Friday, July 07, 2006

Long Tail Wisdom

Chris Anderson's Wired article, The Rise and Fall of a Hit is an extract from his book The Long Tail that I've read a lot about, but not actually read myself. Coming after yesterday's post it is interesting how it highlights the way that the hit mentality is evident in the world outside of music/movies:
If it’s not a hit, then it’s a miss. It has failed the economic test and, therefore, never should have been made. This Hollywood mindset is now how we allocate space on store shelves, fill time slots on television, and build radio playlists. It’s all about allocating scarce resources to the most “deserving,” which is to say, the most popular.
Fred Wilson (the guy who coined the term Freemium) has this to say:
... I believe VC fund sizes have gotten very large requiring ever bigger winners to move the needle. When I started in the business 20 years ago, a $100mm exit, generating $20mm in value to our fund was always considered a big win. For many of the VC funds today, that would be a yawn. And that's a problem because for many entrepreneurs, a $100mm exit is plenty big, particularly if they can figure out how to hold on to 20+ perecent [sic] of the company before the exit happens. The $100mm exit moves the entrepreneur's needle but not the VC's. That's a problem.
It's a problem because it generates a chasm between entrepreneur and VC expectations, one that may well be leading good ideas to not find VC funding, and therefore get trapped in the “lifestyle” business stage more because there is a lack of VC vision, than it suits their business model. The VCs are still trapped in the Hits model, but the market has moved on from them.

This seems to be happening in many different areas, for example, makers of tabletop/pen-and-paper roleplaying games (RPG) are bemoaning the death of the industry as they know it. This is largely because the market has fragmented, and other than a handful of successful companies, the average RPG publisher is working on it as a hobby, a part-time, or at most marginally successful business.

Chris Anderson claims it has had broad impact; “Practically every other sector of mass media and entertainment has witnessed a similar shift away from hits.” He points to popular music, movies, TV and even best-selling novels as all exhibiting a move of consumers away from the mega-hits, to exploring more specific niche selections. If Web 2.0 companies are aiming their products/services at the consumer market, then this fragmentation is both good and bad news. Good news in that there is a place in the market for almost anyone, bad news in that it is becoming increasingly difficult to clearly capture enough of the market to justify the capital expenditure required to develop the products/services being offered.

I think that increasing numbers of entrepreneurs will have great ideas and launch them using their family/friends' capital, but fail to either attract enough of the market to continue to fund growth internally, or to promise to move the needle enough to attract VC investors. My answer for them is to look towards natural aggregators of users, and in one sense that is exactly what the large enterprises are. The Web 2.0 edge in that enterprise market must surely be that users can be attracted and looked after as individuals consumers first, and then second become evangelists for the Web 2.0 product within the enterprise itself. Leave it to IBM to employ a thousand salespeople to win over the CIO, Web 2.0 will win through guerilla tactics, winning the users heart and minds, and taking the IT department by surprise!

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