The Art of Software

I’ve been thinking about the Long Tail concept lately and the affect of this theory on businesses. Last month Chris Anderson, the creator of the Long Tail commented about Netflix data and the Long Tail. What prompted his post was a paper written at Wharton about the Long Tail affect.

If you’re not familiar with the Long Tail Theory it is a theory that selling small volumes of niche items can bring in significant revenue. This seems particularly true in the digital realm, where the cost to store digital files on servers is considerably cheaper than storing physical objects in a warehouse. The term Long Tail is a result of the graph of inventory and sales (seen left). Where the yellow section is the niche items and results in healthy revenues.

The papers findings appear to echo a lot of academia’s thoughts on the Long Tail. That it is a good theory, and one that has been around for a while, but it does not work out the best when you have to account for physical storage and delivery. I see where they are coming from with this, but I’ll leave this up to the academics to debate.

Since I read this article what has kept coming to me is the question, “What are the negative affects of a business seeking out to maximize revenue by implementing the Long Tail?” In fact, what got me thinking about this is the very Netflix data that the paper and Chris reference.

Netflix has been adding more and more movies to its collection for quite some time. Everyday more and more obscure movies, TV shows and self help videos are added. Thousands more than the 3,000 videos Blockbuster puts in its stores. According to the Long Tail theory, the abundance of niche films, documentaries, kids shows, foreign films, snooty French films, and cult classics will create quite a revenue stream for Netflix. Furthermore, it may even decrease demand for mega-pictures. Thus, Netflix can purchase fewer of the hot new releases, because theoretically their customer base will be viewing the niche films more often. It’s a win-win for Netflix and their customers.

This would appear not to be the case once you take into account Netflix Throttling. When first introduced, throttling of your Netflix queue meant Netflix would simply skip the movies at the top of your queue that were currently on everyone’s queue. Instead favoring customers who had received fewer films this month. As this process was refined Netflix finally let you know you were being throttled by telling you movies in your queue had a “Very Long Wait”, “Long Wait”, or a “Short Wait”.

Thus, customers who used the service to the maximum were punished. And customers who paid the same amount but viewed fewer movies each month were rewarded. The business principle here is obvious, the customers who do not view many movies per month cost less to keep. While the customers who view what Netflix deems as “heavy users” cost more per month due to shipping costs.

If a heavy user is upset about this, well Netflix does have over 100,000 movies in their collection, why don’t you choose one of those? Effectively, Netflix has artificially forced its customer base down the Long Tail, rather than customers naturally gravitating towards it. In other words Netflix has a “Forced Long Tail”.

In fact, since the addition of throttling Netflix has even made it harder to even find the newest releases. The new release page commonly shows movies that have been available on Netflix for months. In fact in the New Releases section right now is Mall Cop, a movie that was released to DVD in May, five months ago. This in fact is not the worst offender I see; Madagascar 2 was released exactly nine months ago and is in the New Releases section. This section once truly held new releases, movies that have been out in the past few weeks and even told their customers what movies were coming soon. This is another case of how Netflix is pushing its customer base down the Long Tail.

Is the practice of pushing your customers down the Long Tail in fact a bad practice? Or is it simply a way to expose customers to other movies other than the top hits, in fact a band-aid approach to poor movie suggestion technology?

The positive effect of pushing your customers down the Long Tail of course is to your bottom line. You can purchase fewer mega-hits, potentially increase revenue from niche titles and possible add more customers seeking the niche titles. But at the expense of what?

Customer satisfaction.

The negative effect of this practice is obvious, those customers who love the service the most are instead punished for it, in fact upping your plan to a higher paying, more movies out at a time, plan appears to have no affect on throttling. You pay more, but are still throttled.

The take away here is of course there is always a downside to an upside. The Long Tail may in fact increase revenue as customers explore increased availability to niche products. But at some point businesses may feel that the margins on these niche products are too low and force their customers down the Long Tail at the expense of perhaps customer satisfaction.

But then, the airlines industry has been sacrificing customer satisfaction for years and it’s just doing fine. Right?