THE POWER OF THE LONG TAIL
Last Friday, I was sitting in a meeting with my new "boss" and listening to the pitch of an early-stage company. The executive was talking about the "long tail" of markets and went into some history. Ebay was an obvious winner in capturing the "long tail" of the consumer market, and so were Yahoo! and Google in the search industry. I forgot the details of when and where, but 97% of Yahoo!'s searches were single entries within a given period. In books, Barnes&Noble and Amazon gathered similar amounts of revenue for their top 130,000 books, but Amazon learned to capture the "long tail" of the market. Amazon offers 2.3 million books (couldn't find the exact number, but that's what i heard) and 57% of these are ordered less than 12 times a year. I'll write about the rest of the meeting some other day, but this was just a good reminder on how far we've come and how much the Internet has impacted our businesses, our purchasing patterns, and our lives.
Over the weekend, I started to think about my first startup, ViewPlus, which was a multi-cast video-on-demand (VOD) system. A one-to-many service that was based on the video rental industry's perspective that the top twenty rentals during a given week generate 80% of its revenues. Imagine if there was enough bandwidth, along with a cost-effective system, to have a trueVOD service (i.e. pointcast stream with full VCR capability) that captured the "long tail" of the movie rental market? Unlimited movie inventory. Awesome. "Top Secret!" and "Strange Brew" would be back on my "shelf" since a few years ago my hometown Blockbuster took it off theirs.
I began to think about what other markets the Internet and bandwidth growth would changes (yes, it's rehashing the same thoughts from eight years ago, six years ago, four years ago, etc.). Also how the 80/20 rule is becoming obsolete. I remember working with a couple former McKinsey consultants during my second startup who used the 80/20 rule as a general guideline and tool for analyzing markets... 80% of a market is driven by the top 20%. Not any more.
As I thought about this some more, I was thinking I was going to write an original piece on how the "long tail" effect of the Internet and our world becoming more digital has changed the traditional approach to developing businesses and the analysis of markets. Yesterday, I clicked on "The United Paper Shuffle" at AlwaysOn to check out the excerpts from Andy Kessler's new book and I scrolled down to find "Bye Bye 80-20." Nice. Not exactly the same application of the 80/20 rule, but none the less some air was let out of my ballon. Still determined to write something, a few hours ago I Googled "long tail market" and it led me to WIRED's Chris Anderson's piece about "The Long Tail." October 2004? Crap. Reference to the 80/20 rule? Crap. Great article.
I guess I'm slow to market. For every idea, there are at least ten people with the same idea, so it's all about speed and execution. Now with the blogosphere, it's the same for writing and I'm way behind on this one. Well, at least there are some good links for you guys to enjoy:
To see how, meet Robbie Vann-Adibé, the CEO of Ecast, a digital jukebox company whose barroom players offer more than 150,000 tracks - and some surprising usage statistics. He hints at them with a question that visitors invariably get wrong: "What percentage of the top 10,000 titles in any online media store (Netflix, iTunes, Amazon, or any other) will rent or sell at least once a month?"
Most people guess 20 percent, and for good reason: We've been trained to think that way. The 80-20 rule, also known as Pareto's principle (after Vilfredo Pareto, an Italian economist who devised the concept in 1906), is all around us. Only 20 percent of major studio films will be hits. Same for TV shows, games, and mass-market books - 20 percent all. The odds are even worse for major-label CDs, where fewer than 10 percent are profitable, according to the Recording Industry Association of America.
But the right answer, says Vann-Adibé, is 99 percent. There is demand for nearly every one of those top 10,000 tracks. He sees it in his own jukebox statistics; each month, thousands of people put in their dollars for songs that no traditional jukebox anywhere has ever carried.
To get a sense of our true taste, unfiltered by the economics of scarcity, look at Rhapsody, a subscription-based streaming music service (owned by RealNetworks) that currently offers more than 735,000 tracks.
Chart Rhapsody's monthly statistics and you get a "power law" demand curve that looks much like any record store's, with huge appeal for the top tracks, tailing off quickly for less popular ones. But a really interesting thing happens once you dig below the top 40,000 tracks, which is about the amount of the fluid inventory (the albums carried that will eventually be sold) of the average real-world record store. Here, the Wal-Marts of the world go to zero - either they don't carry any more CDs, or the few potential local takers for such fringy fare never find it or never even enter the store.
The Rhapsody demand, however, keeps going. Not only is every one of Rhapsody's top 100,000 tracks streamed at least once each month, the same is true for its top 200,000, top 300,000, and top 400,000. As fast as Rhapsody adds tracks to its library, those songs find an audience, even if it's just a few people a month, somewhere in the country.
This is the Long Tail.