The Long Tail is a concept that was set forth in 2004 by Chris Anderson, editor-in-chief of Wired, which was then turned into a 2006 book. In short, the idea is that because of the Internet and it’s infinitely wide and incredibly low-cost distribution capabilities, the big “hits” of popular culture (be they movies, music, books, etc.) are no longer the only things that will make money. Now, the “misses” will also be money-makers.

But a new article by Anita Elberse just published in the Harvard Business Review called “Should you Invest in The Long Tail“ is taking a closer look at the theory and suggesting that businesses really shouldn’t shift their promotional dollars to the long tail - and instead should stick to promoting the winners. She comes to this conclusion after determining that the tail, although long, is very flat and accounting for very few sales, and typically less satisfied consumers.

Anderson replies here.

Elberse responds to Anderson here.

This is a very interesting debate, and one that should be followed by anyone who is involved in marketing or advertising online. Anderson and Elberse have taken a great deal of time looking at data and doing analysis on this concept, but here are some thoughts based on reading the articles.

- Anderson seems to be focusing on the fact that online retailers like Amazon.com will begin selling a lot of items in the long tail. Whether or not it’s true is practically irrelevant for the vast number of online businesses. Most businesses don’t have the reach of Amazon.com and are targeted at a much smaller audience. The people who run those businesses know that 80% of their business comes from the top 20% of their clients and customers - so they will continue to focus their attention - both time and money - on reaching those clients/customers. Now they have Elberse’s data to back them up.

- People buy stuff that other people like. This is why user recommendations (such as those on Yelp or TripAdvisor) are so popular, and why the head of the tail keeps growing in popularity. People like to have a choice, but when their time is limited, they typically will go with the easier choice. And it’s easy to choose something that has been recommended by someone they trust - or an online audience of their peers.

- The long tail does exist and consumers are benefiting from more choice - but the tail isn’t a place that any musician or artist or blog or business wants to be. And may not be a place where money can be made. According to the data collected by Elberse and cited by Anderson, “In music, of the 2.4 million digital tracks sold in 2007 in the US (most of them through iTunes) 24% sold only one copy and 91% sold fewer than 100 copies.” 100 copies sold through iTunes (at $.99 each) isn’t even enough money to buy a new guitar.

Photo by loufi

My most recent article for The Industry Standard just went up – How MySpace Music could beat iTunes. If you’re interested, please give it a read!

The music industry is something that I’m really thinking about lately with the launch of Fat J Records and signing Cara Austin – so the recent news about iTunes overtaking Wal-Mart and MySpace Music’s launch are both of great interest to me. And there are a lot of things about the MySpace vs. iTunes topic that I didn’t have space to include in my article for The Standard. So I thought I would just list them here, kind-of stream-of-thought.

MySpace Music can beat iTunes by supporting musicians. This is the premise of the article that I wrote for The Standard. Basically, I think that if MySpace Music provides data about the fans that purchase music, ticket and merchandise to the musicians, it can beat iTunes. Go read the article for the whole argument.

CDBaby is a model of how MySpace Music could work. CDBaby is an unbelievable music retailer that caters only to independent artists. And this is what its privacy policy says (these points are directed at buyers who visit the site):

“Only the musician whose music you buy will know who you are. If you don’t even want the musician to know about you, just say so at the bottom of your order form.”

I use CDBaby to sell CDs for Cara Austin, and so far, NOT ONE person has requested that CDBaby withhold their contact information. This is because people who go so far as to buy a CD are usually fans - and they don’t mind the band or artist being able to contact them again in the future.  According to the company’s Website, CDBaby has sold 4,202,465 CDs to customers resulting in $71,482,212 paid directly to the artists.

iTunes is a store, MySpace is a community. I read this quote from someone involved in the deal, and this is a really important point. While there are millions of people who buy music from iTunes, the MySpace community that uses MySpace to discover new artists and read about what they are up to, will be a powerful environment for making a purchase. With the possibility of revenue coming from MySpace, artists will do even more to make sure that their pages are attractive, interesting and compelling. And the community of music on that site is going to get stronger and stronger. Imagine 5 million musicians adding content, video, new songs and new song versions - this is going to be incredibly powerful and impossible for iTunes to rival.

Facebook’s chance to win in this space is shrinking by the minute. Facebook is gaining on MySpace in the social networking space, but Facebook’s support of music is, well, pathetic. They are going to have one shot to try to release a music platform that users will like (and use) but it’s not looking good. With MySpace’s announcement of the support of three of the four major labels, one possibility is that Facebook already has the support of the fourth (but that is highly unlikely and just speculative on my part).

International will be huge. I read that MySpace Music isn’t going to be able to distribute music internationally yet. What? What is the licensing issue with that? My suggestion – sign up all the indies asap and start selling to Japan, England, Australia, and everywhere else that has an appetite for U.S. music immediately – or else that could be a place that MySpace Music will be vulnerable.

DRM free matters, but won’t be the thing that wins it for MySpace. As part of the announcement, MySpace announced that they music that is sold from its music store will be DRM-free. (DRM=Digital Rights Management, it is the protection that Apple places on its files that prevents people from being able to share them.) This is a big deal, but not the biggest, as this will just (finally) compel Apple to follow suit with iTunes.

There is still a perception issue that could cause MySpace some serious problems. MySpace has kind of a seedy image. The site’s design is fairly unattractive, and it’s hard to navigate the social network without running into something that borders on pornography or spam. The company is going to have to do battle against that perception to win back people who have become disillusioned by previous negative experiences with MySpace.

Can Apple prevent iPods from using this service? Technically, I’m not sure if there is a way for Apple to limit the sites from which the iPod can download music, but if users are unable to load music from MySpace Music to their iPods, that would be a serious setback to MySpace. It also would likely cause a revolt among iPod users against Apple, but it would still be a hiccup in the acceptance of the service.

Anyone who has read this blog for any length of time knows that my company Pure Incubation is working on starting lots of companies. You probably also know that when I get to announce the launch of one of them, I am really excited (and usually a bit relieved!)

Today I get to announce that my latest project is launching: Fat J Records.

I’ve been working on getting this independent record label off the ground for awhile, but I feel like it’s finally official because I’ve signed my first artist: Cara Austin.

Check out her site here: www.caraaustin.com.

I’ve mentioned Cara Austin here before - because I really like her music - but now I am more than just a fan, I’m her label.

To be honest, I’m still figuring out all the kinks with what’s involved with owning and running a record label. The idea to even start this type of business came from a post that I wrote earlier this year about the music industry and the things that are changing with the way that music is sold and promoted because of the Internet. That post is here if you want to give it a read.

The bottom line about the online music business is that no one has it just right yet, so I figured that I might as well jump in now when all the fun stuff is happening.

One thing that I know for sure is that the Internet is changing the fan/artist relationship, and with that in mind, Cara Austin’s blog has launched on Tumblr. I think that the Tumblr microblogging platform might be just perfect for an artist blog that will likely include a lot of pictures, quotes, and short bits and links, as well as video and audio clips. I’m going to be the primary writer of the blog, and I won’t only be posting about Cara Austin and her musical career, but also about our adventures in exploring the online music industry - so feel free to give a read or follow us there.

Second, I don’t think that the online music business models are going to be figured out by one small independent label working alone. So with this post, I invite all of you to get involved. Do you have ideas about what needs to happen to change the music industry? Why don’t you post them here. Are you an independent record label yourself, or an Internet business that is making the best use of the new music models that are emerging? Let’s work together. Send me an email and let’s see if and how we can collaborate.

The launch of a business is always exciting. But today is particularly thrilling for me as the music industry is all new for me. It’s seems sure to be a wild ride.

Yesterday, The Industry Standard published an article that I wrote about why it’s a good idea to start a company in a recession. The article is here. (You should probably read it if you want to follow the rest of this post.)

This article generated quite a bit of buzz on Y Combinator’s Hacker News, so I wanted to take a minute to respond to some of the comments. Here’s the link to that chatter.

- The most common disagreement with the article seemed to be that many of the points that I was making about why it would be good to start a company in a recession also apply to starting a company in a boom. I agree completely. However, we unfortunately are not in a boom at the moment - we’re in (or entering into) a recession. The viewpoint of the article is “since we’re in a recession…” not “if you could pick between recession or boom…” I wholeheartedly agree that if you could set your ideal conditions in which to start a company, a boom would be the time.

- One commentor wrote: “start a company at a time and a place where there are no constraints and even the biggest idiot can be successful.” I disagree with the notion that there is ever a time that there are no constraints on a start-up. If there aren’t constraints, there should be. And this is the point I was trying to make. In a boom, start-ups don’t always SEE the constraints as readily or operate with restraint - but they should if they want to be using best business practices and give themselves the best chance of success. A recession forces those contraints on a start-up - but those constraints aren’t BAD. They help set good patterns and behaviors for running a business.

- In my opinion, it is not true that there is ever a time or place that “even the biggest idiot can be successful.” Successful idiots - especially in the world of start-ups - are rare.

Finally, various commentors suggested three other reasons that it’s a good idea to start a company during a recession and I wanted to include them here because I thought that they were worth mentioning:

1) “Your competitors will go bust.” -m0nty

Another commentor put it this way:

“Because the well-funded riff-raff drops out sooner.” -edw519

2) “Businesses that increase market efficiency in novel ways seem, to me, more likely to succeed during a recession. This is so obvious that I’m surprised the article didn’t mention it.” -mkn

3) “Also could get one more attention — maybe — because the media won’t necessarily expect anyone to be doing anything positive. Recessions are one big moan, and the ‘yipee!’ of a startup will stand in stark contrast.” -sabat

Thanks for all your commentary - keep it coming.

I have been a fan of The Industry Standard for a long-time - I have written about them before, and many of you will remember the magazine version of The Industry Standard as being the fastest growing magazine of all time before the bubble burst, taking The Standard down in its wake. Now The Standard is back, with an online-only site that focuses on a prediction marketplace.

And I’m the newest writer/contributor to the site.

My first article is up now - Five reasons why a recession is a good time to start a company. Go read it, comment on it, let everyone know what you think about it. And then come back to 16thletter and let me know what you think.

Guy Kawasaki just formally released his latest project. It’s called Alltop and it’s getting widely panned across the Internet. Michael Arrington doesn’t like it, and neither do these people. (Although some people like it.)

Alltop basically is simply lists of blogs and publications, organized by category. Kawasaki calls it an “online magazine rack.” The most popular criticisms of the project are that it’s a redo (of popurls and Original Signal) and that the format neglects all the benefits of RSS.

Eliminating a discussion of whether the site is good or useful or worthy of attention, I find this launch particularly interesting because I just started reading Guy’s book, The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything. And it’s not often that you get to read a book about starting companies while the person who wrote the book is starting a company. So here’s my take on that aspect of the launch.

(Major Disclaimer: I am only on page 31, so my analysis of the book is going to be weak, and is not the point anyway!)

Guy says: “Make meaning - create a product or service that makes the world a better place.”

Does he do it?  I would say yes. According to the official announcement of the release, the “goal is to satisfy the information needs of the 99% of Internet users who will never use an RSS feed reader or create a custom page.” This is a pretty meaningful purpose, and one that I can really relate to as most of the people I know in my non-work life do not use RSS or even know what it is.

Guy says: “Make Mantra. Forget mission statements…instead, take your meaning and make a mantra out of it.”

Does he do it? Heck yeah. Check out this catchy mantra - “aggregation without the aggravation.”

Guy says: “Get going. Start creating and delivering your product or service….Don’t wait to develop the perfect product or service. Good enough is good enough. There will be plenty of time for refinement later. It’s not how great you start - it’s how great you end up…The wisest corse of action is to take your best shot with a prototype, immediately get it to market, and iterate quickly.”

Does he do it? YES! And I think that this is the No. 1 best thing about this launch. Guy didn’t wait until the product was perfect, refined, pretty and loved-by-all to launch. It was “good enough” and he let it fly. Now, he’s getting unbelievable feedback and commentary by everyone who is watching the launch. Love it or hate it, the feedback is real and immediate, and I bet that tomorrow he’ll be working on version 2.

Verdict: Guy Kawasaki practices what he preaches - at least what he preaches in the first chapter of his book.

Google’s stock price is dropping, and people are freaking out. Yesterday’s stock price drop was in response to a recent report from Comscore indicating that January 2008 showed only flat growth year-over-year versus a 25% increase in Q4. This apparently is the result of lower click-through rates on paid search ads, and people are worried that this means that Google is exposed to a slowdown if there is a recession in the U.S.

The near-panic is somewhat understandable considering that the overall U.S. economy isn’t doing all that great, the tech folks are scared of another bubble, Microsoft is talking about taking over Google, Apple’s stock is dipping, and everyone is looking for someone - anyone - to believe in. Google has been the obvious choice for a long time, and no one wants the tech darling to falter.

But the thing that I take issue with is the notion that this decrease in clicks is a result of consumers clicking less because of a coming recession. These numbers from Hitwise show that there has been no decrease in overall search traffic to shopping sites - meaning that consumers are still clicking.

And if consumers are still clicking on search links, why would they suddenly not be clicking on paid search ads? Could this be because consumers suddenly have become more discerning about what is a “paid” result vs. what is a “organic” result? No way.

My question for Google would be about how much of this decline comes from the dip in clicks on AdSense partner sites. My bet is that the clickthrough rates have dipped significantly on partner pages. Why? Primarily because of the click fraud prevention that Google has been implementing, as well as the “accidental clicking” measures that Google took back in November.

Remember, this was the second change that Google made to its ads; the company first changed the paid results on its main search pages in April, a move that many advertisers said led to a decline in the number of clicks, but not in the amount of revenue that they were earning.

And this might just be the bottom line. If there is no growth in the number of clicks, but revenue is growing, Google may have figured out a way to increase ROI for advertisers. Like this Businessweek article says, we’ll have to wait for earnings in April to find out for sure.

One of the biggest issues with starting a company - and keeping it running - is finding the cash to stay in business. Even if you work hard at saving money, only spending on the things that are necessary, it is fairly likely that there will be a time when you need more capital.

I am still in the early stages of my start-up, and only have first-hand experience with angel investments, but the following is a rundown of the common ways to raise money for your start-up. Once again, I’m drawing heavily on the stories of the entrepreneurs from Founders at Work by Jessica Livingston for the quotes included here.

The good news for anyone who has limited resources when starting a company is that entrepreneurs seem to agree that this can be a good thing. The need to conserve resources often leads to creativity, hard-work, and a drive to succeed that can be missing when money is available and things are easier and more comfortable. So the first piece of advice when you’re thinking about raising money is to make sure that you really need it before going after cash.

“One of the things we’re seeing that we really don’t care too much for is that way too many companies are taking money when they don’t need it. And the whole idea we had was that having too little money is a great way of getting great product because it’s a way to get focused.” - David Heinemeier Hansson, partner, 37signals

“The money was scarce, but I’m a big believer that constraints inspire creativity. The less money you have, the fewer people and resources you have, the more creative you have to become. I think that had a lot to do with why we were able to iterate and innovate so fast.” - Caterina Fake, cofounder, Flickr

“I really liked the discipline that came from a bootstrapped startup. I think that everybody that goes and does a startup - even if they don’t do a major startup that way - should start a business that is having to make people happy with them day one, through contracts, through small scale sales, whatever it is. How low can you go? How can you build something really inexpensively? How can you not spend money on furniture and matching carpet and those sorts of things?” - Brewster Kahle, founder, Internet Archive/Alexa Internet

“The advice I would give is to avoid [raising money]. I would say spend as little as you can, because every dollar of the investors’ money you get will be taken out of your ass - literally in the sense that it will take stock away from you, but also the process of raising money is so horrible compared to the other aspects of business. You can’t work your way out of it like you can with other problems. You’re at other people’s mercy.” - Paul Graham, cofounder Viaweb

“I think in general being overcapitalized is a path to failure. The VCs want you to spend. There are general ills with being overfunded.” - Joshua Schacter, founder, del.icio.us

1) Use your own money
In my opinion, this is the best way to fund a start-up if you have the capital to invest. Not only will this ensure that your decisions are not controlled by outsiders, it will also guarantee the highest percentage of profit if you sell. It’s also incredibly motivating if your own money is on the line every day. Of course, if you don’t have extra capital and you’re trying to self-fund, that can be a painful process of skimping and saving every dime - as well as living day-to-day with poverty and uncertainty. So this is probably only a viable option if you have significant personal wealth, or have put money aside in savings.

“There are pros and cons to taking money. The best kind of company is one where you don’t have to take any money…I funded the first few years myself. But eventually, I took some money from Mitch Kapor and then others. Not so much because I needed it at that point, but because I knew that, ultimately, you cannot accomplish something completely on your own. You really need to develop a network of people who win when you win.” - Ray Ozzie, founder, Groove Networks

2) Get a loan
There seems to be a general sentiment that small businesses and start-ups are not able to get bank loans. The truth is, there are loans that are earmarked for small businesses. Bank loans can require collateral to secure them, however, and the terms make all the difference in the world, so be sure to read the agreement closely.

“We lucked out and got an interest-free loan from the Canadian government. We’d applied for it, and gotten rejected, and then just sent the same application in again when it was open again, and much to our surprise, we got it.” - Caterina Fake, cofounder, Flickr

3) Apply for grants
From the research I’ve done, it appears that the United States government does not have any grants for small businesses owners, but there are state-based grants available. This list from About.com includes links to the state-based programs. If you’re based in Canada or elsewhere outside the U.S., you may have more luck finding government grants.

“We heard about these government programs, and we started applying for them. It was a lot of work to actually apply for these things, and then it was a lot of paperwork to maintain them. In the early days, they weren’t really big grants. They were rather small, and sometimes you wondered if it was worth all the trouble. But it was very helpful when we needed it. As you become experienced, and as the government agencies that we were working with became comfortable with what we were doing and recognized that we were onto something, the grants became more interesting.” - Mike Lazaridis, cofounder, Research In Motion

4)Put it on your credit card
While it can be difficult to get a bank loan or a government grant, most small business owners (depending on their personal credit histories) are able to obtain some kind of business credit card. The typical issues related to spending on credit apply, with the biggest concern being that the business will fail leaving the entrepreneur with a huge credit card bill to pay off. According to Joe Knight, co-author of the book Financial Intelligence, in a BusinessWeek article, “the worst thing in the world is to have your business fail and be stuck personally with $50,000 in debt at 21% interest.”

“There are more choices nowadays for people - angel money, for example. And many things are much less expensive to do now. You can go further on your credit card than you could before. I want entrepreneurs to make informed choices when it comes to financing. Understand what the impacts and implications are for different financing options.” - Mitchell Kapor, cofounder, Lotus Development 

5) Get consulting work or side jobs
This suggestion is something I covered in an earlier article about how to save money on your start-up. It’s a popular way for flexible start-ups to get some extra cash - money earned from side projects assigned to the company or one of the start-up founders can then be used as an infusion of cash for the business.

“The first year was entirely self-funded. It was just doing this work mostly for HP. HP basically funded Pyra for the first year, unbeknownst to them, because at the time you could charge a decent amount of money for doing pretty simple web application development. If one of us was working on that full-time, it would pay for three of us (not that we were paying ourselves much).” - Evan Williams, cofounder, Pyra Labs

6) Find angel investors
Angel investors are typically wealthy individuals who use their own money to fund a start-up in exchange for repayment of the investment (with interest), or a percentage of the company or both. Angel investors are often friends, family members or previous business partners or associates - or people who are in the start-up founders’ extended network. (This is a good reason to start networking now!)

Angel investments provided me with the initial funding for my business, and angel money has been an excellent way to make sure that I have the capital to fund my start-up, while at the same time having the flexibility to work on a variety of things in different markets without too much outside control. This is how Chris’ company is funded, as well, and it is an increasingly popular way to fund companies, especially in high-tech.

“We all tried to get $3,000 from each of our parents, and five of the six parents put up, so we had $15,000. After graduating, three of us lived in one house in Palo Alto, and three of us lived in another. We set up shop in the garage of the house that I was living in. It was the classic setup. My parents came up and they saw the garage and wound up buying us some nasty carpet. The tables were all Formica. I won a fax machine at Office Depot. We stole our chairs from Oracle Corp.” - Joe Kraus, cofounder, Excite

“We were very encouraged that the angel investors wanted to invest. We gave demos to two investors. We only wanted to raise $50,000, but both of the investors who saw the demos said yes. So we thought, ‘All right, we’ll raise $100,000 then, since they both said yes.’” - Paul Graham, cofounder, Viaweb

7) Take on venture capital
For me, and for most of the founders featured in the book, venture capital is the type of money that is surrounded in the most mystery. Typically, start-up founders don’t understand venture capital or how it works until they go through a funding round with the venture capitalists. There is also a great deal of fear surrounding the idea of working with venture capitalists, and often a great deal of resistance to taking money from them. However, for companies that need a lot of cash to see their idea come to life or to push them to the next stage of growth, venture capital can be a good option.

“Once you start down the treadmill of taking venture capital, it’s ‘How many rounds before people give up on your or you have a positive exit event?’ So you’re really setting yourself up. The best by far is to structure it so that you don’t have to take money.” - Ray Ozzie, founder, Groove Networks

“We took no investments because there were so many horror stories about what VCs would do to you. ArsDigita was the most public one, obviously, of kicking out the founders and then mismanaging the company and bringing in the so-called professional management.” - Joel Spolsky, cofounder, Fog Creek Software

“We didn’t have any desire to take money. We had heard all these horror stories about people receiving venture money, and even though we didn’t think we could have the aspirations to be something huge, we certainly didn’t want to crash and burn because we took money when we shouldn’t have. And we didn’t know anything about it. Are you supposed to pay them back? We didn’t understand that investors put money in and they own a part of your company. All we had heard were bad things that happened, and we didn’t know why.” - Mena Trott, cofounder, Six Apart (they eventually did take VC money)

“It’s one of those things where, if you look back now, when everyone walked away with a ton of money, everyone loves everyone. We had this great time, etc. It’s generally more complicated than that where, when the company is doing well, they’re happy and they think they’re great. The company’s not doing well; they’ve overpaid and they’ve been too nice. It’s half and half.” Max Levchin, cofounder, PayPal

“Then we found one venture capital firm, Brentwood Venture Capital. Jeff Brody, a VC there, saw it and he thought it was great. He said, ‘We want to invest.’ And they were prepared to put in $4.5 million…It was great, since we were plumb out of money. I would have lost everything; my house; I would have been deep in debt; the company would have folded; it would have been a bad scene.” - Steve Perlman, cofounder, Web TV

The next article in this series on start-ups will talk about one of the key attributes of an entrepreneur - the willingness and ability to change plans quickly, and to adapt to outside pressures and influences.

I just got an email with the subject line: “Thanks from the Industry Standard.” Here’s what the message had to say:

“You were one of the first in line to ask to see the brand-new Industry Standard. To show our appreciation for your interest, you are being notified of today’s official launch!

“The site is not only designed to give readers insights into technology and the Internet economy, but also provides a unique community feature — a predictive market.”

I’ve written about the Industry Standard in the past, related to the fall of the mighty business (print) publications that I used to follow. But today the site (as a Web-only property) is relaunching.

The site is positioning itself as a “prediction market,” offering analysis and opinion from writers and experts, and then giving its readers the opportunity to agree or disagree - and hopefully use the “power of collective intelligence” to predict the correct outcome.

From the site:

“The prediction market articulates the same emphasis on community knowledge and networking that is perhaps the Web 2.0 era’s most important contribution — the power of collective intelligence. Prediction markets have proven to be remarkably powerful tools for gauging events and trends, and we think that the addition of this technology to the site will provide a very special type of meaningful interaction.”

From my first look at the site, it is debatable whether it will have much of an impact. The contributors and analysis are good, but nothing to truly distinguish it from the content on any other site. The predicition market stuff is vaguely interesting at first glance, but who has time to vote on more news stories? Even so, my prediction is that the Industry Standard brand and the IDG parent company (with the top tech brands in its arsenal of sponsors - Intel is the “launch sponsor”) will be enough to guarentee a revenue-generating future.

Looks like I may be betting against TechCrunch on this one.

HP’s announcement today that it will begin creating made-to-order DVDs of some of Sony’s movies and TV shows is lengthening the long tail for video even further. By printing movies on-demand, consumers will have access to even more obscure movies and television shows that would not have been economically viable for retailers to stock.

(Thanks to Greg for the tip!)