March 21, 2005

The Long Tail

I have been hearing and reading about "The Long Tail" for quite some time now. Not sure about what exactly it meant, I set about trying to understand the concept. To help me understand better, let me rephrase what I have understood about "The Long Tail" and its business impact here. Your comments/clarification are welcome.

The concept of "The Long Tail" comes from statistics where certain distributions have shape shown in the figure below. Imagine a graph of movies vs. the number of copies of these movies sold. Certain movies which are purchased often will be on the LHS of the graph while others which are not sold so often will be on the RHS. This set of movies which individually dont sell too well but together represent a huge opportunity are often referred to as "The Long Tail".

The products that make the long tail can together make a market share that exceeds that of the current best sellers. They can dramatically increase the market size. But till recently this market was untappable.

Imagine a neighbourhood video store with limited display space and limited inventory carrying system. Which DVDs do you think such a store will carry? Obviously the latest chart busters!

Now imagine a Net based retailer for whom display space is not a problem and inventory carrying system is not a bottleneck. For such a retailer, the long tail suddenly makes a lot of sense. In the long run, it is possible that such retailers will make more money stocking these rare titles than from popular chart busters.

Implications for businesses:
- Make everything available. The additional cost of making an MP3 or an e-Book available is ZERO.
- Lower prices as far as possible. If you are selling e-books, the marginal cost for you is close to ZERO. Maximize your revenues by selling more.
- Provide search that helps users find what they want. With out good search, it will be hard for you to capitalize on the long tail.


At 8:53 AM, Anonymous Anonymous said...

Make everything available - Aren't you assuming that the royalty payment are variably linked to sale?

Also - you are assuming that making an additional song available on the website for sale does not entail 'any' additional cost. The costs would be addittive - storage/replication/ hardware/bandwidth costs for 1 song migh tnot be much, but for 5 million songs, it might be substantial... So for your budgets you might still have to do a 'pick & choose' within the tail.

Lower prices - the above argument applies... Your marginal costs might be very little, but there are amortized costs (for marketing/finance/hr) you would want to cover.

but the real issue here is: what's compteitive advantage? it doesn't seem to be sustainable in long term...

a netflix might be able to create a first mover advantage, but a blockbuster/walmart with deeper pocket can replicate their model and drive them out of business by a simple keeping their prices a bit lower than netflix'.

Is there a way to sustain the competitive advantage from stocking the 'long tail'? Else, it's definitely a way to start off your online venture on a good footing...

At 9:18 AM, Blogger Dhar said...

Some interesting points you have made...

While I dont have the answers, I have some questions which may help clear up (or hey maybe even muddle up) some of the issues you have raised:

1. Royalty Payments: Whether an MP3 is downloaded once or multiple times, the royalty payment will be linear. That is if the royalty payment for one download is X, for N downloads it will be NX. In such a scenario, does it make a difference whether you stock the chart busters or rare numbers?

2. About additional costs: Whether a user downloads a popular number or a rare one, the cost borne by the website is the same. In this case, there is no loss borne by the website owner by stocking the rare number. But wont there be a lost sale if the rare number is not available and the user goes over to a competitor?

3. About your comments about sustainable comeptitive advantage, I really have no answer currently. Will pen down my thoughts once I have an answer.


At 3:13 PM, Anonymous Anonymous said...

Interesting application of long tails. Look at the first couple of lines of this and you'll know its all about long tails.

Well i was wondering since few days why are all these firms either creating or accquiring weird things. Why is everyone trying to become all encompassing itself. However, if u look at IAC launching and adding askjeeves to its basket. You might notice one resounding truth, its all about niche. the life cycle becomes a never ending loop niche->commodity->new niche and it is the period b/w the two ie niche becoming a commodity market that u milk it dry. Plus it also creates an whole new category of a creator/sustainer of niches. That puts into peril the other dude's argument that competitive advantage is lost by the niche.
Why else would you go to a dingy place as maddu mess everytime you need a anda dosa, why else would you prefer reading ajit balakrishnans blog while there are zillions other available(or rather y would i prefer your blog to most others) or even why would mark burnett churn out a new reality show almost everymonth or why would people not get bored of leno/letterman's jokes.
So inventing and more importantly sustaining niches(or may be reinventing new niches) is definitely key i guess. Once it looks stale its gone.

As a student of stat theory for the past few months i definitely was surprised by the amount of market for long tails. I mean, all i(or anyone who does anything related to statistical data analysis or econometrics or biostats) knew was that long tail has to be avoided to guarantee normality and save model assumptions so as to compare the factors. There is a fudgy thing called outlier which kills your analysis if it gets in your way. I never knew that this small thing called the outlier which is the harvestor of most (if not all) sorrows singing its low man's lyrics for us actually sings merry songs for businesses.


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