Friday, April 28, 2006

Does the long tail affect me? (Part 1)

This post will be a brief and non-academic introduction to the long tail. We will then look into how it affects you.

Nerdy definition (thanks of course to wikipedia).

The phrase The Long Tail (as a proper noun with capitalized letters) was first coined by Chris Anderson in a 2004 article in Wired magazine [1] to describe certain business and economic models such as or Netflix. The term long tail is also generally used in statistics, often applied in relation to wealth distributions or vocabulary use.

It is a soft corollary to the pareto distribution. In simpler terms, if you think of the x-axis on the graph above as representing the different products and the y-axis as quantities of the product sold. The long tail says that the products in the brown portion of the curve sell a lot and the products in the yellow portion of the curve sell very small individual quantities. What is interesting is that the yellow portion extends for a while (a long while). If we can keep selling products from the yellow portion cheaply, the cumulative revenue from the yellow portion will eventually start to match and rival the revenue from the brown portion of the curve.

In other words, hot wheels are amongst the top 10 hottest selling toys in terms of revenue. On the other hand you also have the "The Gauss Rifle" (i am not even sure if this technically a toy). I am guessing you are lucky if you can sell 5 of these a year. The challenge till recently was how to make a profitable business selling stuff like the gauss rifle.

In other words till recently (amazon, netflix, ebay.. came along) we did not know how to develop, market and distribute the long tail end of the product space without incurring losses.

Then came rss, peer production, blogging and as we all know by now a means for the mavens and connectors to reach widely and make their influence felt in a powerful way. Highly recommend reading Malcolm Gladwell's tipping point for more on how mavens and connectors are changing the world.

Quick definitions:

maven: A maven (also mavin or mayvin) is an expert in a particular field, usually one who is self-appointed and who seeks to pass his knowledge on to others.
Those with wide social circles. They are the "hubs" of the human social network and responsible for the small world phenomenon.

So, now we have an easy way to search for information, publish information and spread expertise in a cost effective manner that was not possible before. This is mainly thanks to the community effect which brings economies of scale to a long tail marketplace.

So the main costs now are manufacturing costs, support and shipping costs. Companies like Amazon, eBay are making the storage costs negligible using economies of scale. With marketing costs continuing to go down, the possibility that a viable business can be established using the long tail is starting to look more and more likely.

So what next,

  1. Think about this and send me your comments. These are thoughts of mine and obviously not scientifc thesis. Think about what this means to your life (social and professional). I will talk about how it affects my life in the next post.
  2. If you want a more detailed thought provoking academic treatment of the subject, read Umair Haque's latest entry.
The genius of these models is that they tap the space where expertise and heterogeneous production preferences intersect - something that almost never happens in firms, despite big bonuses, nasty bosses, and the other nice things about the rat race.

If the above statement looks like something that makes you get excited about the future, read the entire post and get rolling. Have a great weekend, I am going to be here !!

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