VC advice on finding the money in the Long Tail

David Hornik, a VC at August Capital who has been a good sounding board for me in my Long Tail research, has a long and thoughtful post on where the money in the Long Tail is. He's been pitched countless Long Tail business plans, and his conclusion after all this is the ones that make sense are not so much content creators as aggregators and filters:

The aggregators are those web businesses that seek to collect up as much of the Long Tail content as is possible, so as to make their "stores" a one stop shop for content no matter how popular or obscure. That aggregation may be on a horizontal basis, as is the case with Amazon or Netflix, or it may be on a vertical basis, as is the case with WantedList or GameFly (the Netflix of porn and video games respectively). The value to consumers from these content aggregators is that they need not shop in dozens of places on the web in order to acquire a diverse set of content. As a result, aggregators are able to extract a disproportionate amount of value for the sale of each individual piece of content. And while creators are likely to sell slightly more content as a result of the increased ease of salability, they will not likely emerge from the obscurity of the Tail merely because they are made available for sale on Amazon or iTunes.

The filterers are those businesses that make it easier to find the content in which we are interested, despite the increasing proliferation of content creators, hosts, aggregators, etc. The purest form of filterer is the search engine. But the more obscure the content, the less effective the generalized search engine will be. Thus, I have been pitched on an increasingly large number of vertical search engines that use their thematic focus (shopping, real estate, employment, etc.) as a proxy to increase search effectiveness. And I have also seen an increasing variety of clever technical solutions to help filter the myriad of available content (for example, Pandora uses professional musicians analyzing songs based upon a standard set of characteristics and Delicious and Flickr use forms of end user tagging to characterize a disparate set of content). Again, while these different filtering technologies may make it slightly more likely that an end user finds his or her way to a piece of obscure content, it will not likely be sufficient to catapult an artist into the mainstream. The beneficiary of the filtering is the end user and the filterer, not the content owner per se.

Comments

[Francis Hamit]

Dear Chris:

I'm in my xecond year of experimenting with online publishing. My little publishing company, Francis Hamit Electronic Publishing, distributes through Lightning Source, which resells the product not just through Amazon, but Fictionwise, Diesel E-books,Powells.com and many other online sights. Amazon gives you a global reach since they also sell in Canda, The UK, Germany, France, Japan and Australia.

Frankly, none of it sells very well since most of it is obscure technical stuff from trade magazines, but some of it always sells. There are some mysteries to be solved. One is price point. Amazon is considered the 800 pound gorilla. They simply would not list anything that sold for less than $1.95, so that became our minimum price. That's below what other aggregators charge, but the lower price doesn't seem to move sales. People don't comparison shop for this kind of material and they won't download it even for free if they don't need it. We've tried single articles and thematic bundles at various prices. The stuff that sells best is that which has previously sold since it ranks higher on the list and is easier to find.

We signed up for Google Print which is now Google Book Search. The execution has been poor. I was willing to do this because I though providing a capability to actually browse the text might help sell the titles. Google has put up title pages and tables of contents mostly. They used to have one or two pages of text, but suddenly those can't be found. Moreover they have put up only about twenty percent of the titles we sent them. Results have been hard to measure. There seems to be little correlation between those accessible on Google Book Search and those sold by Lightning Source, despite the link to Amazon on those pages. But it is a new system and maybe , over time, things will improve. I do know that I would be happier if Google actually did these great things they say they are going to do. Rather than rushing into a new initiative every week, it would be more useful if they actually fulfilled these promises. As for the ad revenue from these pages, well you have to have ads, and with speciality material the ads have have some relevance to the text, to be truly effective. Selling soap is a hit or miss proposition if the article isn't about cleaniliness.

Amazon has a new publishing program, Amazon Shorts, which I have also signed up for. Here the price point is 49 cents with forty percent going to the author. This works because Amazon has fifty million customers and is actually adding value, rather than just passively reselling the product. It will be interesting to see how this works out, but it looks like a winner. (Full disclosure: I own shares in Amazon and do business with them in other ways.)

One of the problems that is already apparent with collecting a dogpile of products in one place is the growing size of the pile and the problems of searching out what you need. As we know from Zipf's Principle of Least Effort, most people are very lazy about this. Google is a great search engine, but the application to book search isn't quite there yet.

Google wants to sell ads where Amazon just wants to sell products. Somehow that seems easier.

[csven]

I was clued to this issue a few years ago after reading a lonely article posted on a small music label's website (obviously distraught over the explosive use of p2p for illegal music downloads). In that piece the label owner effectively asked, "What good is having access to all this music for free, if people can't figure out what's good and what's crap?" This person had a point, and that logic influenced my comments when I said to someone earlier this year:

As people develop systems for finding the things they really want, then ‘Obscurity’ really is relegated to things people really just don't want... I'm thinking that Finding the items easily will happen after we're in a position to deliver them. So we'll start off with so much junk we can't find anything. Then we'll figure out ways to really wade through it."

I'd say that narrow-band aggregators are the natural first step in solving this problem and are definitely where the money is... even if we develop reliable ways to search through all the content that will increasingly be made available. That's because as I was alluding to in one of my own posts recently (http://blog.rebang.com/index.php?p=468 ; note last quoted clip re: "adventure" in shopping), there's a sense of adventure that comes from buying content based on only a few samples and the trusted word of a favorite aggregator (I was actually relating it to virtual world content; but any online content might apply under certain circumstances). I do it. Sometimes I'm not immediately happy with the item (music CD's in my case). However, once I give the music a chance, I usually find myself not regretting the purchase. And of course, that just increases my loyalty. So if I'm already doing business with them and they've earned my trust both with their recommendations and my account information, I'm happy to pay a small premium.

Consequently, what we may be seeing is clear valuation of Trust and Reputation on a micro-scale.

[Matt]

These trends are, of course, also good for creators. If what you really want to do is create content and incidentally get paid for it, there's nothing here to discourage that. But it also means you're not someone VCs will want to meet...they want to meet people who are looking to get staggeringly rich, and incidentally get there by doing cool stuff.

From a VC's perspective, then, the Long Tail economic model only works when you can capture _all_ (or at least most) of your market's tail...whereas from the creator's perspective, there's nothing especially wrong with a comparatively very small slice.

[Amber G]

I do know that I would be happier if Google actually did these great things they say they are going to do. Rather than rushing into a new initiative every week, it would be more useful if they actually fulfilled these promises. As for the ad revenue from these pages, well you have to have ads, and with speciality material the ads have have some relevance to the text, to be truly effective.

[christmas presents]

VC funds are in trouble because their institutional investors large investment groups like the Harvard Endowment – have seen a huge drop in the value of their investment assets value current environment. This means pressure is being put on VCs who 1) cannot raise additional money as easily and 2) are being reneged upon for committed capital by institutional investors and high net worth individuals...