February 27, 2010

The Long Tail by Chris Anderson

The Long Tail by Chris Anderson
- Why the future of business is selling less of more.

[It is a remarkable book where Chris's synthesis reveals the huge market for non-hits!]

Hits are starting to, rule less. Number one is still number one, but the sales that go with that are not what they once were.

Most of the top fifty best-selling albums of all times were recorded in the seventies and eighties (the Eagles, Michael Jackson) and none of them were made in the past five years. Every network TV loses more of its audience to hundreds of niche cable channels. Male ages eighteen to thirty four the most desirable audience for advertisers are starting to turn off the TV altogether, shifting more and more of their screen time to the internet and video games. Although we still obsess over hits, they are not quite the economics force they once were. Where are those fickle consumers going instead? No single place. They are scattered to the winds as markets fragment into countless niches. The one big growth area is the Web, but it is an uncategorizable sea of million destinations, each defying in its own way the conventional logic of media and marketing.

In the past, it was mass-culture era- the seventies and eighties. Teh average teenager then had access to a half dozen TV channels and virtually everyone watched a few or more of the same handful of TV channels. There were three or four rock radio stations in any town that largely dictated what music people listened to. Contrast to today's teenager who would have a Mac in his bedroom, fully stocked iPod, never known a world without broadband, cell phones, MP3s, TiVo and online shopping. The main effect of all this connectivity is unlimited and unfiltered access to culture and content of all sorts, from mainstream to the farthest fringe of the underground.

The greatest thing about broadcast is that it can bring one show to millions of people with unmatchable efficiency. But it can't do the opposite - bring a million shows to one person each. Yet that is exactly what the internet does so well. The economics of broadcast era required hit shows - big buckets - to catch huge audience. The economics of broadband era are reversed. Serving the same stream to millions of people at the same time is hugely expensive and wasteful for a distribution network, optimized for point-t-point communication. The era- of one-size-fit-for-all is ending, and in its place is something new, a market of multitudes.

From perspective of a store like Wall-Mart, the music industry stops at less than 60,000 tracks. However for online retailers like Rhapsody the market is seemingly never-ending. Not only is every one of Rhapsody's top 60,000 tracks streamed at lease once, each month, but the same is true for its top 100,000, top 200,000 and top 400,000 -even its top 600,000, top 900,000 and beyond. As fast as Rhapsody adds tracks to its library, those songs find an audience, even if it's just a handful of people every month, somewhere in the world - This is the last tail. You can find everything out here in the long tail.

Take books: the average Borders carries around 100,000 titles. Yet about a quarter of Amazon's book sales come from outside its 100,000 titles. Venture Capitalist and former music industry consultant Kevin laws puts it this way:" The biggest money is in teh smallest sale".

Broadly, the Long Tail is about abundance. Abundant shelf space, abundant distribution, abundant choice.

Rise and fall of Hit:

Before the industrial revolution, most culture was local. The economy was agrarian which distributed populations as broadly as teh land and distance divided people. Culture was fragmented, creating everything from regional accents to folks music. The lack of rapid transportation and communications limited cultural missing and the propagation of new ideas and trends. In was an earlier era of niche culture one determined more by geography than affinity. Influences varied from town to town because the vehicles for carrying common culture were so limited.

But with industrial revolution things started to change - news paper spread world of the latest fashions and moving pictures which gave the stars of stage a new recorded medium to reach bigger audience and play many towns simultaneously.

We are gregarious species, highly influenced by what others do and with film, there was a medium that could not only show us what other people were doing, but could also endow it with such an intoxicating glamor that it was hard to resist, It was dawn of the celebrity age.

Food marketing Institute describes the effect on opportunity for customers to select products directly from shelves. 'The supermarket helped create the Middle Class. Its low prices freed up substantial funds for families to spend on cars, homes, education and other needs and amenities of life. As supermarkets proliferated in the 1950s and 1960s, they played a pivotal role in creating the American middle class. On the supermarket's silver anniversary, President Kennedy said that the supermarket's low-cost mass marketing techniques."

In his autobiography,Boris Yeltsin gave this account of his 1989 visit to a supermarket in Houston: "When I saw those shelves crammed with hundreds, thousands of cans, cartons, and goods of every possible sort, for the first time I felt quite frankly sick with despair for the Soviet people. That such a potentially super-rich country as ours has been brought to a state of such poverty! It is terrible to think of it."

The Ultimate Catalog:

Jeff Bezos of Amazon asked himself as he sat at his desk at the hedge fund D. E. Shaw in New York:

It turns out that selection is a very important customer experience driver in the book category. It also turns out that you can't have a big book catalog on paper; it's totally impractical. There are more than 100,000 new books published every year, and even a superstore can't carry them all. The biggest superstores have 175,000 titles and there are only about three that big. So that became the idea: let Amazon.com be the first place where you can easily find and buy a million different books.

What retailers need is an efficient, economically sustainable way to sell a book that sells just one copy per year. And that means near-zero inventory costs. Amazon's solution was print-on-demand.

In its idealized form books
stay as digital files until they're purchased, at which time they're printed on laser printers and come out looking just like regular paperbacks. Since bits are turned into atoms only when an order comes in, the costs scale perfectly with the revenues. Or, to put it in the simplest terms, the production and inventory cost of a print-on-demand book that is never bought is zero.

Consider this analysis of the "Long Tail of national security" by John Robb, a military analyst who runs the Global Guerrillas Web site:
Traditionally, warfare (the ability to change society through violence) has been limited to nation-states, except in rare cases. States had a monopoly on violence. The result was a limited, truncated distribution of violence. That monopoly is on the skids due to three trends:

• A democratization of the tools of warfare. Niche producers (for example: gangs) are made possible by the dislocation of globalization. All it takes to participate is a few men, some box-cutters, and a plane (as an example of simple tools combined with leverage from ubiquitous economic infrastructure).
• An amplification of the damage caused by niche producers of warfare. The magic of global guerrilla systems disruption which turns inexpensive attacks into major economic and social events.
• The acceleration of word of mouth. New groups can more easily find/train recruits, convey their message to a wide audience, and find/coordinate their activities with other groups (allies).

The result: a Long Tail has developed. New niche producers of violence have flourished. Demand for the results these niche suppliers can produce has also radically increased. Big concepts (such as a struggle between Islam and the U.S.), not championed by states, have supercharged niche suppliers like al Qaeda and its clones.

Collectively, all of this translates into six themes of the Long Tail age:

1. In virtually all markets, there are far more niche goods than hits. That ratio is growing exponentially larger as the tools of production become cheaper and more ubiquitous.
2. The costs of reaching those niches is now falling dramatically. Thanks to a combination of forces including digital distribution, powerful search technologies, and a critical mass of broadband penetration, online markets are resetting the economics of retail. Thus, in many markets, it is now possible to offer a massively expanded variety of products.
3. Simply offering more variety, however, does not shift demand by itself. Consumers must be given ways to find niches that suit their particular needs and interests. A range of tools and techniques—from recommendations to rankings—are effective at doing this. These "filters" can drive demand down the Tail.
4. Once there's massively expanded variety and the filters to sort through it, the demand curve flattens. There are still hits and niches, but the hits are relatively less popular and the niches relatively more so.
5. All those niches add up. Although none sell in huge numbers, there are so many niche products that collectively they can comprise a market rivaling the hits.
6. Once all of this is in place, the natural shape of demand is revealed, undistorted by distribution bottlenecks, scarcity of information, and limited choice of shelf space. What's more, that shape is far less hit-driven than we have been led to believe. Instead, it is as diverse as the population itself.

Bottom line: A Long Tail is just culture unfiltered by economic scarcity.

Each year, nearly 200,000 books are published in English. Fewer than 20,000 will make it into the average book superstore. Most won't sell.

Consider Lulu.com, which is a new breed of DIY publisher. For less than two hundred dollars, Lulu can not only turn your book into a paperback or hardcover and give it an ISBN number, but also ensure that it gets listed with online retailers. Once it's listed, the book will be available to an audience of millions and potentially side by side with Harry Potter, if the winds of the recommendation engines blow that way. With Lulu, the copies are printed in batches as small as a few dozen and the inventory is replenished as needed via print-on-demand. It's an extraordinary improvement over the scorned "vanity" publishing model of just a few years ago. As a result, thousands of authors are now choosing this route.

"Maximum SAT" is a such a book printed and published in this way and a great hit.

For the first time in history, we're able to measure the consumption patterns, inclinations, and tastes of an entire market of consumers in real time, and just as quickly adjust the market to reflect them. These new taste-makers aren't a super-elite of people cooler than us; they are us. The trend watchers at Frog Design, a consultancy, see this as nothing less than an epochal shift:

We are leaving the Information Age and entering the Recommendation Age. Today information is ridiculously easy to get; you practically trip over it on the street. Information gathering is no longer the issue—making smart decisions based on the information is now the trick. . . . Recommendations serve as shortcuts through the thicket of information, just as my wine shop owner shortcuts me to obscure French wines to enjoy with pasta.

Filters make up what Rob Reid, one of the founders of Listen.com, calls the "navigation layer" of the Long Tail. It's not unique to the Internet and, as he points out, it's not new:
Interestingly, the power and importance of the navigation layer is not strictly an online phenomenon. For many years American Airlines made more money from its Sabre electronic reservation system (essentially the travel industry's shared navigation layer for the bewildering world of routes and airfares in the seventies and eighties) than the entire airline industry made collectively from charging people money to ride on planes. From time to time, certain Baby Bells
were bringing in more profits from their yellow pages—essentially the navigation layer of all local business before the Web came along—than from their inherited monopolies. And at its peak, TV Guide famously rivaled the actual networks in profitability.

In a world of infinite choice, context—not content—is king.

Taleb notes, random factors are just as likely to be responsible for that neighborly millionaire as investing strategies.He defines a Black Swan as:

"A random event satisfying the following three properties: large impact, in-computable probabilities, and surprise effect.

First, it carries upon its occurrence a disproportionately large impact.
Second, its incidence has a small but in-computable probability based on information available prior to its incidence.
Third, a vicious property of a Black Swan is its surprise effect: at a given time of observation there is no convincing element pointing to an increased likelihood of the event".

He could just as easily be describing a blockbuster hit.

These are some of the other mental traps we fall into because of scarcity thinking:
• Everyone wants to be a star
• Everyone's in it for the money
• If it isn't a hit, it's a miss
• The only success is mass success
• "Direct to video" = bad
• "Self-published" = bad
• "Independent" = "they couldn't get a deal"
• Amateur = amateurish
• Low-selling = low-quality
• If it were good, it would be popular.

One of the classic examples was the chart in my old Economics textbook that demonstrated the trade-off between long-range bombers and new school buildings. There the constraint was money. Here, the constraint is time. It takes time to find the items you want, and most people will buy what they are looking for the first place they find it rather than look for a lesser price. This is why retail stores place all those little items next to the cash register. Availability and convenience equals more sales. For that matter, so-called "convenience stores" like 7/11 make most of their money from milk, bread, beer, and soft drinks, which they sell for far more than the price at the local supermarket. What is sold is not so much the product as the fact that it is available, right now.

Virginia Postrel observed that the variety boom is nothing more than a reflection of the diversity inherent in any population distribution:
Every aspect of human identity, from size, shape, and color to sexual proclivities and intellectual gifts, comes in a wide range. Most of us cluster somewhere in the middle of most statistical distributions. But there are lots of bell curves, and pretty much everyone is on a tail of at least one of them. We may collect strange memorabilia or read esoteric books, hold unusual religious beliefs or wear odd-sized shoes, suffer rare diseases or enjoy obscure movies.

In 1958, Raymond Williams, the Marxist sociologist, wrote in Culture and Society: "There are no masses; there are only ways of seeing people as masses."

Is a fragmented culture a better or worse culture? Many believe that mass culture serves as a sort of social glue, keeping society together. But if we're now all off doing our own thing, is there still a common culture? Are our interests still aligned with those of our neighbors?

Christine Rosen, a senior fellow at the Ethics and Public Policy Center, shares Sunstein's concerns. In an essay in The New Atlantis, she writes:
If these technologies facilitate polarization in politics, what influence are they exerting over art, literature, and music? In our haste to find the quickest, most convenient, and most easily individualized way of getting what we want, are we creating eclectic personal theaters or sophisticated echo chambers? Are we promoting a creative individualism or a narrow individualism? An expansion of choices or a deadening of taste?

The secret to creating a thriving Long Tail business can be summarized in two imperatives:
1. Make everything available.
2. Help me find it.

Now that you've got the big picture, here are nine rules of successful Long Tail aggregators:
Rule 1: Move inventory way in . . . or way out.
Rule 2: Let customers do the work.
Rule 3: One distribution method doesn't fit all.
Rule 4: One product doesn't fit all.
Rule 5: One price doesn't fit all.
Rule 6: Share information.
Rule 7: Think "and," not "or."
Rule 8: Trust the market to do your job.
Rule 9: Understand the power of free.

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