Industry Perspectives: Chasing the Long Tail of Distribution

Over the past 5 years, we have heard a lot about "the long tail" as it applies to successful internet businesses from retailers such as Amazon to online video rental companies such as Netflix.

The basic concept of the long tail is that as the cost of storage and distribution go down, less-popular items can prove to be more profitable than popular ones, which typically make money when inventory is limited. In other words, you can make more money by selling less stuff to more niche audiences than by selling popular stuff to the masses. For example, Netflix finds that, in aggregate, unpopular movies are rented more than popular movies.

So what happens as the cost of storage and distribution approaches zero? This may never happen for physical goods, but it is already happening for digital content. If we believe in the long tail theory as it applies to digital content, then why is it so hard for online video companies to make money today? Some argue that the economics are flawed, with production, streaming, and licensing costs being too high while online advertising revenue remains low. I believe that the problem is much deeper than CDN fees and CPM (cost per thousand) rates. The key to solving this dilemma lies in two phenomena native to the entertainment industry.

Ingrained Hiccups
The first phenomenon is new to our industry. It exists largely because the internet is opening up new opportunities for long tail distribution. Never before have we had a medium to reach niche audiences with video. This has left us somewhat confused; over the last decade, we have not done a good job of distinguishing between professionally produced content for niche audiences and unprofessionally produced niche content. In order for the long tail to work, the product itself needs to be sellable to begin with. If there is an audience, professionally produced video has inherent value. Unprofessionally produced video may gain an audience, but it does not have inherent value to begin with. Therein lies one of the problems.

The second phenomenon dates from the earliest days of the entertainment industry, when storage was expensive but distribution was limited to a few theaters around the country. This was the beginning of the concept of "hits" and "windows of distribution," concepts that had their time and place but are now a burden on the new economics of the internet.

Tiny Evolutions
Let’s start with the historical point of view on why the long tail theory is not working for online video today. Back in the early 1900s, when production companies began to form around the film industry, inventory and distribution were extremely limited and expensive. This gave birth to the hits business, or today’s Hollywood, and it made perfect sense. Movie theaters can only show so many movies to so many people so many times a day. Therefore, to make the most bang for their buck, production companies needed to create popular movies that could be marketed to drive as much demand as possible within a given distribution time frame.

Then along came television. TV gave the industry the opportunity to bring the theater into every home in the country every night. This made mass distribution cheaper and increased the shelf life of content, but inventory was still finite. Home video and cable further lowered the cost of distribution, created more inventory, and expanded the duration value of content. Each of these evolutions boosted the industry and business to the next level, but each evolution was incremental. In computer science terms, the decreases in storage and distribution costs and the increases in inventory were all within the same order of magnitude … until now.

Enter the Internet
The internet revolutionized the entertainment industry. Storage and distribution costs are approaching zero, inventory is virtually infinite, and the overall audience is growing exponentially worldwide. This next chapter of the entertainment industry is far from incremental. In this new environment, the concepts of hits, windows of distribution, and shelf life should disappear (not including time-sensitive content such as breaking news and sports). But it is not happening yet because of all the previous incremental evolutions in the industry that forced us to hold on to legacy business models and practices. Consumers are moving at light speed to watch all kinds of content online, but the big media corporations that own the rights to premium content are struggling to maintain their giant legacy businesses while embracing the new opportunities of the internet revolution.

We are starting to see some change with simultaneous releases of feature films across multiple mediums. For example, Luc Besson’s latest movie, Home, premiered on YouTube on the same day as its theatrical release. We are also seeing the online streaming of hit TV shows the same day as their prime time airing, such as on Hulu, which now is owned by three major television organizations. These steps are great for the industry and for consumers, but these steps are still incremental. Until content is freed from legacy restrictions, we won’t be able to realize the full potential and profitability of the long tail theory as it applies to online video. A prime example of this is Hulu pulling its content from Boxee earlier this year and preventing international viewers from accessing the content on the Hulu site.

Content’s New Forms
This brings us to the other phenomenon preventing the profitability of online video today. If all the good content is locked up or limited to a few distribution channels online, what will take its place in the meantime? We have seen the rise of two new types of content over the last few years: user-generated content (UGC) and made-for-web content.