FT : Financial Success Is Pipe Dream For Web 2.0 Companies

Monday, June 2, 2008

Facebook’s announcement a year ago that it would open up its social network to let applications from other companies on to its “platform” marked a peak for Silicon Valley’s Web 2.0 euphoria.  The move touched off a wave of enthusiasm for making “widgets” – mini-applications that internet users can plant on their Facebook page or on other websites.  By grabbing the attention of the millions of users on social networks, the companies making these new portable applications dreamed of tapping into a vast new market.  A year on, the much-talked of “widget economy” has failed to take off.  In their entirety, widget makers are making only about $40m in annual revenue, according to Will Price, chief executive of Widgetbox, a website that acts as a catalogue for the applications.  Max Levchin, chief executive of Slide, the most successful of the widget-makers, declines to discuss finances, though he says that only “two or three” companies have achieved the scale where they can make revenues “in the high single to low double-digit millions [of dollars]”.  For the rest, widgets have become a cottage industry.  Some developers have made enough of a living from creating widgets to be able to quit their regular jobs, says Howard Hartenbaum, a partner at venture capital firm August Capital.  But these are likely to remain very small businesses, he adds.  “I can’t say with any confidence that any of the widget companies have figured out a sustainable revenue model,” says Mitchell Kertzman, a partner at Hummer Winblad, a venture capital firm.

The difficulties of the widget companies point to a broader problem that has beset the crowded Web 2.0 landscape.  The wave of “social media” companies that has arisen since the middle of this decade, many of them characterised by user-generated content and new forms of communications, has changed the way millions of people interact and entertain themselves online.  Yet, by their nature, these new forms of behaviour are proving extremely difficult to turn into hard cash.  At the start of the decade, Google struggled to find a suitable way to make money from search before alighting on the keyword advertising that has underpinned its fortune.  A similar hunt for forms of advertising that suit the social media – where users want to engage with each other, not corporate brands – has proved difficult.  By common consent, the key to commercial success lies in co-opting the crowd, though few have so far succeeded.  “The core strength is the communication between people and the network,” says Martin Green, head of business development at Meebo.  “They send each other tons of links, refer things to each other and if you can put ads into that stream in a way that users pull it through, not hijack those relationships, then we think you’re halfway there.”  Even those companies that hit on a way to meld adverts with their media are likely to discover few advertisers ready to try it out.  “Social media is ahead of the capacity of the advertisers to take advantage of it,” says Mr Price at Widgetbox.  The standardised units of advertising and methods of measurement needed for this medium have yet to be developed, he adds.  “Real spend has been held hostage by that lack of analytics and what we’ve been relegated to is fighting for experimental budgets that don’t require clear proof of value.”  Meanwhile, many Web 2.0 companies face another challenge.  Four or more years since the movement began, the winners, at least in terms of users, are starting to emerge.  Many others can still dream of winning “viral” adoption, as millions are drawn to their services by word of mouth, but setting themselves apart from the crowd is getting harder.  “Some of those companies have risen to the top and people are beginning to believe they will have an overwhelming advantage in the market,” says Mike Maples, who runs a micro-cap fund whose investments include Twitter, a micro-blogging site, and Digg, a news aggregator.  It is only natural, he adds, that the winners in this race for audience attention will end up with “mass adoption and user attention before you necessarily recognise where the revenue comes from”.  That was the thinking behind a few winners – and many losers – from the first generation of consumer dotcoms at the end of the 1990s. Something similar looks in store for Web 2.0.

The messaging may be instant but revenues have been a long time coming for Silicon Valley start-up Meebo, writes Chris Nuttall .  Its founders – Sandy Jen, Seth Sternberg and Elaine Wherry – set out to create access to instant-messaging services from any browser, without the need to download client software from AOL, Yahoo or MSN…..Meebo is useful for workers who want to stay in touch with friends in the office through instant messaging but do not have permission to install the software on their machines.  It has 30m users a month sending 5bn messages and has gone through three funding rounds.  The latest – $25m raised last month – gave it a $200m valuation…..The target is 100m users – and profitability.  Advertisements will arrive next month, weaved into Meebo’s conversations.  Mr Green says social media have yet to figure out a way to serve adverts that suit the way people use new services.

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