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Consumer-embedded widget companies are fool’s gold. Here’s why.

A widget, according to Wikipedia, is:

“a third party item that can be embedded in a web page.”

A widget company is the third party ““ a company that builds an item that is primarily meant to appear on someone else’s site. (I’m referring, specifically, to consumer-embedded widgets, not those that are embedded by the publishers themselves.)

The implications of this are three-fold:

1. Most visibility for the company appears in the form of the widget on other companies’ sites.

2. The widget company becomes highly dependent on the other company or companies for its traffic and display of its widget.

3. The widget company is at the mercy of the other companies for its traffic and its ability to monetize its traffic.

Widget companies look like gold. The traffic is there and continues to grow (sometimes to astronomical heights), and until these companies try to monetize it, it’s no big deal. It seems like the real thing. It seems like a mutually beneficial relationship, like that of the butterfly and the flower in the picture below.

When these widget companies try to monetize or when a large supplier of their traffic (such as a social network) simply decides for other reasons to cut off that traffic, widget companies are seen for what they really are.

Why might such a “platform” company disable a widget’s functionality?

• It might be to show who is boss if the widget company is trying to sell
• It might violate some aspect of the platform company’s monetization strategy or policy (such as if advertising within a widget conflicts with an agreement the platform company has with another large advertiser or platform company)
• The platform company may simply have decided to implement the functionality of the widget itself
• The platform company may have selected a single widget player in a particular category, with one company getting the win and others being shut out.

I love widgets, but…

They are cool, fun, and provide huge amounts of functionality for blogs, social networking sites, and web sites in general. Some companies do make the leap from widget to destination.

The reality, however, is that it’s very hard to do. If at the end of the day you are not a stand-alone destination, and instead users primarily interact with your offering on someone else’s site, you will eventually run into trouble.

Your investors will too. That’s why I don’t understand investments in companies that are primarily consumer-embedded widgets and not destinations. It’s one thing to accelerate your growth through a widget that appears elsewhere. It’s another to be highly dependent on a very small set of other sites for your traffic and your ability to monetize.

As I mentioned earlier, publisher-embedded widgets are different. They are knowingly and contractually (even if via a self-serve model) embedded in a web site by the web site’s owner.

Real world miners have mistaken fool’s gold for the real thing for years. Internet miners may only just now be learning to tell the difference.

Don’t be fooled.