The Long Tail

The time/money formula of free

At some point in your life, you will wake up and discover that you have more money than time. And you will then realize that you should start doing things differently, which means not walking four blocks to find an ATM that doesn't charge a fee, driving for miles to find cheaper gas, or painting your own house.

This same calculus is the foundation of a big part of the "freemium" economy. We see it a lot in free-to-play online games, such as Maple Story, where you can buy things like "teleportation stones" to let you get from one place to another without a long slog or wait for a bus. Most of these paid digital assets don't make you a better player, but they do allow you to become a better player faster.

If you're a kid, you probably have more time than money. That's the force behind MP3 file trading, which is kind of a hassle and but is free (albeit illegal, of course!).  As Steve Jobs famously pointed out, if you download music from peer-to-peer services, fixing the messy metadata as you go, the time it takes to avoid paying means you're working for less than minimum wage. Nevertheless, that works if you you're time-rich and money-poor. Free is the right price for you.

But as you get older, the equation reverses and $0.99 here and there no longer seems like a big deal. You migrate into a paying customer, the premium user in the freemium equation.

As some of you may know, one of my other side projects is an open source hardware company (developing and selling aerial robotics technology), and so I've been following the emergence of the open source hardware world closely. It's a really interesting example of how to make money from free, one that adds a new dimension to the open source software world because it's about atoms (which have real marginal costs), not just bits.

The way most open source hardware companies work is this: all the plans, printed-circuit board files, software and instructions are free and available to all. If you want to build your own (or, even better, improve on a design), you're encouraged to do so. But if you don't want the hassle/risk of doing it yourself, you can buy a pre-made version that's guaranteed to work.

For instance, take the great Arduino open source microprocessor that our autopilots are based on. You can build your own, with full instructions. Or buy one. Most people do the latter. The Arduino team make their money from a certification license fee they charge the companies and retailers that make and sell the boards.

You can build a good business on this model, as Limor Fried (AKA LadyAda, picture above), has shown with her electronics kit retail/design/community AdaFruit Industries. She and her business partner, Philip Torrone, explain the economics and tactics in a presentation here (good summary here).

Short form:

1. Build a community around free information and advice on a particular topic.
2. With that community's help, design some products that people want, and return the favor by making the products free in raw form.
3. Let those with more money than time/skill/risk-tolerance buy the more polished version of those products. (That may turn out to be almost everyone)
4. Do it again and again, building a 40% margin into the products to pay the bills.

As Torrone said in an email, "I can't imagine doing a book, a video, a magazine unless I had a community that would rally along the way. In the end it always seemed to be about a story, people like to see the beginning, middle, end and plot of something -- and if there's a buy button somewhere, they sometimes click it and reward us for working hard."

Presto: a free business model that scales neatly from bits to atoms. It's exactly what we'll be doing at DIY Drones, too. Not just because it's free, but because it works better than anything else out there. It's not a bad way to think about writing a book, either ;-)

How big is the free economy?

Here's a question I get all the time: how big is the free economy? That's harder to answer than you might think, for both definition and measurement reasons. But here's a first pass at doing it anyway.

(Note: I'm just using US figures below, unless marked otherwise)

There are at least three classes of free:

The first is the use of "free" as a marketing gimmick: "buy one, get one free", "free with purchase", "free phone if you commit to the two-year service plan", etc. All basically cross-subsidies or loss leaders--sooner or later you'll pay. I suspect that there isn't an industry that doesn't use this one way or another. There's no new economic model there and it's totally impossible to quantify, but arguably it touches every bit of the entire consumer economy itself, which is to say trillions of dollars a year. And thus it's a meaningless number. So I'll move on....

The second form of free is the "three-party market", which is to say the world of advertising-supported free media. That's most radio and broadcast television, most web media, and the proliferation of free print publications, from newspapers to "controlled circulation" magazines. For the top 100 US media firms alone, in 2006 radio and TV (not including cable) advertising revenues were $45 billion.

Online, almost all media companies make their offerings free and ad-supported, as do many non-media companies such as Google, so I'll include the entire online ad market in the "paying for content to be free to consumers" category. That's another $21-$25 billion.  Free paper newspapers and magazine are probably a billion more, and there are no doubt some other smaller categories I'm omitting and a lot of independents not included in the numbers above. Let's call the total of offline and online ad-driven content and services $80-$100 billion.

Finally, there is what I call "real free".  Products and services that don't cost most consumers anything at all, either in cash or ad clutter. (Most of this is online, where the marginal costs are near zero). This includes companies that use the "freemium" model (where a minority of paying customers support a majority of non-paying customers, as in Flickr and Flickr Pro or the growing world of online games), all those companies that are in the pre-revenue part of their evolution, and the entire "gift economy", from Wikipedia to the blogosphere. 

This last category is impossible to properly quantify, especially since much of it has no dollar figure attached at all, but I'll break out some interesting subcategories that do have some numbers attached:

Open source software (service and support around free software):

• The "Linux ecosystem" (everything from RedHat to IBM's open source consulting business) is around $30 billion today.
• Other companies built around open source, such as MySQL ($50m annual revenues) and Sugar CRM ($15m), probably add up to less than $1 billion.

Free-to-play videogames:

• These are mostly online massively multiplayer games, which are free to play but make money by charging the most dedicated gamers for digital assets (upgrades, clothing, new levels, etc). They started in South Korea and China (where they're now a $1 billion business) and have now come to the US, with games like Runescape and NeoPets.
• The "casual games market" (think everything from online card games to flash games) is now at nearly $3 billion.

Free music:

• How much of Apple's iPod $4 billion in annual sales should be credited to the libraries of "free" MP3 that created demand for gigabyte storage devices? How much of MySpace's $65 billion estimated value is due to the free music bands put there? How much of the $2 billion concert business is driven by P2P file sharing?

So what's the bottom line? By a strict definition of free (just the third category), it's pretty easy to get to $50 billion total revenues. Include the next most interesting free market, online ad-driven content and services, and you're around $75 billion. Expand that to the traditional ad-supported media, and you can get to $150 billion. Go worldwide, and you can easily double all those figures.

Whichever definition you like, there's a lot of money to be made around free.

Kevin Kelly: The Three Tails

If I wait long enough, all the smart things about the Long Tail will be said by other people and I can just quote them here. Today's installment is by none other than Kevin Kelly. If he will forgive me reprinting his post in its entirety below, I will forgive him the cringe-making term "long tail of the Dragon of Love" ;-)

Over to Kevin:

"Seth Godin recently posted a dissection of the three "profit pockets" within the Long Tail, which he illustrated like this:

There's a blatant switcheroo that Seth (and almost everyone else) makes when explaining the Long Tail. In pocket #1 of the curve, Seth talks in terms of a creator of a work. In pocket #2 of the curve, he also talks in terms of the creator. But then when he gets to the long tail, he switches away from a creator, to talk in terms of an aggregator of other creators' work. Why is that? What happens to the creator? The creator is dropped when we get to the long tail "pocket of profit" because the long tail is not profitable for the creator. It's profitable only for the audience and aggregators.

I'm not really sure the "fractal long tail which operates within a long tail" (every subject has its own long tail) mentioned in Seth's previous post helps a whole lot either, other than to say you want to be as close to the head as possible even in your niche.  That is a no brainer. Being an aggregator is not an option either for a creator. Almost no creators I know are productive enough to create sufficient quantity of new things to aggregate their own work. Aggregators are by definition not creators.

So as one crosses the sections -- going from the short head to the long tail -- one should be consistent and view it from the aggregator's point of view or the creator's point of view. I think it is a mistake to conflate the two view points.

I've been wrestling with this for a while and I think the only advantage to the creator that I can see in the long tail is that aggregators can invent or produce a long tail domain that was not present before.  Like Seth's Squidoo does. Before Squidoo or Amazon or Netflix came along there was no market at all for many of the creations they now distribute. The proposition that long tail aggregators can offer to creators is profound, but simple: you have a choice between a itsy bitsy niche audience (with nano profits) or no audience at all. Before the LT was expanded your masterpiece on breeding salt water aquarium fishes from the Red Sea would have no paying fans. Now you have maybe 100.

One hundred readers/watchers/listeners is not economical. There is no business equation that can sustain profits for continual creation from so few buyers. (It can of course support the business of aggregation above the level of creation.) But the long tail niche creation operates perfectly well in the realm of passion, enthusiasm, obsession, curiosity, peerage, love, and the gift economy.  In the exchange of psychic energy, encouragement, meaning of life, and reasons to live, the long now is a boon.

That is not true about profits. Economically, the more the long tail expands, the more stuff there is to compete with our limited attention as an audience, the more difficult it is for a creator to sell profitably. Or, the longer the tail, the worse for sales. But if we view the long tail as a market of a different type, as a market of enthusiasm and connection, then as the long tail expands, this increases the chance of two enthusiasts meeting, and so the longer the tail, the better. The first two pockets of the curve are trying to maximize profits; the last pocket of the long tail is trying to maximize passion and connectivity.

There is one further indirect advantage to the long tail. Since your creation now exists in a market (where it would not have existed at all before) it can, if you are lucky, start to migrate uptail.  With creativity you may be able to move your creation out of the economic doldrums of the long tail up into section #2, where 1,000 true fans and other mid-level success lies. As I argue in 1,000 True Fans, this is where you want to be as a creator. Seth calls it the pocket of " the profitable, successful niche product" and I agree with him that this pocket #2 rather than pocket #1 is where you want to aim for.

But if you fairly evaluate section #3 according to the same metrics as section #1 and #2 -- the dollar value to  the creator -- then the long tail is a desert for profits. It makes sense to pursue this pocket only if you switch. You must switch in pocket  #3 either to looking at it from the perspective of an overlord aggregator, OR, you need to switch to looking at this territory as an alternative economy, one that is not running on the dollar. A new region with its own dynamics.

In other words, Squidoo and Amazon and Netflix make the profitable long tail very happy. But happy long tail does not make happy creator.

I prefer to think of the Long Tail as being a tail to a different animal. We've misidentified the intangible being it belongs to. It is not the long tail of the Beast of Commercial Profits. Rather it is the long tail of the Dragon of Love. The love of creating, of making, of connecting, of unreasonable passion, or making a difference, or doing something that matters to ourselves, the love of connecting, giving, learning, producing, and sharing.

It is important to know which tail we are wagging."

What he said

As usual, Seth Godin puts something better than I could:

A lot of people don't seem to understand a key implication of the long tail: Given the choice, it's better to make a hit.

If you have a choice of cutting a top 10 record or making a track of Jamaican polka music for iTunes, go for the hit.

If you have a choice between being on page 30 of the Google results for "Bolivian sushi" or the number one match for "buy life insurance", go for the latter. No brainer.

The problem, of course, is that you don't have a choice. You can give the hit a shot, but it's awfully crowded at that end of the curve.

The implications of the long tail have nothing to do with this false choice. What it explains in a powerful but subtle way is:

1. Collecting many many products among the tail permits you to amalgamate a market that may be just as big or bigger than the short head. But you need a lot of them. Squidoo is my proof--a profitable site with no real short head. So are eBay and YouTube and dozens of other places. Which is going to be worth more in ten years: the leaky boat of a network TV franchise or the relentlessly growing collection of long tail video at YouTube?
2. Within the long tail, there are micro long tails. The long tail permits entirely new micro-markets to emerge (exercise clothing, for example) and within that market there are hits and then the tail. It's sort of a fractal curve of new markets living within markets. (Simple example: Amazon enabled an entire eco-system of books on presentations and graphics to emerge).

The Long Tail of Baby Names

The top baby names, like the top-selling records or most-watched TV shows or you-name-it, command less and less market share:

"The diversity in U.S. baby names has exploded since the 1950s. Back then, a quarter of all boys and girls got one of the top 10 baby names, according to Laura Wattenberg, author of "The Baby Name Wizard" (Broadway, 2005). In recent times, the top 10 names account for only one tenth of all baby names, Wattenberg writes. Her blog has an interactive tool [screenshot shown] that displays the historical popularity of thousands of names from the 1880s to now."

From LiveScience. Thanks to Barry Ritholtz for the tip

How long will the WSJ keep its pay model?

I'll admit it: it bugs me that Rupert Murdoch hasn't yet followed through on his plan to make the Wall Street Journal's website entirely free. It's the last big holdout in the all-web-media-must-be-free trend, and as the guy writing the book on free, people keep throwing it in my face. So I sighed when I saw in today's headlines that traffic at WSJ.com, with still just a small fraction of its content free, nevertheless grew by 45% last year, to 150m page views per month. Damn. Can pay really, well, pay?

Before we get into the data, let's revisit the argument for web media being free to consumers. It's simply that free sites get a lot more traffic than pay sites, and experience suggests that making money from advertising on a big user base is easier than making money from subscriptions on a small base. Why do free sites get more traffic, aside from the obvious reason of no barrier to entry? Because third-party sites (blogs and other news sites) will typically only link to sites that are free and Google only searches and drives traffic to sites that its crawler can get into. And on the Web, if you're not in Google and the blogosphere, you're not in the conversation; for much of the audience you simply don't exist. The trickle-down effects of such invisibility are felt in other aspects of your business, from customer acquisition to PR.

Here are the traffic figures for WSJ.com versus the New York Times, which went from the pay to free model in September of last year:

Both have grown over the past year, but in August last year, when both websites were behind pay walls, the NYT had about 5 million more users per month more than the WSJ. Now that the NYT is free, it has about 10 million more users per month. (Don't be misled by percentage figures; they always make growth from a smaller base look bigger).

If the NYT has the same 10-to-1 ratio of page views to unique visitors as the WSJ, those extra 10 million visitors account for an extra 100m page views, which at a modest $15 CPM, two ads per page and 50% paid inventory, are worth about $1.5 million a month, or $18 million a year. (Needless to say, that's just a back of the envelope calculation; the NYT may very well get a higher CPM)

Meanwhile, WSJ.com has subscriptions, which are nominally priced at $89. We don't know how many people currently pay for them, since that wasn't part of the latest press release, but last time the company reported numbers, there were about 1 million paying subscribers to WSJ.com. That's $89 million a year, right? Wrong.

Here's a screen shot from the WSJ's subscription page. As you can see, the recommended offer is the combo deal that leads to only a $10 online subscription fee. 

  

As the footnote in Dow Jones's last 10Q notes, "WSJ.com subscription figure now also includes subscribers who selected to pay for both the print and online products as part of a bundled offer and registered to use WSJ.com."

So odds are that the online subscription revenues are now closer to $10 million a year than $89 million as people go for the combo offer. It might even be less than the $18 million more the NYT makes with ads online (using the above napkin-scratching numbers). If the WSJ dropped its pay wall, would it get as much traffic as the NYT? Maybe not. But it would at least be betting on the faster-growing part of the market.

Indeed, there's good reason to think that the subscription numbers are not growing at all. Felix Salmon from Portfolio (our Conde Nast sibling) observes:

If you look at the Mediaweek story, there's one statistic conspicuous by its absence: what has happened to the number of subscribers to wsj.com over the past year. Betcha it hasn't grown at all, and that substantially all of wsj.com's new uniques are there for the free content only. (That would help explain why pageviews are growing much more slowly than uniques are.)

Felix is betting that the WSJ pay wall will come down, sooner or later. I agree. I give it 24 months.

A Longer (and cheaper!) Tail

Just in time for another controversy over powerlaw statistics (wheee!), I'm delighted to announce that the paperback version of The Long Tail will be published next week and is now available for preorder.

What's new? Well, along with a new cover, lower price and the usual corrections and updates, it's longer: there's an epilogue on the response to the book (pro and con) and a whole new chapter on Long Tail Marketing.

It's slightly ironic that this new chapter wasn't in the book in the first place, since the marketing implications of the Long Tail are the #1 thing I've been asked to speak about since its publication. But no worries: that just means that I've had more time to think about it ;-)

The marketing chapter is based on one of the overlooked things about the LT: if you're selling things, you don't necessarily need to massively expand your product range to tap LT markets. You can instead just reach the "long tail of customers", which is to say all the potential pockets of demand that don't necessarily lie within your normal marketing channels. This is the smaller potential customers, the ones you don't know about, the ones you never considered and the ones who didn't even think they were potential customers until they heard about your products from someone they know.

The new chapter is subtitled "How to sell where 'selling' doesn’t work" and includes examples that range from how Dell clawed back from its "Dell Hell" customer backlash to the tactical decisions that led Microsoft to let thousand of their employees blog, essentially distributing the PR function to regular folks in the bowels of the company.

For a glimpse of how this form of bottoms-up vs top-down marketing works, here's an earlier post on what I called "Long Tail PR: how to do PR without a press release (or the press)"