It is no longer news that the internet has become an alternative medium for the distribution of information and entertainment products, competing with the traditional platforms of radio, TV, movie theaters, bookstores, music stores, newspapers and magazines. What might not have been noticed by the general public is how the internet is radically altering the economics of supply and demand, enabling digital companies to invent and implement new internet driven business models that are impossible for the traditional media and entertainment platforms to adopt.
To properly understand these changes, we first need to understand the fundamental difference between the traditional infotainment platforms and the internet. The traditional platforms are broadcast platforms and as such are subject to severe physical constraints (e.g. there is only so much radio spectrum, only so much TV airwaves, only so many movies that a theater can show, only so much shelf space for books and music CDs, only so many stories that can be featured in newspapers and magazines).
Those constraints ruthlessly dictate a certain kind of economics that forces traditional purveyors of infotainment to exclusively focus on the most popular songs, films, books, news stories etc. in the process creating a homogenous culture, in which most people aren’t aware that the vast majority of infotainment artifacts simply aren’t available for sale because they sell in too few a number to justify commanding some shelf space, airwaves or screen time at a theater. What does command some precious shelf space, airwaves or screen time is what infotainment culture refers to as the hits/bestsellers.
The internet, being a purely digital platform, does not suffer from the same physical constraints as the traditional infotainment platforms. As a result, internet powerhouses like Amazon, Apple iTunes and Netflix have found out that it makes economic sense to carry everything since the economics of internet distribution makes this practically feasible. Once infotainment products are rendered in digital form, each product is a virtually costless entry in a database, making it just as economical to carry fringe products as it is to carry hit/bestseller products.
This had led to a phenomenon where the single mass culture driven by hits is fragmenting into millions upon millions of niche cultures where virtually everything available is finding its own mostly very tiny markets but the upside for internet retailers is that collectively, all these niche markets make up a significant part of the entire market and is growing very fast. This phenomenon is known as the “Long Tail”, a term borrowed from the field of statistics.
It perhaps needless to say that such a seismic shift is having a deleterious effect on the traditional infotainment. Those unable to adjust to the new world of internet distribution continue to go out of business at an alarming clip, while those that have had made the transition have had to endure painful experimentation in order to discover workable business models.
While the Long Tail is primarily an internet phenomenon, it was however enabled by other innovations that had been introduced over the decades; database technology, electronic payment systems, and in the case of companies that sell physical goods over the internet, logistics, giant centralized warehousing and a “virtual warehouse” of a network of suppliers.
Few have exploited the coming together of these innovations better than Jeff Bezos, founder of Amazon, who in 1994 decided to start selling books over the internet, at a time when the internet was growing by more 2,300% annually. Google is another company that has profited marvelously from the Long Tail, where it mostly caters to the needs of millions upon millions of small advertisers as opposed to focusing on the huge corporate titans.
In addition to the infrastructural innovations mentioned in the previous chapter, there needed to be a proliferation of goods available for consumption, easy access to them and relatively painless means of finding them for there to actually be a long tail phenomenon. The first condition was made possible by the democratization of the tools of production, a prime example being the PC, which enabled anyone interested to become a producer books, film, music, etc. The second was made possible by the adoption of the internet as a distribution platform, dramatically cutting distribution costs even for physical goods. The third was made possible by the rise of search engines, recommendation engines, blogs and customer review sites.
Mathematically speaking, the long tail of the internet is an example of a power-law distribution. I have discussed power-laws in a previous post. Power-law distributions describe phenomena where a small percentage of a population controls a large amount of something. Population here need not refer to people. Taking an example from digital entertainment, here population could refer the list of musical tracks available for sale from the Apple iTunes store or TV shows available for streaming from Netflix.
The first power-law distribution was discovered in the 19th century by Italian economist, sociologist and civil engineer, Vilfredo Pareto. Pareto was studying wealth distribution in 19th century Europe and discovered that a relatively small number of people ended up with most of the wealth. He supposedly discovered that the actual ratio was that 20 percent of the people ended up with 80 percent of the wealth and this ratio was stable across time and space.
His discovery was eventually seen to be a very common feature of life, nature and society and thus was generalized into what is popularly referred to as the 80/20 rule. Examples of the 80/20 rule found in other areas include:
- The small number of hazards responsible for most of the injuries or accidents in a factory
- The small number of large companies responsible for most of the market capitalization on a stock market index
- The sizes of human settlements (few mansions, many small houses and huts)
- File size distribution of internet traffic (many small files, few large ones)
- The values of oil reserves in oil fields (a few large fields, many small fields)
- The length distribution in jobs assigned to supercomputers (a few large ones, many small ones)
- Sizes of sand particles (a few large grains, many small ones)
- Size distribution of church offerings (a few large offerings, many small ones)
- Severity of casualty losses in insurance business (a few large payouts, many small ones)
- Number of visitors to internet websites (few websites with many visitors, many with a small number of visitors)
- Population distribution of countries in the world (Few large countries, many small ones)
In the long tail of internet retail, the 80/20 would take the form of the small number of hits/bestsellers that sell in large volumes and the large number of non-hits that sell in small numbers that make up the many niches.
You might be wondering…” if the 80/20 rule has long been a feature of life whether online or offline, what’s so special about this long tail business?” What is new is in the world of traditional retail and entertainment, retailers could only afford to stock the 20% that brings in 80% of the revenues because their stocking and distribution costs were high.
In the world of internet retail and entertainment, the storage and distribution costs are so low that you can afford to stock the remaining 80% (that is the long tail) in addition to the high selling 20%. This is radically changing the shape of the demand curve and has brought us much closer to the consumer ideal. Being able to find a product that suits every quirk or fancy you might have, and that is what retail in its pure essence is all about.
Bibliography
- Anderson, Chris. 2006 The Long Tail: How Endless Choice is Creating Unlimited Demand London: Random House
