A few years ago the term The Long Tail was popularized by the former head of Wired magazine in the book of the same name. The long tail was a new type of business model that did not depend on a few big clients, but countless smaller clients who spent much less, but added up to the same revenue. Strength in numbers.
The book focuses on the music industry which after the wide adoption of the internet saw their profits disappear into thin air as consumers were able to download music for free from services such as Napster. As the crackdown on downloading began, the need for an alternative grew. Music streaming took its place and masses flocked to different services. It’s a very interesting development and we see it in all shapes and sizes. But the question is, are businesses equipped for this new type of digital economy?
Strength in numbers, losses in numbers
The long tail strategy is based on having a large customer base who generates as much revenue as a few large customers would do. The old way of doing business so to speak. Embracing the long tail strategy would give a more stable source of income for a business, because when a few customers leave, it doesn’t put as much of a dent in the revenue. While this in practice sounds very good, I had my concerns. I was very pro long tail years ago, but I see now that in practice this makes competition almost non existing.
Will an average company generate a loss for 13 years and remain in business? Probably not.
Why have I changed my mind you might wonder. I would attribute this fact to the rise of the platform economy. Look at services such as Uber, Lyft, Airbnb or streaming services such as Netflix or Hulu. Most of them are backed by major investors, but have yet to prove themselves in terms of profitability. Uber Technologies still made a loss of a whopping $1.01 billion in 2019 despite its 37% revenue growth year over year. Spotify became profitable after 13 years with an operating profit of $107 million. Will an average company generate a loss for 13 years and remain in business? Probably not.
These companies are so dependent on a large customer base, because they make so little money out of each customer, they need massive amounts of them to become profitable. It’s a constant battle to generate as much revenue as possible from a customer to stay afloat. This brings me to my next point, which was failed to be conveyed through the book, there is no level playing field for new competitors.
A new long tail focussed competitor would need large investments to grow into a business with enough customers to become profitable. The only companies that can still claim market share are competitors who have seen the market mature, decided through a board meeting that there might be money to be made, allocate research and development funding and use their marketing prowess to dominate the market. Just look at how Disney with Disney+ is entering the streaming video market, trying to claim market share from Netflix. It acquired media powerhouses such as Pixar to its arsenal years before and entered a market ruled by Netflix. The average consumer thought it was a done deal, no small company could rival this powerhouse.
Small startups, if they even attempt to start a business in what has now become essentially a red ocean, face tough competition from established companies or fast growing venture backed corporations. Without the massive billion dollar funding some of them receive, it’s nearly impossible to gain any meaningful market share to keep the company afloat.We’ve also seem to have glorified the going in debt to grow business model. But is this really a sign of a healthy company?