Many many moons ago, I graduated as an economics major. I enjoyed most of the courses I took although it was the six hours of lectures per week that was more of an appeal at the time! Economics can be a rather dry subject so reading a book about demand curves may not be your idea of a good time. But I do recommend you read this book written by editor of Wired magazine. It is easy to digest and holds some valuable lessons in understanding the digital economy that we are in. Here are a few insights I found.
The 98% rule
In his research, Anderson found that the aggregate market for niche products is huge. One online music retailer found that 98% of albums sold at least once per quarter. The implications of this are:
- the tail of variety is long (add up all the sales outside your best-sellers and that comes to a significant amount.
- it is now economically within reach due to digitizing of content, widespread computer usage and broadbank and powerful search ability. Examples of companies featured include Amazon, iTunes, rhapsody, eBay and Netflix.
- Niches aggregate up to a significant market (see below)
Move from hits to niches
In a hit-obsessed culture we are focused on Top 10 lists and the blockbuster movies, music stars and books. Anderson found that online retailers tap into the demand outside this limited range. The size of the long tail was between 25-40% of total sales. Anderson makes a (philosophical) point that this is a shift from scarcity to abundance. The Long tail is culture unfiltered by economic scarcity.
Cultures started from local and fragmented groups. Became much more uniform and global. And are now returning to interest-based niches, where a niche is not confined by geography.
Three forces affecting the Long Tail
1. Production
2. Distribution
3. Connecting supply and demand
1. Production
With computer hardware and software widely available there is a much smaller barrier to entry to produce your own content. Wiki is a example of how the wisdom of crowds can produce a “product” that is accurate, self-correcting and free to use. Anderson refers to this as a probability-based system which although statistically much more accurate than, say, a printed set of encyclopedias, still has a restriction that individual entries can be of a much lower quality. However, the ability to quickly update and correct errors is a powerful feature of these online collaborations. Anderson has case studies on self publishing and a comedy group, The Lonely Island.
2. Markets
Here the key word is aggregators. Familiar examples are Amazon, eBay, iTunes, Google and Facebook. Anderson looks at markets in 5 categories: physical products, digital, advertising / services, information, and community.
The key learning here is that pure digital companies are able to tap the long tail demand more effectively than physical products and hybrids. This can help explain why Amazon is moving towards inventory on demand with its printing on demand services.
3. Connecting supply and demand
Anderson explains the idea of a filter. For example, an editor of a newspaper is a filter as she needs to fit information into a fixed amount of newspaper “real estate”. Certain news stories have to be cut out. This judgement call acts as a filter and by definiation cuts out potential readers.
Examples of old economy “pre-filters” are editors, marketers, advertisers, studio executives. Their main role is to predict the success of a product. This hit and miss approach is based on scarity and is wasteful.
The “recommendation age” has post-filters of blogs, playlists, reviews, recommendations, customers. These new tastemaker’s main role is to amplify word of mouth down the long tail thus increasing possible demand.
Anderson declares the death of Pareto’s 80:20 rule. An example of one 80:20 rule is that 20% of your customers give you 80% of your sales / profit. He makes a good point that this rule could just as easily be 95:20 or 80:10 as “customers” and “sales” are different variables and so do not need to add up to the 100 that you often see mentioned. The Long tail opens up the other eg 20% because in a digital world we are not limited by scarcity or physical limitations like shelf space.
Abundance
One message I liked in this book is that abundance is the correct way to think of the new digital age. Our current models are based on scarcity trade-offs between time/convenience and money which has been a norm since Adam Smith. Anderson recommends that we embrace waste and account for plentitude. He references Moore’s Law and writings by George Gilder as proof of this concept.
From “Or” to “And”
Anderson concludes his book with some tips on how to create a long tail business. In short:
1. Make everything available.
2. Help us find it.
If you are interested in business and how the future will be played online, I recommend this book. It’s easy to read and full of case studies. If you are pressed for time, focus on the first 5 to 6 chapters and then refer to the final chapter. You can read Chris Anderson’s blog here.