a $20 MM equity investment, and then later reselling the company for $800 MM in 2007.
And then, on May 17, 2013, a curious event took place that wasn't reported anywhere in the press. SkyMall merged with a company called Xhibit Corp, an entity which looks to be more of a parody of a tech company than a real company at all.