Home / Blog / Changing Paradigms – V

Changing Paradigms – V

5. How much money is there in the long tail?
The long tail, by definition, represents a multitude of niches forming a fragmented market, We should clearly distinguish the fragmentation of the market in terms of niches addressing different “needs” from a market fragmentation depending on geographical separation. This latter has changed significantly as the market geography has changed because of better, more efficient distribution chains. What used to be separated markets are now a single market. Companies can now sell globally, and they do. The same product can reach a customer in Australia and one in UK, basically at the same distribution cost (if the product is made of bits, distribution cost is exactly the same, that is “zero”). Hence, market has grown in size thanks to the possibility of reaching a wider audience.
Flexibility in product manufacturing has increased the possibility of affordable customisation, so that one can leverage on the economy of scale (volume production) and at the same time customise the product to specific markets (the Australian market may require, because of regulation or specificity, a slightly different customisation then the one in the UK). The “softwarization” of functionalities has clearly helped in the flexibility and customisation, and so has the flexibility in the whole manufacturing value chain. Benetton, as an example, inject flexibility in its product lines from the design stage when designers create models that can fit a variety of body shapes, from China to Italy, with minimum impact on tailoring. Then the production is split into stages so that the decision on the colour and then on the trimming of a sweater can take place at a later stage, allowing for specific colour and trimmings to be selected for a specific market.
This first fragmentation, the geographical one, has therefore being conquered and the result is a worldwide market place that creates volumes where before they did not exist because of fragmentation.
The market value in this case is huge and big companies are attacking it with all the sophistication (and cost) required for collapsing the fragmentation into a single market.
The other type of fragmentation is intrinsic to the specific need of a specific potential buyer. In this case the fragmentation cannot be reconciled by “shrinking” distances, the value is in the uniqueness of the need and its satisfaction. Although here you still have the distribution cost as an important factor, the focus is on the diversity. We really have niche markets and these are the ones usually addressed by the term long tail today.
Clearly, also here by looking at a potential worldwide audience you are increasing the potential market but the fragmentation is so high and the specificity on the product so stringent that you never reach big volumes, hence the value of the single niche remains low.
This is reflected in the world of the Apps. Although a few, out of the millions existing, can reach volume downloads (millions of downloads) 99.99% of them will be of interest to a few hundreds, a few thousands of customers. Hence the low value of the niche. Clearly, all together the millions of niches create an interesting overall market value but the appeal of this value is low to big companies, since the revenue per niche is usually not enough to justify investment (and operation cost). This is the play field of one person company and small enterprises where 100,000$ is already a very good revenue!

About Roberto Saracco

Roberto Saracco fell in love with technology and its implications long time ago. His background is in math and computer science. Until April 2017 he led the EIT Digital Italian Node and then was head of the Industrial Doctoral School of EIT Digital up to September 2018. Previously, up to December 2011 he was the Director of the Telecom Italia Future Centre in Venice, looking at the interplay of technology evolution, economics and society. At the turn of the century he led a World Bank-Infodev project to stimulate entrepreneurship in Latin America. He is a senior member of IEEE where he leads the New Initiative Committee and co-chairs the Digital Reality Initiative. He is a member of the IEEE in 2050 Ad Hoc Committee. He teaches a Master course on Technology Forecasting and Market impact at the University of Trento. He has published over 100 papers in journals and magazines and 14 books.