55. The Long Tail
The distribution and sales channel of the Internet enables businesses to reach new niche markets by selling a large number of unique items in small quantities. The Long Tail describes a business model developed by Chris Anderson, editor of Wired magazine and author of The Long Tail: Why the Future of Business is Selling Less of More. A perfect example of this business concept is Amazon.com.
The average Barnes and Noble bookstore carries approximately 130,000 books. Store size limits the inventory of books that can be physically inventoried and sold, which essentially forces Barnes and Noble to carry a large inventory of the most popular books. On the other hand, Amazon is the largest bookseller, with two-thirds comprising “unpopular” or out-of-print titles. What makes this possible is a business model stripped of distribution, inventory, real estate, and other significant costs that are a burden to traditional retailers.
Netflix provides another example of how the Long Tail is an effective business model. Unlike competitors, Netflix can inventory and distribute a large number of obscure titles as well as popular movies. Netflix distributes approximately 2 million movies a day An inventory of popular movies makes up the front of the demand curve, but the long tail of unpopular titles is far greater than the most popular titles. If you consider how the addition of a search and recommendation engine adds value to the business model, the Long Tail distribution to niche markets grows even longer (see Figure 55.1).
Figure 55.1 Long-Tail business model
Other companies like eBay and iTunes have tapped into this successful business model, which is dominated by companies on the Internet. As more businesses begin to leverage the potential of the Long Tail, even large Internet businesses will begin to be affected by smaller online businesses that focus on niche products or niche target audiences.
The concept of the Long Tail business model is an ideal example of an integrated strategy that has no boundaries. Is it a niche target market strategy? A distribution strategy? A competitive strategy? A product strategy? Or perhaps it’s a promotion strategy because it leverages social media. The answer to all of these questions is yes; depending on your strategy and approach, it can be all of the above. It’s certainly innovation.
New Revenue Streams and Business Models
A result of innovation is new business models. Many of these, especially Internet-based businesses, create and capture revenue in unique ways. Revenue streams can be generated through product and service transactions or through commissions from affiliate relationships. New revenue can also be produced by fees for memberships, subscriptions, licenses, installation, maintenance and service, click-through fees, and hosting or on-demand fees. In an online world where so much is offered for free, there is also unlimited potential for generating new revenue.
The Internet enables mass customization to be possible for both customers and suppliers. Online newspapers and online television channels such as Hulu are shaking up entire industries. Open-source software like Linux commands respectable market share, and new companies like Threadless are creating an open and collaborative business model built entirely around the customer.
Businesses are not the only drivers of innovative business models. Nokia estimates that by 2012, approximately 25 percent of web content will be user generated. Wikipedia and YouTube content is entirely user generated. As social networking and blogging software enable more collaboration and personalization, it will be interesting to see the evolution of Internet 3.0. Companies will discover that Internet marketing will no longer be about driving customers to their Web sites, but driving content to customers, enabling them to interact with it and add new value.