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Aug 12
2009
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Two dangerous ideas have been devouring capital and sucking the life-force from entrepreneurs. The first is the notion that you can build a viable Web business by relying on advertising alone - that if you attract enough eyeballs, enough ad revenue will follow to see you through to profitability. The second is the Long Tail hypothesis: the idea that, because “shelf space” on the Web is unlimited, it’s possible to build a business selling products on the “long tail” - that segment of demand that is on the opposite end of the curve from the bestseller list, where, the argument goes, you can sell onesies and twosies - unusual products to idiosyncratic buyers - that couldn’t be sold profitably before.
Chris Anderson, editor of Wired, deeply brilliant man, and a friend, has made the best case for the Long Tail; and, indeed, there’s a wealth of anecdote and an intellectual plausibility to support it. Back in the early days of the Internet, when its root server stood unguarded on a shelf in a Virginia basement, I marveled at the existence of a company - in Indiana, if memory serves - from which you could buy every conceivable type of hubcap. Thanks to the Internet (it wasn’t the Web yet), weak signals of demand could be discerned and aggregated - and a store created to serve the three people in the whole wide world who needed a hubcap for a 1954 Hudson.
Well, no. Professor Anita Elberse of Harvard Business School cut the Long Tail up and turned it into oxtail soup in a Harvard Business Review article in July 2008. It turns out, if you look at the numbers, that the Web is really an incredibly powerful amplifier of the feast-or-famine, bestseller-or-flop tendencies that characterize all global media. Just recently Charles M Blow of the New York Times took another whack at the long tail; in a column analyzing the sad state of music sales, he cited data from PRS for Music, a UK association of songwriters and composers: they show that, of the 13 million songs for sale online, only 3 million had any sales last year at all; and 52,000 songs snagged 80 per cent of the revenue, a ratio that makes Pareto’s 80-20 rule look like a great deal for the little guy.
When you think about it, Long Tail theory is based on the premise that there exists a vast market of people with esoteric taste who never before had the means to satisfy it - millions upon millions of geeky grad students whose pockets bulge with unspent cash. Those customers exist - just not in big numbers. They can support a hubcap business, but not an automobile industry. In the real world of the Web, the rich get richer, and the niches get nichier. As Ann Winblad of the Hummer Winblad VC firm once told me, “If there’s a long tail, I want the fat part.”
The dream of ad-based revenue models is doomed to disappoint, too, for three reasons. By now even the most gung-ho Web startups recognize that there will never be more than a handful of megasites - the Googles and YouTubes that attracts tens or hundreds of millions of visitors and can therefore command ad revenue on the basis of audience alone. That hasn’t stopped people from imagining an ad-sales version of the Long Tail, in which ever-more-infinite customer knowledge produces the ability to define and pitch to ever-more-infinitesimal market segment: If I create a destination website for professional rodent removers, then whoever builds a better mousetrap will have to beat a path to my door. The fallacy there is the one that afflicts Long Tail thinking generally: while there are, indeed, micro-mini markets, they command micro-mini revenue; most people still want what most people want. Marketers’ hoary lament is “I know that half of my advertising spending is wasted; I just don’t know which half.” The hope of ad-based sites is that they can solve that problem. But suppose they did? The obvious response of marketers would be to cut their spending in half.
Dreams of advertising riches are naïve for a second reason: They throw an infinite supply of advertising inventory against a finite supply of advertising spending. There is - let’s face it - only so much ad budget to go around: X per cent or Y per cent of GDP, depending on whether you’re in a consumer economy like the U.S. or EU or an emerging one like India or China; A per cent or B per cent of revenue, depending on whether you’re selling consumer goods or gas turbines. When the number of advertising outlets expands (in the US, from three television networks in the 1960s to hundreds today, for example), each gets a smaller piece of pie. It’s worse on the Web, where there is no theoretical limit to the amount of advertising a site can create. When demand is constant and supply increases, prices fall: you learned that, recall, on the first day of your first economics class.
The third nail in the coffin of the eyeballs-to-adverts delusion is what my Booz & Company colleagues brilliantly call “private label media”. These days companies can literally disinter-MEDIA-te by investing in their own media - professional, popular Web sites that they build and operate themselves. Why advertise on Epicurious (the foodie web site operated by Conde Nast) when you can build BettyCrocker.com and attract 8 million unique visitors a month?
Private label media is the latest, and most powerful, manifestation of a long-term trend, whereby advertising has taken a smaller and smaller portion of all marketing spending - a stepchild of marketing. According to analyst Jack Myers, 70 per cent of marketing communications spending went into advertising in 1963; today, however, only 30 per cent does - the rest going into merchandising, trade promotion - and now, private-label media. Sure, marketers still use advertising to attract customers - but increasingly they are trying to move them into their private-label media, and keep them there. Check out babycenter.com, for example, run by Johnson & Johnson: when expectant parents register there, they are invited to enter their baby’s due date. On the site, they get great content - produced by an editorial staff every bit as good as that of magazines for parents. And J&J, knowing the baby’s birthday, can estimate when the child will be ready for a first pair of shoes, for toilet training, for a tricycle - even for acne medication. If you were a rational marketing executive, where would you put your next dollar of spending?
And if you were a rational entrepreneur, how would you design your business plan?
Thomas A. Stewart is the Chief Marketing and Knowledge Officer of Booz & Company. Formerly the Editor and Managing Director of Harvard Business Review, he is the author of Intellectual Capital: The New Wealth of Organizations and The Wealth of Knowledge: Intellectual Capital and the 21st-Century Organization.
Comments (1)
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However, this is changing. As we move into a more multi-polar world, this US dominance will inevitably have to shift. As it does we will start to see the value of the long tail principal. I think this trend is clear and apparent though not as visible as we would suppose right now also owing to the embryonic stage of the shift in the ability of users to to find diverse content and also of the evolution of the power structure of mass communication media away from the hands of a handful of media companies. I think when we look at the consumer space 5 years down the line this principal will be much more evident and apparent.
That said one very clear example of the long tail principal was in the funding mechanism of Barrack Obama during his campaign for the Democratic nomination and then for the presidency. Surely it was the long tail principal that enabled him to out fund his opponents by appealing to the long tail of the electorate as opposed to the large institutional base that typically determined the funding capability of candidates in the past?
On the advertising model issue, it is true as coined by Lord Lugan, most marketers do not know which 50% of their advertising has no meaning and which 50% adds value. The great advantage of digital is that it enables them to determine precisely that. By knowing this they will not necessarily reduce their advertising budget as current ad spending numbers demonstrate but they will seek to achieve 100% efficiency from their advertising spend. This will result in a much greater ROI or uptake in sales if one subscribes to the idea of the effectiveness of marketing and advertising spend in driving sales. The reality in the current economic climate is that most companies are looking to achieve better results with the same and sometimes less spend. Knowing which 50% of spend is wasted enables them to do this.
A reality of the new paradigm of the internet is that people are more individualistic with much shorter attention spans and content needs to be much more personalised in order to be relevant. As such there is value in a long tail advertising model. The real challenge is changing the culture and practice of media buyers in line with changes in the consumer landscape. This will inevitably happen though as he benefits of hyper targeted media become better understood.
As to whether establishing a web business on the pretext that it can survive with advertising sales alone is valid or not, I think the reality of that has been evidenced by both Facebook and Twitter. Even though both of these companies are yet establish a robust and definitive advertising model the reality is that there are a multitude of companies queuing up to throw millions of dollars at these companies once they do. This is because of they eyeballs that they command and the level of engagement consumers have when in these properties. The reality of the internet era is that companies have to go where consumers are. Even though they can create their own content channels they cannot drive consumers to them regardless of how brilliant their content is without significant marketing and promotion. It is for this reason alone that so many companies are clamouring to advertise on Facebook. Facebook is where users are... in their hundreds of millions. If a business can build up a critical mass of users then commercial benefits will eventually follow. This in itself is part of the digital revolution. We are moving into an era where there are many forms of currency and value that can be created, demonstrated and traded. Intuitively more and more business are starting to grasp this as this value can be translated into commercial value down the road.
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