Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Long Tail Economics - Bonanza Or Bogus?

Posted by Tom Foremski - March 20, 2008

The long tail is a concept popularized in an essay by Chris Anderson, editor of Wired magazine, that points out a characteristic of Internet commerce--the ability to profit from business markets as small as just a handful of potential customers.

Usually the larger the market, the larger the potential reward. Tiny markets reap small rewards. But if you can aggregate huge numbers of small markets there are big rewards to be had. Mr Anderson argues that there is a pot of gold in the long tail of micro-markets that exist within many industry sectors, especially in the media industry.

Silicon Valley startups love the long tail term and often try to work it into a part of their business plans in a bid to impress investors and themselves, that they are forging new business models.

Yet the business of monetizing massive numbers of small markets has been going on for far more than a decade, long before Mr Anderson christened it with a term.

The Internet's largest businesses such as Google, Yahoo, Ebay and Amazon, have all executed very profitable long tail business models. This was called small and medium business (SMB) markets. These days it is the business of small (BS) markets, this is the long tail.

If you look around, many of today's competitive battles can be seen as fighting for the spoils of ever smaller markets. MySpace and Facebook for example, are living off of the market opportunities around groups of friends. Most of these groups are made up of just a few dozen people and represent tiny markets.

To monetize tiny markets companies have to figure out how to attract customers. Marketing expenses are traditionally a very large cost of doing business. A traditional approach would wipe out any potential profits in small markets.

One solution to attracting potential customers is to have compelling content and services. But to make money the content has to be free, or as close to free as possible. For example, Google scrapes its content for free, it is harvested by machines from any web site it comes across. It serves up that content as part of its search service, which costs little per search--an index is very scalable and easily leveraged against billions of search queries.

The current generation of Internet giants has figured out an even easier way to gain free content, and also much better content--content that is of huge interest to individual users, and is individual to those users, which means lots more repeat visits. That's what is called user generated content and that's what every Internet company wants.

Facebook, YouTube, MySpace, and many other sites, are competing to attract as much user generated content as they can, because that generates massive traffic flows to their sites, with very low customer acquisition costs.

Free content is a great business model and it seems also to be the best way to monetize long tail markets.

The accepted notion these days is that the long tail represents an untapped bonanza of business opportunities. But I'm not so sure following a discussion I had this week with David Scott, the CEO of 3PAR, a top supplier of data storage systems for massive data centers.

Here is part of that interview . . . (more) And there is more to come on this topic.

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