11:06 AM

Saturday Post: Choking On The Long Tail - The Unbearable Burden

The business of the Long Tail is the concept that there is money to be made in services and products with a potential market of just a few people.

ChrisAnderson at TEDWe can see Internet companies exploiting such micro-markets everywhere, well before the concept was popularized by Chris Anderson, editor of Wired magazine in October 2004.

We see it in Amazon and Ebay, they host the many millions of small markets that are interested in obscure books or collectabilia.

We see it in Google, which monetizes interest in the most obscure parts of its index. We see it in MySpace and Facebook, which seek to monetize markets that can consist of many thousands of "friends" but are mostly groups of just a few dozen people.

The trick to success is to have as many Long Tail markets as possible. Each micro-market generates micro-profits therefore the more the better.

Selling free content...

If you can get that Long Tail content for free, that's the best kind because producing content is expensive. For example, Flickr, a Yahoo company, hosts people's photos for free. In exchange for free hosting it sells advertising around the photos.

Users come back to visit their photos, and they also share them with friends, and sometimes complete strangers are attracted to the photos too. That's a lot of free traffic and you can make money from traffic.

YouTube hosts people's videos for free and in exchange it sells advertising around that content. Again, as in the Flickr example, users created the content, and brought traffic to that content, and YouTube monetized that traffic.

Not a bad business model and one copied many times over: user generated content comes with its own viral marketing, which equals free monetizable traffic. And user generated content can sometimes catch much larger viral traffic, such as LonelyGirl15, or a skateboarding dog.

Facebook viral marketing tools built-in...

MySpace and Facebook are examples of trying to grab even larger amounts of user generated content. On Facebook I can upload my videos, photos, blog posts, movie tastes, etc.

It also provides me with viral marketing tools through my news feed which automatically informs my friends of what I've done, "Tom uploaded photos, Tom wrote a blog post," etc.) I didn't have to email, or text, or twitter anyone at all, Facebook did it all automatically.

Again, it is the same type of business model: user generated content of all types, aided by automatic viral marketing tools, creates more monetizable traffic.

This is the business of the Long Tail, making money from tiny markets. And this has been the business of the Internet in one form or another, for two decades.

How much can be made from the traffic to my YouTube videos? Not much. How much money can be made from traffic to my Flickr photos? Not much. But aggregate many millions of such tiny long tail markets and you can make billions in revenues and hundreds of millions in profits.

Profits from free content...

It's not a bad business: you get the content created for free, and you get the traffic for free. It is like having a shop with many customers buying products you obtained for free. Your cost is the store rent and cashiers to take the money.

Another cost is the warehouse space. In the online world the warehouse is your data storage systems, which is far, far cheaper than physical warehouse space. Hosting digital content such as photos, blog posts, video, digital books, etc is extremely inexpensive. That is why Google, Amazon, MySpace, etc, are profitable - their costs of doing business are less than their revenues.

As long as user generated content keeps flooding in, it brings its own traffic, and that fuels the business.

-As long as people keep creating new online content, Google will index it (and store a copy) and make money from the traffic that seeks that content.

-As long as people create content for free, and upload videos to YouTube, or photos to Flickr, the same business dynamics apply. As user generated content increases, it leads to more traffic, which leads to more profits.

The burden of free...

What would happen if user generated content decreased? Clearly, it would lead to less traffic and lower profits.

What could lead to a decrease in the amount of user generated content?

Consider this scenario:

The cost of hosting the massive amount of long tail content, all the photos, video, etc is very small. As the amount of this content increases, the hosting costs rise.

As long as traffic also rises, the costs of business remain in balance with the rise in revenue.

But traffic growth is limited. There is a limited number of people in the world, there is a limited number of hours in a day. There are fundamental limits to the rate of growth of traffic.

But the amount of content collected by Google, Flickr, or YouTube, for example, grows much faster, and there is ever more of it that has to be stored and hosted. There is a legacy mountain of content and it's becoming a mountain range.

That means expanding your data storage systems, that means more power needed to drive those systems, it means administering the storage systems, which is people intensive, the data has to be made secure, the data has to be backed up. These are the exponential rising business costs of Long Tail economics.

As the number of long tail micro-markets increases, the less profitable each one becomes. This is because each long tail micro-market competes with an increasing number of other long tail micro markets.

More of any product or service means less revenue for that product or service. A current example: more housing on the market means a lower price for housing. Same thing applies in any market.

There is no way that increases in Internet traffic can keep pace with the growing number of long tail micro-markets.

The costs of hosting long tail micro-markets will continue to increase until they exceed the profits that can be made from them.

I was recently speaking with David Scott, CEO of 3PAR data storage systems, and he pointed out why 3PAR stays away from certain markets.

I might view a photo of my grandma, and that might be once a year or less. Yet that data still has to be hosted, secured, managed, and backed up. What is the business case for that photo? The cost of keeping that photo and others like it, will continually force companies to cut their storage costs and that will lead to them to storing the data themselves on cheap disk drives.

High traffic from skateboarding puppies, or Brittany Spears photos can subsidize hosting Mr Scott's grandma photos but that is only true for now.

At some point, businesses will be chocking on the costs of supporting the Long Tail of data that makes up their micro-markets. The costs of the Long Tail will twist tighter around the neck of profitability. What happens then?

Dump the grandma photos...

Companies have a fiduciary duty to their shareholders to maximize profits. They will have to dump the data, dump the grandma photos.

That means dumping the many links that users created to their content. The idea of permalinks, links that will remain rooted forever in the concrete of the Internet will become a fallacy.

Even though the online companies make no guarantee in their terms of service that users' content will be always available there is an implicit guarantee that user content will be always be there. When that implicit contract is broken users will be less willing to spend all that time uploading and tagging their content.

They'll be less willing to tell their friends about it, to post links to it, etc, because there is no guarantee it will be there next year or beyond.

That's the scenario that will dry up the flood of user generated content to online firms. And that is the great flaw in the business of the Long Tail.

Businesses making money from the economics of the Long Tail will be dragged under by mounting costs of maintaining Long Tail micro-markets.

Maybe this should be the title of my upcoming book: "The Unbearable Burden of the Long Tail - How Internet Commerce Will have to hack-off the Long Tail to Survive."

[Saturday Post is the name of a series of essays. This is the first in that series.]

Please also see:

Long Tail Economics - Bonanza or Bogus

Have we misinterpreted the business value of the long tail?