August 07, 2006

Anderson -- The Long Tail

[cross-posted on Chicagoboyz]

[based on a free review copy provided by the publisher]

Anderson, Chris, The Long Tail: Why the Future of Business is Selling Less of More, New York, 2006. 238pp.

In late 2004, about the time that the Anglosphere Challenge was published, WIRED magazine editor-in-chief Chris Anderson wrote an influential article called The Long Tail.

Looking at the sales figures of companies in a new generation of online industries (such as digital jukebox company eCast), he discovered that substantial corporate income was being made from the vast array of goods which didn't appear on anyone's "hit" list. Sales figures showed a so-called power law distribution. As one moved down the sales ranking, sales volume dropped dramatically. In the new world of online marketing and distribution however, people were responding to more choices in products (the "Long Tail" of the sales distribution curve) by purchasing a wider variety of goods. Vendors were selling less of the lower ranked items, but in aggregate were actually selling more. As Anderson puts it, "popularity no longer has a monopoly on profitability." The early online success stories were companies that carried the "hits" of their industry but offered a new and efficient way to find and access older and less famous choices.

longtail01.png

The so-called Pareto principle ... where 80% of sales come from 20% of catalog items ... was giving way to a new and more attenuated sales pattern. The Long Tail of sales persisted, in modest but significant numbers, as far down the sales ranking list as anyone wanted to measure. Whether it was ITunes, Netflix, Amazon, Rhapsody (an online music rental service), or eBay, it seemed clear that even a huge inventory of goods, if matched successfully with a large enough pool of purchasers, would attract sales of almost every item. The cleverest retailers were finding new ways to lengthen the Tail (add inventory) and fatten the Tail (increase unit sales).

At the time, Anderson proposed three rules for generating a Long Tail business.

  1. Make everything available.
  2. Cut the price in half. Now lower it.
  3. Help me find it.

Anderson's article generated plenty of "why didn't I think of that" moments and the phrase Long Tail has since become a dot-com buzzword and a handy way to encapsulate how the Internet has become a streamlined vehicle for providing, finding, and selling many kinds of goods. Some of those goods can be dropped on one's shoe (as Amazon, eBay, and WalMart.com prove every day) and some of those goods (like eBooks and music files) seem more like an electronic dance between your credit card, your computer screen, and perhaps a digital appliance.

Now Mr. Anderson has assembled a more thorough, more data-rich inspection of the Long Tail concept. By working closely with economists at prominent universities, and using a Long Tail weblog to engage the assistance of a community of readers, the author has evaluated a number of Long Tail industries (and actual sales data sources), to see whether his ideas about the Long Tail in his earlier article hold up under scrutiny.

The short answer, with a few modest caveats, is Yes.

The long answer, however, makes fascinating reading if you have any interest in economics, business, or civil life. The appearance of these Long Tail businesses in the last decade provide a kind of industrial watershed. A Before. And an After. For myself, exposure to the After is limited to Amazon and ITunes. But I'm also old enough to remember the Before, especially growing up in rural Nova Scotia. Young adults may take the current online commercial marketplace for granted. They shouldn't, and Anderson's book is an approachable summary of how 20th century mass marketing and distribution differs from 2006. This book will also appeal to any adult business person who is an avid reader. Like myself, they can match their personal experience against the book's description of the new Long Tail businesses ... imagining new possibilities and opportunities.

Finally, people who are interested in history and where our culture is heading will find this book's insight into the changing commodity markets a great tool for reflecting on the changes in our broader social and cultural worlds ... not only where we've been in the last few centuries but where we are ... as Albion's Seedlings itself illustrates. Anderson's efforts can be firmly placed with a larger group of books (James Surowiecki's Wisdom of Crowds, Robert Wright's Nonzero, Reynold's Army of Davids, and Moises Naim's Illicit), considering how personal freedoms and individual appetites relate to modern economic activity. Anderson's tale is upbeat, as befits a book on markets and customer interests, but the empowerment of individuals can, of course, cut both ways.

Like the aforementioned authors, Anderson makes no cultural claims for why the new mode of commerce appeared first in the Anglosphere. Nonetheless, readers are given enough information to form their own opinions, and draw their own conclusions. The metaphor of the Long Tail ... of letting the market choose rather than central planning experts ... has plenty of broader implications.

As one would hope from an editor-in-chief, Anderson writes cleanly and clearly. Pitched to a general audience, he leavens his discussion of industry changes (primarily media and entertainment) with personal anecdotes and useful illustrations. He provides some of the historical background for the industrial changes we see today, and some sense of how things might proceed in the future. The meat of the material however is a careful analysis of sales figures to confirm that there is, in fact, money to be made in the Long Tail. Anderson organizes the dynamos of the Long Tail economy into Production, Distribution, and Transaction ... companies that produce content, accelerate or reduce the cost of distributing it, and finally companies that discover new and effective ways of matching buyer and seller.

It may still be an open question whether overall commodity sales increase in response to Long Tail innovation. "Hits" in the music, TV, and movie businesses are now less dominant in their respective industries, and sales do appear to move down the Long Tail toward a wider variety of products, but exactly where the money is going in the overall economy seems a little fuzzy. Online sales are only now reaching 10% of overall product sales. Annual growth rates of 25% suggest that the impact of Long Tail enterprises will become increasingly visible. And for new companies, grabbing 10% of a very big commercial pie is still a lot of money. We'll need to watch further to see whether "creative destruction" simply shifts money from one pocket to another.

What the evidence does seem to support is that people change their buying habits in response to greater choice, and while their overall spending may not increase, their satisfaction with their purchases does. Getting more for less (through efficiencies of scale and distribution) also serve customers well. Human curiosity and delight with novelty seem timeless drivers of change. That's certainly my own experience in buying from Long Tail companies. Brand new industries (one need think no farther than ITunes) can have a dramatic impact on bricks-and-mortar company sales by offering a competing product. But it's clear that many transactions in the Long Tail are modest in scale and are "non-rivalrous." Your purchase of model train parts doesn't impede my acquisition of Pokemon memorabilia. With the innovations of the online world, these products and services no longer compete for scarce shelf space, advertising dollars, or transportation capacity. Without an effective way to set up a transaction between a small pool of buyers and a small pool of sellers, the Long Tail market would have remained potential rather than manifest.

Let's turn first to the way it was in the "bad old days." Say, 10 years ago.

20th Century Scarcities

Anderson gives us a nice capsule summary of the evolution of mass communication in the 19th and 20th centuries. With the advent of telegraphy, the railways, and newspapers, the movement of commercial and commodity information became much more affordable and rapid. Advertising had a platform to drive consumption. New printing technologies increased volume and speed, and reduced price.

Edison's invention of the phonograph was one of the innovations which preceded the development and dramatic expansion of moving pictures, radio and television. By and large, these were one-to-many or point-to-multipoint innovations. Telegraphy and telephony were influential but also remained relatively less affordable. The infrastructure necessary to build and operate a radio network, for example, meant that the large upfront investments had to be matched with an equally large audience for advertisers. The ups and downs of corporations during this era (plenty of consolidations, bankruptcies, secret trusts, and buy-outs) suggests that getting the numbers right was extremely difficult. The era suited big business and the allocation of scarce resources (air time, theatre space, records racks) to products which would provide the best return on investment.

The upshot of all this change was an American market in the fifties dominated by a small number of television networks ... where vast nightly audiences could be aggregated for particular TV programs and where advertisers could purchase access to the eyeballs of tens of millions of consumers. A similar, though less dramatic, pattern could be seen in other media and entertainment enterprises ... a handful of movie studios, goliaths in the music industry, continental networks of radio stations (often allied with TV networks). The tools of production and distribution were expensive, and very narrowly distributed. The mechanisms for linking seller and buyer were similarly set, often literally, in concrete.

As the 80s and 90s unfolded, the appearance of cable TV provided some cracks in the media markets but we still saw the blockbuster hits of music sell tens of millions of copies, and hit movies capture huge percentages of the audience. As Anderson notes in his book, it's not that a lower-ranked film of that era was particularly bad ... it's that there were no available screens to show it on. Sales figures, in this scenario, were driven by available distribution networks. Films ranked 1-50 got a shot. Films ranked 50-100 might end up in art cinemas. Films ranked below 100 simply disappeared.

How this story changed is very much a part of popular culture. The advent of the VCR (videocassette recorder) and cassette audiotape suddenly expanded the distribution pipelines for movies, TV, and music. The result was a fragmentation of the giant markets (and scarcity economics) which had dominated the media and entertainment industries through the late 19th and 20th centuries. The corporate struggles to adapt to this reality continue. The most common response has been consolidation ... if the television audiences for nightly news have dwindled, find ways to aggregate all those strange little niche programs into single packages for advertising and revenue. The rise of the cross-media giants is merely an adaptation to audiences scattering to the four winds. A great summary of Hollywood's efforts to predict hits in the current era is discussed in Epstein's 2005 The Big Picture: Money and Power in Hollywood.

A question remains unanswered. What if the audiences can't be re-aggregated?

21st Century Abundance

In a sense, the entire Long Tail thesis is about a new era in commodity economics built around abundance. Abundance of production, abundance of distribution, and abundance of information to link buyer and seller. Abundance also usually meant a drop in price. Anderson used a vivid and very useful analogy here. Much as the shoreline of a lake or island defines its area, a dropping waterline (reduced costs, in this case) can progressively open up geography in sometimes dramatic fashion.

Every improvement in accessibility and affordability increases the potential for profitable niche markets, and every new niche market offers potential synergistic benefits for cross-marketing and aggregation (as the Food Network hopefully proves conclusively).

The appearance of the Internet was simply the most dramatic of the factors associated with these reduced costs. As Anderson carefully and rightfully points out, the e-commerce infrastructure we take for granted is based on a multitude of incremental changes and innovations which took place throughout the 20th century. Components such as credit cards, Fedex, bar codes, and ISBN numbers ... apart from any consideration of affordable PCs and broadband ... were essential for boot-strapping the current era of commodity abundance. The Long Tail is very much dependent on the infrastructure built for the "Short Head."

If anything, the most common misinterpretation of the Long Tail concept is that the niche market will destroy the "hits." Anderson explicitly, but unsuccessfully (to judge by MSM reviews) denies this. Hits are here for good, he says. It's just that they won't have the overwhelming dominance on the market that they once had. The dominance of hits will be methodically but modestly nibbled away ... but they will never disappear. Some thing is bound to strike most of us as appealing. That's a hit.

And much as online commerce will never replace bricks-and-mortar for some purposes, the nature of retailing is more likely to be a multiplication of choices rather than an abandonment of earlier choices.

longtail02.png

Each of these different kinds of retailers, whether operating stores, online catalogs or purely digital products, will successfully make a profit from different parts of the sales ranking curve. In some cases, those retailers will be "non-rivalrous" ... their impact on each other will be modest. Wal-Mart marches on. In other cases, newly affordable tools of production and distribution will deeply affect a traditional retailer. Tower Records being a case in point.

Anderson's great image of an "infinite, non-rivalrous, shelf space" stirs the imagination for what is and what isn't possible in these new commodity markets. I certainly can't wait to convert my bookshelves to digital files stored in a really good "electronic book." As a side note, it's interesting to hear from the author that the reason why so many TV programs and movies are still unavailable for rent or purchase on DVD is the huge headache in getting music clearances. The person or company that solves that tricky problem will be hailed as a new hero of the digital age.

One of the most powerful concepts introduced in the Long Tail is the idea of "pre-filters" and "post-filters." Pre-filters are methods used by companies and institutions to identify products that will appeal, and to steer consumers to those products. This process is predictive, and as discussed in Epstein's book linked above, it leads to the hits-and-misses scenario we see in many categories of products -- movies, clothes, cars, consumer goods. At times, no one seems to know what consumers want. Post-filters, by contrast, are methods of selection which use the market itself to make selections. This may seem like a trivial insight ... haven't companies always responded to their consumers?

The surprising power of the insight comes from this new era of abundance ... what if the products that you offer don't cost $100 million and aren't take-it-or-leave-it? Rather than guess what your customers want, adjust your product or service to be demand-driven. As long as the marginal costs of maintaining inventory and distributing it are modest, you can let your customers create as many "hits", "niches" and one-off enthusiasms as they want. Each transaction makes a profit for the company.

And that's the secret of hits-and-misses (20th century) versus hits-and niches (21st century). In the old model, the "hits" had to do well to cover the losses from the "misses." In the new era, what once were "losses" can now capture less revenue but just as much profit.

In another great example, Anderson talks about the difference between the omnipresent Dewey Decimal System (for sorting books in libraries) and Amazon's organization of its books by "peer set" and consumer buying patterns. The former is a pre-filter meant to guide readers to a particular book or topic, but it's very much a reflection of the time and culture in which it was created. Amazon's mathematical method which lets readers form associations between books is far more responsive to changes in public demand and in the links that readers make between titles. To paraphrase Anderson, post-filters have less polish, but more credibility.

Of final interest in this book is the "lessons learned" that Anderson offers between this 2004 article and his 2006 book. He's uncovered a new set of rules that he offers for aspiring businesspeople.

  1. Move Inventory Way In ... or Way Out
  2. Let Customers Do the Work
  3. One Distribution Method Doesn't Fit All
  4. One Product doesn't Fit All
  5. One Price Doesn't Fit All
  6. Share Information
  7. Think "and" not "or"
  8. Trust the Market to Do Your Job
  9. Understand the Power of Free

In these rules, we can see that the goal is to accommodate and actively engage as much of your customer base as humanly possible ... to let their enthusiasm and curiosity and altruism shape the inventory that a company carries and distributes. Not so far from the modest list offered in 2004, but buttressed with a wider array of current commercial examples that would let prospective businesses identify where they fit and what their goals should be.

Long Tail 2.0? or Actually 3.0!

As a way of introducing the idea of servicing the Long Tail, Anderson has a small but great section on the creation and development of the Sears-Roebuck company in the late 19th century. It took place soon after 1886 and was based on creating large warehouses near railway junctions, initially in the Chicago area. A printed catalog, leveraging the new advances in printing and lithography, brought a huge array of new products to rural America, at affordable prices and using the railways and postal system for efficient delivery. Its system of inventory handling was unparalleled and Anderson notes that Henry Ford was reputed to have visited the Chicago operation. While Anderson moves on to discuss the later introduction of the supermarket in the 30s but I found myself returning again and again to the distinctive change which Sears-Roebuck introduced.

Obviously, one great advantage of the company was the lack of "installed base." They were selling to customers then serviced by very limited options (undercapitalized local stores with minimal, expensive inventory). New methods of transportation, communication, and finance had become available. And a rapidly expanding economy meant increased sales and profits were there for the taking. To some extent, then, Sears-Roebuck is perhaps an example of Long Tail 1.0 ... a direct reflection of the sorts of changes in the Information Economy that have been discussed by historians such as Headrick and Cortada.

But if Sears-Roebuck is a possible exemplar of Long Tail innovation, can we spot any earlier examples? Anderson pretty much begins at the Industrial Revolution but a quote from his book offers telltale signs of ahistoricity:

"Before the Industrial Revolution, most culture was local. The economy was agrarian, which distributed populations as broadly as the land, and distance divided people. Culture was fragmented, creating everything from regional accents to folk music. The lack of rapid transportation and communications limited cultural mixing and the propagation of new ideas and trends. It was an earlier era of niche culture, one determined more by geography than affinity. ...
But in the early nineteenth century, the era of modern industry and the growth of the railroad system led to massive waves of urbanization and the rise of the great cities of Europe." [p.27]

Hmm. Well, it's Anderson's bad luck that the book I reviewed just before his was Practical Matter: Newton's Science in the Service of Industry and Empire 1687-1851 because a reader would come away from any careful consideration of the 18th century with a dramatically enhanced respect for the brains and curiosity of ordinary men and women. And for the newly developed tools of information gathering and filtering (newspapers, diaries, magazines, dictionaries, encyclopedias, handbooks) which appeared to satisfy individual appetites. Without compromise, we can say that an "Industrial Enlightenment" (to use Prof. Joel Mokyr's phrase) preceded the appearance of the railways and steamships by many decades. And tools of production, distribution, and market-making which Anderson uses to explain the modern Long Tail were all newly in place in the first few decades of the 1700s in London ... rapidly moving to the counties, shires and Continental salons.

As for niche culture, a quick review of Maxine Berg's Luxury and Pleasure in Eighteenth-Century Britain will disabuse any reader that the English of the period were provincial in their tastes, reading, or interests. This was a populace that was uniquely literate, tied into an increasingly global trade and military network through its island geography, and (post-English Civil War) very touchy about restraints on their ability to think, say and do what they felt was right.

The birth of science as "public culture" was an 18th century event, not a 19th century event. And my nominee, therefore for the Long Tail 1.0 event best linked with our own is the appearance of "public natural philosophy" in the England of the early 1700s. Which pushes this current iteration to version 3.0 at the least, by my reckoning.

Anderson covers a lot of territory in his book and it's to his credit that he took the time to provide some historical background to the trends of the 20th and 21st centuries. Nonetheless, I think it strengthens his arguments substantially if we can place his themes and images into a much broader historical context. Our current mass-to-niche market changes aren't duplicated in the past but they are certainly mirrored there ... in exactly the areas where a sudden drop in cost (of literacy, printing, ocean transport, social convention, upward mobility) allowed people to express their individual appetites with less hindrance.

Long Tail and the Anglosphere

Quibbling over the historical anchoring of The Long Tail is, of course, my traditional bloggish way to segue into assessing the book from the perspective of Anglosphere themes and concepts. As noted above, people in the English-speaking world have been successfully curious and idiosyncratic for many centuries. And if we take Professor Alan Macfarlane's work seriously, the English have seen themselves uniquely as "individuals" for a very long time.

In this light, the strikingly rapid Anglosphere adoption of technologies allowing the expression of individuality (in production, distribution, market-making) is just one more case study of how the Anglosphere Challenge expresses itself. This doesn't imply that other peoples around the world aren't enthusiastic about the technical changes, or are unwilling to substantially add to the pool of useful goods and services available in the Long Tail. It's just to say that the watershed -- from analog to digital, from physical to virtual -- which we've seen over the last decade, fits perfectly with the predisposition of the citizens of the Anglosphere. High trust interactions between strangers is our inheritance and our great gift. We've been "niche nations" for several centuries. The challenge of exploration in the late 16th century set our culture (along with the Hispanosphere and Lusosphere) in a self-confident mode of exploration. And as Anderson so clearly illustrates, as the costs associated with niche exploitation drops ... whole new geographies of interest, enthusiasm, and opportunity appear. We're just soooooo ready.

I kept thinking of Lewis's book (The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability) and the unique balanced dynamism in the American economy. Now The Long Tail allows more and more individuals to independently drill down into more efficient use of capital and resources. And it rewards corporations handsomely for letting those individuals do so. Anderson's great summary of this recent change bodes very well for the economy, for doing more with less ... the hallmark of productivity.

One Long Tail straw man needs to be addressed. Is too much choice a bad thing? Are the dreams of central planners everywhere going to being proven out in this new wave of the Long Tail? Maybe offering people more choice is a trivial or ultimately counterproductive market approach. Fortunately, Anderson takes the time to address the arguments put forward by Barry Schwartz in his 2004 book The Paradox of Choice: Why More is Less. Schwartz, as his title suggests, makes the case that when more choices are available, consumers begin to crumple into paralysis. With a bit of further research however, Anderson discovered that "[t]he paradox of choice turned out to be more about the poverty of help in making that choice than a rejection of plenty." We enjoy having more choice, especially if we have easy ways to assert our personal interests. If our purchase is trivial or routine, we can be price-sensitive or simply default to the most popular choice. If we're particularly motivated in our shopping, then we'll want as many different tools as possible to help us make our choice. Tremendous variety in products, services, and consumer tastes can co-exist successfully. The successful Long Tail businesses are proof-positive of that. It's a lot easier to measure taste than predict it.

Finally, relating back to my earlier reference to books like the Wisdom of Crowds or Army of Davids, Anderson makes a great point about the powerful marginal advantage of the Long Tail. In situations of scarcity ... where hit-and-miss predictive filters are used the resulting product or service will often shoot for "lowest common denominator" tastes. Quality will range from "mostly average to good." In a Long Tail situation, where the costs of production, storage, and delivery are more under control, and "post-filters" are used to sift content, quality ranges from "awful to great." The awful stuff would be unaffordable if the marginal costs of storing and filtering it were not close to zero. But the tremendous strategic advantages of such "great" items, speedily implemented, discovered continuously over the long term, are what can spell success for cultures and nations. And predicting what those great items will be is virtually impossible from an inductive viewpoint (ably discussed, as Anderson notes, by Nassim Nicholas Taleb in his book Fooled by Randomness). The Long Tail of great ideas is even more precious than the Long Tail of great products and services.

The Bottom Line of the Long Tail

After vainly trying to summarize a fun, varied, and rich reading experience, let me try to highlight what you should know before buying or borrowing The Long Tail:

Firstly, I can't imagine a better birthday or holiday gift book for business people ... whether established or aspiring. The writing is clear enough that even a clever junior high school student would find it inspiring. For those already in the business world, Anderson does a great job of spotting the trends, patterns and business data that will shape Long Tail business in the next five to ten years. The underlying dynamics of "selling more of less" make a lot of sense.

Secondly, the Long Tail suite of information has a great fit with other titles that demonstrate a systematic pattern of advantage to free and efficient markets. Those markets extend from commodities to those of ideas. From the Anglosphere perspective, the advantageous civic sphere (filled with "horizontal knowledge") has migrated in a dramatic new way that should be acknowledged and tracked. The rich and chaotic mix of Anglosphere political opinions, religions, and hobbies has reappeared in the world of products and services.

Posted by jmccormick at August 7, 2006 05:42 PM
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