Return of the Long Tail

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New York – Last year, Integrity published a white paper discussing how “long tail” trends were evident the investment research industry. This paper posited that demand in the investment research industry is shifting from mainstream research products (e.g. sell-side fundamental research) towards unique, niche offerings (e.g. industry-specific primary research, boutique data vendors, etc.).

New evidence derived from Integrity’s proprietary database of 1500 research providers lends additional support to this thesis. While demand for mainstream research products remains robust, there are indications that revenues are shifting away from the “head” and towards the “tail” of the research distribution curve.

Before we discuss this evidence, let us first review what long-tail economics is and how it applies to the financial research industry.

The Long Tail of Research

The long tail is a statistical distribution in which a high-frequency or high-amplitude population is followed by a low-frequency or low-amplitude population which gradually “tails off.” Long tail curves can be used to describe demand in many industries, especially content-based industries, where a small number of products account for a large percentage of overall revenues.

The chart below provides a graphical representation of a typical long tail demand curve. While a small number of mainstream products have a large portion of overall market share, the long tail of niche products can be cumulatively as large a market presence as mainstream products—or larger.

While traditionally applied to other content industries, this demand curve aptly describes the financial information industry. At the “head” of the tail are the major sell-side firms, which dominate the research market, and the large data vendors, which supply a majority of the financial data. At the “tail” are the boutique research and data firms which have a small individual share of the market but a large cumulative share of the market.

Demand Shift from Head to Tail

In 2006, Chris Anderson published The Long Tail, which argued that that innovations in distribution, pricing and marketing are transforming many content industries, shifting demand from mainstream products and services to smaller market niches. This argument was applied to the music, books and movie industries, in which new companies like Amazon.com and Netflix were enabling people to identify and access niche products to a greater degree than ever before.

In January 2007, Integrity published a white paper that applied this argument to the investment research industry. The white paper looked at demand trends for investment research and posited that the research industry follows many (though not all) of the patterns of other long-tail industries.

New Evidence of Long Tail Trends in Research

Since Integrity published its “Long Tail of Research” white paper last year, we have more than tripled the number of firms in our proprietary database of research providers, which currently includes over 1500 providers of financial analysis and data. By looking at when these firms were founded, we can get a sense of how the investment research industry has grown in recent years.

According to our analysis, more than half the firms in our database were founded after 1993. In other words, the number of players in the research industry has doubled in the past 15 years. More interestingly, many of these new firms are highly specialized in their offerings and approaches.

While it is unclear how fast demand in the research industry is shifting towards the tail, the data clearly shows that the tail is growing fatter.

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