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August 17, 2006

Life on The Long Tail – Introduction

The good news is that there is more life on the long tail of anything than ever before.  The bad news is that life on the long tail is worse than ever before (but better than death).  This has implications for entrepreneurs, new bloggers, and would-be novelists.

The subtitle of Chris Anderson’s The Long Tail is “Why the Future of Business is Selling Less of More”. As almost everybody knows by now, Chris postulates and gives evidence for the theory that the Internet has changed things so that a greater percentage of sales are of non-hit products than in the days of brick and mortar retailing.  His oft-quoted example is that Amazon has an infinite bookshelf and can therefore carry more titles than even a Barnes & Noble Superstore.  None of the books on the far end of Amazon’s shelf individually sell many copies; but, as a group, they can represent significant sales.

Spill over benefits are wider choice for consumers and less need for a book to be an instant hit or disappear.  Same for music.  Same for almost anything else.

Chris doesn’t mean that hits will disappear.  The Long Tail itself is a hit.  Chris believes that the natural distribution of sales follows the democratic but very un-egalitarian power law.  According to the simplest form of the power law, the value of being #1 in a category is twice the value of being #2, three times the value of being #3 four times the value of being #4  etc. and dismal etc. as you get further and further out on the curve.

So, if a best selling book in a category sells 10 million copies per year, book #1,000 in the category can expect to sell 10,000 copies/year (still a hit); but book #10,000 will sell 1,000 copies per year.  That’s three copies per day worldwide, not many per individual book store.  Obviously, #10,000 isn’t going occupy physical shelf space very long.

Looked at another way, if there were one million separate titles in a  category, one-third of sales would come from the top 100 (they’ll be in the airport book racks), another third of sales come from books 101 through 10,000 (they’re in the book stores), and the remaining one-third of value is contributed by books 10,001 through 1,000,000.  That last third is value that Amazon can harvest because it can afford to carry these books and the physical books stores which would have to actually stock them can’t.

Note for nerds: The sum of the power law formula is that, if there are N distinct items for sale, the top M items (where M can’t equal 1) account for the percentage of sales calculated by log(M)/log(N).

Actually, though, before Amazon (oversimplifying) books 10,001 through 1,000,000 might as well not have existed.  If there were only 10,000 books, then the top 100 would account for 40% of all sales and books 101 through 10,000 would account for the remaining 60%.

So is this good news?  Yes if you’re Amazon.  Yes if you’re the author of book 10,001 and would rather be live on the long tail then out of circulation.  No if you’re the author of any of the first ten thousand books! You are going to lose sales to the newly extended long tail.

Clay Shirky posted brilliantly in 2003: “We also know that as the number of options rise, the curve becomes more extreme. This is a counter-intuitive finding - most of us would expect a rising number of choices to flatten the curve, but in fact, increasing the size of the system increases the gap between the #1 spot and the median spot.

“A second counter-intuitive aspect of power laws is that most elements in a power law system are below average, because the curve is so heavily weighted towards the top performers.”

So, although the producers of hits suffer marginally from the growth of the long tail, the average denizen of the tail is hungrier than ever. A corollary of Chris’ thesis is that the long tail is growing increasingly over-populated.

Debut authors should NOT quit their day jobs too soon.

(Clay and I are ignoring the fact that the existence of more choice somewhat grows the total market.)

The power law also explains why it is bad idea to be the twentieth social networking site or VoIP phone company even if #1 was just purchased for a gazillion dollars.  Let’s assume that a gazillion means a $24 million just to make the math easy.  Power law says that #2 is worth $12,000,000 (still not bad), #3 is worth $8,000,000 (you’d get by even after your VCs’ cut).  But #20 is worth only $1.2 million.  When you check the liquidation preference (see Brad Feld on this) in your financing, you’ll find that you don’t get any of that – it all goes to the investors and they won’t even be happy.

The lengthening tail affects copy-cat entrepreneurs as well as authors.  The ever lower cost of starting and running an Internet business means that #20 will always have to contend with #21 through #50 if it looks like any money is going to made in the category.  Tough to get the investors’ money back.  Actually, since so much of the value is at the head of the curve when talking about network businesses, it is impossible for any but a handful of network business to succeed within a category.

So how do establish a position on or move to the head end and off the long, hungry tail?  If I knew that secret, hackoff.com would be on every best seller list and Fractals of Change would be the most  popular blog in cyberspace (at least among entrepreneurs and nerds).  But that won’t stop me from posting more hints and speculations.

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This comment by Brian Thomas in Tom Evslin's Fractals of Change is a nice summary of my view of the Internet:My personal belief here is that given equal exposure, the good generally wins over the bad, and better communication makes [Read More]


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