venerdì 29 febbraio 2008

The long tail

Some days ago I was reading a technical white paper when I came across an expression I had never heard before: “the long tail”… what is it?

So I decided to Google it, and a new world was revealed to my eyes! I happened to learn some interesting concepts, that here I’d like to share with you.

The “long tail” was used for the first time by Chris Anderson in an editorial that appeared on the Wired magazine on October 2004; it was about the transformations that Internet and the digital technologies are producing to the entertainment market. The success of this article induced the author to publish a book on this topic in 2006 (“ The Long Tail: Why the Future of Business is Selling Less of More”).

The idea that lies behind is quite simple: thanks to new technologies and to the widespread use of Internet, consumers can now acquire “contents” (music, movies, books, etc.) in new formats (e.g. mp3 files) and/or using new distribution channels (e.g. Amazon, iTunes, eBay, etc.). This implies that now we live in the “world of abundance”, because we are not limited anymore in our choices about what we want to read, listen or see. On the Internet we can find any book ever written, and we have a choice far broader than we can have in any bookstore; and we can say the same things about CDs, DVDs, radio stations, etc.

On the other hand, the traditional ways of content distribution are limited by the physical world: there are limitations in the shops’ space (it’s necessary to sell enough copies of any book, CD, etc. in order to pay for the space it occupies), limitations in the reachable audience (any cinema or shop “attracts” consumers from a restricted area), limitations in the frequencies available for radio or TV stations, etc.

These limitations bring (or, at least, contribute) to the “blockbuster tyranny”: only commercial hits can guarantee profitability to shops’ and cinemas’ owners. That’s why almost only “popular” TV shows are broadcasted, only best-sellers are exhibited in bookshops, and only blockbusters are shown at cinemas. So we can say that the “low level” entertainment that we get (at least in Italy) is the market answer to the physical space limitations. In the “traditional” world it’s not possible to provide everyone with the content he desires.

But now things are changing.

Let’s take an on-line music distribution service as an example (say, iTunes). It gives its users the possibility to choose among hundreds of thousands songs. OK, most sales are in the “top 10,000” titles (the same that you could find in a good record shop, like Tower Records); but also all the other songs make some money and, as there’s a huge number of them, the total amount of revenues is considerable. And these revenues are not addressable by a traditional shop, because it does not have those songs at all, as they don’t sell enough to be profitable. iTunes doesn’t have this problems, because the service is purely digital, with no warehouse costs and hardly no distribution costs: for iTunes, any song, even those that cannot be considered “hits” (because the sell few copies), is a success, because it guarantees the same profits of a hit song. And there are much more “non hits” than “hits”!

The demand curve is therefore characterized by a “peak” that corresponds to the few hits, and a long “tail” for all the other titles: this is the “long tail”. A surprising feature of this tail is its size: the market of the “misses” is usually larger than the market of the “hits”! This is why on-line services like Amazon are so successful; Amazon, in fact, gain most earnings from its “low success” titles, the ones that a traditional bookstore do not have on its catalogue.

Another interesting implication is that this data shows that people’s tastes are not so “mainstream”, and that the cultural levelling is caused by lack of choice and alternatives. Almost all songs of iTunes’ infinite catalogue have an audience…

For everybody who sells goods or mass services, the future is in the “long tail”, in the capability to address this “mass of markets” in an efficient and profitable way. These concepts can also be extended beyond the entertainment market, e.g. to the telecommunication services market (the one I am interested in); in this moment, in fact, service providers are transforming (or will soon be obliged to do so) in order to face competition coming from new parts (Skype, Google, etc.). And one of the new revenue sources that have a high potential is the introduction of innovative “niche” services, which address the needs of the long tail.

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