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July 22, 2005

Comments

Amit Patel

It's a seductive idea. I've been bitten by it too. The red area is on the top right of the chart, and the chart is log-log, so the red area is MUCH bigger than it seems when converted to dollars. So the long tail looks like it's incredibly valuable.

The trouble is that by using the log/log scale, most of your datapoints are on the part that doesn't fit the line. You're making quite an extrapolation there by taking a minority of points (the largest ones, which are on the "line") and extrapolating to the majority (which are not on the "line").

Also note that the line isn't even really straight even on the left side. The entire thing is curved. That suggests that the strict power law may not really hold, that the curve downwards is natural, and that the linear extrapolation is not valid. The log/log scale is stretching out the left side of the curve, making it look like it's straight, and that misleads us into thinking the whole thing should be straight.

bill fischer

Certainly an arbitrage play looking at IP securitization (i.e. Bowie Bonds) could be interesting using "long tail" projections to re-evaluate net present value calculations.

I'm not sure what CSFB is up to, currently, but they were designing come moderately exotic securitized music catalog products a few years back. One of the issues was a lack of transparency in music business practices. With new distribution channels that offer greater transparency AND reduced economic friction, coupled with new outlets to capture latent demand, this would be an interesting area to re-investigate.

Bill Fischer
www.dvdstation.com

chris anderson

Anita Elberse (HBS) emailed a good point, which she has allowed me to post here:

"I think your post ignores a possible substitution effect. Say a movie studio has two movies, X and Y, only X is released in distribution-constrained world, and both are released in a long tail world. Now, if I am a consumer with unlimited resources (time, money), I might want to see both. But if I have resource constraints (as is often the case!), I might only see Y, or only see X, depending on my taste (entertainment products often are mostly horizontally differentiated). In the latter case, you could argue that the studio's library is just as valuable as it was in the old world."

John "Z-Bo" Zabroski

@Amit Patel

One temperament worth mentioning is that, in any business venture, creativity is key. Everybody knows the conventional ways. You can almost never do things by the book and be successful. "The book," as a metaphor, exists because history creates it -- "the book" on business exists because the idea has already been done. (One of) the fundamental rules of business is you have to be able to differentiate your goods and services, corporate identity, etc. from your competitors.

The notion Anderson presented is something that is a proven business practice, at least in one business case study, and I can put my finger on exactly what company: Lion's Gate Entertainment Corporation (NYSE/TSX: LGF). Lion's Gate started out as a film production studio. However, to quote Business Week Online: "Lion's Gate is more than that now." After buying out Artisan Entertainment for 160 million dollars and assuming its liabilities, "it now has a library of more than 8,000 titles." As well as previously "buying independent studio Trimark Holdings for $49.6 million in stock and cash," What's more? As of the publication in Business Week two years ago, Lion's Gate had a 57% stake in CinemaNow, "an online site for downloading movies that Feltheimer figures will find a way to offer movies-on-demand via TV."

Most of the Lion's Gate library is relatively unknown titles yet accounts for a significant portion of its revenue. There have been rumors swirling for awhile now that because of their large independent film library, they are a likely candidate for Hollywood-takeover.

While you are right the graph is troublesome, the point deposited here is that a business should not haphazardly follow a fossilized blueprint, but rather try creating their own blueprint: identifying the most productive content that will ultimately meet the business's mission statement and corresponding identity. To simply attempt a "roll down the long tail" in pursuit of its competitors, a business is doing nothing to differentiate itself in the market place. THAT, I deposit, is the real troublesome fact that I suspect will be an issue for many businesses. Just my two cents.

Jakob Nielsen

Anita Elberse makes a good point about the substitution effect, but I don't think this eliminates the value of archives.

Yes, making Y available may simply mean that it substitutes for X among a subset of customers and thus doesn't generate any additional sales overall. But X may be another company's product, and thus making my archive (with Y) available will allow me to take marketshare from this other company.

Of course, sometimes X will be my own product, and then I will just be shifting revenue within my own catalog. But in industries where most vendors have small market shares, most of the lost sales will come from other vendors.

Furthermore, there's not 100% substitutionability when you leave movies behind and look at more diverse markets with more specialized info. Quite often, you will find a report about some specialized topic that certain customers might buy to solve their problem: if this report were not available, people would have to spend the time to figure out the solution on their own, because no other report would provide the exact answer they need.

In other words, given that you have one specific problem, the substitution is between buying the report and spending your time, not between buying two different reports on two different topics.

In general, when thinking about Long Tail, remember the B2B market as well as the many specialized fields within the B2C market. Mass-market entertainment may not provide the best examples.

John "Z-Bo" Zabroski

One way to hedge against substitutions might be to adapt the company's business model. New ways to sell (distribute) goods and services might benefit from new ways to sell (price) those goods and services, and customer relationship management might be improved by customer-centric thinking as well.

Consider NetFlix business model, which is described as Chris Anderson as a "long tail" way of doing business and so rightly seems like a good example: It is probably cheaper for NetFlix to let their customers keep the DVDs as long as they wish... rather than to have late fees and hire people to handle returning over-due DVDs. One suggestion might be to include a transaction processing system (TPS) that bills people for overdue movies. However, how would this be handled? Would it be added monthly to each bill? One might assume customer's would complain or call-up asking why their service price changed and the cost of maintaining an inbound telemarketing (customer care division) unit would increase. Other customers might assume they are being fraudulently over-billed and call the Bureau of Better Business (BBB) and lead to BBB investigations. Even if the BBB dismisses each of these complaints, it takes time away from important company resources (labor).

There is also the odd chance that a customer will lose the DVD, and instead of reporting it to NetFlix as a lost item and paying the price of the DVD, not mention that they lost it (due to embarassment or some other factor) while they wait a month or more searching for the lost item. If customer's wait long enough to report it lost, NetFlix gains twice on lost merchandise.

Finally, perhaps I do not fully understand Anita Elberse's point or the follow statement reinforces her point, however either way, in the NetFlix business model, the basic package plan offered by NetFlix allows for "no monthly limit" of one DVD at a time rentals -- for $9.99. NetFlix does not appear to suffer from product substitution. Here, NetFlix product does not seem substitutable (each individual DVD is the same value as another DVD, except perhaps if compared to NetFlix competition). What is happening is not a substitute for a product but a change in the consumer's demands and consuming habits: Less desire to watch DVDs, so they don't buy DVDs; or alternatively less desire to watch DVDs, so they do not take full advantage of NetFlix offer.

Keep in mind that in business there are two ways to make a profit without changing demand for the product: increasing productivity and decreasing costs. By having customers who view a minimal amount of movies per month, NetFlix is decreasing its costs (shipping and handling) and increasing its productivity (the consumer is not utilizing the offer to its fullest advantage, similar to people who buy a product with a rebate offer, perhaps even buy it because of the rebate offer, and never mail-in the rebate) by developing a pricing model that attracts customers who are attracted to their goods and services who are not likely to take full advantage of the company's offer.

Out4Blood

I think even in the Netflix model, substitution still occurs. The constrained resource in this model is time. As a consumer I have a finite amount of time which I can devote to watching movies. And the distribution process, while efficient, still has a large cycle time (roughly X movies every 3-4 days, depending on my fee plan).

With the constraint, not on distribution, but on consumption, I make concious choices about what I am willing to devote my time toward.

I like the overall logic behind determining market value of long-tail archives. But, in reality, there will still be tiny costs associated with inventory, distribution, and consumption, which means that we will never see the theoretical value maximization. The trick will be in knowing how close we can get.

Rick Berringer

I really dont think any of this has anything to do with actual money or actual product. This is just a bunch of wish-wash.

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Tidbits

The Long Tail by Chris Anderson

Notes and sources for the book

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