Are these widgets worth half a billion?

If Max Levchin's Slide can cure what ails online ads, they might just be.

Implausible as it sounds, some very serious people believe that Slide and its "widgets" could be the answer to a problem that everybody in the business of selling ads on the Internet, including mighty Google (GOOG, Fortune 500), has been experiencing of late.

Widgets are small, self-contained programs that can be plugged into a web application like a blog or social network. And in the world of widgets, Levchin's Slide is a giant. The widget factory he built with a portion of his fortune from PayPal - which he co-founded and sold to eBay (EBAY, Fortune 500) in 2002 for $1.5 billion - is now the largest in the world in terms of users (50 million and counting) on the strength of such hits as FunWall, Slideshows, and Top Friends.

There's no question that widgets are popular with a sought-after demographic- those 18- to 25-year-olds who waste hours playing with the things and beaming them to their friends. But since there are millions of widgets out there, and the vast majority of them are free, where's the money?

Levchin offers two answers. The first has to do with the changing nature of the Web, where social networks are the fashion of the day. Online search - which is where Google does most of its ad business - today accounts for only 6% of what people do online. This leaves a lot of contested ground.

And although those 18- to 25-year-olds are spending more and more time on places like Facebook and MySpace, they're not particularly loyal. They move from one hot spot to the next and don't look back. But wherever they hang out, they tend to find Slide's widgets; with a little tweaking, the tiny apps can be made to work almost anywhere.

Levchin's second answer has to do with how companies measure the success of their ads. The metric Google and most ad buyers use - the page view - doesn't work so well when friends are throwing virtual pillows at one another. Advertisers need a new tool to capture this kind of activity, and Levchin thinks he has one. He calls it engagement.

"The metrics for success," says Levchin, "are going to shift away from who can provide the most reach toward who is paid the most attention."

Levchin claims he's in a unique position to measure engagement. He can mine that database of 50 million active widget users for all kinds of behavioral data. Who are these people? Whom do they poke when they SuperPoke? How else do they interact? To advertisers trying to target their messages, this kind of marketing data is gold.

But engagement is not an easy sell on Madison Avenue. Most advertisers still price ads by the number of people who view them. And although they are frustrated by how small the returns are for the banner advertisements they've been running on the web - where the typical "clickthrough" rate is 0.2% - it's a hard habit to break.

"It's going to take a P&G or a Coca-Cola to suddenly say we are shifting our dollars toward engagement for the industry to actually change," says Marc Schiller, founder of digital creative agency ElectricArtists.

Still, engagement seems to be catching on. Nielsen has added a new metric that evaluates the amount of time users spend on a site. Google has a cost-per-action option, and in early March, Microsoft (MSFT, Fortune 500) introduced something it calls "engagement mapping," a program that measures online interactions in branding campaigns.

This is also fertile ground for startups, most of them in Silicon Valley. The No. 2 widget maker, in terms of number of users, is RockYou, whose widget catalog includes SuperWall and Horoscope. Another startup, VideoEgg.com, runs video ads on widgets and charges 50 cents to $1 when someone interacts with them.

Meebo provides an assortment of web-based applications that live on top of its instant-messaging platform. While Meebo can't claim the massive page views of Slide, its IM platform helps keep Meebo's 28 million users on the service an average of 2 1/2 hours a day.

But Slide has the largest audience at the moment, and that makes it popular among media buyers. "They're a good way to get widgets into people's hands in a short period of time, rather than wait for grassroots adoption of a widget you make yourself," says Ian Schafer, who founded the full-service interactive agency Deep Focus.

That's what counts for Levchin, who claims that Slide will be even bigger than PayPal. "We have a big distribution advantage and strong metrics and have built up a tremendous amount of customer loyalty," he says.

Despite all that, turning Slide into a multibillion-dollar company won't be easy, even with a half-billion-dollar head start.

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