Chris Anderson’s new book, The Long Tail, makes Harvard Business School’s James Heskett wonder what happens when the economics of scarcity meets the economics of abundance (HBS Working Knowledge August 4, 2006)
Mr. Heskett characterizes The Long Tail as:
…a world where everything digital is available at all times. And because of the very low cost of maintaining and distributing inventory, everything is likely to remain available forever, enabling the occasional gem of intellectual property to survive "in print" or in circulation. It is a world of non-zero-sum thinking.
This is in stark contrast to many of the rest of us who actually read newspapers, watch television, go to the movies, and use the Internet for such mundane purposes as sending and receiving email and making purchases of merchandise generally thought to be in what Anderson calls "the Short Head" of the item popularity curve. The Short Head accommodates hit recordings, the most popular fashions, best-selling books, and other products of a world taught to believe in the economics of scarcity based on a limited amount of retail shelf space, a limited number of television channels, and generally limited resources of all kinds—in short, zero-sum thinking.
In the Long Tail, money is made by such things as avoiding inventory, producing to order, letting customers do the work, pricing creatively and flexibly to various customers, utilizing a variety of distribution methods, sharing information, trusting the market to do your job, and understanding the "power of free" combined with money-making services or products.
Mr. Heskett seems to have captured the details while missing the point. The Long Tail is not an idea, it’s a way of describing emerging business realities.
In his 2004 Wired Magazine article, The Long Tail, Chris Anderson posed the question raised by Ecast CEO Robbie Vann-Adib (Ecast’s digital jukeboxes serve up more than 150,000 music tracks): "What percentage of the top 10,000 titles in any online media store (Netflix, iTunes, Amazon, or any other) will rent or sell at least once a month?" Mr. Vann-Adib asked.
If you guessed 20 percent, you’re right in there with most people who guess wrong. The correct answer is not 20 percent but 98 percent. This finding sets the media business on its head.
To put this in perspective, Anderson notes that most movie houses don’t exhibit a film unless they believe it will sell a minimum of 1500 tickets in a two-week run; because it takes a little over a hundred customers a day just to cover the cost of opening the doors. Music retailers can’t afford shelf space for CDs that don’t sell at least two copies a year because that’s what a half inch of productive shelf space costs. The same principle is true for DVDs, books, newspapers and videogames – every title must pay it’s own way or make room for another.
Two CDs a year doesn’t sound like a lot, until you consider how very local most retail businesses are. The only reasons customers drive farther than they must are factors that tend to add to the cost of sale (things like location, selection and service). Typical retail solutions to this reality include aggregating a whole bunch of stuff in a big box; settling for low-cost, low-quality goods and competing on price; sticking with sure bets; combining all three with stringent cost controls. Good luck finding much outside the current popular mainstream in most retail establishments. They can’t afford to stock items they don’t expect to sell a lot of PDQ.
This is why, after hearing Gregorio Allegri’s achingly beautiful Miserere at a Maundy Thursday service in 1999, I searched for months to find it on CD. And it’s why, in 1998, I tracked Elvis Costello’s All This Useless Beauty for most of a year before locating a copy. They weren’t difficult to find because they’re not good – both are fantastic within their genres. They were hard to find because they were not hits.
According to Mr. Anderson just 20 percent of television shows, videogames, books and major studio films are hits. Which means they bear the cost of lackluster performance in the other 80 percent (much as Mr. Pareto’s Principle guessed they might). Among media companies the news is worst in the music industry where the Recording Industry Association of America says fewer than 10 percent of releases recoup their costs. This is matter of scale. Gigantic Wal-Mart must push 100,000 units of a CD through its system just to cover costs – and less than one percent of CDs reach that threshold. You can see how this limits the number of titles Wal-Mart (or just about any store) can stock.
But, take local real estate out of the equation and everything changes.
When Anderson was working on his Wired feature he learned that Wal-Mart stocked about 39,000 music titles compared to something over 735,000 at the online music service Rhapsody (a number that has doubled in the last two years). Past those 39,000 titles, Wal-Mart sold zero units (obviously). But Rhapsody streamed more songs below its top 10,000 every month than among its top 10,000 and the curve never dropped all the way to zero:
I’d go to the 100,000th track, zoom in, and the downloads per month were still in the thousands. And the curve just kept going: 200,000, 300,000, 400,000 tracks—no store could ever carry this much music. Yet as far as I looked, there was still demand. Way out at the end of the curve, tracks were being downloaded just four or five times a month, but the curve still wasn’t at zero.
The same thing was true when Mr. Anderson looked at Barnes & Noble stores stocking about 130,000 titles compared to Amazon’s 2.3 million. Over half of Amazon’s book sales came from below its top 130,000 titles.
Anderson found fewer than 3,000 movie titles at Blockbuster Video stores. At Netflix, 20 percent of rentals lie beyond its top 3,000 DVDs. When the top rated Hindi language film Lagaan: Once Upon a Time in India came to the US it opened on just two screens (that’s about one screen per million Americans of Indian heritage). It turns out that is nothing but a real estate problem because Netflix rents something on the order 100,000 Indian-made movies every month in the US.
These examples are all American media content companies and if that’s as far as it goes, the Long Tail is still a big deal in a nation where more workers are employed in entertainment than in steel production.
But there are also great rewards to businesses that extend their reach down the Long Tail of services, durable goods and consumables.
One category – mail order cataloguers – discovered this long ago. Benjamin Franklin in the 18th Century; Hammacher Schlemmer, Montgomery Ward, Eatons and Sears Roebuck in the 19th century; J.C. Penney, Lands’ End and L.L. Bean in the 20th century delivered everything from waterproof shoes to prefabricated house kits for consumers living quite literally at the end of the line (forgive me if I left out your favorite niche cataloguer).
In 21st century India, Unilever improved the value proposition by reformulating its Lux brand for rural customers who require a single product for cleaning body, hair and clothing. They packaged the new item to sell at a quarter the cost of any other soap sachet – half a rupee compared to the going rate of two rupees – in a market where family incomes average 4800 rupees a year. They are being rewarded with brand loyalty in an emerging market vast enough to make half rupee purchases add up to something big.
Google is making a fortune one search result at a time by helping us find what we want. And just in case you’re new to this part of the conversation, those search results are ordered by our fellow internet searchers whose billions of daily clicks form what John Batelle calls our "database of intentions."
Long Tail businesses make those intentions purposeful. In the Long Tail we are not merely searching but expressing preferences about what we find. As Mr. Anderson has it:
For a generation of customers used to doing their buying research via search engine, a company’s brand is not what the company says it is, but what Google says it is. The new tastemakers are us. Word of mouth is now a public conversation, carried in blog comments and customer reviews, exhaustively collated and measured. The ants have megaphones.
And what we’re finding and talking about with people like ourselves is well off the beaten path of current hits. Netflix CEO Reed Hastings says Blockbuster has generally reported that around 90 percent of its store rentals are new releases of theatrical films. But that’s not true for Netflix:
About 30% of what we rent is new releases and about 70% is back catalog and it’s not because we have a different subscriber. It’s because we create demand for content and we help you find great movies that you’ll really like. And we do it algorithmically, with recommendations and ratings.
This is Long Tail business thinking: riding the wave of satisfied customers to create demand for useful products, services and experiences. Long Tail companies don’t succeed by manipulation and mass marketing but by addressing solutions to real needs and desires at a scale that makes sense to customers.
To paraphrase Mr. Hastings:
We create demand for content and we help you find great [x] that you’ll really like.
Let [x] equal products, services and experiences that meet people’s needs, solve people’s problems and improve people’s lives on their terms and you’re on your way to the Long Tail.
For an extended excerpt from The Long Tail, visit Mr. Anderson’s UK publisher, Random House, UK.
