Once upon a time, let us say in 2004, Robbie Vann-Adibé, CEO of Ecast, a “digital jukebox” company, asked Chris Anderson, editor in chief of Wired magazine, the following question: what percentage of the 10,000 music albums available on the Ecast jukebox were sold at least one track per quarter. The “analog” normal answer would have been 20% because of the Pareto rule (20% of the products account for 80% of sales). However, the correct answer was 98%! This finding derived into the well-known article “The Long Tail” by Chris Anderson published in Wired magazine in October 2004 and into the book “The Long Tail: Why the Future of Business Is Selling Less of More” published by Hyperion in 2006.
To make a long story short, in the “analog” world since storage is a scarce resource (i.e., shelf space), stores have to pre-select only a limited number of hit products in order to maximize their revenue. However, in the “digital” world where storage, transmission, and search are abundant resources with a cost near to zero, on-line stores can afford a much bigger catalog, almost infinite. In those instances, there is shelf space to sell not only the hit products but also niche products, with the well-known shaped curve with a lot of sales from a few number of hit products at the head of the curve and a few sales of a lot of niche products at the tail of the curve. This type of distribution is called the Long Tail. Long Tail businesses are characterized by a drastic reduction of the transaction costs, where offer connects with demand without the classic barriers of “analog” markets (storage, location, transport, packaging, search, etc.).
Another well-known side effect is that after reading “The Long Tail” book, one tends to identify Long Tail business everywhere. This was the case in my trip to the US this last August. To begin with, this blog is an example of a Long Tail business, on the head of the distribution are well-known newspapers like the New York Times, but more and more amateur journalists (bloggers) can publish their opinions and compete for sizable and targeted audiences in the tail of the distribution, thanks to the commoditization of publishing and distribution tools.
While visiting a friend at Google headquarters in NY, one can witness the pure Long Tail business with their search engine with $23.6 billion in revenue in 2009. Many of these dollars are from advertising from small business in niche markets that could not afford to access traditional agencies. Due to this reason, Google is investing heavily in improving their search engine. For instance, Google unveiled recently Google Instant, a new search enhancement that shows results as you type. If you type “f”, the instant answer is “Facebook”, the head of the Long Tail for searches starting with the letter “f”, which is the most popular search or hit. As we type more letters like “facts about melatonin”, Google Instant surfs in real time through the tail of the Long Tail, reaching this niche with its associated AdWord ads about health effects and remedies related to melatonin. However, certain type of search tends to take into account the opinion of your social graph (e.g., to choose a restaurant) more than the result based on exclusively on the popularity of the links. In other words, as we go further into the left side of the Long Tail, populated with thousands of niche markets, it is more important to weight the “Like”s of your friends, that is to say Facebook, than the popularity of the “links”, that is to say Google. For this reason, it does not come as a surprise that Google is needling Facebook for making it difficult for Google to import social information. In the same fashion, Facebook is crying out loud that Apple prevents Facebook from importing information from Ping, the new social network for music integrated in iTunes.
Another paradigm of Long Tail business is Netflix, who offers in the US for $8.99 a month as many movies as we want to stream instantly to our computer or TV, via a Netflix ready device (Wii, Xbox 360, PS3 and the new AppleTV). While in Blockbusters stores, the 90% of the movies they rent are new theatrical releases. In the case of Netflix, 30% of rents is new releases and about 70% is back catalog. Several posts in this blog have addressed the future of TV and the implications of the change from analog to digital format. The traditional TV business model is based on broadcasting content packetized in TV channels based on a scarce resource like the radio-electric or cable spectrum. For this reason, TV industry, like the music industry, have been focused in hit content to maximize their audience. Digital TV opens a completely different landscape, where the concept of channels as containers of content disappears, mainly because we can practically stream any content to any user over the Internet. Here is again the Long Tail. For instance, Google TV bets on the need to search and filter the abundance of TV content (professional and amateur) and getting a revenue stream from advertising. However, many viewers in the US are not willing to give up their cable subscription because some of the prime content is still not available on-line (e.g., “American Idol”) and mainly because of live events (e.g. sport events). To overcome this resistance, YouTube, a Google company, is already conducting test of the Live Streaming platform. In other words, Google is ready to cover both the head (hits and live events) and the tail (niches) of the video content market.
“One more thing…” Steve Jobs said at the Apple Special Event this September while presenting his “hobby”, the new Apple TV. A small set-top-box priced at $99, which can stream from any home computer, as well as, YouTube (the Apple walled-garden version), iTunes and Netflix service. In this case, Apple focuses in the mid section of the Long Tail to monetize in a convenient way the professional content (e.g. 99¢ for renting a TV series episode) and disregards the most right side of the Tail or the amateur hour. To make a long (tail) story short, let us take a look to the new iTunes logo. The CD icon is gone together with Tower Records, HMV and Virgin stores in NY. Who will be the next casualty of the Long Tail? Meanwhile, “The Long Tail” is already a hit.
