Changing Paradigms - VI

The explosion of Apps fills needs previously satisfied by Big Companies at a lower price for the end customer. This shrinks the market value and jeopardise established biz.

6. What is the impact of the long tail?

I have observed in the previous post in this sequel that progress in the production and distribution, particularly in software based products where manufacturing and distribution cost can be very very low, allows the addressing of market niches; however, in general these niches are not appealing to a big company since in most cases they cannot generate sufficient revenues to compensate for cost. Hence they are, and will remain, the play field of SMEs.

However, this explosion of services/products deriving from the multitude of SMEs creating them is affecting the big guns more and more because the various niches all together cover most of the global market place and their offer meets many of the demands of that marketplace at a very low cost. This leads to a “devaluation” of the products/services offered by the big guns that will find selling their services and products harder and harder.

In turns, the money that is freed by buying a lower priced product is going to be spent in other lower priced product thus creating a death spiral for the big guns.

We have seen this clearly happening in the Apps sector: just look at all the apps supporting a variety of needs for manipulating photos. Adobe Photoshop is starting to feel the heat, and Adobe is now providing free photoshop apps for smart phones in the hope of locking in customers that would then further retouch their photos on their computer using Photoshop (and paying a hefty sum). This is not working (not as much as expected, anyhow) and we are now seeing Adobe exploring other ways to sell their product, transforming it into a service (pay per use, subscribe to service…).
Photoshops remains, buy far, the best (along with other professional packages like Aperture…), but more and more people are finding apps available for free or at a tiny price (1.99$) good enough and often easier to use.

Apple has decided to provide its software (OS, iLife, iWork) for free to its customers thus sinking in a single swept MS suites and contrasting the many free apps on the market. They can do that because this moves is expected to increase the appeals of their suite of (hard) products and hence their sales.

So what we are witnessing here is a change of paradigm where the “market pull” distorts the rules of the game. It is no longer the natural selection of a technology over another operated by the market preference, here we see that the selection does not affect technology but the production process: the survival moves from being able to decrease price through leveraging scale factors (mass - volume market) to decreasing price by decreasing the value chain cost, independently of the volume!

This is clearly affecting those companies that have made their sophisticated, and costly, production and supply - distribution processes their competitive asset. Once a product can be created and delivered below a certain price thresholds the cost involved in the up keeping of sophisticated value chains dooms the big company.
The long tail is therefore growing, shrinking the market space for big companies.

Author - Roberto Saracco

© 2010-2018 EIT Digital IVZW. All rights reserved. Legal notice. Privacy Policy.