'Long Tail' impacts on billing for digital businesses

Summary

'Long Tail' content and other digital businesses will maintain larger product catalogs that accumulate many, but remove few, products over time. This retention complicates related areas such as retail billing and content settlement which must support products for the long-term and maintain ongoing relationships with product providers (e.g. content suppliers, writers, publishers, musicians) to perform revenue sharing.

Businesses offering digital products

Historically, a business' product lifecycle implemented new products, billed them for a period before retiring and removing them from sale. Products may have operated for many years before their retirement, but almost all reached a point where their market appeal (or technological relevance) declined along with the associated revenue. This ongoing process of attrition limited the number of products (along with their aligned supplier relationships) that a business had to maintain.

Digital businesses change this by offering products with effectively infinite lifetimes that do not expire and are hence not retired. These businesses accrete new entries in their product catalogs as new items are published, but find few reasons to remove older entries. Revenue sharing (settlement) and supplier relationships must be maintained for these products for the long-term.

For example, digital content such as music (e.g. iTunes) can be downloaded by customers with few restrictions due to reproduction and distribution costs. The major publishers' (distributors') entire music catalogs can be held digitally in a relatively small 'physical' space, and through the internet distributed worldwide.

iTunes competes with sales of physical CDs from retail stores that are subject to the economics of physical goods. Retail stores focus their inventories on CDs they believe browsing customers will buy, limiting their offerings to the most popular titles.

Netflix is another digital business with an increasing digital product catalog. Netflix rents (physical) DVDs on a subscription basis to customers throughout the US using the US Postal Service for DVD distribution and return. Netflix customers indicate which DVDs they would 'like' to rent indicating their preferential order. As customers return their DVDs, Netflix sends customers their highest preference selections as they become available (and subject to other customers' competing preferences).

Ideally, DVDs sent back by customers are immediately redistributed to the next customer seeking the same DVD. If performed efficiently and promptly (along with good estimation models for DVD demand (popularity) and retention (delay)), the physical storage required to hold unrented DVDs can be reduced. With DVDs distributed by post, distribution point(s) do not need to be local to customers, they can be located anywhere in the US.

Netflix competes with (amongst others) local overnight rental stores (e.g. Blockbuster) who can only stock a limited number of DVDs in each store biasing their selection towards the most popular titles (which Netflix can also offer, albeit with a delay). 98% of Netflix's 40,000 titles are borrowed each quarter (June 2005).

Billers who retail products with a necessarily 'physical' bias such as electricity, water, tollways or ambulance service subscriptions are not subject to the same issues of an increasing product catalog since they have a limited number of offerings and relatively little product catalog growth.

What is 'The Long Tail'?

Chris Anderson popularised the term in his October 2004 Wired magazine article of the same name describing how digital businesses provide endless 'shelf space' by breaking the economics and physical linkage between the physical shelf and the size of a business' product catalog.

Consumer consumption was broken up into 'The Head' and 'The Long Tail' (wikipedia picture reference of The Long Tail division between Head and Tail). 'The Head' of the consumption curve is where the majority of historical consumption falls with a relatively low number of products but each with high sales (consumption). Customers and products in 'The Head' are concentrated with physical economics preventing a wider product catalog from being available.

The widest variety of products lay in 'The Long Tail', but they were dispersed and historically uneconomic to access. Each 'Tail' product attracted only a small number of sales associated with its 'niche'. The internet (distribution, marketing) and computing automation (processing power, demand matching, search) now allows smaller niches to be targeted, and opens up the sales possibilities in the 'Tail' to more businesses.

For example, iTunes can offer individual music tracks to small audiences distributed worldwide because the storage / distribution costs are small relative to sales revenue. Worldwide sales of a niche music track to one thousand customers across the internet is a more attractive proposition (to iTunes) than a physical CD store trying to find those same customers from their fixed location with limited shelf space. 95% of iTunes' tracks have found a buyer.

Netflix can offer DVDs to niche (cult) movie followings distributed across the US that would be uneconomic if offered in only one specific market. DVDs could be added to the Netflix catalog on the speculation that the necessary demand existed somewhere across the US. Netflix can hold a small number of copies (one ?) of less popular DVDs and gradually distribute those copies to subscribers as they request them.

In each case the business' sales catchment area has been expanded, and the cost of offering a particular product to the market has dropped.

Chris Anderson observed that (a component of current) consumption would move from the 'Head' (where most current sales were seen due to the easily located customer demand), to the 'Tail' using the increased accessibility, distribution and choices that digital businesses offered. Further examples of 'Long Tail' behaviour can be found in his 'Long Tail' blog (that will be used as the basis of a book due out in 2006).

How 'Long Tail' digital products impact billing

Historically, physical economics drove the removal of products when their sale (and support) costs began to exceed their diminishing revenue. The obsolescence of a product's underlying technology also provided an end-of-life impetus. This ongoing culling process provided an end-date to the product's support in the product catalog, billing and revenue settlement.

Retaining products for longer periods (or indefinitely) generates operational issues in billing (and related areas) related to the time products remain active and the larger number of concurrently active products.

Most of these billing impacts fall on the biller and remain hidden from customers. Customers make their purchases based on what is for sale 'today' without worrying about how the biller supports those same products into the future. To the customer, individual sales are one-time, but to the biller they are events on a longer timeline.

Search - Customers and the biller's staff must look through more catalog entries to find what they are looking for. The wider selection (longer lists) can generate presentation issues on screens and when printed on the bill. Customer searching can be assisted by recommendation software that notes similar buying patterns between customers, or by collaborative filtering that indicates popular choices from the individual customer preferences. Improved search can allow customers to discover and purchase choices (e.g. music) that would otherwise have remained hidden.

Classification - Closely related to search, the classification of product catalog entries will assist customers and staff to find a selection (e.g. The Beatles, rock, jazz, Bollywood movies), and may be used in bill presentation, pricing and revenue settlement. The level of segmentation in the 'Tail' will be larger than the relatively few categories used in the 'Head'.

Tracking previous purchases - Some purchases are only appropriately performed once. For example, songs may be purchased and downloaded once - repurchasing the same song is unlikely to be an appropriate customer action. Customers may be reminded when they try to re-purchase a product identified for 'one-time' sale, requiring the long-term retention of their purchase history. Since products are not retired, billers may be unable to cull older product purchases to reduce storage volumes.

Increased number of suppliers - In addition to their traditional suppliers, billers may establish relationships with the smaller suppliers associated with niche content. These suppliers may be individuals or small groups such as musicians, cartoonists, and writers. Billers must work with these suppliers to access the niche sales of The Long Tail across a broader geographical area and wider customer base.

To reduce the biller's costs, the content 'collection' / 'capture' / 'acquisition' process must be streamlined so that, for example, a band can offer (and a biller accept) their songs for sale cheaply without expensive manual processing. When multiplied by the number of niche suppliers, billers may find a manual process too expensive to justify the additional ('Tail') revenue.

Maintenance - Products near the 'Head', will undergo rapid changes in price and classification, whilst those in the 'Tail' will be retained longer term. Maintenance processes must address both approaches and operate within a multi-supplier environment. The toolsets used must be appropriate for both large and small suppliers.

Audit / review - The product catalog, billing and revenue settlement will contain more elements that must be reviewed for correctness (e.g. pricing, classification) and audited over the long-term. The toolsets and audit approaches (e.g. rotating reviews) must be adjusted to account for the larger workload.

The Long Tail book

"The Long Tail" - For those who haven't followed the 'Long Tail' discussion, the book is an essential primer providing a base upon which to build further investigation and discussion. For those who have followed Chris Anderson's blog, the book provides supporting historical details and orders the core principles in a way that was not appropriate on the blog during the book's development.

The relentless movement from geographically-limited markets where the same selection is offered to all, to a marketplace where each customer is offered or seeks out their own very diverse selection means 'The Long Tail' is a book that should be considered by producers and businesses alike as they seek to 'market' what they 'produce' to their end 'customer'. [ISBN: 1-40130-237-8 / Hyperion / Chris Anderson / 2006]