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A couple of posts on Techcrunch, one on Filmloop entering the Deadpool, and another on a rumor that Slide took $20m in funding have sparked some lively debate in comments about the business models for widgets. I don’t pretend to have the answer to this, although I did note in my earlier post on 2007 Consumer Internet predictions that this would be the year that social networks would find a business model.

I led Lightspeed’s investment in Rockyou early last year (Sequoia was our co-investor). Rockyou is a competitor to both Slide and Filmloop – they help people to customize their online representations (on social network pages, blogs etc) by embedding widgets, including photo slideshows, glittertext, image text and other widgets. As has been noted in the comments to the Techcrunch posts, the technology involved here is not terribly complicated (although the challenges of scale are meaningful). We invested for a couple of reasons: (i) Rockyou had achieved very real adoption from users and (ii) we really liked the two founders, Lance Tokuda and Jia Shen. Lance and Jia have a great sense for their users needs. Here in the valley we can get a little insular, but Lance and Jia have developed a fantastic sense of what their user, the Myspace/Bebo/Friendster user, is looking for.

We have been very happy with our investment in Rockyou. It has only continued to grow since we invested – it now serves well over 100 million widget views every DAY, and it has diversified well beyond a dependence on Myspace (a majority of its visits do not come from Myspace anymore). Having too much of a dependence for new users on a single source is a scary thing for any company. When Myspace launched its photo slideshow widget a few months ago, we waited with baited breath to see the impact on our growth. If Myspace blocked Rockyou (or Slide or any other widget company) it would have a meaningful impact on the business. However, Myspace has grown in large part by being open. It briefly blocked YouTube in December of 2005 (eventually attributed to a misunderstanding) but reversed that shortly afterwards, perhaps due to complaints from its users. Its hard to read the FIM/Myspace tealeaves, but they have had plenty of opportunity to block successful widget companies in the last year and have not chosen to do so so far, even while they have launched competing services internally.

That being said, like most startups just past their one year anniversary, Rockyou is not yet profitable. As I mentioned in my prior post, Youtube is really the only company that has suceeded in turning widgets into a destination website that can be monetized directly. Photobucket drives enough traffic from users uploading and editing photos to be able to generate significant revenue from advertising as well. Its fair to say that none of the other widget companies, Rockyou included, have achieved the same level of success in creating a destination browsing experience to the same degree.

Its not yet clear what the business model for such widgets will be. One possibility is sponsorship. Rockyou partnered with Sony to offer “Casino Royale” themes and with Nettwerk Records to offer “Matt Wertz” and Leigh Nash” themes that users could apply to their slideshows. All three have been successful, with large numbers of users choosing these themes resulting in 10s -100s of millions of widget views. This could well be a path to monetization. Another is freemium models. Although the base products will always be free, users may be willing to pay for certain premium customizations. Rockyou allows users to customize a “pin” to replace the rockyou watermark on their slideshows for a small fee. Its early days, and we don’t yet have a clear picture of exactly what the monetization model will be, but these are both highly promising options. Venture investing, and starting companies, always carries elements of risk after all!

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