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March 09, 2005

The long tail of software. Millions of Markets of Dozens.

Hello blogging, my old friend…

You know you’ve been constipated in getting a post out the door when you start it with three caveats:

  1. This post is WAY long. For that I’m sorry. Some things just take a while to say.
  2. This post is not so much about entrepreneurship as it is about where I see opportunities for entrepreneurs to create new businesses and describing the general direction of my new company, JotSpot.
  3. This post is based on a presentation I’ve been giving for the last five months. If you want a copy of it, you can download it here. Download jotspot_long_tail_sw.ppt  


Excite and the Long Tail.

In Excite’s heyday, we were handling millions of searches a day. If you graphed the frequency of those searches (the Y axis being the number of times a query was asked per day and the X axis being the actual query listed in order of frequency) you got a power law curve that looked something like this (excuse my lame-ass powerpoint graphing...).

Without_percentages_3

The most popular searches (things like Sex, MP3, and the bare midriff female singer du jour) were vastly more popular than the 1000th most popular search. For example, “sex” was on the order of 100,000 times more popular than the 1000th most popular search (whatever that was). Said another way, there were a handful of extraordinarily common queries and millions of far less popular queries.

In fact, the frequency of the average query was 1.2. That means if you wrote each of the millions of queries on a slip of paper, put them all in a fish bowl and grabbed one at random, there was a high likelihood that this query was asked only once during the day. Of ten-plus million queries a day, the average search was nearly unique.

The most interesting statistic however, was that while the top 10 searches were thousands of times more popular than the average search, these top-10 searches represented only 3% of our total volume. 97% of our traffic came from the “long tail” – queries asked a little over once a day.

With_percentages_1

Down the tubes

You know the real reason Excite went out of business? We couldn’t figure out how to make money from 97% of our traffic. We couldn’t figure out how to make money from the long tail – from those queries asked only once a day.

Overture figured it out, Google perfected it and we all know what happened from there. Those guys figured out something revolutionary -- the long tail of search was a advertising marketplace. But it wasn’t a traditional advertising marketplace like television, where a handful of large advertisers reached out to a handful of very large markets. It was a special kind of marketplace where small advertisers could reach small markets efficiently. It was and is a revolution to the traditional economics of advertising (where the cost of producing and distributing advertising requires large markets to justify the expenditure).

Search is a long tail business and that is the source of its power and profit.

Other Long Tail Businesses

Can I get a shout-out for Chris Anderson? For those of you who don’t know him, he’s the editor-in-chief of Wired Magazine and he wrote a great article called the Long Tail about six months ago.

Chris pointed to three other long-tail businesses (Rhapsody, Netflix and Amazon) as examples of the power of the tail.

Here was the first set of charts Chris showed.

Anderson_1_1

Let’s look at the Amazon example. This graph shows that Amazon sells roughly 2.3M books and that the average Barnes and Noble retail store stocks 139,000 books. So, Amazon stocks roughly 2.2M more books that Barnes and Noble.

No surprise here. That’s the benefit of an online storefront. Massive inventories housed in ultra-low-rent areas that are fronted electronically.

The astonishing figure is the percent of sales that comes from the “long tail” of books (books that Amazon carries but that Barnes and Noble doesn’t).

57%.

57% of Amazon’s sales come from books you can’t even buy at a Barnes and Noble (to be fair, there is some skepticism around this number voiced here). This runs totally counter to the traditional 80/20 rule in retailing – that 80% of your sales come from 20% of your inventory. In Amazon’s case, 57% of their book revenue comes from 0% of Barnes and Nobles inventory.

Anderson_2_1

To quote Gary Coleman, I can hear retailers across the globe saying,  “What you talking about Willis!?”

ITunes and the Long Tail

iTunes has over one million songs in it’s catalog. You know how many have been bought at least once?

Every one.

Completely counter to the traditional 80/20 rule, every iTunes song has been purchased at least once.

What this says to me is that the tradition 80/20 “rule” is more a function of consumers having their expectations set by the limits of physical inventory in retail stores than it is about real human nature. Amazon and iTunes are great examples.

So what?

What all these data points mean to me (and to most folks who are interested in long-tail stuff) is that the most interesting, transformative businesses that have been built over the last decade and that will be built over the next one are going to operate in and make money from the long tail.

Google, eBay, Amazon, Rhapsody, Netflix, iTunes. What do they all have in common? They all work the long tail and they’re all radically changing the dynamics of their more traditional businesses.

The Long Tail of Software

The long tail doesn’t just apply to music and movies. There’s a long tail for software as well. Here’s why.

The purpose of software in business is to support the way a business does business – from the way a business runs it’s hiring and firing to the way it orders materials to the way it tracks sales. In the market-speak that surrounds the technology business, the purpose of software in business is to support these “business processes”.

Let’s do some simple math. First, every business has multiple processes. Things like hiring, firing, selling, ordering, etc. Second, while some of these are pretty common in name from business to business (recruiting, for example), in practice, they are usually highly customized. Finally, there are simply a large number of processes that are either unique or that are common to millions of very small markets and therefore not traditionally worth the effort to buy software for (for example, the process by which an architecture firm communicates between it’s clients and the city planning office).

These three facts

  • every business has multiple processes
  • processes that are similar in name between businesses are actually often highly customized
  • there exist a large number of processes unique to millions of small clusters of industries.

means that there is a combinatorial explosion of process problems to solve and, it turns out, little software to actually support them.

Said another way, there is a long tail of very custom process problems that software is supposed to help businesses solve.

Inaccessible Tail

In the past, software’s long tail has been generally inaccessible because software has been

  • Too difficult to write
  • Too expensive to write and distribute
  • Too brittle or expensive to customize once deployed.

It just hasn’t been economical for someone to create a custom software company to help architecture firms.

That’s why, in the software business, the traditional focus has been on dozens of markets of millions instead of millions of markets of dozens. The traditional software model is to make software have enough features and address enough of a homogeneous market that you can sell millions of copies of the same software. In the past, that’s been the only way to make money.

How the software tail gets address today

The market doesn’t like a vacuum and people do solve their software needs in the long tail. They do it using two basic tools: Microsoft Excel and email. I’ve seen so many business that run on Excel+email. People build structured lists in Excel and then send them out over email for comments and updates – a list of people to hire, a list of deals they want to do with action items included, a list of features for the next product. Something like this

Excel_sheet_5

While normal users don’t think of it this way, what they’re really building is an long-tail application – a custom application, built by the end user and networked over email.

Doing better (warning, personal plug for JotSpot coming…)

Excel and email are the wrong tools for software in the tail and we all know it. It’s really easy to start with, which is fantastic, but it suffers from.

  1. Versionitis. We all know what happens with spreadsheets like these. You create it, you mail it to 10 people. One of them changes and mails it back out. Rinse, lather, repeat until everyone’s inbox is full of this thing and no one knows who has the latest version.
  2. Updates. You only know the sheet has changed is when someone emails it to you.
  3. No integration. What about the stuff that doesn’t fit in the grid? – the email and documents that go along with these spreadsheets?

That’s where JotSpot comes in. JotSpot is a company that is building a platform to make it easy and affordable to build long-tail software applications. To take those Excel spreadsheets and turn them into real web-based applications where you don’t have versionitis, where updates find you instead of you looking for them and where you can integrate data in your hard drive with data from the web, email and other applications.

Please, really Joe, wrap it up…

So, my tip for entrepreneurs? It’s all about the long tail. Whatever business your starting, think about how to serve millions of markets of dozens instead of dozens of markets of millions. Serving the head isn’t a bad strategy. You can build a great business. But, figure out how to serve the tail of your market efficiently and you’ve got a blockbuster.

March 9, 2005 | Permalink

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Comments

Excellent, excellent write up!

Those Excel+Email tools sounds very familiar to me having worked for different Fortune 500 companies. Definitely, there is a market for product which end user himself can customize. Though I think that this kind of product, which end user can themselves use, would be very very difficult to create. (I agree with Joel Spolsky on this). I think I am going to register for JotSpot beta and try it out.

JD

Posted by: JD | Mar 10, 2005 1:46:09 PM

Btw, is your goal with JotSpot is to create a tool which end user can use OR to accelerate development of apps by any average Joe (pun intended) developer?

JD

Posted by: JD | Mar 10, 2005 1:58:44 PM

It strikes me that the Excel + e-mail approach is better replaced by a Wiki.

Posted by: fling93 | Mar 10, 2005 4:26:36 PM

Email and Excel are what these folks know. They do NOT have TIME to learn anything else.

So... if you're going to provide a program to help them with this, it better be immediately intuitive to nearly anyone in the first 5 minutes.

Posted by: Mr. Analogy | Mar 10, 2005 5:55:13 PM

I've been Jotspot for a short while. It has its quirks, but so far I like it.

There are 2 pressing things for me (and I'm probably a classic case of the long-tail market) to consider though, before I can switch to this: pricing, and applications hosting.

1.) Pricing - The Jotspot website says it hasn't figured out pricing yet. But if it's an application for the long tail, it has to be priced very competitively.

2.) Hosting - I don't want to host sensitive company information on a remote server. In fact, I'm probably switching to something else I can install ion my server, just for peace of mind. It just creeps me out. Can I install Jotspot on my own server, and download the custom applications from a central repository? That would be the deciding factor for me.

Posted by: Gabby Dizon | Mar 10, 2005 6:23:53 PM

Joe,

I signed up for JotSpot beta several months ago. I got an email about a delay with the beta and then nothing. Should I just sign up again?


Thanks.

Posted by: James | Mar 10, 2005 8:52:28 PM

Jim,
The lesson in this single page is more powerful than anything I have ever read. I will look at the wired article as well. With some history in the retail business and all things being equal, it is understood that billing a million customers for 10 bucks has always had more value than billing 10 customers for a million bucks, and while you can take that apart the essence is true. When you enter the word "bubble gum" in googlesuggest (http://www.google.com/webhp?complete=1&hl=en)you get over 800,000 sites. That's a nightmare for the guy looking or selling. I believe that the next wave of the web will be (are you ready?) word of mouth. Jim, best of luck with jot. I am looking forward to my delivery of jotbook.jot.com. I look forward to buildig it a foot wide, and a mile deep, with a nice long tail.

Posted by: Frank | Mar 10, 2005 9:31:07 PM

Sorry for nitpicking, but in the last paragraph is says, "Whatever business your starting," but it should be you're instead.

Just so you know. ;)

Posted by: dan | Mar 11, 2005 12:51:36 AM

And wouldn't you know it, I made a typo myself. I meant "it says" not "is says."

Posted by: dan | Mar 11, 2005 12:55:38 AM

That's our market, and it's a tough one. You need more than a web interface -- you need to be able to deal with business rules using a product that a non-programmer can use, and you need to handle integration.

I agree there's a huge untapped market here - all the major app vendors are trying to go there.

See you at the finish line!

Posted by: David Lambert | Mar 11, 2005 7:00:48 AM

Things like versionitis are better solved by having shared, networked directories with files that anyone can modify (with changes logged); and by wikis. There is no need for some new elaborate architecture.

Posted by: jhn | Mar 11, 2005 7:06:18 AM

Ummm...its Lather, Rinse, Repeat. You really should read your shampoo labels more clearly, dude

Posted by: Fine James | Mar 11, 2005 8:36:53 AM

i could not get the ppt slides....it is corrupted..can u mail it to me at sir_Animesh@hotmail.com
thanks a lot

Posted by: animesh | Mar 11, 2005 9:31:34 AM

Wondering about how broken the 80-20 rule really is (not to say that it won't be moreso soon).

For example, just because Amazon has 57% of its sales (which as Jeff Bezos clarified, is more around 25-30%) outside of B&N's inventory, that doesn't mean that 80% of amazon's sales don't come from 20% of its inventory.

If you compare the two (2.3M vs. 120K) it shows that 100% of B&N's inventory only accounts for 6% of Amazon's, meaning that Amazon still has plenty of room in its top 20% of inventory.

It's not about how much of Amazon's sales come from B&N's inventory, instead we need to compare apples to apples.

I don't think the long tail will have its full affect until its easier to find 'non-mainstream' material. Hope to write more soon.

Posted by: adam | Mar 11, 2005 11:35:13 AM

The point about Amazon is not whether 20% of their inventory represents 80% of sales. The real point, from the consumer's perspective, is that only Amazon can satisfy your needs when you're not looking for The DaVinci Code. As a result, you're much likelier to be loyal to Amazon and to return to their store for all of your book needs.

Posted by: Steve | Mar 11, 2005 2:24:39 PM

Wonderful article, I just thought that it was amusing you ended it with "But, figure out how to serve the tail of your market efficiently and you’ve got a blockbuster." rather than saying "... and you've got a netflix."

Posted by: Philip Ashlock | Mar 11, 2005 4:17:22 PM

interesting and thought provoking...Makes you wonder who will beat GOOGLE in the end

Posted by: colbert | Mar 12, 2005 6:53:27 AM

Joe, excellent post. However, I believe that the Long Tail of JotSpot is severely limited due to 1) Jot-based apps being online only, and 2) lack of APIs/tools to extend the base platform (i.e. it’s closed, not open). Although more and more people are getting online, it doesn’t mean that people want to run online apps only. There are two reasons why smart/fat clients will continue to flourish: 1) Privacy of use as well as of the user’s data, and 2) richness of the user experience being much better than online apps. Google’s Long Tail works because online advertising is a fairly “passive” application in that the user simply points and clicks. There’s very little data i/o and no need for rich user interaction. Nevertheless, the arrival of Google Maps represents a new breed of online apps that may rival smart/fat apps at least from the richness standpoint, but still, the privacy issue remains unresolved.
So, which software company do I think is creating a viable Long Tail? Answer: SalesForce.com with its Sforce Platform and On-Demand Architecture. Actually, they created this Long Tail over two years ago, and it's clear (with 150 ISV apps and almost 14,000 customer apps) that it continues to grow rapidly.

Posted by: Lawrence Liu | Mar 12, 2005 9:05:37 PM

I think there is an error in this sentence

"from the way a business runs it’s hiring and firing" should be
"from the way a business runs its hiring and firing"

great article!

Posted by: paolo | Mar 13, 2005 7:57:19 AM

There are some problems with extending the "long tail" anaolgy to software. When I listen to Sleter Kenny, it doesn't matter whether they have 100 or 100 million fans: my enjoyment is just the same (indeed, for some folks, the more obscure the better). But the utility I get out of Microsoft Word depends very much on it being a universally used standard.

There are HUGE network effects to software. If that wasn't the case, the OS market wouldn't consist of one big gorilla and a few little apes. Sure, there may a lot of small sellers that make decent money, but in the long run in software you need to either get big or someone else in your category will.

Posted by: Matt | Mar 13, 2005 7:25:14 PM

Music, Movies, Books, fine, the long tail is working out just dandy for them. But as least as big as any of these industries is videogames, and their long tail is seriously dis-proportioned. It consists almost entirely of what would in the other media industries be called backcatalog, games that either aren't made anymore, have been re-released as "Platinum Hits", etc., or are rented via services like Gamefly. There is no room for the "indie" games in videogame retail. The Long Tail is opening up, but videogames are in danger of being left behind if the publishers don't wake up. Just look at the racks at Walmart; sequels, movie tie-ins, franchise titles. The new availability of the Long Tail means nothing if their aren't similarly broadened avenues of content creation as well. Let's not leave the plight of this industry out of the Long Tail Discussion, or it might just be left out of the revolution.

Posted by: Terence | Mar 13, 2005 7:37:35 PM

To Lawrence:
Hey Lawrence-

I appreciate your perspective on JotSpot. I honestly don't know if we'll be successful in our approach, but I do know that it certainly seems like an opportunity worth striving for. Let me see if I can address your points.

Richness of experience:
I agree that fat clients have it way better than the web, but I think there is a serious, long-term shift toward rich internet interfaces. Certainly Oddpost, Google and others are/were leading the way and we're investing pretty heavily in this area. But, I concede the point, the richness of web based interfaces will remain inferior to think clients for some time to come.

The advantage of course of not having a download is that you receive a much easier trial ability.

Lack of APIs:
This one isn't true. In fact, JotSpot's philosophy while not open source, is certainly open data. We haven't published the documentation around our APIs, so they might as well not yet exist, but we intend to have a large variety of interfaces in and out.

Privacy:
I agree with you that the *perception* that hosted services are less secure is an issue. Like rich interfaces, I think time is on the side of hosted services but the question is 'how soon'. We believe that JotSpot can be successful as a hosted service, but you should see some news from us soon on this front as well.

Thanks again for the comment.

--Joe
Joe Kraus
CEO/Co-founder, JotSpot

Posted by: Joe Kraus | Mar 13, 2005 8:40:07 PM

Great piece.

But I am new to this site, so: who is this writing? I downloaded the presentation and there is no name there either.

Just a suggestion: in the pie charts about the portion of sales from long tails, please mark which sector is the long tail. It's obvious from this writeup, but not so in the presentation.

Posted by: Ray | Mar 13, 2005 8:40:58 PM

Doesnt Linux solve the problem of long tail?

Posted by: Nach | Mar 14, 2005 3:35:30 AM

Marketing/awareness of software solutions for the long tail markets should prove to be extremely challenging. Commodity goods such as music and books are perfectly understood in the mind of the consumer. But specialized software apps to help streamline miscellaneous business processes, that's something that no consumer has much interest in. Users generally don't want to learn any new software to accomplish their goals-- they themselves can barely describe what custom result they need to accomplish their general-purpose tools.
Good luck, though.

Posted by: Emma Blowgun | Mar 14, 2005 7:26:31 AM

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