December 29, 2005

Internet - Long Tail economies - not just a buzzword anymore?

Having almost started a music business focused on the longtail economy and the Ipod craze, I have spent a whole year talking about the term. It is now more mainstream and could be here to stay. More insight below from www.ventureblog.com:

Where's The Money In The Long Tail?
By David Hornik on December 13, 2005 11:56 PM | Permalink | Links In | Print | Comments (10) | TrackBack (0) | Categories: Consumer Internet & Media and Internet Infrastructure and The Economy & Finance
Six months ago there was barely a pitch I heard that didn't include a slide entitled "Long Tail" or "The Long Tail of [fill in the vertical]," with the obligatory long tail curve. Impressively, it has taken less than a year of entrepreneurs explicitly referencing and explaining the Long Tail before it has become so well recognized and understood that it need only be implicated in passing without the same sort of fanfare as it used to receive. This is by no means an indication of the diminishing relevance of the Long Tail. Quite to the contrary. It is a recognition that the Long Tail is so obviously relevant and important as to no longer require explanation. Saying "Long Tail" is like saying "viral" or "search engine optimization" -- the concept is part of the standard parlance for VCs and entrepreneurs alike.

Yet despite the fact that "Long Tail" has become short hand, the economics of the Long Tail are, to my mind, still often misunderstood. I continue to hear funding pitches that talk about the Long Tail as a powerful enabler for content creators. Companies are presented to me premised upon the increased value of Long Tail content for musicians and artists and film makers. The fact that increasingly the likes of Amazon and iTunes make it possible for Long Tail authors or bands to sell a few books or records through legitimate, recognized channels is touted as the revolution of the artist. Far from it.

It is certainly the case that in the aggregate, Long Tail content is extraordinarily valuable. The question for VCs and entrepreneurs is "for whom?" I've had the good fortune over the last year or so to engage in a number of conversations about the economics of the Long Tail with Chris Anderson and to see those economics illustrated by innumerable Long Tail investment pitches. And, from those conversations and pitches, I have come to the conclusion that there are essentially two general classes of technology the will benefit economically from the Long Tail -- aggregators and filterers. And while both aggregators and filterers rely upon the increasing volume and diversity of content to assure their value in the ecosystem, that growth of content will not have a material impact upon the value of any one piece of content floating somewhere in the Tail. The value will all inure to the benefit of the aggregators and filterers. So who are the aggregators and filterers?

The aggregators are those web businesses that seek to collect up as much of the Long Tail content as is possible, so as to make their "stores" a one stop shop for content no matter how popular or obscure. That aggregation may be on a horizontal basis, as is the case with Amazon or Netflix, or it may be on a vertical basis, as is the case with WantedList or GameFly (the Netflix of porn and video games respectively). The value to consumers from these content aggregators is that they need not shop in dozens of places on the web in order to acquire a diverse set of content. As a result, aggregators are able to extract a disproportionate amount of value for the sale of each individual piece of content. And while creators are likely to sell slightly more content as a result of the increased ease of salability, they will not likely emerge from the obscurity of the Tail merely because they are made available for sale on Amazon or iTunes.

The filterers are those businesses that make it easier to find the content in which we are interested, despite the increasing proliferation of content creators, hosts, aggregators, etc. The purest form of filterer is the search engine. But the more obscure the content, the less effective the generalized search engine will be. Thus, I have been pitched on an increasingly large number of vertical search engines that use their thematic focus (shopping, real estate, employment, etc.) as a proxy to increase search effectiveness. And I have also seen an increasing variety of clever technical solutions to help filter the myriad of available content (for example, Pandora uses professional musicians analyzing songs based upon a standard set of characteristics and Delicious and Flickr use forms of end user tagging to characterize a disparate set of content). Again, while these different filtering technologies may make it slightly more likely that an end user finds his or her way to a piece of obscure content, it will not likely be sufficient to catapult an artist into the mainstream. The beneficiary of the filtering is the end user and the filterer, not the content owner per se.

(As an aside, I believe that it is difficult to be an aggregator without also being a filterer. It will be hard to sustain the scale necessary for an aggregation business if you don't initially also provide some of your own filtering tools. For example, Amazon has long been a leader in collaborative filtering, as has Netflix for that matter (interestingly, iTunes has been the laggard in this respect and I anticipate that we will see innovation on the filtering side from Apple soon enough). Once a business has reach scale as an aggregator, it can then rely upon mechanisms like affiliate programs and content syndication to empower others to be the filterers for their content (this has happened with Amazon in spades). But until that time, it will be necessary for aggregators like iFilm or Rhapsody to come up with their own clever filtering mechanisms to help consumers fully appreciate and navigate the breadth of the content they have to offer.)

None of this is intended to express any skepticism about the power of the Long Tail or the importance of the phenomenon. Long Tail economics are implicit in virtually every new media company I spend time with. But I think it is helpful for venture capitalists and entrepreneurs alike to focus on where the money is in the Tail. The real money is in aggregation and filtering and those will continue to be interesting businesses for the foreseeable future.

Comments:
Very interesting post this about the longtail. It made me think a bit more about what I am trying to do with a small online business I'm trying to build (a site that helps people and small business keep their business skills up to date). I need to start adding a bit more of the obscure, hard-to-find content/info on business courses for my site's visitors. Thanks for sharing your insights. Best wishes, Gordon
 
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