I’m at the AlwaysOn Media Conference in NYC today. At breakfast, Esther Dyson (who just recently left CNet), Chris Dobbrow (now at GoingOn, the platform powering AlwaysOn), Melinda Gipson (GateHouse Media) and I had an interesting discussion about how to build long tail aggregator businesses. This type of business does not have access to the head and torso of the distribution–it only works with the tail.

The basic premise is to aggregate the value under the tail. Revenue per unit (of whatever you’re measuring on the X axis) will be small on the tail portion but there are many units, hence the opportunity to build a big business, provided you can keep costs low enough to make great margins/unit.

It was impossible to build these types of businesses in the real world–costs are simply too high. You need the draw of the hits to bring an audience in and support fixed costs such as rent. On the Net, the early wisdom was that you cannot launch without the hits–what would Amazon and Netflix be if they had tried to launch without the bestsellers and blockbusters? Things have changed in a decade. Search and social discovery mechanisms have made niche content much easier to discover, bringing customer acquisition costs down enough to make a meaningful difference.

At the highest level, to become successful as a long tail aggregator, you have to be very easy to do business with at every level: how you’re discovered, how customers and partners engage with you initially and over time. If you’re not, there will be increased sales, marketing, account management and support costs, which directly affect margins. Part of being easy to do business with has to do with you providing a whole solution (in a Crossing the Chasm sense) to your customers and partners.

The obvious, Business 1.0 approach is vertical integration. That’s the Apple way. If you can execute it with near perfection over time, it’s a fantastic way to go. It’s also very expensive and very risky. iPod/iTunes couldn’t have launched outside the shadow of a large company such as Apple.

The Business 2.0 way is orchestration and clean APIs. You need to orchestrate the solution because you must control your customers’ experience. You partner with best-of-breed providers to fill out the areas where you need help. By itself, that’s no different than what Geoffrey Moore preaches. In a Web 2.0 world, the difference comes through clean APIs, which allow you to maintain efficient, fluid and broad partnerships while keeping costs low.