What does the first Sears Roebuck catalog, circa 1890, have in common with Netflix, iTunes or Amazon.com? All offer examples of the “long tail,” according to Chris Anderson, editor-in-chief of Wired magazine, who wrote an article in 2004 about the phenomenon — and is now writing a book about what appears to be becoming the buzz-phrase du jour. Today, references to the “long tail” pop up in many conversations with technologists, including those attending the recent Supernova 2005 conference, co-sponsored by Wharton, where Anderson was one of the speakers.
Primitive as it might seem in the web era, the Sears catalog was brilliant for its time. It was a breakthrough in removing the barriers of time and space from retail marketing. Customers could shop any time they chose; they could select from more offerings than any local store could afford to stock; they could even chat over the back fence about what product worked best before they placed their next order.
Fast forward 115 years to the present and consider Amazon.com. The average Barnes & Noble store carries 130,000 titles, said Anderson. “Yet more than half of Amazon’s book sales come from outside its top 130,000 titles. Consider the implication: If Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is larger than the market for those that are. In other words, the potential book market may be at least twice as big as it appears to be.”
Another Demand Curve
Here, then, is the crux of the long tail, visually represented as another version of the demand curve. The long tail comprises the technologies and businesses that are shifting consumers from the top or “head” of the curve where a few blockbuster products, broadly popular, are sold in large numbers to a mass market, to the “tail” of the curve where millions of different products can be sold in millions of niche markets, each serving small numbers of consumers. In addition to an explosion of products, there is an explosion of information about products.
In the world of the long tail, consumers use personal devices such as computers and PDAs to access the web where they browse, search for product information and recommendations, and order. Sellers use the Internet to minimize transaction costs and sophisticated software to offer consumers what they will probably like, based on purchasing patterns, their own and those of others like them.
This new economic model is clearest in the media and entertainment industries, where, said Anderson, “unlimited selection is revealing truths about what consumers want and how they want to get it in service after service.” He cites the example of E-Cast, a digital jukebox company, with more than 150,000 tracks in its players. Care to estimate what percentage of its top 10,000 titles sell at least once a month? Anderson said most people guess 20%. “We’ve been trained to think that way, to think of the 80-20 rule, also known as Pareto’s principle, as a general rule of thumb.”
That rule of thumb doesn’t apply when it comes to long tail businesses. For E-cast or any online media store, like Netflix or Amazon, the right answer is 98%. “We’re so stuck in a hit-driven mindset, we think that if something isn’t a hit it won’t make money,” said Anderson. But long tail businesses have discovered that “misses” make money, too. And with little or low sales costs, “a hit and a miss are on equal economic footing, both just entries in a database called up on demand, both equally worthy of being carried.”
In addition, long tail businesses have gone beyond the fallacy of assuming that there is little demand for titles not carried by larger retailers like Wal-Mart. In fact, the economics of Wal-Mart means that its stores must sell at least 100,000 copies of a CD to cover overhead and make a profit. Less than 1% of CDs do that kind of volume. “We equate mass market with quality and demand, when it actually often just represents a scarcity of shelf space, familiarity and savvy advertising,” said Anderson.
Consider the example of Rhapsody, a subscription-based music streaming service that currently offers hundreds of thousands of tracks. Every one of its top 100,000 tracks is streamed at least once a month — and the same is true for its top 200,000, top 300,000 and top 400,000, said Anderson. “As fast as Rhapsody adds tracks to its library, those songs find an audience, even if it’s just a few people a month. In fact, we’re learning that the more you put out, the more you sell. We are beginning to see what happens when some markets have everything, all the time.”
Tyranny of Choice
One of the things that can happen is information overload, with consumers so overwhelmed that choosing becomes oppressive, and they don’t choose at all. Anderson calls this the “tyranny of choice.” Here’s where the often-overlooked part of the long tail comes in. Filters and user recommendations allow individuals to communicate, in effect marketing to one another. “In the past, we’ve had pre-filters consisting of editors, studio executives and professional buyers. Today, we have post-filters: peers, word of mouth and buyers with a small “b,” consumers themselves. This is not one-to-one marketing; this is lots of conversations going on,” said Anderson.
Such filters are essential to driving business down the long tail. As that tail gets populated with more products, more powerful filters are needed to customize offerings for each individual. Great long tail businesses guide consumers from mass market content to niche content by “following the contours of their likes and dislikes, easing their exploration of the unknown,” said Anderson. Amazon, for example, does it with collaborative filtering; that is, using the browsing and purchasing patterns of users to guide those who follow them. This, said Anderson, is “the difference between push and pull, between broadcast and personalized taste. Long tail businesses can treat consumers as individuals, offering mass customization as an alternative to mass-market fare.”
As the long tail grows, there will continue to be three broad opportunities for businesses. First are those who act as aggregators: Google, for example, whose income is largely from small niche advertisers, and eBay, which sells niche and one-off products. Second are niche suppliers who get aggregated by someone else. Third are businesses that provide the filters to help consumers find what they want and help drive demand down the tail.
As the ‘tail’ expands, what happens to the ‘head’? It will remain substantial, said Anderson. Popular media won’t go away, but its influence will soften. “For example, the top 50 CDs account for 80% of the offline business, but only 20% of online sales.” Gains will come in the middle of the demand curve where existing goods haven’t reached their full potential because of the lack of distribution, and, of course, at the long tail, the end of the curve where new goods are made possible by new means of distribution.
The lesson in all this, said Anderson, is that “you can’t treat markets as large groups any more, pushing stuff out that may be relevant to only a few. We’re learning how consumers operate if there’s no scarcity. The natural shape of the demand curve is more niche-oriented than we ever realized.”