Sunday, January 28, 2007

The Sad, Premature Death of the Widget Economy

Aaron Cohen (CEO of spoke at a local Video 2.0 Meetup last Thursday night, and tucked in the sweeping arc of an insightful discussion was one ominous note for the burgeoning widget economy.

[I'm using 'widget' to describe the broad class of mini-applications that are intended to be deployed on personal home pages, such as Netvibes or the Google homepage, or downloaded to be run in a desktop environment like the Yahoo! widgets and the Apple Dashboard widgets. Widgets are popular with consumers because they allow them to assemble personalized experiences using content and information from disparate sources.]

It's clear that widgets are hot- there are several companies out there dedicated to building widget ecosystems. I am sure that some of these companies will find varying measures of success, probably in the form of acquisition or technology licensing fees, vs. creating a networked economy that rides the various widget collection sites to runaway success.

The reason is the cyclical and inevitably cycle of ideation to realization that happens in software:
  1. A new capability emerges
  2. Smart people sieze on that capability to create things that let you 'do stuff'
  3. Consumers, engaged by the novelty of the capability, do that stuff in droves
  4. After a while many imitators emerge with similar capabilities, and the capability to 'do that stuff' becomes commoditized
  5. At that point, only the companies who siezed on the attention garnered by their novelty to move their models to the next level survive as independent entities. The rest either fail, are acquired, or limp along as agencies / service bureaus / professional service firms.

I call this the 'feature company' syndrome. The test is to look at a company's offering- if your first reaction is, 'That's not a business- that's a product feature,' then you've probably spotted one. This idea has been covered before

Stu Phillips (the author of the linked post) implies that the only value in building a feature company is to own a category and wait for acquisition- which, from the point of view of a VC, sounds like a pretty good plan, I imagine. However, many of the founders of these companies have different ideas- they extrapolate a future where new behaviors emerge around their features, and as the category killers, they are immediately granted ownership of all activity around that capability. This is far-fetched at best, and delusional at worst- mainly because the widget makers typically don't own the two most critial pieces to next-level success- content and distribution.

Which brings us back to Aaron's talk, and the inevitable reference to the 800 pound gorilla of widgets- YouTube. Every widget company's business plan is going to have a reference to YouTube gaining wide distribution through web page embeds, and then flipping over to Google for $1.65 billion. Cohen argues that rather than proving the viability of widgets, this story actually just proves that MySpace is good at generating page views, which YouTube parasitically exploited to gain enough streams/users/eyeballs/buzz to become an acquisition target (because Google certainly didn't acquire them for their technology or revenue strategy).

Furthermore, by becoming a very visible widget 'success story,' YouTube has ruined it for others who want to build vast distribution without paying for it- MySpace is rumored to be planning to exact a toll for using their platform, which will inhibit others who are looking for a free ride on their page-view highway to success (Om later prints an email from Fox denying that they have any plans to charge for widgets, but Young does not retract).

This plan may backfire for MySpace, who are starting to exhibit an inward-looking attitude perfected by AOL in its early years- but it's really the only thing that they can do now that they are owned by a public corporation, and are no longer in the business of squandering investor money to acquire users. I bet they feel like they've got enough critical mass so that they can swap out all the third party widgets that made MySpace actually useful and interesting and replace them with internally developed tools that keep the monetization loop all in the family, and their userbase will mostly not care (and I sort of agree).

So, if widget makers have mostly missed out on the free MySpace ride to wide distribution, and their technology is commoditized to the point where it's not worth acquiring, and they don't own content compelling enough to power viral distribution, what's their fate? They get to compete with each other to sell their services to the companies that hold the actual power in the widget economy- the content owners and the distribution platforms. Unfortunately for those with the grandiose plans, servicing the economy is not as attractive as owning it.

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