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Microsoft Doesn’t Want Your App Startup
In an interview published this morning in the Financial Times, Microsoft CEO Steve Ballmer said he wouldn’t be looking to pick up any other Internet companies just because the Yahoo deal failed. One can only imagine how far shares of Facebook would have plummeted on that comment had the social networking site been publicly traded. Ditto for Slide and RockYou, both of whom recently raised money at lofty valuations.
“People don’t understand what they’re talking about,” Ballmer told the FT. “At the end of the day, this is about the ad platform. This is not about just any one of the applications.” And for Microsoft, according to the interview, the primary ad platform is search. That makes sense as search is a billion-dollar, proven business.
Application companies have some ad revenue, but right now they’re kind of like cable channels for the web, while an ad platform is the means to a business model that supports that cable channel. Microsoft wants to own the keys to the business model. So to prove their worth, it’s time for application developers to prove their business model.
All that Glitters is Gold: RockYou Raises $35M
RockYou, the maker of applications such as SuperWall and Likeness that ride on top of social networks, has raised $35 million in a round of venture funding led by DCM. We confirmed with a company spokesperson that previous investors Partech, Lightspeed and Sequoia participated in the round. San Mateo, Calif.-based RockYou had previously raised $10 million-$15 million, she said, though she declined to confirm a specific amount.
The $35 million likely brings RockYou’s valuation under fellow widget maker Slide’s, which was $550 million in its last $50 million round from two private equity funds. It’s also less than a reported $50 million-$70 million on a $400 million valuation that RockYou was supposedly seeking. An insider spun this difference in valuation with Slide as a positive thing, though, telling us it would make RockYou a more digestible acquisition target.
Competition is fierce between the companies; in our experience it’s impossible to interview RockYou CEO Lance Tokuda without him carrying on about Slide. Though some of his points seem valid — Slide execs have admitted some of their products and features were inspired by competing with RockYou. However, Slide has CEO Max Levchin’s impeccable PayPal pedigree, whereas RockYou’s founding was tied up in a lawsuit claiming that Tokuda and cofounder Jia Shen stole the idea from their former employer, Iconix (it was settled out of court).
RockYou says it has 87.5 million monthly uniques and 2.7 billion page views across its network. It’s impressive reach, but along with that comes impressive infrastructure costs. The company’s justification for the new funding isn’t terribly specific — it said it wants to hire, expand advertising and publisher offerings, and add more applications (BTW Slide apparently said it’s done adding new Facebook applications). In terms of anticipating and fine-tuning what it’s audience wants from its products, I’d give RockYou the upper hand, but making money may take a different skill set. The plan is “building brand awareness and loyalty” by tapping into engaged young users.
Breaking: Widget Maker Slide banned in Turkey
Updated: Slide, the San Francisco-based widget company has joined a very special list of web companies that have been banned by the Republic of Turkey for (according to Slide blog) what the local government calls “harboring pictures and articles that are considered to be insulting to Ataturk,” founder of the republic. It is not clear what are those articles and photos that are insulting
Slide spokeswoman tells us that they have been in touch with the Turkish Government and are trying to resolve this situation, but hasn’t received any response.
Slide isn’t the only company that has been blocked by Turkey. Automattic’s Wordpress.com is also blocked by Turkey. Several countries including Pakistan, China and UAE have blocked or are blocking popular Web services such as YouTube, Facebook and MySpace.
Chart Me Up: Web 2.0 Venture Deals
Dow Jones VentureSource put out some data on Web 2.0 deals in the U.S. earlier this week that I’ve put together into these charts. The first one above shows how much money has been invested in Web 2.0 startups so far this decade. In 2007, venture capital poured into Web 2.0 companies at a record pace—$1.34 billion. That was up 88 percent from the $716 million invested in 2006.
But did Web 2.0 deals peak last year? Take out the $300 million raised by Facebook, and the amount invested was up only 46 percent, a marked slowdown from the 132 percent dollar growth the year before. (The amounts charted above, starting with 2001, are $68 million, $29 million, $79 million, $232 million, $716 million, and $1.343 billion)
The growth in the number of deals is also slowing. Last year, there were 178 Web 2.0 deals in the U.S. That was up only 25 percent, after doubling every year for the previous four years. And in Silicon Valley last year, the number of deals actually dropped from 74 to 69.
In 2007, the median deal size was $5 million, up 22 percent. And the median pre-money valuation was $10 million, up 66 percent (from $6 million in 2006). Both deal size and valuation for Web 2.0 companies remained below the average VC deal across all industries ($7.6 million and $16 million, respectively)
Here is a list of some of the biggest venture financings of 2007, including ones for Facebook, Ning, Zillow, Veoh, MyStrands, and Hi5. Slide’s $50 million isn’t included because that was in 2008. Hey, maybe things haven’t peaked after all.
Crunch Network: CrunchGear drool over the sexiest new gadgets and hardware.
Companies Can Make Money With Widget Ads
Selling advertising on entertainment-focused widgets such as Scrabulous or Zombies is about as easy as spinning straw into gold, yet there are plenty of people trying. And there are ways of generating revenue through specially focused widgets designed solely to sell rather than toss sheep. Brand and comparison advertising done through ad-focused widgets is emerging as a viable way of using the ubiquitous applications. Widgets’ interactive features, their ability to be virally distributed and potentially be placed on a target’s own page makes the creations appealing to advertisers.
Where that leaves startups such as RockYou and Slide, which develop entertainment widgets, and the ad networks that cater to those applications, is still unclear. I’m waiting to see if enough users buy into ads shown on their fun widgets or click through enough transactional widgets to make a viable business. However, existing online ad networks and possibly a few new widget creation and advertising firms are already proving that widgets aren’t just fun and games.
WidgetBucks is one such widget-creation/ad network company making money with this approach. CEO and Chairman Matt Hulett says the company sees click-through rates of 0.5 percent to 1 percent with its ads, which resemble interactive, dynamic banner ads. The company expects to pull in $10 million in sales this year. The company’s approach, however, has come with its share of drama, as some publishers have complained about WidgetBucks’ rates and practices.
When it comes to making his widgets a success for advertisers, Hulett based his design on the theory that people using widgets for fun aren’t expecting to be engaged in commerce, but people in other venues (such as those reading a product blog, for example) might welcome widget advertising that shows the latest deals on a device.
“It’s kind of like pre-roll advertising,” Hulett said. “It’s really hard when the context is around having fun. People do not like monetization in front of those platforms and the CPMs are awful.”
A similar approach to using a widget as a more interactive ad rather than entertainment is Toyota’s new campaign for its Scion vehicles, which launched on Tuesday. This is an example of widgets as brand advertisement, which can be spread virally around the Internet. The idea is that consumers use the widgets on social media sites as an identification of their aspirations, much like one might wear a Nike shirt.
Adrian Si, an interactive marketing manager for Scion, says the firm is using widgets as an extension of the rich media banner ads it runs through Interpolls. Si is hoping to achieve the same 1 percent to 2 percent click-through rate Scion sees using Interpolls’ rich media banners. That translates to a 4 percent to 5 percent engagement rate. Scion will measure both click-throughs as well as the number of times the widget is installed on someone’s site.
“This could be more valuable [than banner ads],” says Si. “Obviously, it shows they have a lot of interest in the brand. On their MySpace pages they can put a whole bunch of stuff, so it must have meaning to them. It’s also an opportunity to get our brand in front of them every day.”
Listening to these two companies I realized that widgets aren’t a new business, but rather a new form of advertising and entertainment. Those focused on advertising are making money; the question is, will the ones focused on entertainment do so, too?
Flixster-IAC: Deal or No Deal?
It’s like the Silicon Valley version of the boy who cried wolf. The IAC-Flixster deal, that is. Earlier this month, TechCrunch and The Wall Street Journal’s “Deal Journal” blog reported on rumors that Barry Diller’s IAC was buying Flixster, a movie-fan web site that has gained a lot of traction thanks to its Facebook application.
Now I heard the same rumor, except this time those in the know said the deal was finally done, with a price tag of $200 million — of which $100 million is an “earn out.” Now that would be a handsome payout for Flixster, the San Francisco-based company that has raised about $2 million from Lightspeed Ventures and other angels. Even though it was a rumor, it still needed checking out. I called IAC and a spokeswoman was pretty categorical in denying the deal, saying:
To be clear, we have not acquired them and there is no deal in the works. Whatever information you have is completely inaccurate.
So there you have it. No deal.
The reason there are a lot of rumors floating around Flixster is because it has a direct bearing on the Facebook app community. A big-ticket exit (like the one rumored) would pump more hot air money into the Facebook ecosystem, which has yet to prove its money-making potential. We recently saw East Coast mutual funds pump $50 million or so into San Francisco-based Slide at a massive half-a-billion-dollar valuation (say what??!!).
Flixster has been using the Facebook app to basically pump up its growth. According to comScore, Flixster has about 15.4 percent of the total Facebook audience. The deal bodes well for other high-traffic (if not high-profit) apps on Facebook, such as iLike and Mesmo TV.
Jeremy Liew of Lightspeed Ventures (investors in RockYou and Flixster) had posted his thoughts on building a “business” based on widgets and Facebook apps. It outlines the challenges and opportunities associated with this “business.”
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Fox Interactive keeps on buying
A few days ago I had breakfast with Peter Levinsohn, President of Fox Interactive Media, days after Rupert Murdoch made a $5 billion bid for Dow Jones. We chatted about a variety of topics, but most of them were off the record. One bit I got on the record was about MySpace/FIM’s acquisition strategy.
Levinsohn, who has spent nearly 20 years at various News Corp. business groups, said that the company wasn’t backing off from making acquisitions, but was looking to make small acquisitions - ones that filled out holes and helped with monetization better. (Of course this was before the $250 million rumored-but-not-confirmed-by-FIM deal to buy Photobucket.)
Looks like he was serious. FIM is rumored to have acquired Flektor, a slide show widget creator. TechCrunch reports that the price is in the $10-to-$20 million range. Fox Interactive spokeswoman declined to comment on the deal.
The deal is seen as an additive to the company’s rumored PhotoBucket purchase, which is yet to close according to our sources. While the Photobucket deal is about reuniting users with their data (after all the two most popular actions on myspace are photo-viewing and message writing), the Flektor deal is about helping those users better utilize their own data.
Flektor tools can help MySpace compete on an even footing with the likes of Slide and RockYou, both offering around 150 million slide show views a day. The acquisition, if true, is yet another proof that widget (and other start-ups) need to diversify their user bases, because sooner or later MySpace is going to end-up compete with them. This is the way of the large companies, and it is not unusual. What is strange is that start-ups ignore this fact of life - putting their destiny in other people’s hands.
Think this way - if a company trying to do an IPO gets 50% of its revenues from one customers, even the bravest investor runs away from that deal. Why should it be any different for start-ups who are basically hawking traffic and eyeball stats? Funnily enough people have been ignoring what Fox executives have been saying for a while now.
This situation is not going to change anytime soon. For first four years MySpace ended up giving up on its data to third parties, thereby boosting valuations of those third parties. Having had to spend a rumored $250 million to buy back that data, MySpace is not going to make the same mistake again.
Flektor’s competitors have hopefully learned this lesson. Rock You co-founder Jia Shen says now only 40% of their slide shows are served on MySpace, followed by Bebo and Friendster. “Our share of MySpace traffic as a function of percentage has been going down,” says Shen, who points out that while it is easy for MySpace to move into the widget space, it remains to be seen what they can do.
Slide founder Max Levchin says as “a third party developer we add a ton of value to the networks,” who sees his company as (social) network neutral. Slide is beginning to see gains on other networks indicating that it is not a MySpace-only widget play anymore. “We are happy to be growing in as many networks as possible, so reliance on any one is a bad idea.”
Widget mania run amok?
For past few days there has been an amazing amount of chatter about widgets - which are transforming themselves into advertising widgets, billboards and what not. Earlier today, for instance Mpire introduced shopping widgets that tap into say eBay and Amazon, and let you sell goods via Mpire widgets.
As the buzz (or the hype, depending on which side of the debate you sit) reaches cacophonic levels, the big question is: how many damn widgets can you put on your blog or on your MySpace. (According to some estimates, 40% MySpace users have 3.2 widgets on their page!)
The amount of space on a web page, contrary to popular belief is pretty limited. Widgets, it seems are going to face the same challenge as the denizens of Iconistan, those little icons that actually came between the readers and the content. The widget ecosystem might have attracted a lot of money and attention, but not many users. If you checked out WidgetBox, a good proxy for the ecosystem, a typical popular widget has about 300-to-500 subscribers. And amongst those that are popular, they are the ones, which have an element of personal expression.
David Cohen, put it aptlywhen he wrote, “provide something useful to the publisher so they’ll go out of their way to place your brand all over their property.”
A Last.fm widget on my blog, or a little twitter widget (as used by Martin) and Slide.com’s slide shows on MySpace are very different from Mpire.com’s commercial widgets. These are precisely the widgets that are built to last, and have worked well as audience-boosting and branding tools. Will it translate into dollars?
That’s precisely the question one has for commercially oriented widgets. If it is about money, then the money had to be more than what Google is putting a price on.AdSense-widgets are pretty much the barometer now, and if history of advertising is any indication, it is hard to find traction against Google’s money promise.
Did MySpace just buy Photobucket?
Updated with Photobucket stats: MySpace is buying Photobucket reports Valleywag, even though it is not offering any details on the price MySpace is paying for the photo-hosting company. According to reports, Photobucket had hired Lehman Brothers to shop it around and was looking for $300 million. We are still waiting to hear back from MySpace executives.
That was before Photobucket got into a brawl with MySpace, which started blocking some of its slideshow widgets that were deemed as “advertising.” The very public and ugly spat showed who was the boss, and likely the price might have come down a little bit.
The Valleywag report says that the negotiations ended last week, and there is an all hands meeting at Photobucket today at 10 am, and perhaps that is when the news is going to be announced to the employees.
So why would MySpace buy Photobucket? The MySpace photo service hasn’t really gained as much traction and MySpacers continue to gravitate towards Photobucket. According to Hitwise, “Photobucket accounted for 73% of Photography category visits leaving MySpace and Photobucket is by far the most dominant photo website for MySpace users.”
If indeed true, then it could be one Happy Monday for Photobucket’s investors - Trinity Ventures and Insight Venture Partners. Their good fortune would mean that other Silicon Valley moneybags would be willing to take riskier bets on start-ups that have high traffic, but little in terms of revenues, profits.
Some Photobucket stats via Hitwise:
- Photobucket is the 22nd most visited website overall in the US among all US websites for the week ending May 5, 2007
- 58.78% of Photobucket’s traffic came from MySpace.com and MySpace Mail combined for the week ending May 5, 2007.
- Based on Hitwise Clickstream data, Photobucket was the fifth most popular website visited after MySpace.com, with 1.7% of the traffic leaving MySpace.com to go to Photobucket for the week ending May 5, 2007.
