Long Tail

All the management Gurus,at least the successful ones come up with new, catchy terms which become part of MBA lingo. One such term is Looooonnnng Tail and the Guru is Chris Anderson.

 

Everyone likes to remember the ‘good old days’ when hindi songs were melodious. But, there is a reason why people loved old songs while new songs seems to be not very good. The reason is scarcity. In the ‘good old days’, There were limited number of ways one could listen to hindi songs. The methods were limited to

• Get up at ungodly(in my opinion) hour and watch ‘Chitrahaar’ at 7 in the morning on a sunday.
• Listen to All India radio, which as far as I can remember used to have more “krishi samachar” than songs

Since the options were limited, most of the people used to listen to same music and few of them were liked by most of the people. These songs became “hits” while the others which were not liked by majority became “flops” as were quickly dropped from the playlist of the above programs.

Only other option to listen to music is to head to the nearest music store. Since the music store has limited capacity to hold cassettes, he maximised his profits by keeping only “hit” cassettes.

This phenomenon is explained in the figure below –

Music availability in old days

The album which did not meet the minimum number of sales (shown by the brown dotted line) would be dropped and replaced by a new album. This created an artificial “hit” and an artificial set of “flops” as the album which would have sold more copies was dropped as it was not profitable for the seller.

All these changed in recent times, There are about 7 or 8 FM radio channels in Bangalore itself. Apart from this we have 24 hour music channels, you tube, Pakistani sites from where we can download any amount of songs for free and other avenues to explore our taste in music further. This results in fractured verdict for most of the songs and the misconception that songs from the “good old days” were good.

The author says because of digitization of songs, the brown dotted line ( depicting profitability) can move way down the line. A song added to the database costs the vendor 4MB which comes to about 4 rupees. So, even if one person downloads the song the song would cause profit to the vendor.

This results in a sales curve that keeps tending to zero, but never reaches zero no matter how far down the X-axis one moves. This is shown in the figure below

Choices available because of digitization of Music

The author says these products at the tail end of long tail together can contribute as much as 30 – 40% of total revenues of companies.

The practical effect of this is no one likes other person’s playlist entirely. It’s a big problem when we go on road trips. One guy likes only english songs, other guy likes only AR Rahman songs, and I like a mix of both. How do we manage? We cram an 8GB USB stick with all possible songs and hope that we can find a song all of us like during the trip…

All that is fine, but how does it apply to us as a software company? Well,I think we are still stuck in the “hit” and “flop” market. We are doing “CMS”,”FS” and “Home builders” which are our “hit” markets. If we build an application which has a lesser amount of sales, it is not worth building it.

We need to move away from this and move to the new “long tail” model.  We need to reduce the cost of building an application so that it becomes profitable to build and sell apps that sell only to 2 or 3 customers. How do we do it? No, not by outsourcing to cheaper countries…We need  to allow our partners to build small applications and use our marketing platform to sell it.  CDC should get  a cut of any sales that happen which can be used to maintain and improve the platform.

Other companies that effectively have a long tail of either products or customers are –

• Google – They have an entire spoken language as their Keywords. People can buy these keywords. Also, google has a long tail of customers. They do not have one or two big customers who contribute 20,30% of revenues. They have millions of small companies who contribute 100 or 1000 dollars per month to their profits.
• Apple – You can build an app for iPhone and publish it on iTunes store. If someone buys it apple gets a cut in it. The work done by apple? absolutely nothing… it’s basically like printing your own money.
• Salesforce.com – Similar to apple. One can build an app and sell it using their platform. SFDC gets a percentage on every sale.

 

Can you think of any other company that is using long-tail effect successfully?

Geniuses at Google

The next few posts relate to IPL 2010. It might look a little dated now, but please remember that I had first written in on April 1 2010 when the IPL was actually taking place –

Google have a very good policy. Do not interfere with what user wants to do. In fact, it was the only site which relied on getting users OFF their site to become successful. All other websites are designed to make you stay at their page as long as possible.

 

Even with “get users OFF” policy google is successful because it managed to find a way to make money while getting people off their site using google adwords. Google Adwords are the ads you see on the right hand side of the page when you do a search like “Memory profile .NET”. When you click on one of the ads on the right hand side, google makes money.

 

All this was fine, but my respect for the people in google increased with the start of IPL 3 cricket tournament this year. Let me explain…

 

In 2006, google spent 1.65 billion dollars to buy YouTube. I was always wondering how they would make money out of such an offering. People are used to watching free videos, so converting to paid service would just kill the site. Keyword based search that they had would not work, because the kind of users who search on google are different from the ones who search for a video. ex: When I search for “.NET memory profiler ” its most likely that I want to download a trial version of the product and maybe buy it. Hence advertisers will queue up for such a keyword. However, when I search for “Yuvraj Singh’s 6 sixes” on you tube, I am not looking to buy anything. I just want to while away some time. Hence not many advertisers would want to advertise in you tube.Google needed a different way of earning money from their 1.65billion$ investment.

 

All that has changed with IPL 2010. Google struck a deal with BCCI to stream the match live on you tube.  Google was free to sign up their own advertisers for these matches. Currently Hero Honda and most other TV advertisers are also advertising on You tube. The revenues would be shared between Google and IPL(BCCI).

 

With this move, computer is suddenly challenging the reign of TVs over live events.I believe TV rights deal sizes would slowly start reducing and internet telecast rights would become costlier in the future.

 

If I owned sites like cricinfo.com, I would be very concerned about my company’s survival. These sites would give textual updates on what is happening in the match. The company does not have to pay anything to BCCI to do this. SO, their expenses was not much. However with the streaming of live content, these kinds of sites would lose eyeballs to YouTube.

 

Only way to compete is to bid for the rights next year, which would mean higher costs for the company. I believe this is a perfect example of disruptive technology invading and destroying an existing company.

 

Currently not many people have broadband capability to watch IPL on YouTube. So, the market is small…most of the people will still go to sites like cricinfo to get match details. But soon, with improvement in broadband’s penetration and speeds, most people would be shifting to YouTube like service.

 

If you were the owner of cricinfo kind of site, what would you do to counter YouTube?