Why the Smartest People in the Valley Were All Dead Wrong about Widgets
Can we all agree that the idea of the widget economy is officially dead? I mean, beyond dead. It died a few years ago, and recent events are just stomping up and down on the ashes. It's so dead that you kids just arriving in the Valley probably don't even know what I'm talking about.
The promise was that widgets (WIDGETS!) could allow you to have something more important that unique users -- you could have gargantuan reach, because parts of your site would be all over the Web. It's always been dicey to build a company on top of someone's else's platform, but widgets would theoretically allow you to skirt that because you'd be across many thousands of sites, every one a platform. Sure eyeballs gained through widgets would be worth less than traditional traffic. But if you could push your widgets on to enough sites might it be possible to build the next Web giant?
No, as it turned out. In fact we were all wrong about widgets. Wrong. Wrong. Wrong. The press who wrote about them (me included), the VCs who invested hundreds of millions in them at nosebleed valuations, and entrepreneurs who saw a shortcut to building a single huge site, by throwing lego pieces of their Web property on everyone else's huge sites around the Web.
Even Valley sage Marc Andreessen* told BusinessWeek in 2007, "The big widgets have the potential to become the new networks." And I don't mean to pick on Andreessen -- Quincy Smith and Meg Whitman are both quoted in that article too, as is Vinod Khosla who said, "Widgets are a fundamentally important idea. I believe it has the potential to create big billion-dollar winners." The smartest people in the Valley had plenty of company on this one.
It's surprising that at the time when skepticism was riding highest about the consumer Internet that everyone so fervently believed this could be the next big thing.
This didn't come out of nowhere. Blame the runaway success of YouTube for inciting widget fever back in 2006 or so, when so many YouTube streams were coming from MySpace, blogs, and other social sites. YouTube was huge even without YouTube.com. That was something new, and it was a revelation.
But it's important to note that while YouTube was a successful exit, it never built a successful business on its own. It never even came close. And nearly six years after Google snapped YouTube up for $1.65 billion, it's still more of an outsized cultural phenomenon than it is a revenue line that moves the needle for Google.
And YouTube was arguably the widget economy's high-water mark.
The widget business model died with Slide's sale to Google, and its subsequent shut down. Led by the intense and hard-charging Max Levchin, Slide gave it everything a company possibly could, pivoting whenever it saw glimmers of a business.
If anyone could have pulled it off, it was Levchin. Back in 2008, Slide raised $50 million at a $500 million pre-money valuation, because of Levchin's ability as an entrepreneur and all that reach. The company's Slide deck boasted that, in terms of reach, Slide was ninth on the Web, just after Amazon.com. This wasn't a lie. It just didn't ultimately matter in terms of building a big business.
Viral tricks and the flood of users from the emerging world allowed such a surge in everyone's unique users and reach, that it made the statistics almost meaningless. What mattered was how much those little bits of real estate on other sites mattered to people. And it turned out even at huge scale, they didn't matter much.
Slide was sold to Google for nearly $200 million -- a nice exit that allowed most of Silde's early investors (including Levchin) to do pretty well, and even for its late stage investors to get their money back. But that's about it. Worse, Google recently called the acquisition a failure. Ouch. Slide's once arch competitor RockYou has fared even worse, pivoting to gaming with mixed success.
If Slide killed the widget, Meebo danced on the widget's grave -- and it did it twice. Meebo was a leader of that very early social media/widget wave and started life solving a very definite problem: Making IM networks interoperable in an easy-to-use, engaging interface. There were loads of users, just not much of a business there.
It wisely pivoted to being an ad network with its publisher-friendly (IMO) Meebo toolbar -- grave dance #1. As Sternberg told me two years ago, "Meebo did widgets super early. Guess what we learned? Don’t build stuff that sits in a box.”
The toolbar was an interesting pivot. We get people bitching about it here and there, but those are mostly people who will complain about any attempt to monetize. I don't have a lot of sympathy for that. Good content costs money, and you can't tell me the Meebo toolbar isn't a jillion times better than slowing the page down with a ton of noisy display ads. There's not a lot of innovation in blog advertising, and as a publisher I appreciate that Meebo gave us a different way to make money. That's one reason it was the only ad unit we've ever put on our page.
Unfortunately, ad networks are also a shitty business. Despite equally stunning "reach" that justified a well-priced $25 million venture round back in 2010, in the end Meebo investors and employees did even worse than Slide's. It raised $70 million and just sold to Google for $100 million. (Grave dance #2.)
It's interesting that the widget "leaders" all found exactly one exit strategy: Google. Was Google the last believer? Or did it just buy up for the ad inventory and talent? In the case of YouTube and Meebo it was likely the ad inventory-- those may still be good bets. YouTube unquestionably was given Google's stock price at the time. In the case of Slide it was likely the talent. But a lot of that talent is now gone.
There was one thing that was keeping the promise-- or at least the ethos-- of the widget dream alive, and that was the runaway success of Zynga. To call Zynga a widget company would be a stretch, because part of the challenge is that it's so dependent on one site: Facebook. That's totally different than a company that runs across thousands of sites, a la YouTube. But still, Zynga built a huge business in Facebook apps, where companies like iLike, Slide, and RockYou ultimately failed, so there's some common heritage there.
And check out Zynga's stock price. Yesterday, it slid below $5 a share for the first time. To be fair to Zynga, aside from LinkedIn, few tech IPOs have fared well of late, and I'd still sure as hell rather be Zynga than Groupon.
A lot of this goes back to Zynga's need to move beyond the company that makes "-Villes" for Facebook. Zynga analysts I've spoken with say the slide is due to Zynga's inability so far to show meaningful traction building a business off Facebook, particularly its lack of a strong beachhead in mobile. DrawSomething could have been its Instagram. Unfortunately, just after Zynga purchased DrawSomething, it started to bleed users. Zynga didn't just buy the game; it bought a strong team in the group behind DrawSomething, which has many more ideas up its sleeves. But for now, Wall Street is panicking.
I wouldn't count Pincus out, he's a formidable entrepreneur and as able to focus and tune out the whining of Wall Street as anyone. The company still has a $3.6 billion market cap and plenty of cash and Pincus is structurally protected from any Dan Loeb-like figures. But the stumble should show just how hard building a big business on someone else's site still is even in an age of robust platforms and billions of people online.
And that gets back to the widget lie. Platforms may help you get more reach faster, but they come at a cost. The more sites you rely on, it doesn't necessarily mitigate that risk. Sometimes it just means you own that much less of anything truly valuable.
This should be the real cautionary tale to the story: Levchin and Sternberg are equally two of the most hardworking, most driven entrepreneurs I have ever met. Neither of these guys gave up -- they just grabbed the best out for investors and staff when they saw it.
Good ideas usually fail when it comes to execution in the Valley, but in both of these cases, the best execution couldn't make up for what was at the end of the day a flawed idea. It's remarkable that the each company got nine figure exits and managed to return capital when hundreds of others of companies chasing the same widget dream were utter roadkill. (That's why investors will line up to back these guys again.)
For those who wring their hands about soaring private company valuations, erroneously calling a game that only a handful of insiders are playing a "bubble," it's worth noting that there was no greater economic carnage from everyone being wrong about widgets. It barely registered headlines. The Valley got it wrong, and the Valley moved on. And at least investors in Slide and Meebo didn't lose money.
Still, it will be interesting to see if widgets -- or a similar concept -- can become viable companies one day. If it was the timing, not the idea, that was flawed. After all, it took a lot of Web 1.0 business models another ten years to become profitable companies. Push technology was a dramatic and expensive failure in the late 1990s, and now it's the cornerstone of most mobile apps.
I've been in the Valley long enough that I wouldn't be surprised. Still, should it rise again, you can count on everyone who got burned this time being more skeptical -- me included.
- [Disclosure: Marc Andreessen is an investor in PandoDaily]
[Illustration by Hallie Bateman]