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The IT Market’s $150B SMB “Long Tail”

Posted by Frank Gens on March 15th, 2006

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At IDC Directions 2006 last week, I talked about several disruptions that will drive major change in the Enterprise IT market over the next several years. To some, the most surprising of these is the shift coming in the role of small and medium businesses (SMBs) – from a backwater of IT adoption, to an epicenter of innovation, and an on-ramp for new, disruptive players into the market.

Catalyzing my thinking about SMBs has been the ongoing industry discussion about “The Long Tail” , an article written by Wired editor Chris Anderson about how the Web has opened up difficult-to-reach markets in the Media/Entertainment industry. Anderson observed that, before the Web, media companies’ primary model for making money was to focus on producing and selling “megahits” – the small number of songs, films, books and other products that deliver the highest sales volume (the blue region of the chart below). High costs have traditionally made producing, promoting and delivering the thousands and thousands of low-grossing, niche offerings (the pink region) financially unattractive, or even prohibitive.


But now, Anderson pointed out, by taking advantage of the Web’s low-cost marketing and delivery capabilities, companies are able to profitably mine the “long tail” – the previously elusive huge volume of low-volume opportunities. This fact has been hiding in plain sight, of course, for the past several years – with, Netflix, eBay, Apple’s iTunes Store, and others profiting by selling into the long tail. Anderson’s conclusion was that, by using the Web, “the future of entertainment is in the millions of niche markets at the shallow end of the bitstream”.

When I look at the chart above, it really makes me think about SMBs in the IT market. If you look at the average annual IT spending by enterprise size, below, you see a very similar curve. While hundreds of thousands of large enterprises spend an average of over $2 million per year on IT, millions of medium businesses spend a relatively paltry $140,000 per year, while tens of millions of small businesses spend an almost infinitesimally small $2,000 or so per year. That is a very long, and steeply pitched, tail indeed.


The chart above explains why the strategic focus for so many IT suppliers is first and foremost, on the “megahit” market of large accounts. With the very low average annual IT spending per SMB, it’s been very tough to profitably get IT to the long tail of SMBs. Even so, through brute force – with extensive and expensive channel structures – the IT industry has done an incredible job of actually pushing SMB adoption up to 49% of all IT spending (2005).


But most would agree, this is well below the SMB segment’s potential, considering that SMBs account for 60% or more of global GDP, and about 70% of total worldwide employment. And for those who have an eye on emerging markets, the potential is likely even higher, with SMBs accounting for 72% of employment in China, 73% in India, and over 80% in Latin America. If the IT industry – like the most innovative players in media, entertainment and retail – is able to effectively use the Web as a platform to fill that vacuum between reality and potential in SMB, it would add another $150B or more in annual, new IT market opportunity.


The challenge, of course, is that where there’s such a large vacuum between reality and potential, it will be certainly filled – and sooner rather than later. While traditional IT suppliers are trying to reassess their strategies and opportunities (e.g., see “SAP Jumps Into the SaaS Pool”, a new tribe of “long tail” vendors are steadily edging in. The totem, or the symbolic leader, of this group of suppliers is certainly Google. Google and this growing group of companies share three important traits: 1) they use the Web as a low-cost delivery platform, 2) they participating in huge, highly-productive innovation communities, and 3) they heavily using IT, but aren’t typically “selling IT” (they are selling business & consumer services) – all three traits present interesting challenges to traditional IT vendors.

In our view, the SMB market’s $150B long tail potential will make it an epicenter for a wide range of disruptions – and disrupters – that change the IT industry over the next several years. IT suppliers simply can’t afford to keep SMBs a strategic backwater; they need to move their SMB efforts to the front lines of their strategy, and use those efforts as a place to explore new, low-cost development, marketing and delivery methods. Traditional IT suppliers must be prepared to be among the disrupters who take advantage of the Web as a platform to capture the SMB long tail opportunity.

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12 Responses to “The IT Market’s $150B SMB “Long Tail””

From what I understand about Long Tail applications, the product or service you develop has to be able to “respond to” or “enable” one off use case configurations, many of which you will have no ability to predict, but you will have to enable anyway. A bit like making a small digital clock in the early 1980’s that could be into anything!

Now replace the term digital clock with google adword!

The key is how to support and promote applications as service in a way that is meaningful to the end user, and that creates realisable, indeed visible added value. If you read into the debate on mash-ups, composite applications, open source routers etc., exactly what do people end up paying for? They pay to know that the thing works, and that it is supported. The value of applications could end up being some kind of measure of the time and effort put into them, and plain old transaction cost econcomics such as switching costs.

If the software business can learn anything from the auto business its that contant incremental improvement wins; the brand is the product (but only x amount of its total value); and buyer supplier relationships are key to delivering the innovation cycle.

End point. He Who Creates The Best Eco-System Wins. Now what might that look like in a Google App world?

[...] The chart below, from Frank Gen’s blog (he’s from IDC), superimposes key datapoints to illustrate the importance of Small to Medium size companies when it comes to employment, GDP contribution and how much $ they spend on IT. IT, when deployed properly must make a company more competitive, more responsive, more customer centric and more profitable. The Long Tail aspect shows that the number of businesses in the SMB market is vast, distinct and traditionally doesn’t spend as much as larger companies on IT. Most IT service and solution companies see this as unattractive. They are wrong! [...]

[...] But, as we anticipated last year, things have clearly changed at SAP – in the priority that management is putting on the SMB market, and in terms of what SAP is prepared to do to compete successfully.  SAP has a high-priority, well-funded push down into the SMB Long Tail. Based on SAP’s behavior in the past six months – punctuated by last week’s SAPPHIRE customer event – Kagermann and team seem to have a revolution of sorts in mind, revolving around a high-priority, well-funded push down into the SMB Long Tail, defined in part by three key elements:  [...]

[...]  Image by Frank Gens,  [] [...]

[...] in SMB Is Now an Obsession. We’ve discussed the growing importance of “the SMB Long Tail” for accelerating overall IT market growth, and particularly for capturing growth in emerging [...]

[...] a critical driver for both sectors’ transformation is the growing desire to reach the “SMB Long Tail” – the very large number of low unit-spend customer accounts that have been traditionally [...]

[...] talked repeatedly about the growing importance of the SMB market (especially in emerging markets) for IT market growth. And we’ve asserted that it will take a [...]

Dear Frank,

Thanks for doing such an excellent job in describing the market for Encanvas! We’ve been developing this technology since 2003 and it’s a relief that we’re finally able to tell people what it does and who it serves. I think, in addition, we see cloud computing as the likely delivery vehicle for these technologies and the interplay between the mashup portal services you describe and business social networking as being a fundamental influencer on pace of adoption. Great work.

[...] spending is the role that SMBs will play in this IT industry transformation.  As we’ve noted many times, the opportunity to open up under-served SMB segments, in both developed and emerging markets, is [...]


[...] Image source: IDC exchange [...]

[...] No matter where you go when you’re browsing the web, you’re gonna get assailed by these “If you liked x, you’re gonna love…” messages.  And surprisingly enough, it’s not just to get you to spend more money while shopping online.  You see, there’s this phenomenon called the long tail. And that’s one looooong tail. image credit [...]

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