Monday, November 17, 2008

YouTube and the Changing face of Business Models in Internet

Many believed that the world was flat until Richard Florida proved that in reality is becoming spiky with focus of innovation and activity concentrated around certain areas. Some really nice diagrams that circulated through the Internet put the final prove to this question.

In a similar way, once the long tail was coined by Chris Anderson in Wired (October 2004), it was tough that the strategy of selling small quantities of a large number of unique items could be used to capture large revenues at an insignificant cost. This article became a book in 2006: The Long Tail: Why the Future of Business Is Selling Less of More.

Amazon with its recommender systems tried to build on this strategy. However, last week YouTube announced a partnership with Metro-Goldwin-Mayer to distribute their full-length movies and capture revenue by including publicity in them.

In many ways it looks like YouTube have given up with the idea that a significant amount of revenue can be obtained from user generated content.

However, this finding that revenue comes after all from the head and not from the tail is not new.

Once again we find that pattern that repeats so often. A new mostly untested idea finds its way to the market and is adopted by the vast majority of participants preventing further experimentation. After a while, the idea is finally dismissed or reviewed.

If we take a look at Amazon data, we can see that after all the strategy produces revenues and at a lower cost, compared to the blockbusters, and taking into consideration that the amount of fixed costs that we incur in order to pursue the strategy is negligible. The problem lies not in the fact that the strategy is profitable but that is not profitable enough to maintain the business.

Here we must also consider a different aspect: quality. Technology has reached the point of providing tools that allow professional quality work in writing and in photography, but probably not yet in movies (but coming with the new Red One, Nikon D90 or Canon Mark 5 III models). However quality is not only restricted to technical quality, but to the overall result where factors like the capacity to assemble a group of people capable of a professional result count a lot. This is probably why we are eager to pay more for an unknown book than for an unknown movie, but here we are probably going to see very interesting developments that will challenge all that.

Even if there is no clear way to capture a sizeable amount of value from the long tail in certain type of business, it drives users to the site and provides a space for sharing. Ad based business models are certainly the most popular ones in Internet, but maybe, we need some innovation in the business model too!!!  

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