The Long Tail: Moving From Mass-Market to Niche Economics

Rather than invest in IPTV to directly compete with cable and satellite providers that already have 40 to 50 VoD movies every two hours, and thousands of mainstream movies, carriers should consider the concept of “The Long Tail” in the back of their minds as they build out IP networks and roll out IPTV services and products.

The term was coined by Wired Editor Chris Anderson in his best-selling book and popular blog, and refers to the flatter portion of a demand curve that is less spectacular but nevertheless may be very lucrative in the long run.

It’s an economics theory stating that the lowest common denominator to which most products are marketed does not reflect what “most” people want. In fact, the contention is that creating one type of product to fit such a culturally and geographically diverse world has led to bland content that is general enough it will not offend most, but ends up boring many. By casting such a wide net, readily available content leaves out the variables and characteristics that certain demographics and geographies would not only favor, but pay a premium for.

As Anderson believes, the 20th century entertainment industry was about hits, but the 21st will center equally on misses.

The assumption is that people are willing to pay for what is harder to find, or “less popular.” After all, what does “less popular” really mean?” The definition really depends on the prism through which one views demographics and geographic boundaries and sub-segments.

Because most digital content and entertainment currently is produced by North America and Western Europe, billions of people remain untapped. With digital content, there is an opportunity to sell any product or any service, because there is someone out there who will buy it.

The more rare or unusual the content, the higher the premium people will pay. A native of Spain would pay for bullfighting video, or an Englishman in America for a cricket match involving his hometown team. A great example is the fact that “Bollywood” content has failed to reach the more than 1 million East Indians living in the United States, despite the popularity of India’s film industry. It produces hundreds of feature films every year, but only a few get U.S. distribution.

The same is true for today’s shrinking TV model, which allows us access to only 3 percent of the more than 31 million hours of programming out there in the world today.

“Your content is somewhere out there in the world, but you can’t access it,” says Mark Nicholson, CTO and senior vice president of product development with Syndesis. The crux of the problem with mass marketing has been that retailers carry only content that “earns its keep,” which spawned Anderson’s theory about the “tyranny of locality,” where “popularity” is based on inefficient supply-and-demand matching.

In the world of physical goods, poor distribution is common because of the high cost of stocking inventory, paying for fuel, planning driving and flying routes, and so on. For that reason, marketing has often targeted what is consumable by people within a limited radius of stores, stadiums or theaters. Traditionally, the cost of keeping in inventory one copy of an out-of-print book for which someone would pay a very high price is not worthwhile, because managing the inventory efficiently enough to know where the book is once someone wants it would be difficult.

That concept has caused many products to fail that might otherwise flourish in the Long Tail economic model.

For example, the once-forgotten but now popular book “Touching the Void” went from nearly going out of print to becoming a sensation eight years later because of referrals by Amazon for readers of the more recently written “Into Thin Air.” Now the former has outsold the latter two to one.

Think “Niche”

The low cost of distribution in the digital world lends itself to The Long Tail concept, because virtually any digital product can be “stocked” at a low cost regardless of how many “units” of it actually sell. Because products are streamed from their source rather than stored on a shelf in boxes, the number of available niche digital products could outnumber the popular ones by several orders of magnitude. It is those niches that form The Long Tail.

Rhapsody, Apple, Netflix, iTunes, and Amazon are examples of how companies can possess vast inventories without retail store fronts. They handle products that scale up to millions of units or just one. Specifically, Apple’s iTunes and Rhapsody take this model further because their products are purely digital. As a result, they take up virtually no physical “warehouse” space. Consequently, it might be smart for CSPs to focus on niches, rather than competing to squeeze millions from the most popular music, movies, books and games.

“For a telecom to operate more like an Amazon, a carrier would have to be able to market to a ‘segment of one’ and do peer-to-peer referrals,” says Jeff Popoff, VP of marketing with Redknee. “For example, wireless carriers already have vasts amount of network usage and billing information to mine for demographics, lifestyle, travel preferences, and shopping preferences.”

He contends that selling to individuals means having a network built around the individual consumer and having a means to match the consumer to the content. He speaks of personal logs that proactively reach out to individuals according to their esoteric needs. “The network needs to be built around the individual, rather than around the OSS/BSS and mediation constructs in existence today,” says Popoff.

“The move from physical products to digital content will open the door to bi-directional communication,” Popoff says. “E-mail, news groups and other sub-groups could form to facilitate requests or questions, so that matches could be tailored to esoteric needs or desires.”

The CSPs could possibly compete with the Googles, Microsofts and Apples of the world in terms of the types of specialized portals they could create to cater to specific niches. That means CSPs not only could generate revenue from the broadband access they facilitate, but they could also offer QoS guarantees that would differentiate their portals from others.

There’s a lot of gray area right now about how traffic could be prioritized, as Net Neutrality debates heat up, but if telcos think more like retailers or manufacturers, they could possibly avoid being relegated to nothing more than a bitpipe while others capitalize on their investments in IP networks.

The fact is consumers will follow the content. Already, they can get content straight from the source. For example, an individual with broadband access can go directly to the BBC online or Reuters sites to see news stories and raw footage not available in the mainstream.

Carriers can become a key member of the value chain by becoming the “preferred content aggregator” that offers value-added features such as superior quality levels, self-service and provisioning, and the ease of a consolidated bill from a trusted source are all things people want.

“If you move away from marketing untailored stuff, which is spam, and toward marketing things specific to individual interests, you can then get into context-sensitive [for example, tailored to a user in an airport versus at home] marketing to drive more value,” says Popoff. “As they mine The Long Tail, carriers can float up the right information and ultimately get to zero-click discovery, where portals are tailored to individual users.”

Already, “macro portals” such as YouTube and MySpace are matching niche wants with niche content, but CSPs could go a step beyond.

What is compelling about the Long Tail is that it enables the “prosumer” (a hybrid of professional and consumer), to quickly become proficient with low-cost digital production software (i.e., Final Cut and GarageBand), and high-definition cameras now priced under $1,000. “That means independent movies will likely become a very viable part of the Long Tail,” says Nicholson.

If CSPs think about the TiVo way of doing things, there could ultimately be services that provide customers with a personalized list on their TV, PC or phone to scroll through Internet sites, videos, news and music that cater to their interests—an Italian soccer game, news from stations in the Middle East, songs from Mexico, etc.

“Carriers could begin to offer features others don’t or can’t, such as overlay parental controls for MySpace via deep packet inspection, to generate new revenue streams,” says Nicholson.

The possibilities are endless, as an independent movie about a climb up Mt. Everest, or a Buddhist’s trip around the world, or a doctor’s new method for setting a broken leg, or a new way to make your friends lose bladder control in their sleep, could all become cult classics. It’s a matter of matching the content to the user.

CSPs have the chance to be the chosen aggregators because of their knowledge about their customers, the trust they have already established, and the systems they have as a foundation for service and fulfillment.

As service providers get into the next generation of filtering and intelligence, they can generate powerful analytics. The ability to drill into people’s many profiles ((i.e., Susana Schwartz the tech writer, the wife, the equestrienne, the gardener, etc.) would help to match content to the niche consumer.

“Recommendation engines like those of Amazon could be developed to match content to wireless or wireline customers,” says Thomas Pedersen, director of IP business lines at Intec.

Such “referrals,” however, would require an investment in search and intelligence technologies, or an investment in firms already doing those types of things. Then operators could drive people to other content according to characteristics discerned from buying and customer care patterns. If someone buys a piece of content about wine making, the carrier could know that same person might be interested in a travel video highlighting Italy’s wine regions.

Perhaps there is a way to leverage the cognitive and intuitive search technologies that are quickly developing with both search giants and newer players. For example, Accoona is a search engine designed for content-relevant searches, which means users find Web pages through increasingly intuitive language-based reasoning that does not require exact keyword matches or “dumbing down” the wording. There’s also been a lot of buzz about AI development at Google to someday enable language-based, context-driven searches that mirror human thinking.

The question is how telcos will advance in search, billing, revenue settlement and OSS/BSS components so that they can flexibly and reliably handle the volumes of digital content and the speeds with which products must be introduced, fulfilled and assured.

OSS/BSS Considerations

Today’s networks already handle simultaneous delivery of multiple applications and content streams, but if CSPs are to inject thousands of different forms of products into their IP networks, many elements have to improve significantly.

Although carriers already possess the activation, ordering and billing infrastructure other parties lack, the sheer volumes of digital content will require 100 percent automation for fulfillment and assurance processes to work seamlessly.

“When a service provider’s product catalog increases by the thousands with contributions by product falling concurrently, the only option is 100-percent automation in the fulfillment, assurance and revenue chains” says Nicholson.

In other words, the marketing concept of The Long Tail is contrary to a Wal-Mart’s thinking, yet the operational efficiencies of a Wal-Mart are necessary to make The Long Tail pay off.

With digital content, carriers must automate ordering and assurance for thousands and tens of thousands of products to ensure connectivity, product delivery and trouble management.

That task will grow in complexity, as the number of specialized requests increase with marketing’s creativity. “Where you used to activate a service and not touch the HLR again for a long time, you now have to establish it according to specialized characteristics,” explains Pedersen.

That means a la carte programming could drive the number of requests up three or four orders of magnitude. “If someone self-provisions HBO for just weekends, the activation system has to establish the service on Friday night and tear it down on Monday, as well as inform other systems that it has accomplished that,” explains Pedersen.

Today’s IPTV activation and middleware systems are pretty basic, so more flexibility and management capabilities will have to emerge if carriers are to get their arms around billing systems, inventory, distribution and supply chain systems for such a la carte offerings.

Also, service and product catalogs will have to be fully automated so products can be introduced at a moment’s notice. The goal would be to create entirely new catalogs without having to revamp the fulfillment processes every time.

Because Netflix and iTunes already enable users to browse product catalogs possessing tens of thousands of products, CSPs have to figure out how to handle so many products, as well as how to navigate them. Whether there will be menus or scroll bars or different users lists, the key is figuring out how to organize the information so users are matched to the content.

Today, the number of videos on demand to be offered could be limitless, but the process of searching for the content that fits user profiles is still manual, as there is no centralized place where all the world’s content resides.

Also, real-time decisions about the user and the product have to be made. Pass codes or log-ins have to be established to authenticate and authorize users, and then, depending on user profiles, some sort of transcoding has to occur so that the content fits the device. The user at home wants high-definition programs for the TV, but at work she wants something that fits on the cell phone screen.

“As carriers put the subscriber layer over their networks with IMS and online charging systems, the charging rules and HSS constructs will have to somehow evolve to know customers’ brand preferences, their opt-in and opt-out choices, and so on,” says Redknee’s Popoff.

In addition to knowing customers preferences around the actual services, carriers would also have to offer, and be able to accept, payments that are simple and small. With thousands of products, many with lower price points, a lighter “micro payment” system would be necessary. “PayPal is a good start, but other forms of micro payments such as Bee-Tokens and indieKarma will ultimately evolve to enable purchase bundling such as twenty 10-cent downloads which can then be rolled up to be handled by a macro payment processor such as Visa,” notes Nicholson.

With so many small amounts floating around, strong reporting will be necessary to manage cash flow. “The complexity of marketing agreements grows with the increase in content sponsors, distributors, rights owners and aggregators involved in products,” says Intec’s Pedersen. Reporting will have to span BSS, he says, if service providers are to be able to assess what products have been delivered, and who needs to pay or be paid.

For that reason, relationships and automation among the CSPs and third parties involved in digital content will be critical.

Indeed, multi-party settlement is going to be a critical factor in digital content. Service providers will have to manage contracts among the content producers, the aggregators with the Web sites that connect to major networks, as well as the transportation layer itself and the multiple networks used to deliver content.

“Today you may have a few dozen carriers with whom you connect, but once you get into drop-down lists to navigate tens of thousands of products, you have to be able to view agreements in much the same way,” Pedersen says. “You have to be able to navigate who your partners are for each product, so you can repudiate disputes and track profitability.”

With so many partners, the payment and revenue settlement process will have to involve real-time detection, charging and repudiation, as well as AAA functionality. Only with real-time capabilities can providers identify the usage, charge for specific usage and collect the money for it. “As marketing gets more creative, there will be more and more revenue shares to handle, and depending on the power of the studio or record label, different contracts could be demanded,” says Pedersen.

As carriers grapple with all the OSS/BSS automation complexities and with federating of data to third parties, they are devising both long- and short-term strategies. Though something like Verizon FiOS TV is a mass market service, the company has talked of looking to extend the breadth of content to cover niche markets in the long run, as it recognizes that a broad spectrum of programming could mean higher premiums.

Other than diversifying the content offered, to succeed carriers must also balance personalization of content with privacy needs. Mining private information to match consumers with content must be balanced with a way for consumers to protect their privacy.

“With location services and ATM finder services and so on, the barrier was the lack of opt-in options, or of a unified preference server that allowed users to dictate how they should be reached,” says Popoff. “The same will be true for MySpace users and so on, as they will want only friends on a list to be able to access them.”

As users fight to gain more control over the information generated by their consumption of digital content, the trust factor will become huge. Carriers already have 100 years of trust built up—something the other segments in The Long Tail won’t have. There is value in the networks and the SS7 signaling over which messages are sent, and in the fact that people’s local brands are entrusted already with credit card and banking information, as well as all the other data that reflects where they live and work, and what they do day to day.