The Internet and the death of the 80/20
Kevin Laws
Principal,
PacRim Venture Partners
PacRim Venture Partners
The Death of 80/20 on the Internet
It’s not just media. Once you start to think of the world in those terms, it is clear that most of the successful Internet companies fall into exactly that category: business models aggregating the untapped tail.
# Amazon makes most of their profit from the tail—they receive a higher margin because they don’t have competition in that area.
# Ebay does nothing but aggregate all of the tiny, single lot size items that were not being sold at all (or just through local classifieds).
# Google and Overture are aggregating all of the advertising spending that was not happening because it could not be targeted well enough. Coke doesn’t go there in a big way, but Riley’s Trick Shop in Worth, IL, can target you if you’re looking for vampire teeth.
The current crop of private companies include some doing exactly that. CafePress aggregates all of the niche content on the Internet and makes it available as merchandise, books, and CDs. They are making millions in the areas the traditional publishers and music houses have ignored. (Full disclosure: we are investors in CafePress). The blogging phenomenon is all about the long tail in journalism, spawning tools like Technorati and Movable Type (by Six Apart, where Andrew is now working). Clay Shirky has noted that blogs are surpassing niche media in traffic (though he believes that 80/20 applies to blogs also).
More opportunities?
With Yahoo sitting on a pile of cash and needing growth engines to compete with Google, and Google sitting on cash from IPO, you can bet activity in the Internet sector is going to pick up again. For the entrepreneurs among you, now is the time to start thinking about other businesses where the Internet could help aggregate the long tail. The next Ebay or Overture will be found there.
Kevin Laws is an investor at PacRim Venture Partners, where he spends his time on software and services investments. Before crossing over to the dark side, he was at Epinions.com for several years where he headed up the product group. Prior to Epinions, he worked with the Media & Entertainment and Information Technology groups at Booz, Allen & Hamilton.
In a pre-business life, he worked at Computer Sciences Corporation's office in Heidelberg, Germany, heading up a team responsible for developing in-the-field prototypes of high technology applications for the U.S. Army in Europe.
(This article was written in November 2004)
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Reader's comments(4)
1:
80/20 rule works only in cases where there is limited resource. A shop keeps only thousand titles because it is constrained by space and can't keep 100s of thousands. It is anybody's guess that in situation like this you would like maximize your sale by keeping things that people like. Internet has no such space limitation plus it is easier to search on internet than in a physical store. So that's why internet doesn't follow 80/20 rule.
Posted by:Avinash Kumar - 21 Aug, 2009
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