As I sit on a plane today flying back from Spain where I spoke at Chris Shipley's Innovate Europe conference, I find myself fixated, once again, with widgets. There's all sorts of activity in the widget world. The biggest widget news, of course, is the sale of PhotoBucket to MySpace. Meanwhile Slide and RockYou are battling it out for "Biggest Widget Company in the World." And new widget companies/experiences are emerging each week. This universe of web services is what Fred Wilson has long been espousing as the cornerstone to Web 2.0, and it continues to evolve rapidly. And that evolution has been a fascinating one to watch (a bit like watching your character evolve in Will Wright's Spore -- some choice, some interaction, some happenstance, then real tangible change).
As I wandered the pavilion floor of the DEMO conference earlier this year, the challenges posed by the "widget economy" became pretty clear. I talked with lots of companies, and in particular found myself gravitating towards the various widget providers. But what struck me as I talked with the latest generation of media platforms -- be they for photo sharing or video sharing or animation -- was that these companies are going to face a serious challenge when it comes to monetizing their traffic. That challenge is a byproduct of their precarious relationship with the "host" services to which they attach. To the extent those relationships are symbiotic, the combined organism will thrive. However, to the extent those relationships are, in fact, parasitic, the host will need to shed the parasite in the name of survival.
When determining if a widget relationship is symbiotic or parasitic, it makes sense to look at a few different factors. The most widely acknowledged, of course, is monetization. If a widget is doing nothing to monetize its host's traffic (e.g., when Flickr photos are served into MySpace), it might be viewed as neutral or perhaps symbiotic for freely increasing the functionality of the hosts site. If a widget is seeking to monetize the host's viewers (e.g., ads or branding on a voicemail widget), the host may view that widget as parasitic. This relationship, of course, assuming there is a zero sum game of monetizable attention on any given host service, therefore the fact that a widget is monetizing some of that attention means the host has lost that revenue opportunity in return. While I think that a number of hosts may view it that way (there is every indication that MySpace and Facebook do), my view is that if a service's functionality is significantly enhanced as a result of the various widgets that attach to it (e.g., the MySpace experience was massively enhanced early on by the work of both Photobucket and YouTube), one might argue that the widget experience is always symbiotic -- enhanced functionality in exchange for traffic, monetized or not.
Herein lies the tricky dance that is going on in the widget space right now. And the first episode of Dancing with the Widget Stars appears to have ended with MySpace taking home Photobucket after a winning run on the dance floor. MySpace and Photobucket weren't always the well honed dancing machine they appear to have become. Only a few short weeks ago, Photobucket attempted to assert its ability to monetize its traffic on MySpace by serving up branded slideshows. MySpace's reaction was to refuse to dance with Photobucket at all -- shutting off all 15 million of Photobucket's users in MySpace. The question remains who that move hurt more, Photobucket or MySpace? Was it a purely parasitic relationship that MySpace could shed at will without its user base revolting. Or was it a symbiotic relationship, in which both MySpace and Photobucket were hurt by the efforts to shed Photobucket slideshows from the MySpace service? To the outside observer, it would appear that both parties determined the relationship was much more symbiotic than MySpace might have originally hoped and, as a result, MySpace is buying Photobucket to both enhance the user experience and better monetize its own traffic. That feels like a win-win.
While the vast majority of widgets companies have engaged in a strategy of achieving distribution first and monetization second, a few companies have attempted to strike that balance up front. The most notable company on that front is my own portfolio company, VideoEgg. Rather than go down the path of having millions of VideoEgg videos embedded on host sites before engaging in the conversation about monetization, VideoEgg established those relationships early. When VideoEgg monetizes a video on one of its partner's services, that revenue is shared. As a result, the hosts are happy to promote video on their services, and VideoEgg is able to monetize the over half a billion videos it is now serving each month into various host services (and the opportunity to share revenue grows each successive month as VideoEgg's traffic continues to grow rapidly). What's more, social networks, community sites, information services, etc. no longer need to expend the daunting resources necessary to create their own video service. Rather, they are able to leverage VideoEgg's significant development and hosting dollars to give their end users the best available video experience. That again feels like a win-win. Perhaps MySpace and others would come to similar agreements with photo hosts, avatar companies, SMS providers, etc.
One clear advantage to the VideoEgg approach is that it goes a long way to minimizing channel conflict. There is a general sense in online media today that a large and definable audience will necessarily draw advertisers. While as a general rule I think that is true, when it comes to widgets one challenge for advertisers is determining the right channel for their advertisements. Should they advertise on MySpace directly, or should they advertise on RockYou and Slide in order to get distribution on MySpace? Media buyers have a much easier time buying advertisements on a site when the source of that inventory is clear. Thus, when multiple parties sell advertisers inventory on a particular service, the sale becomes significantly harder for each of the parties involved. Given that, the large social networks feel the pain of channel conflict when there is "unsanctioned" selling of ad inventory on their sites by third parties. This necessarily makes their job of selling ad inventory on their own services more difficult and devalues the inventory that they have. So even if these hosts view the widget providers as generally symbiotic, they may find it hard to allow third party advertising on those widgets given the channel conflict that necessarily ensues.
There is one additional wrinkle to this evolving widget economy. In the wake of massive distribution for a number of successful widget companies (consumers are creating over 200K new widgets a day on both RockYou and Slide, resulting in tens of millions of page views a day), there are an emerging set of service providers that are seeking to act as widget aggregators. Companies like SplashCast, Magnify.net, MixerCast, etc. are working to produce a unified experience whereby consumers or producers can aggregate other widget services within a single experience. In other words, one might create a video channel that draws video from YouTube, Photobucket, etc., or a photo experience that draws from Flickr, Slide, and others, or, as is the case with MixerCast or SplashCast, you might intermingle media formats (video, photo, music) from any number of third party sources. The end result is a curated experience drawn from various other widget providers (and, perhaps, some content that is proprietary to the service doing the aggregating). The challenge these widget aggregators face is, again, one of monetization. If they become significant destination sites like a MySpace or Bebo, they will certainly control their economic fate. However, the strategy these aggregators appear to be pursuing is to have their experience embedded into the same hosts that the widgets are going after (MySpace being the gorilla, of course) -- so instead of embedding a widget into your MySpace page, now you are embedding a widget of widgets. If it is challenging to work out the economics for a dominant host and a single widget provider, imagine the challenge of working out the economics for a host, a widget aggregator and an arbitrary number of widget providers being aggregated.
Despite these challenges, I am extremely bullish on the widget economy. I believe that the vast majority of these relationships are indeed symbiotic -- great experiences being enjoyed by millions of consumers are enhanced by additional great experiences developed by third party widget companies. Unmonetized, these widgets are a gift to the hosts -- they allow for a more engaged consumer with a more engaging experience and cost the host nothing. Thus, it will be up to the hosts and widget companies to sort out the economics in the coming months and years. I expect significant progress on that front this year and look forward to being a part of that evolution as I continue to invest in hosts, widget services and content aggregators alike.