How big could the Long Tail get?

Over at Mediabistro, there's been some interesting discussion on the size of the Long Tail in books that deserves some comment here..

In response to a previous Mediabistro article about the LT, a reader wrote:

Even if half of the books sold on Amazon are long tail and Amazon is just 10% of all book sales, they make up only 5 percent of a book publisher's actual sales, suggesting that the long tail isn't a vast and untapped marketplace, but simply the 5 percent tail. Am I missing something?

It's a fair question, especially since our subsequent analysis suggests that it's closer to a quarter of Amazon's sales. So does that mean that the LT is just 2.5% of the book industry?

Richard Nash, another Mediabistro reader answers some of the question for me:

"Overall the Amazon market share numbers are correct. And they are also correct for Soft Skull in aggregate. But the interesting thing is that in Year Two of a given title's life, Amazon could be responsible for as much as two-thirds of a book's sales. Now those numbers in unit terms could be too small to make it worth a big publisher's time to keep it in print, but for an indie, or a university press, having, say, half your in-print titles moving 50 units a year (in our case that would be for 100 titles) that's about an extra $25K/year...and close to pure margin.

"The appeal of the Long Tail in the world of music is that digital downloads have close to zero marginal cost: They're digital copies! Books of course have a relatively high marginal cost; each additional book could be a dollar, say. But in practice, what we do is make a guess about demand, and print, say, 3,000 books. After about a year, that book has basically had its day in brick and mortar stores and, I would argue, the value of the inventory at that point should be written down to about zero. The books are worthless.

"But in fact they do keep selling! Maybe only 50 units a year, as I said, but it is pure marginal revenue! And, for a publisher that has $1 million in sales, and profit margins of 5 percent, an extra $25K in revenue on which the marginal cost is basically zero (the inventory would otherwise have been pulped), you've increased profitability from $50 to $75K!

"Now that's the short-term benefit from the Long Tail. And there are limits: For 50 units a year, it would be impossible to justify a reprint (unless the book were short enough that you could get $2/book unit cost through short-run digital printing...). The long-term benefit would be when eBooks become viable through advances in reader technology, and the marginal cost of a book truly becomes zero."

Richard's right, but there's more. For certain categories, such as documentaries, a Long Tail retailer such as Netflix can represent a huge proportion of the market. Netflix alone accounted for half of the US business for Capturing the Friedmans, for instance. And the used book market, which is far more Long Tail than new books, now accounts for 8.4% of all book sales.

Meanwhile, in music (or at least for the paid part): digital music sales represent 6% of the business, and the LT represents about 30% of that. It's anyone's guess what's going on in the file-trading world, but some BigChampagne stats we've seen suggest that it's far more LT than the commercial world.

Some industries will be more online than others. I suspect that media and entertainment will all be online in the not-too-distant future, and the head and tail will be in rough balance there. But food and perishable goods will stay largely offline, and the tail will remain tiny in that domain.

Let's stand back and look at the big picture. Jeff Bezos has often said that he thinks that online retail (which is the best, but not the only example of the "infinite shelf space" markets where the LT flourishes) will probably stabilize at 10%-15% of all US retail. Our own calculations, meanwhile, suggest that the LT is likely to account for no more than 50% of that (it's now between a quarter and a third for most such retailers, a percentage that's growing by a few percent each year as inventory expands, filters improve and buyer behavior adapts). For now, let's be conservative and call it a third.

If so, a back-of-the-envelope sizing calculation would put the potential size of the LT at 33% * 10% or 3.3% of all US retail. If that sounds insignificant, recall that annual US retail sales are $3.9 trillion (about 70% of the US economy). That would still make the LT a $125 billion opportunity.

The lesson: A small percentage of a big number is still a big number.

Comments

[David]

Chris, the significance of the revenue is also relative. A small percentage of the pie might not mean much to a big publisher, retailer or entertainment company. But for someone putting out their own music or publishing their own book, that added income could mean the difference between keeping or dumping a day job. The fact that Amazon can carry a title at little-to-no cost has a huge impact on the ability of niche producers to get (and keep) their products out on the market.

[julian.bond]

There's a question I wanted to ask the Big Champagne folk but never got round to it. How much of P2P sharing is around music that is unavailable anywhere else? Because it's deleted, back catalogue, never released, bootleg concert recordings or whatever. This is the tip of the tail but it's significant for a record business that wanted to exploit the long tail of demand. There's gold in them thar vaults of recorded music that's currently simply unavailable.

[Michael Cader]

Careful here, Chris--you've made another statistical leap. In the BISG used book survey you link at, over 70 percent of those sales are for used textbooks, which is probably a very non-Long Tail market. (It's more likely a relatively small set of standard works.)

In many respects, the consumer used book volume that the study found is actually smaller than a lot of observers were expecting. And the study didn't even look at distribution of sales over number of titles. Amazon itself is of course a big piece of the used consumer book market now, and it's quite likely that this market is only as Long Tail as the general book market at Amazon.

Also, Richard's accounting is fun--but the key is the "mental writeoff" more than anything. I also don't see allowances for the cost of warehousing and fulfilling those 5,000 books, and the author's share.

The better point he raises is that Amazon's overall percentage of the business doesn't matter--for many books Amazon sales comprise a much larger, and sometimes even the largest, source of sales.

[Sam Ramji]

There should be a number of technology/infrastructure opportunities to enable economically efficient long tail markets - JIT infrastructure for real goods (and no, I'm not going all "Diamond Age" on you).

You pointed out Richard Nash's mention of short-run digital printing - sourced through Kinko's as a local distribution network, what are the opportunities if a full-sized book could be printed for $3? What technology would have to be invented to make that happen?

Where are other similar "real-world" (i.e. physical fulfillment) markets that would benefit from Long Tail JIT?

[Francis Hamit]

The real reason that books are remaindered is not because there is no Long Tail value. If you have a warehouse, you can find storage space for the rest of the print run that hasn't been sold. It has to do (in the USA anyway) with a tax law decision called "Thor Power Tool". In that case it was decided that old inventory could not be depreciated, but had to be carried at full asset value until sold. The only way to get a write down was to sell older books to a dealer in "remainders". These sales cancelled the remaining royalties to the authors and created a secondary market which devalued new books as well. Why buy a new hardbound when you could wait a year and get it for the cost of the paperback? Because a publisher would always order more than they expected to sell of a new book, there would always be remainders. The more heavily promoted a book was, the more likely there was to be remainders and several mail order dealers and one major chain, Crown Books, made most of their money from these remaineders, which they acquired at scrap prices and sold for 20 to 30 times their cost. The existance of this new channel (which also meant that books would not be pulped because they had some salvage value) also impacted the sale of trade paperback and mass paperback editions that were released later. Authors were competing with themselves because the old books from the better editions were priced the same or lower than the new editions that paid royalties. Some savvy authors bought their remainders and resold them themselves to libraires and collectors. Another example of the Long Tail being used to advantage.

So the backlist has virtually diappeared, except where it has been replaced by books produced in "Print on Demand" formats -- which never go "out of print"-- and authors' royalties have been diminished, even for "best sellers".
That, in turn, creates a treadmill effect, where they must simultanously rpomte the current book to maximize short term income and work to complete the next
book for publication. Given the time and trouble involved in most non-fiction, it is not surprising that the Midlist has pretty much gone away. (See the Authors Guild report from their web site.)

[ps3 spiele]

It is the great mark achieved by the Long Tail books and it goes on increasing. Anyways i really appreciate the success of long tail and wish to continue the same winning streak....