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Internet business models debunk The Long Tail theory

An internet business model riddle exists for content creators, owners and publishers. It's a riddle about how to make money when so much information is free on the internet.

Prominent in all this is Google which in 10 years has shaped a perfect market for itself. Google brings net users to publishers (Google search) and sells them to advertisers (Google Adwords). For many publishers there is a business model riddle left for them, and little money. Some would like to shoot the messenger, Google.

The thirst for answers to the publisher's riddle of how to make money on the internet is so great that catch phrases or unproven theories have been taken up as assumed truths. Repetition has made them appear to be credible. It's time to debunk a couple of those catch phrases and theories.

In the 1990s there were prophets for the catch phrase "Information wants to be free". Loud advocates included John Perry Barlow. I never found him convincing in any of his 1990s articles in Wired magazine. The free model worked for him as a lyricist for Grateful Dead, but that's not enough evidence.

free_chris_anderson_bookIn our current decade there has been Chris Anderson, Editor-in-Chief of Wired, including in his book The Long Tail and his July 2009 book., Free: The Future of a Radical Price. The Free book is now being talked up by some and questioned by others.

I wrote on The Long Tail theory in my first Lightbulb blog post - The long tail versus the hit industry typology. I was not convinced then about the theory, I'm absolutely unconvinced today.

I've never been a fan of the theories of Barlow or Anderson. But rarely has there been enough evidence to test my hunch.

I found credible evidence a year ago, in September 2008, but decided to keep it to myself, and my powder dry.

Now is the time to talk. Because today I found another like-minded critic, someone too with credible background experience, and more evidence. We'll get back to him at the end of this article.

First let's examine the dry powder debunking The Long Tail theory, from none other than Google's CEO.

I made note a year ago of a video interview by Dr Eric Schmidt, CEO of Google, with McKinsey Quarterly. Set out below are long extracts from Dr Schmidt's interview where he critiques The Long Tail theory. Read them carefully.

The Quarterly: So how do companies make money in these markets?

Eric Schmidt: Free is a better price than cheap. And this simple principle has been lost on many a business person. There are business models that involve free with adjacent revenue sources. And, in fact, free is a viable model with branding [advantages], [charges for] service, and other things. But it’s a different business model from what most of us are used to.

A rule of economics is that for manufacturing and mature businesses, eventually the price of the good goes to the marginal cost of its production and distribution. Well, in the digital world, for digital goods, the marginal cost of distribution and manufacture is effectively zero or near zero. So, certainly, for that category of goods, it's reasonable to expect that the free model with ancillary branding and revenue opportunities is probably a very good thing.

In the same interview Dr Schmidt says:

pc_aliveI would like to tell you that the Internet has created such a level playing field that the long tail is absolutely the place to be—that there's so much differentiation, there’s so much diversity, so many new voices. Unfortunately, that’s not the case. What really happens is something called a power law, with the property that a small number of things are very highly concentrated and most other things have relatively little volume. Virtually all of the new network markets follow this law.

So, while the tail is very interesting, the vast majority of revenue remains in the head. And this is a lesson that businesses have to learn. While you can have a long tail strategy, you better have a head, because that's where all the revenue is.

And, in fact, it's probable that the Internet will lead to larger blockbusters and more concentration of brands. Which, again, doesn’t make sense to most people, because it’s a larger distribution medium. But when you get everybody together they still like to have one superstar. It's no longer a US superstar, it's a global superstar. So that means global brands, global businesses, global sports figures, global celebrities, global scandals, global politicians.

So, we love the long tail, but we make most of our revenue in the head, because of the math of the power law. And you need both, by the way. You need the head and the tail to make the model work.

Tom Foremski, blogger at Silicon Valley Watcher, is the like-minded critic I read today of The Long Tail theory. Foremski is a full time journalist and many of his 2009 articles have been insightful reviews on the economics of newspapers today especially in the U.S.

On reading his blog post today on Anderson I was moved to add a comment to all the above.

Tonight I noted that Tom had replied to my comment with more powder testing Anderson's Long Tail theory:

Noricd: The long tail theory assumes that there is no marketing to be done to reach the small numbers of people that might be interested in buying long tail content. Those small communities are hard to reach, the marketing is expensive. No Silicon Valley startup wants to be exploiting the long tail when the bulk of the profits are in the short tail. There's no money in the long tail and it's a big (and growing) expense. Think about all those photos of my grandma that Facebook or Flickr hosts and that have a market consisting of maybe ten people. Even though storage is cheap managing that mountain of long tail content is not. I guess if we update this all with Mr Anderson's "free" economy, now that (nearly) all digital content is free there is even less money to be made in long tail content. Nothing much has changed from the old world to the new. Still very little money in the long tail...


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