Slide , a startup that creates social networking widgets, announced last Friday that it had raised a $50m round of investment from Fidelity Investments and T. Rowe Price at a hefty valuation of $550m.
But is their bet on the power of widgets as advertising platforms foolish?
The company's widgets, which are available at no cost to users of popular social networks such as MySpace and Facebook, are used to display everything from slide-shows to guestbooks. Back in May 2007, the company reported that it was serving more than 150m daily slide show views.
While such reach is impressive, a $550m valuation for a company whose revenue outlook remains unclear will certainly contribute to growing talk of a second internet bubble. Even Sarah Lacy at BusinessWeek, who is a fan of Slide, commented that the valuation is, "by any normal valuation math," unjustifiable at the current time.
With somebody like Max Levchin at the helm, Slide is the most obvious investment to be had in the widget space and with its extensive reach on some of the hottest online properties, I have no doubt that his plan essentially boils down to creating the online equivalent of the billboard advertising leader Clear Channel.
Billboard advertising is a multi-billion dollar industry and Clear Channel controls some of the prime billboard real estate in the United States. Slide's attempt to take the prime real estate that it has acquired on the profile pages of social network users and turn it into virtual billboards for advertisers on the surface seems to be a promising endeavour, especially given the rapid growth in online advertising spend. However, I'm still quite sceptical.
A Tricky Game
Unless Slide manages to balance its own interests, the interests of its advertisers, the interests of its users and the interests of the social networks its widgets are used on, I believe it's going to have an uphill battle in making it all work.
With a $550m valuation from investors who typically provide mezzanine financing before an IPO, Slide's interest is quite clear - it needs to start making money. That means it not only needs to start selling to advertisers, it needs to start turning its widgets into virtual billboards as quickly as possible, with or without users' explicit buy-in.
There's a reason advertisers are so intrigued with social networks - some of the most elusive and sought-after demographic groups are increasingly easiest found on services MySpace and Facebook.
Unfortunately, thus far, social networks have not been able to deliver what advertisers are really looking for: ROI. Given that, it's not entirely clear how effective widget advertising is going to be for advertisers. Are users really going to be receptive to advertisements displayed within a widget whose primary appeal to that user is certainly not the advertisement? Is there any reason to expect that advertising in widgets will deliver significantly better results than the advertising served up by the social networks themselves?
Furthermore, given that the content contained within Slide's most popular widgets, such as slide shows, is user-generated, the advertiser has little control over what sort of content its advertisements are displayed next to. Although advertisers are becoming more comfortable with user-generated content, this will still be a thorny issue for companies like Slide.
In turning its widgets into billboards for advertisers, Slide risks alienating its users. They ostensibly signed up for Slide to take advantage of its free offerings, not to serve advertising to their friends on their social network profiles.
When ads start appearing alongside a user's slide show, for instance, it's not unreasonable to expect that many users will be upset. After all, their personal content has been hijacked for advertising purposes. In essence, it's the equivalent of a building owner waking up to find that billboards have been plastered all over his building without his permission.
From this perspective, Slide differs from Clear Channel in that Clear Channel gives the owners of the properties it leverages as advertising space a financial incentive for that space. Can and will Slide do the same?
Finally, it's not quite clear whether social networks will perpetually permit widget advertising to occur on their properties. After all, who wants to subsidise somebody else's business? That's essentially what they'll be doing.
As all online publishers know, placement is key - positioning and quantity can have an incredible impact on results. As such, if social networks such as MySpace and Facebook permit third-parties to leverage their services as advertising platforms without any checks and balances, they may be doing so at their own detriment; the advertising displayed within widgets may hurt their own efforts to effectively deliver advertisements for their own advertisers.
Slide could very well turn its widget empire into a virtual Clear Channel, but the $550m bet Fidelity and T. Rowe Price have placed on widget advertising seems awfully risky and perhaps downright foolish at this stage of the game, especially with a recession on the horizon.