Thursday, November 03, 2005

The Short End of the Long Tail

When I first read Chris Anderson’s article “The Long Tail” in Wired a year ago, I was intrigued, but at the same time one piece of the equation never made sense to me. (For those of you who don’t know, the basic principle behind the Long Tail is that mass product or content aggregators such as Amazon.com and Netflix can make money selling or renting content that appeals to a very narrow niche. While any one niche represents only a small market opportunity, the sum of the revenues from all the narrow niches can be very large indeed.)

The gaping hole in the theory lies with producers, rather than distributors, of content. It costs a lot of money to produce any kind of “professional-quality” video—anywhere from a few thousand to many millions of dollars. When Amazon.com buys a video for resale, it couldn’t care less about how much the producer spent to make it. The price of the video is completely independent of its production and manufacturing costs—it’s set at whatever price comparable videos are sold for.

When Amazon.com sells ten copies of the video, it doesn’t make very much profit, but it does make a profit. From the producer’s point of view, however, they can’t possibly make a profit on sales of ten copies. The fewer copies they sell, the greater their losses. Thus, the Long Tail effect holds for aggregators but not for producers.

However, what I’m beginning to grasp now is that while the Long Tail effect isn’t viable for “professional” productions, it works just fine for things like podcasts and videocasts. With only a few exceptions, podcasts and videocasts are produced by individuals for niche audiences of which they’re members. Their primary goal is to communicate and/or entertain, not to make money. If their production costs are low enough, and making money is at most a secondary consideration, they can not only live with the Long Tail, it may be the only way for them to reach a sizable audience.

In the podcast/videocast world, however, Amazon.com and Netflix can’t survive, because they have to make money on everything they sell or rent. If only a handful of productions actually generate revenue, they can’t afford to build and maintain the infrastructure needed to make the sales and deliver the content.

So who are the successful aggregators in a near-zero-revenue medium? Today, Apple. While Apple’s Music Store is usually thought of for downloadable music, it’s also by far the largest directory of and source for podcasts and videocasts. Apple makes money by convincing visitors to the iTunes store to buy some songs while they’re there, and by selling iPods that store and play the podcasts and videocasts very well.

Tomorrow, the leading Long Tail aggregator is likely to be Google. Google is positioning itself to provide information any time, anywhere, any way you want it. Google appears to be building “the great file server in the sky”: Put in any content, index it any way you like, and make it available to anyone you want, anywhere, on any kind of device. Google’s already getting there with blogger.com, Google Video and Google Base.

How will Google make money from free content? Through advertising, just as it does now. The difference is that they have to expand their advertising model beyond text ads on search pages, blogs and websites. Perhaps they’ll look and sound like conventional radio and television advertising. The conventional web advertising networks have had little success (or, for that matter, experience with) inserting ads into audio and video on the fly. Imagine a contextual ad serving system that knows about you, knows about the content of the podcast or videocast, and inserts relevant audio or A/V ads on the fly without human intervention. This is well within the technical capabilities of Google, and is a natural extension of AdWords.

Yahoo! also has the potential to become a Long Tail aggregator, but its emphasis seems to be on acquiring and distributing content from the major motion picture studios and television networks. Google is building from the grassroots up, to eventually reach critical mass that can’t be ignored by the major media companies. And how about Apple? Even though it’s currently the market leader, Apple tends to trip itself up by its penchant for proprietary technology. For example, the only music downloading site that works with the iPod is the Apple Music Store, and the only digital music players that can play music purchased from the Apple Music Store are iPods. It would be nice to believe that Apple’s podcast/videocast directory will remain player and format agnostic (as long as you want MP3 or AAC,) but sooner or later, Apple always seems to close its doors to the non-Apple world.

Ultimately, the Long Tail creates a quandary for conventional media companies that are used to selling a large quantity of a relatively small number of titles. Their focus is mass markets, not slivers, and their mass marketing techniques are massive overkill for reaching the Long Tail niches. On the other hand, companies like Apple, Google and Yahoo! are very well positioned to serve even the smallest niches. Layering communities and tags on top of a global content database like that envisioned by Google will make niche content much easier to find. In short, the future of media lies with the niches, not mass markets, and the organizations that will serve niches the best will be the ones that can truly make content from everyone available to anyone.
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