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August 18, 2005

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» The root causes of box office slump from Blowing Smoke
On Ed Forster's Gripelog, there is an interesting discussion called Declining Movie Reciepts (it may be a couple of months... [Read More]

» The Long Tail: Are niches more profitable than hits? from Tomas C
This is very interesting. Need ponder some more. article in English / artículo en Ingles o en Español usando Google o Altavista/Babel Fish from tomasc.com –» My name is Tomás ... [Read More]

» The Long Tail for Heavy Business? from technogoggles
I was with Paul [whose digital footprint is miniscule, he’s practically invisible. Get about more man!] the other night and we were trying to work through what ‘marketing as conversation’ meant to marketers.It’s tricky. The implications seem to be that... [Read More]

» Niches more profitable than hits? from Nimble - The online musings of a nimble partner.
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Comments

Shawn

Niche products can be very lucrative, in marketing terms, because the market is more predicatable and a premium can be charged. The customer is willing to pay for quality.
The old model involved mostly mass-marketing, which doesn't seem like the optimal situation at all, unless their are obstacles to getting the niche product out.. but the long-tail smashes those obstacles.

Mass market might still be the way to go for commodities, but for music and video, niches are just a natural thing. Music lovers don't like music made to sell to everyone on the planet; they like music in the various genres they are fans of. Oh mass market stuff is going to stick around and be listend to by the crowd that doesn't know much and wants to be led along... wants to be part of a big group so they feel secure in numbers that they have good taste... and I think there is a charm to knowing a big audience is grooving on the same song at a dance club, etc...

However, producers of niche products will gain ground fast. I note that they should always charge a premium - they are providing a better, more useful product. Big conglomerates will probably try to through a monkey wrench into this process. But if niches products maintain the pay for quality status, what might then happen, is that their sales would begin to detract from the mass market stuff by drawing more disposable income away on the higher price, while at the same time causing tastes to become more refined and migrate away from the herd. It's a real threat to the mass-market concept (in music, video, and the like)....

Niki Scevak

Interesting analysis but isn't this simply a temporary situation of industries that are in flux? i.e. the reason why hits are less profitable are that studios/publishers demand a higher revenue share because they know exactly how much retailers make off them. As soon as Netflix, Amazon et al become hugely profitable (that is, when online retail hits critical mass or 20% of total retail) and as soon as the economic opportunity of the long tail is quantified (perhaps 10 years from now) the studios/publsihers will start demanding higher revenue share for tail titles too?

At the moment the majority of retail makes very little from the tail. But soon that will presumably change as commerce shifts online. You can bet as soon as it does the studios will be raising their prices.

So although the profit breakdown looks as it does today, as soon as the long tail reaches scale hits and niche titles will be equally profitable.

Trova Hellstrom

The same is very, very true of automobiles. There is much more margin in used cars than in new. Among the reasons: Most consumers know, or can easily find out the dealer's cost on a new car, but with used cars the lowball when buying, then have a lot of pricing flexibility when selling.

You could probably do a whole chapter on cars as an example of the long tail.

Aron

I believe there is a logical reason that tail products can provide a higher gross margin in the longterm. Namely, there is an innovation challenge in connecting the products to the buyers. Profit is the reward for the effective application of recommendation engines and other website merchandising techniques to generate sales from these otherwise 'dead' products.

But I agree with the commenter that said studios would eventually move to soak up the margins in the tail products. However, I believe they will always have a relatively higher margin because there is so much more room for innovative merchandising.

Any one can sell Spiderman 2. Not everyone can sell 'My Left Foot'.

(BTW, the gross margin line in the first graph is mathematically incorrect. 12$ revenue and 6$ cost is 50% margin).

chris anderson

Aron,

Good catch on the margin thing; I put a wrong number in the spreadsheet. The current graphic is corrected.

T J Neville

The comments that the studios will soak up Tail margins are very astute. On the business side their entire culture focuses on avoiding being leveraged (“being HBOed”) over the long haul, sometimes to the point of irrationality. More importantly, in this era of great uncertainty, most are very reluctant to do long term or exclusive deals; and the nature of the web makes it difficult even to make long term commitments for small territories. This means that almost every deal will be essentially structured as a research project to learn their distributor’s business, and then to renegotiate.

You are also probably underestimating the incremental revenue/margin advantages Hit products have as promotional platforms for Tail products. With the transition to pure electronic distribution, you can assume that dynamic integration of AdSense-like contextual promotions/advertising within (or side-by-side) presentations of Hit product will be healthy sources of incremental revenue. Also, this revenue stream will probably grow as screen sizes get larger.

It’s a good bet that these “cross promotion” opportunities will both increase margins for Hit products (…whose owners will quickly calculate their value to distributors), while simultaneously extracting revenue/margin slices from niche distributors anxious to grow their audiences.

Tom

brian

Chris,

Are you confusing niche being the same thing as back catalog? Niche products (like anime and Bollywood) do release new products and I assume they follow the same cost-price cycle as more marketed/well known products (Hollywood blockbusters). So, if I deal with niche products it doesn't mean that NEW releases cost me any less (and may cost more because they don't get economies of scale) than non-niche products. Back catalog products follow the same path as well.

chris anderson

Brian,

I'm not confusing niche with back catalog; I'm giving back catalogs as *one example* of niche. In general, however, retailers have more pricing power in most niche categories because they are not, by definition, commodities. So I think the case holds true across all sorts of niche categories, not just older media titles.

web design india

Niche product and services has always been more profitable than hits. though at times niche comes from hits only. for example google created a niche industry for search engine optimization.

web design india

Niche product and services has always been more profitable than hits. though at times niche comes from hits only. for example google created a niche industry for search engine optimization.

Joomla Web Design India

Good catch on the margin thing, Niche product and services always been more good than hits. although the profit breakdown looks as it does today, as soon as the long tail reaches scale hits and niche titles will be equally profitable.

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ARYOL PREFABRİK

It is very interesting research and also useful
thank you so much

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Tidbits

The Long Tail by Chris Anderson

Notes and sources for the book

FREE was available in all digital forms--ebook, web book, and audiobook--for free shortly after the hardcover was published on July 7th. The ebook and web book were free for a limited time and limited to certain geographic regions as determined by each national publisher; the unabridged MP3 audiobook (get zip file here) will remain free forever, available in all regions.

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