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Sunday, August 27, 2006

"The biggest money is in the smallest sales"

This review, of The Long Tail by Chris Anderson, appeared in a slightly modified form in today's Indian Express.

In 2004, Chris Anderson writes in his book The Long Tail, Lagaan opened on just two screens in the USA. And yet, there were 1.7 million Indians living in the USA, a large enough market to justify bigger exposure. But these 1.7 million Indians were thinly spread out in terms of geography, and there were few places which had enough of them around for a theatre to justify showing Lagaan. That’s the economics of scarcity in play; and yet, as Anderson explains in his seminal book, our world is gradually becoming a “world of abundance.”

The Long Tail has its genesis in an essay Anderson wrote in Wired Magazine, which he edits, in 2004, in which he described how the shape of business is changing fundamentally because of new ways of doing business, enabled by technology. His basic insight deals with the removal of the biggest limitation of traditional business, the “tyranny of physical space.” Consider places that retail music, for example. Even the largest megastores have a limit on how many albums they can display, and the result is an industry focussed on creating and pushing hits, and not looking much beyond. Anderson informs us, for example, that 90 percent of the music sales of Wal-Mart, America’s largest music retailer, comes from just 200 albums.

But all that has changed, and the internet is responsible. Anderson tells us, “ITunes offers nearly forty times as much selection as Wal-Mart. Netflix [a DVD rental store on the net] has eighteen times as many DVDs as Blockbuster and would have even more if there were DVDs to be had. Amazon has almost forty times as many books as a Borders superstore.” The result, in Anderson’s words, is the “largest explosion of variety in history.”

Now, you’d imagine that most of this, as Sturgeon’s Law would have it, is crud, and probably doesn’t sell. Not true. Anderson found that across businesses, the demand curve never drops to zero, and almost every piece of inventory sells something or the other. This Long Tail, as he terms it, can often amount to substantially large business. “The market for books that are not even sold in the average bookstore is already a third the size of the existing market,” he says, and cites Kevin Laws’s pithy observation, “The biggest money is in the smallest sales.”

The Long Tail is fed, essentially, by two phenomena: one, the tools of production have been democratised, and the costs of recording a song or publishing your thoughts have become negligible. Two, the means of distribution have expanded, and the costs of storing and transmitting bytes are next to nothing compared with the physical costs of getting a CD to a consumer through a regular store. All this choice can be overwhelming, of course, and Anderson describes how filters play a key part in this economy: For examples, Amazon’s reader reviews, Netflix’s recommendation engines, and even blogs.

This upturns conventional wisdom about the tastes of consumers. What we want has so far been circumscribed by what is available, and, as Anderson puts it, “the true shape of demand is revealed only when customers are offered infinite choice.” The choices available, and the means of navigating those choices, empower individuals by helping them find content and products to fit their specific needs and desires. “We now treat culture not as one big blanket,” Anderson writes at one point, “but as the superposition of many interwoven threads.”

These are fascinating times we live in, and The Long Tail helps us understand it just a little bit better.

For more, you could head over to Anderson's blog on The Long Tail. Also check out a couple of interviews of Anderson, one by Glenn and Helen Reynolds, and the other by Russ Roberts.
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