What's a Widget Worth?

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The startups are waging a programming and PR battle for users and advertisers. "It's like Coke and Pepsi," says Jeremy Liew, a general partner at Lightspeed Venture Partners, which invests in RockYou.

But both companies say their popularity has been vastly undercounted, holding back their ability to sell advertising. Other executives and investors in social networking and widget software companies say the absence of accurate usage data for widgets has capped growth in the market: Widget ad revenue was estimated at about $20 million in 2007, or about one-thousandth of Internet advertising as a whole. According to the new comScore data for November, Slide claimed almost 144 million unique viewers, for a 16% market share, and RockYou claimed a 11.7% share, with 104 million individual viewers. In July, Slide had 130 million individual users, or a 15% share, while RockYou boasted 96 million users, or 11.1% of the total.

Improved measurement tools are only one of the ingredients software companies will need in order to build lasting businesses on the backs of Facebook, MySpace, and other networks. Widgets present an attractive new market for advertisers—usage of the software has exploded since Facebook began allowing third-party software on its site in May, 2007, and MySpace is developing an advertising system (BusinessWeek.com, 11/5/07) for independent software vendors as well.

Yet competition among different networking sites means it's harder for advertisers to reach a large audience using the medium. Then there's the lack of a standardized widget ad unit: Should you run a "banner" ad across the top of the page rather than a long, narrow "skyscraper" ad along its side? Factor in advertisers' unease with risqué material on users' profile pages, and it's not surprising revenues have been low. "Current revenue is going to be lumpy," says Lightspeed partner Liew.

Other Obstacles to Ad Sales

Not counting Facebook activity "was absolutely a gross omission" by comScore, says Liew, but Web companies' lack of agreement about whether they're selling widget views, clicks, or installations is a larger barrier to ad sales. "This is a great step forward," he says of comScore's revised numbers, "but it's not enough."

Disney (DIS), for one, has opted not to advertise on pages associated with widgets for such reasons, according to people familiar with the company's thinking. Coca-Cola (KO) has held off on advertising through Facebook's Beacon feature, a controversial program (BusinessWeek.com, 11/30/07) that broadcasts users' online purchases to people in their networks. And while social networks' popularity has attracted sizable investments by some of the computer industry's biggest players—Google spent $900 million in 2006 to place ads on MySpace, and Microsoft (MSFT) in October, 2007, took a $240 million stake in Facebook that valued the company at $15 billion—more serious money from those companies may wait until the networks and widget companies iron out the advertising kinks.

The numbers for social networks are still heady. Traffic is expected to climb 31% in 2008, to 489 million broadband Internet users, according to research company eMarketer. Advertisers are expected to spend $1.56 billion on social networks in 2008, up 69% from $920 million in 2007. But that's still less than 6% of all online ad spending, which eMarketer pegs at $27.5 billion for 2008. And only a tiny fraction is likely flowing through widget software. Will Price, a managing director at Hummer Winblad Venture Partners, which invests in a widget software exchange site called Widgetbox, estimates advertisers will spend just $20 million to $40 million on advertisements linked to widget software in 2008. Others have put the number even lower (BusinessWeek.com, 10/27/07). "No one knows what a Facebook user is worth," says Price.

House of Cards?

In the interim, widget publishers are looking for creative ways to generate revenue. Slide, which makes applications like FunWall, Top Friends, and SuperPoke, has tried offering users branded slide shows with characters from movies Bratz and Bee Movie. The company also sells online photo frames that look like magazine covers.

RockYou, which publishes widgets including Superwall, Likeness, and X Me, has struck deals to promote other widget software makers, collecting 50¢ each time a user installs one of those applications based on an ad on a RockYou page. The company stopped embedding ads in its slide shows after finding that click-through rates ranged between one-fifth of one percent to a little more than 1%, says founder and CEO Lance Tokuda.

But widget software companies need to be wary of foisting too many ads on their users and of building a house of cards based on promoting lots of small companies that, if history is any guide, will eventually go out of business. Says VantagePoint's Davidson: "Widgets live on Facebook, and can also die from it."

Ricadela is a writer for BusinessWeek.com in Silicon Valley.