You May Be Growing a Long Tail

Mark Cuban had no doubt about it. There was no way Google would buy YouTube for the sums touted about in the press.

He knew whereof he blogged. Seven years ago he told his startup, Broadcast.commercial, to Yahoo! for the nice round sum of $5 billion. Since then he's become a highly versatile sort of multi-millionaire; he owns the Dallas Mavericks basketball team, he's an entrepreneur, and he's a blogger, too.

Twelve days ago he explained on his blog why YouTube was doomed to die; it has no business model and is under legal threat.

Only an idiot would buy YouTube, Cuban scoffed, moments before Google bought it. It will end up sued to death for copyright infringement, he explained: they break the law, pure and simple. The only reason they haven't been sued yet is that nobody could bother to invest in a lawsuit.

Om Malik had no doubt, either. Malik, one of the five greatest U.S. experts on the new Internet age, also known as Web 2.0, promised two weeks ago to drop 40 pounds of averdupois if Google went and bought YouTube.

The day after the deal was declared, Cuban wrote in his blog that he still thought Google was nuts. Last week he came to himself and wrote that maybe they weren't crazy after all and maybe the legal threat isn't that grave. Malik is still mulling over matters.

Cuban and Malik are not morons. They know the Internet and media business. Their mistake in reading the map just shows the frightening speed at which things happen in Internet.

That's some baby

YouTube is a website launched just a year ago. It enables surfers to post videos they took and to watch other surfers' video fare. You can upload movies at lightning speed and can plant any video downloaded from the site on your private website or blog.

Sounds simple? Maybe it isn't. Thousands of websites are added to Internet every day but YouTube, a year after its inauguration, boasts 100 million video views a day. It has become one of the ten most popular sites in the U.S.

Google paid for YouTube in stock. The founders, Chad Hurley and Steve Chen will be getting 1.25% of Google's stock. Google is worth $130 billion on Wall Street. You do the math.

But we aren't in the megabubble year of 2000. Shares in Google might as well be cash. Nobody questions its business model and not many think it will collapse.

Google has $10 billion in its kitty. Its revenues are expected to reach $7 billion this year, and its profits are approaching $3 billion a year. Net.

Unnatural business

For Google, which in its eight years can claim to be the fastest business success in history, buying an Internet startup for that much isn't entirely natural. This is the first time that Google is admitting that it doesn't have all the Internet wisdom under its paw. It has to pay, a lot, for a very young website, after its efforts to compete with all its heavy guns failed.

YouTube has no business model. Its costs of storing all that video content are high, and it has no real income from advertising yet. Not a few of the videos that surfers upload do violate copyrights. It could get face major lawsuits, and it could yet be a fad that fades.

But focusing on potential lawsuits against YouTube or Google misses the point, which is: the fundamental change in business and culture that Internet brings, what reporter Chris Anderson coined - "The Long Tail".

Until Internet took off many sectors were based on "hits", a small number of products or services that generated most of the revenue in each area.

The economics of "hits" results from the economic structure of the marketplace: the limitations of distribution, shelf space, logistics, or high fixed costs. Record companies could plug only a few stars a year, supermarkets and bookstores could only present so much on their shelves. TV and movie studios could only make and broadcast so many series, programs and films.

The real Internet revolution is that it is gradually releasing most markets from these natural limitations. It enables the creation of countless niches that have economic justification to exist.

Amazon doesn't need shelf space to hawk millions of titles. Netflix doesn't need gigantic video libraries to sell millions of movies.

The results are obvious in music hits, for instance. In 2001, ahead of the Internet revolution, 1,200 turned gold, platinum or diamond in the U.S., meaning each sold more than half a million copies. In 2005, that number was halved.

Who killed the hits?

Who killed the hits? Digital distribution, that made accessible hundreds of thousands of other albums (in the long tail of the distribution chart).

How did they become accessible? Through digital distribution, which enables any band to upload its songs to Internet, lowers marketing costs, and enables outlets  to offer millions of albums at zero storage costs.

Similar processes are happening at light speed in sectors where the service is a digital file. It's happening too, albeit more slowly, for sectors selling something physical.

The long-tail revolution impacts most supply, and demand. technology enables sellers of products and services to offer an endless supply of items, thus demand for products and services that had been in niches reach market. Consumers access these niches through high-speed search, categorization, and rating.

YouTube is the long tail of the video world. You can distribute your video for free and watch millions of other clips.

The model of distributing millions of clips, of strikingly poor quality, which is the case for most YouTube offerings, looks very unattractive, by the lights of the business models that had ruled the worlds of TV and movies in the last 100 years.

But Internet technology changes the business models, and is changing culture, too. Teen surfers who had once watched MTV or popular soaps are now spending more and more time watching cheap niche videos that appeal to them.

Google knows the potential of the long tail very well. Its two revolutionary advertising models, search results-linked AdSense and AdWords, have opened advertising options to hundreds of thousands of bit advertisers and websites that pay by click, no more.

Instead of fixating on the future of YouTube or Google's market valuation, which depend on the companies' strategies, skill at execution, and competition, start thinking about the opportunities and threats opening up in your market as "hits" die out and the long tail starts to grow.