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Saturday, March 12, 2005

Software Business & The Long Tail

Joe Kraus writes brilliantly about the long tail effect on search business and provides his perspective about the future software business.

In Excite’s heyday, millions of searches were handled everyday. The query distribution looked quite insightful.Excite query distribution.In fact, the frequency of the average query was 1.2. That means if you wrote each of the millions of queries on a slip of paper, put them all in a fish bowl and grabbed one at random, there was a high likelihood that this query was asked only once during the day. Of ten-plus million queries a day, the average search was nearly unique.The most interesting statistic however, was that while the top 10 searches were thousands of times more popular than the average search, these top-10 searches represented only 3% of our total volume. 97% of our traffic came from the "long tail" – percentages categorised-queries asked a little over once a day.

The real reason Excite went out of business is because we couldn’t figure out how to make money from 97% of our traffic. We couldn’t figure out how to make money from the long tail – from those queries asked only once a day, while overture and google could find a solution for this.It was a special kind of marketplace where small advertisers could reach small markets efficiently. It was and is a revolution to the traditional economics of advertising (where the cost of producing and distributing advertising requires large markets to justify the expenditure).
Search is a long tail business and that is the source of its power and profit.
Chris Anderson wrote a great article called The Long Tail recently and pointed out 57% of Amazon’s sales come from books you can’t even buy at a Barnes and Noble. This runs totally counter to the traditional 80/20 rule in retailing – that 80% of your sales come from 20% of your inventory. In Amazon’s case, 57% of their book revenue comes from 0% of Barnes and Nobles inventory.
If we look at the software industry from this prism - the purpose of software in business is to support these "business processes" - To support the way a business does business – from the way a business runs it’s hiring and firing to the way it orders materials to the way it tracks sales.
- First, every business has multiple processes.
- Second, while some of these are pretty common in name from business to business (recruiting, for example), in practice, they are usually highly customized.
- Finally, there are simply a large number of processes that are either unique or that are common to millions of very small markets and therefore not traditionally worth the effort to buy software for (for example, the process by which an architecture firm communicates between it’s clients and the city planning office).

These mean that there is a combinatorial explosion of process problems to solve and, it turns out, little software to actually support them.This is a long tail of very custom process problems that software is supposed to help businesses solve.

In the past, software’s long tail has been generally inaccessible because software has been
- Too difficult to write
- Too expensive to write and distribute
- Too brittle or expensive to customize once deployed
It just hasn’t been economical for someone to create a custom software company to help architecture firms.In the software business, the traditional focus has been on dozens of markets of millions instead of millions of markets of dozens. The traditional software model is to make software have enough features and address enough of a homogeneous market that you can sell millions of copies of the same software. In the past, that’s been the only way to make money.
Joe writes,Jotspot is building a platform to make it easy and affordable to build long-tail software applications. To take those Excel spreadsheets and turn them into real web-based applications where you don’t have versionitis, where updates find you instead of you looking for them and where you can integrate data in your hard drive with data from the web, email and other applications and Joe concludes by advising entrepreneurs to look for the long tail in all business and develop strategies for fulfilling those needs. Joe has a good presentation on this topic available here.

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