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Technology Stocks : The *NEW* Frank Coluccio Technology Forum

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From: Frank A. Coluccio5/11/2005 4:01:01 AM
   of 46820
 
THE LONG TAIL

PROFITING FROM OBSCURITY
May 5th 2005

[... from The Economist ... if this subject interests you, then I commend
the article from Wired Magazine to you, whose URL you'll find below ... I'm
hoping that some here will see the relevance of this article to some of the topics
we routinely discuss ... with thanks to a friend who e-mailed this to me ...]

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What the "long tail" means for the economics of e-commerce

economist.com

DISRUPTIVE technologies, learning curves, tipping points--every so
often a trendy new term enters the business lexicon and becomes a
staple of business plans, conference speeches and PowerPoint
presentations. The latest example, generating buzz among entrepreneurs,
technologists and bloggers, is the idea of the "long tail". The term is
not new, having long been used in statistics to refer to a feature of
"power-law" distributions, such as the frequency with which different
words are used in English: there are a few common words that are used a
great deal, and a long tail of increasingly obscure words that are used
less often. But the idea is now in vogue because of its particular
relevance to the economics of e-commerce. Its popularity in this
context is due to an article*[1] published last year by Chris Anderson,
formerly a correspondent for THE ECONOMIST, who is the editor-in-chief
of WIRED, a technology magazine. The article struck a chord: Mr
Anderson is expanding it into a book, and talk of long tails is
becoming a venture-capital cliche. "Business plans now have to have an
obligatory long-tail passage," he says. So when people invoke the long
tail, what do they mean?

The short answer is a shift from mass markets to niche markets, as
electronic commerce aggregates and makes profitable what were
previously unprofitable transactions. Consider book sales, which obey a
power-law distribution: there is a small number of very popular books,
which sell millions of copies, and then a long tail of less popular
books. A real-world shop can only stock so many titles on its shelves,
so it generally holds those most likely to sell, at the head of the
curve: even the largest bookstore carries only around 130,000 titles.
But an online store, with no limits on its shelf space, can offer a far
wider range and open up new markets further down the long tail. In the
case of Amazon, for example, around a third of its sales come from
outside its top 130,000 titles. Similarly, Rhapsody, a streaming-music
service, streams more tracks outside than inside its top 10,000 tunes.
Mr Anderson's point is that the collective demand for obscure items is
very large, is growing, and can be aggregated over the internet, so
that selling obscure books, music CDs or movies could prove to be just
as lucrative as selling hits.

This has a number of intriguing implications. For one thing, opening up
those previously uneconomic niche markets should increase overall
demand: as people are better able to explore niches, they are more
likely to find things they like, and may well consume more of them.
This will then shift some demand, at least, away from hits. Indeed, the
long tail reveals the hit-driven nature of the entertainment industry
to be, in part, a vestige of scarcity. With limited space on store
shelves, media providers are traditionally very discriminating about
what they release, and use intensive marketing to generate a handful of
hits. The shift towards electronic sales and distribution,
however--music can already be purchased and downloaded instantly, and
movies will be next--means that content providers can afford to be less
discriminating. "The long tail says rather than trying to guess what
the market wants, put it all out there and you'll find demand you
hadn't anticipated," says Mr Anderson.

But how can people find content they want when it is buried far down
the tail? Already, a number of mechanisms have emerged, based around
user recommendations. Perhaps the best known is "collaborative
filtering", in which purchase histories are analysed to work out what
else is likely to interest the buyer of a particular product
("Customers who bought this item also bought...", as Amazon puts it).
This approach allows users to navigate from hits that they know they
like to more obscure titles further down the tail. "You need not just
variety, but information about variety," says Mr Anderson. "A long tail
without good filters is just noise." Many people find even the amount
of choice on supermarket shelves overwhelming--in large part because
there is so little information on which to base a rational choice. But
a mere 27 flavours of jam is nothing compared with millions of music
tracks or thousands of movies, so providing filters to help people find
what they want is vital.

FROM MASS MARKET TO NICHE NATION

Perhaps the most profound implication of the long tail, however, is its
impact on popular culture. As choice expands and people can more easily
find niche content that particularly interests them, hits will be less
important: so what will people talk about when gathered around the
water cooler? In fact, says Mr Anderson, the idea of a shared popular
culture is a relatively recent phenomenon: before radio and television,
he notes, countries did not operate in "cultural lockstep". And the
notion of shared culture is already in decline, thanks to the rise of
cable television and other forms of market fragmentation. The long tail
will merely accelerate the effect. There will still be blockbuster
movies, albums and books, but there will be fewer of them. The
companies that will prosper, says Mr Anderson, will be "those that
switch out of lowest-common-denominator mode and figure out how to
address niches."

Many successful online businesses, such as Amazon, Rhapsody or the
iTunes Music Store, already exploit the effects of the long tail. So
too do other internet companies, such as Google (which makes money not
just by selling adverts to big firms, but also by placing obscure
adverts alongside obscure web pages) and eBay (which aggregates low
levels of demand for obscure products to make a huge business). Hence

the venture capitalists' enthusiasm for long-tailish business
plans--and, now that the term is deemed to be cool, its use and misuse
in other spheres. The misuse, says Mr Anderson, is painful. But it is
arguably a sign of success: the "long tail" has passed into common
parlance.

* "The Long Tail": wired.com [2]

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FAC
frank@fttx.org
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