A Widget's Worth

Social networkers frequenting the likes of Facebook can't get enough of these small apps, but developers are still trying to determine how to make money

Developers of add-on software widgets for Facebook have had little trouble drawing huge audiences for their applications, which allow social network users to gather and share all sorts of information, photos, and videos. But generating a profit from this success has proven more of a challenge.

VideoEgg Chief Executive Matt Sanchez is helping to change that. In the second half of 2007, VideoEgg's new ad distribution network generated $1.5 million in revenue for the creators of more than 150 Facebook applications, including a Scrabble widget called Scrabulous, an app for reviewing and rating movies named Flixster, and Vampires, which transforms photos of users' friends into virtual bloodsuckers. "The fascinating thing about widgets is it turns out that distribution isn't really the challenge. People have been tremendously successful in aggregating attention," says Sanchez. "The question is how do you monetize that attention?"

Sanchez is one of several names featured on BusinessWeek.com's list of young tech entrepreneurs trying to transform this new genre of social network widgets into a legitimate business. Other widget creators such as RockYou! and Causes seem to be cracking the monetization code, too.

Interactive Advertising

Most of the strategies involve advertising in one form or another. That's not so surprising. Of the $26 billion advertisers are expected to invest in online marketing this year (BusinessWeek.com, 3/18/08), nearly $1.4 billion will go to placing ads on social networks, according to research firm eMarketer.

Many widget makers have two opportunities to generate ad revenue: They can display ads on their Web sites where users download widgets, and then within the widgets themselves.

Both RockYou and VideoEgg have networks that display ads within a variety of widgets for marketers interested in promoting brand awareness. VideoEgg works with NBC (GE), Nike (NKE), and Hewlett-Packard (HPQ), to name a few, charging them 75¢ to $1 when users interact with these ads by, for example, clicking on or scrolling over it, or perhaps watching a video. About 60% of the revenue goes to the widget developers. In addition to selling ads for other widget creators, RockYou also sells ads on the entertainment widgets it develops in house.

Profitable Transactions

Project Agape takes a different tack with its Causes application, which raises awareness and money for nonprofits and other causes. The service takes a 4% transaction fee on contributions raised through the application. Since launching nearly a year ago, the application has generated more than $2 million in donations. Causes also sells ads to companies that want to be associated with these nonprofit endeavors. "A lot of [our revenues] come from the huge expanding world of cause-based marketing," says Project Agape co-founder Joe Green. "Companies care a lot about how they are viewed in terms of causes."

Transactional revenues are also gaining ground as a way to make money from widgets. For example, iRead recommends books that people can purchase by clicking a link that takes them to Amazon.com (AMZN) or Barnes & Noble (BKS). The creators receive a referral fee for each book purchased. Similarly, Cartfly, a widget that enables small business owners to list items for sale on their blogs and social network pages, takes a 3% transaction fee on all items sold through the application.

Other ventures such as iLike are pursuing a mix of transactional and advertising revenue. The music-sharing and -discovery application, part-owned by IAC/InterActiveCorp's (IACI) Ticketmaster, takes a portion of the revenue generated when the widget steers them to other sites where they buy songs, ringtones, or concert tickets. It also sells ads and sponsored music recommendations. "You need to find a balance," says iLike CEO Ali Partovi.

Indeed, the widget economy is still taking shape, and no one is fully settled on the best way to make money from the small programs. "Ideally you want to build a business that has diversified revenue models," says Green.

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