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Summary:

This time last year, VC firms had already invested nearly $60 million into widget-related companies like Slide and WidgetBox. *AOL* got caug…

imageThis time last year, VC firms had already invested nearly $60 million into widget-related companies like Slide and WidgetBox. *AOL* got caught up in the widget craze too, and gobbled up desktop and web app-maker Goowy Media. Was it a hasty investment — like the one the company admitted it made when it bought out Bebo for $850 million during the social media rush the previous year?

More on that later … In the year since that acquisition, VCs have continued to invest in widget-related companies, with nearly $13 million worth of funding for startups like iWidgets, mEgo and SocialMedia in the past four weeks. And the apps have evolved from profile badges, to branded units that let users play games and videos, to price-comparison tools. But analysts are still expecting a shakeout, as advertisers are cutting back their budgets across the board, and investment firms are scrutinizing the business models of startups (and even established companies) on the hunt for cash. More after the jump.

But how real is the widget economy?: The latest forecast from eMarketer only pegs widget- and app-based social media spending to reach $70 million this year — less than 6 percent of the $1.3 billion advertisers are slated to spend on social networking ads overall. eMarketer Senior Analyst Debra Aho Williamson said the notion of a “widget economy” — at least one like last year’s, with sky-high valuations for startups that aren’t profitable yet — had no basis anymore. “This is still a developing market, and most of the companies are spending their resources on making the widgets smarter, more intuitive and improving their tracking capabilities,” Williamson said. “Are many of them making a profit? I’d tend to say no.”

Widgets are evolving to better meet advertisers’ needs: CNET, for example, partnered with Gigya to launch widgets that give tech junkies the ability to embed product reviews and video clips, and even a software downloader into their social media profiles and blogs. The apps are continuously updated — and since they’re tied to products, they go beyond the glut of widgets that just look pretty or thrive on novelty (like throwing a sheep or a thong at your friend) that quickly wears thin. “Last year it was about the rush to just ‘do a widget’ that’s fun but didn’t have much use,” Williamson said. “Advertisers have decided that they need to be more than just fun — they need to serve a purpose. If you can provide real-time pricing info on a product right on a review site, that’s an interesting model.”

The shakeout is still coming: “There’s going to be consolidation across the space, simply because there’s only so much real estate on someone’s social networking page,” William said. “There are already thousands of Facebook apps available, and only a few that are going to do really well.” Companies like Gigya, WidgetBucks and others that build in-depth analytics and other features into their widgets may survive, but a majority of the app development and distribution startups won’t if they don’t get more cash — or get acquired. Williamson also said some of the widget funding and development market might “siphon off to the iPhone,” as startups take what they’ve learned (and their investors) and port it to mobile app development.

As for AOL (NYSE: TWX), the company folded Goowy into its Platform-A business in July, and then pulled the plug on the Yourminis customizable start pages — a feature the startup had been known for — so that Goowy could focus on developing brand-friendly widgets. According to a release touting the deal

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  1. Widgets = gimmicks
    Gimmicks = widgets

  2. Thanks, Tameka, for continuing the widget conversation!

    The "widget economy" is alive and well, to be sure. It may be difficult to quantify it based on how you define a widget, but the lil' guys are extremely diverse and still sit at the forefront of online marketing. Which is part of the reason they can be so hard to catch up with, I think.

    Whether a widget lives on a person's desktop or start page for a more personal and utilitarian purpose, encourages social and brand engagement across vast swaths of friends and communities on Facebook or MySpace…or even makes the move to iPhone and other mobile platforms as a "mobile app" or site, widgets aren't going anywhere…they're simply evolving.

    Are widgets making a profit? Without a doubt.

    Are they making a profit for VC-backed companies? You'd have to ask them one by one, I guess.

  3. How funny. Made some of the same points in a piece I did Monday (Big Money for Lil Widgets? Widget Platforms Get Funded to the Tune of $50M! recently , $160M+ in Last Year)

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