How long is the Long Tail?

We all know about the groundbreaking work from Chris Anderson from Wired about the Long Tail. In theory it makes a ton of sense – on the web, companies have no inventory costs and can stock as many titles or products as possible and that over time the one-offs or misses can generate as much or more sales than the hits.  As you can imagine, this Long Tail meme gets mentioned by many an entrepreneur that I meet and saying "we are going after the long tail of X" is almost as popular as saying "I’m a Web 2.0 company."  I have not read the book or the data, but as I said, in theory it sounds great.  You could even extend this long tail concept to user generated content.  For example, YouTube could be like the long tail of video – people get to see new content which would never sell at any traditional bricks and mortars store and YouTube has the opportunity to make money off all of this Long Tail content.

As for the Long Tail, the only question one can ask is when will it happen vs. if it makes sense or not.  In today’s Wall Street Journal, Lee Gomes (see his article here – sorry, requires login) challenges the timing of the Long Tail and comes up with some interesting data.

"By Mr. Anderson’s calculation, 25% of Amazon’s sales are from it’s tail, as they involve books you can’t find at a traditional retailer.  But using another analysis of those numbers – an analysis that Mr. Anderson argues isn’t meaningful – you can show that 2.7% of Amazon’s titles produce a whopping 75% of its revenues.  Not quite as impressive.

Another theme of the book is that "hits are starting to rule less."  But when I looked online, I was surprised to see what seemed like the opposite.  Ecast says 10% of its songs account for roughly 90% of its streams; monthly data from Rhapsody showed the top 10% songs getting 86% of streams."

Lee has a few other examples and one of the most interesting ones is when he states that when Chris looked at the data 2 years ago for eCast that 2% of songs did not play every quarter and now with a much larger inventory that number has risen to 12%.  Maybe eCast just had the hits up in the first place?  In short, Lee Gomes concludes that the Long Tail may be true but it will also take a long time before it happens.

From my perspective, I do believe we still live in a hits driven world but that it is definitely changing.  In addition, if you apply the concept of the Long Tail more broadly to concepts ike YouTube, etc. then it is happening today. Regardless of what you think, Lee’s article is one of the few that I have seen challenging the Long Tail meme that we all want to believe.

UPDATE: Since I posted from the train this morning and have been in meetings for most of the day, I did not get to see Chris Anderson’s thoughtful response to Lee Gomes. Here is an excerpt from Chris’ post:

What it does say is that the current data at Rhapsody, Netflix and Amazon show that the tail amounts to between 21% and 40% of the market, with the head accounting for the rest. Although I don’t discuss this in detail in the book, in the case of Rhapsody, the trend data suggests that the tail (as defined above) actually will equal the head within five years. Which is why the language Gomes cites from the book jacket is actually all phrased in the future conditional tense ("What happens when the combined value of all the millions of items that may sell only a few copies equals or exceeds the value of a few items that sell millions each?"). I asked him to quote the jacket copy in full context, but it apparently wasn’t convenient to his thesis to do so, so he didn’t.

From this post, it seems that Lee misquoted Chris and that Chris agrees that it will take some time for the Long Tail to outsell the hits.

UPDATE 2 – Please read Lee Gomes’ comment to my blog post below where he clarifies his thinking on the article and stands firm on his position especially in relation to Chris Anderson’s rebuttal and my commentary where I suggest that he may have misquoted Chris about the impact of the Long Tail. 

Ed, I usually don’t respond to blogs, not because I don’t value them enormously — I do — but simply because I write for a pretty big outlet myself, and think that once I have my say about something, I should shut up and let others have theirs. I need to comment, though, on your suggestion that I might have misquoted Chris. As I hope you appreciate, that is one of the worst things a journalist can do, even (or especially) when writing about a person whose views are being subject to scrutiny.

Here is how I described the book’s premise about this matter: "In the book’s main sections, Mr. Anderson writes that as things move online, sales of misses will increase — so much so that they can equal or exceed the sales of hits." Note that it is written in the future conditional tense, exactly like Chris says own his sentence is. I never said that Chris said that misses were currently outselling hits; my point was simply that considering all the to-do he makes about this in the book, I was a little surprised that he didn’t have any current examples. Had I had more space than I do for my column, which recall runs in the print paper and thus is limited to around 850 words, I would have happily quoted Chris’ entire sentence, as well as this other one from the jacket. "Using the worlds of movies, books, and music, he showed how the Internet has made possible a new world in which the combined value of modest sellers and quirky titles equals the sales of top hits."

As for the suggestion, not yours, that I misunderstood Chris’ methodology: I know perfectly well how he made the calculations he did, and explained them (I hope) very clearly in my piece. I added, though, that there was another way of looking at those same number, making it clear to my readers that Chris did not think that second method was meaningful. At least I gave readers a choice between two methods; the book didn’t even acknowledge that some other method existed.

Thanks for letting me have my say, Ed.
Lee Gomes
Wall Street Journal

Ok-this is done and I thank Lee for questioning the Long Tail meme and stirring the pot as I believe this healthy debate will only improve our thinking and analysis around this concept.  Of course, I am curious to see the how the data around the Long Tail evolves as time passes as this transparency will help all of us get a better understanding of the timing and true impact of the tail in certain markets.

I hate shitty software – webroot spysweeper v5

Having invested in a couple of security companies, I am pretty adamant about security when it comes to my personal computers.  Until now, I have been using Norton Antivirus, ZoneLabs ZoneAlarm Security Suite, and Webroot’s SpySweeper.  Things were going great until a few days ago when I upgraded my Webroot Spysweeper from v4.5.9 to v5 and then all hell broke loose.  My computer kept freezing on the simplest task such as opening a browser and after several diagnostics I realized it was Spysweeper.  After uninstalling it, I still had problems so I am now in the process of rebuilding my machine.  After doing a Google search, I recognize that I am not the only one with a problem as you can see here.

For the life of me, I don’t understand how a great product went to shit with just one release.  Maybe it was the fact that they raised $100mm or so of venture capital and feel the heat to grow and expand quickly.  As you might notice, every security player that locks down the home PC has evolved into a suite-based approach.  In addition, I see that Webroot also expanded to the enterprise as well.  All I can say, is that any company looking to expand and grow should not forget what got them there – in Webroot’s case it is great antispyware software for the individual consumer. Webroot may also want to do a better job of QA before releasing its product to the market.  Given all of these issues, I am done with Webroot and moving on to another anti-spyware program.

Reliving the bubble

Fred Wilson has a great post on remembering the old wounds from the last bubble in 2000.  In particular, he highlights the question that many of us have asked at board meetings – are we being too conservative or is it time to step on the gas a little.  This is a vibrant area for discusssion – we never know the real answer as hindsight is 20/20 but it reminds me of a post I wrote back in March 2004 called Thoughts from PC Forum – going into attack mode.  Here is a little excerpt:

The companies that survived this downturn were excellent at cutting costs, repositioning their products for new markets, and being resourceful and creative to survive. While these are some of the business principles I want my companies to continue to adhere to, I also want to caution that there is a danger in being too cheap. Some of these companies were so shellshocked from what happened during the past couple of years that they have become too cautious. For anyone that has been through the tough years, the only thing I can say is congratulations for surviving but now it is time to take some calculated risks. It is time to get out of the bunker and go into attack mode. Go after your competition, take some calculated risks, and focus on creating some revenue growth. What is different now than before is that most companies that survived the nuclear winter know who their customer is, how much they will pay, and what features and functionalities they may want in future versions. While it may sound like idle VC talk, I encourage you to spend that extra $$$ now as long as you can see the real ROI behind a targeted marketing program, the hiring of a new engineer to finish a product faster, or a new sales person to manage more qualified leads. Once again, take it with a grain of salt, as some entrepreneurs may think this is another VC swinging for the fences, but the point is don’t be too cautious because the opportunity may just pass you by.

Trust me, having lived through the bubble has changed my mentality a ton but I always have to remember that there is that lingering fear in my mind (fear can be good), and that I also have to temper my psychological mindframe with the data we have at hand and the opportunity in front of us. In other words, have a strategy and stick to it and if anything remember that old wounds can haunt you and use the data at hand to help make your decision.  If the ROI and return is there, test it out and try it as you never know until you take that step. There is a huge difference in building your company because your competitors are doing it versus building because it is the right thing for your company and the data suggests it.  Underinvesting in your company is just as much a sin as overinvesting in it.  So find the balance and continue building.

Free phone calls!

Sipphone (full disclosure-my fund is an investor and I am on the board), developers of Gizmo Project, made a bold move yesterday offering users free calls to mobile and landlines in over 60 countries.  It is akin to the old MCI Friends and Family plan where customers could call other MCI customers for free.  This is viral marketing at its best.  Similarly, in order to take advantage of our offer, any Gizmo Project user can call any other registered Gizmo Project friend on any phone line in the 60 countries offered.  As Jim Courtney from Skype Journal says in his post:

The genius in this program is the attempt to drive market awareness virally by getting all your (PC- and headset-equipped) friends and family to sign up for GizmoProject and experiment with it. You then have the option of calling them at no charge; they can receive the call on either the GizmoProject softphone or their legacy PSTN phones.

There is lots of buzz in the blogosphere about this plan – some calling it great and others calling it a marketing gimmick.  Yes the free calls require both users to be registered to Gizmo Project but whether you call it a gimmick or not, I can already see some dramatic user signups in the last few days.  Michael Arrington from TechCrunch gets it when he says:

If calls continue moving towards free, then it’s going to be all about the value-added features. Video, better conferencing support, SMS – I can only imagine what sorts of features VOIP providers will be able to find substantial profit in. Perhaps these consumer VOIP services will have to make consumer VOIP a loss leader in exchange for building the strength of enterprise VOIP offerings. Ad supported free calls could be acceptable if the ads appear on the web interface. It’s hard to say what could take the place of burning through VOIP-out minutes, but interesting things will likely emerge.

As I have always thought, the price of phone calls has nowhere to do but down (and it has been dropping substantially over the last 5 years) and Gizmo Project is making a big move with its "free" offering.  As you might assume, the key to making our business model successful is the upsell of value added services and to continue to make sure we acquire new subscribers at the lowest cost possible.  From my perspective it all goes in the marketing bucket – would you rather spend money on silly television ads or pass on the low cost of telephony to your customers?   As Jason Droege, President of Sipphone told Om Malik,

“Wholesale PSTN rates are sooo cheap these days that it’s not much different than the cost of bandwidth back when I started,” says Jason Droege, chief executive of SIPphone, the company behind Gizmo Project. “In the last 12 months I’ve seen wholesale PSTN costs drop dramatically and I expect this to continue. ”

While Mark Evans has a point that the problem with our service is that at least one user has to remain tethered to the computer to make calls, all I can say is to watch for an upcoming product announcement in the next month or so which will change all of that.  In the meantime, enjoy your free phone calls!

For other perspectives see Silicon Beat, Andy Abramson’s VOIP Watch, and Engadget.

Software & Information Industry Association survey

It is always helpful to get benchmark data on your competitors and on other companies that have a similar business model.  To that end, I encourage you to sign up for the SIIA Financial Survey to see how you stack up against your competitors. 

We encourage you to invite your software industry portfolio companies to participate in the SIIA Software Industry Financial Survey, conducted with assistance from Deloitte & Touche LLP and its affiliates.

The report from this survey will provide in-depth analyses on nearly 100 financial statement and productivity ratios — detail far beyond that available in annual reports or SEC filings. These include R&D, sales and marketing, legal, revenue per employee and inventory turnover, among others. Results will be shown by sales volume, market segment, ownership, profitability and other measures, allowing you to make appropriate peer comparisons.

I am sure this will be a worthwhile endeavor for you.  When I meet an entrepreneur I always like to ask who they want to be when they grow up and why?  In other words, I like to know what company out there today has a business model that you would like to emulate.  While I do not pin my valuation for an early stage company on the financial model, it is important to have one to understand your costs or cash needs and to understand whether or not you have a viable business model with high gross margins or low gross margins.  For example, if you are another social networking company that walks in my door wanting to be the next MySpace then you better understand that the only way to make that model work financially is to have a huge audience generating tons of page views since the monetization rates on each page view are so low relative to paid search as an example.  If you are  selling infrastructure software and you model out in 3 years that you will be more profitable than every other company out there, I am sure you are missing something as well.

VOIP and IM World Update

Congrats to the Sipphone team (full disclosure-portfolio company and I am on board) for getting the Gizmo Project client out for the Nokia Internet 770 Tablet (see Andy Abramson’s blog for more on this).  Nokiascreen This is quite exciting as the company is executing on its vision and roadmap to extend its SIP and IM service to many devices and networks, particularly wireless ones.  Our other vision was to focus on standards-based interoperability for IM and VOIP.  To that end, the Gizmo Project 2.0 release allows users to have dual log-in from one soft client to either Asterix based PBXs or other SIP-based networks.  On the IM side, it seems that the world is slowly moving into the interoperability direction as Yahoo and Microsoft are in limited testing for federation of their respective networks and as LiveJournal added XMPP/Jabber based-IM to its network of 10 million users.  As Om points out, it will be interesting to see how federation in the IM and VOIP space continue.  As I have mentioned in the past, most of the number 1 players have no reason to federate, but I do believe as a number of smaller communities and networks spring to life, that the little guys will be able to federate and create a standards-based IM and VOIP service that rivals the larger players.  Doesn’t open standards win eventually?

Knowing more about my readers

I am always looking for new tools and services to help me better understand who my readers are, what they like to read, and where they like to go.  Besides the more active participants that like to comment and trackback to some of my posts, many of my readers have been anonymous to me and to each other.  Scott Rafer, who founded Feedster, recently contacted me about a new project that he is working on with Eric Marcouillier called MyBlogLog Communities.  What is interesting about MyBlogLog Communities is that it allows me to put a name and a face to my readers, to discover what you like/dislike, and to perhaps give me an opportunity to further tailor some of my posts to your interests. What’s in it for you?  Well it allows you to interact with other readers on my blog and to see what others in my community see as hot topics of the day via a link tracking mechanism.  While this service is early in its release, I encourage you to sign up for the BeyondVC community (look for the Join Community button on my page) and to experiment and learn more about each other, what blogs we like to read, and favorite posts from around the web.  Maybe you’ll discover something new or meet some other entrepreneurs with similar interests.

Why wireless apps are tough

As you know, it is no secret to look to Europe and Asia to understand the future of new wireless services.  As I mentioned in the past, having a hit wireless app can be a big play, but the chances of making it happen are far and few between, especially since business success hinges on relationships with the carriers.  Look at what happened in China recently for what a change in mobile carrier policies can do to its partners.  China Mobile recently made some changes in how their customers subscribed to wireless value-added services changing per-message fees to monthly fees and making its partners offer the first month of service for free.  Granted, this was done to make sure that customer satisfaction is improved for its user base, but this one change gave many public wireless service plays a beating in the market.  According to an article in China Daily, several analysts outlined the near-term impact of the changes.

"We believe service providers would likely see significant revenue volatility over the next one to two quarters," JP Morgan analyst Dick Wei wrote in a research note.

"We expect roughly a 10 percent to 20 percent revenue impact across the second quarter of 2006 to the third quarter of 2006."

Piper Jaffray analyst Safa Rashtchy also expected "major impact" on wireless service providers.

"We believe the total impact of these services will be severe and could reduce revenues by 20 percent-30 percent in 2007, with potentially much more near-term impact," Piper Jaffray wrote.

While there is always a tradeoff of how to get your wireless app in front of millions of users with the  revenue share and loss of control to the carrier, I just hope that the wireless walled gardens will crumble to give many of us the freedom and opportunity to use new applications like Google Maps on our devices. Whle this carrier policy shift was meant for the good of the customer, it still shows us how vulnerable a wireless service provider can be to its carrier partner.  As I have seen in other situations, the wireless carriers could have just as easily changed the percentage on the revenue share leaving its partners with less of the pie. The allure of creating a hit wireless app is compelling but reliance on the carriers can make life extremely difficult.  If you go it alone you will have more control but there will still be significant barriers to market your app to potential users, get them to download it on their phone, and finally to actually have it work on their device.  We are still far away from making open access a reality, but when it happens, there will truly be tremendous growth in the use of new wireless services.

When to hire a VP of Sales

As I mention in an earlier post, companies evolve and need different types of management with different profiles as they grow.  A clear kiss of death that I have seen more often than not is hiring a VP of Sales too early.  Here is the typical scenario – you just signed 3 or 4 customers in a couple of different verticals and you feel that all you need is some bodies on the street to grow your business.  On top of that, you figure that you want to hire the senior guy first so he can bring in his own troops.  Hiring a VP of Sales too early can cost you dearly.  Here are a few reasons why:

  1. VPs of Sales need to make their comp.  Typical salaries range from $150-200k plus performance equaling a total package of $300 to $350k.  Most VPs of Sales will try to get you to guarantee the first year or at least the first couple quarters of compensation to offset the risk of working at such an early company.
  2. All VPs need people to manage which means your VP of Sales will want to hire a bunch of reps to grow the business.  The experieced enterprise direct sales reps will cost you $80-100k base plus performance of up to $150-175k total comp.  Once again many of the best reps will want to get some guaranteed draw for at least a quarter or two to get started.

What ends up being a situation where you expect to bring on a performance-oriented sales team becomes one which many of your new hires get guaranteed comp for a couple quarters.  The burn rate added to your company almost doubles overnight with these heavyweight sales guys with no leads to go after and no mature product to sell.  In addition, over time the sales team will get frustrated if the product is not ready for primetime and they will be out looking for a new job in a couple of quarters making all of this effort a very expensive experiment.  Hiring a VP of Sales is not a commitment to hire one guy, it is a commitment to bring on a team, one that will not be cheap.  Before you make this commitment, make sure you are ready.  As you can read from an earlier post, when you ramp your sales efforts is critical.

Do more with less and be careful of ramping up sales until you have a repeatable selling model.  In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins.

Many of the best companies I have seen have taken the bootstrapped approach where the founders of the company act as the initial sales team to close a few deals, to learn about the customer, and further refine the product.  Yes, this can only last so long as everyday out of the office or with customers means another day not developing the product.  That being said, rather than hire a VP of Sales first, I would encourage you to focus on generating leads and hiring a sales rep or two to follow up on them.  This way you can take a smaller step to refine your sales model and product before going big.  Remember don’t hire a VP of Sales to only have them hunting for dodo birds.