Inside the 'New Economy'
The Internet has changed virtually everything about human existence. But how, exactly? Chris Anderson, editor of Wired, took on part of the question by studying how Internet companies differ from traditional businesses. In his new book, The Long Tail: Why the Future of Business Is Selling Less of More, Anderson describes how revolutionary changes that began with the Internet are rewriting some of the most basic rules of free enterprise and empowering the consumer.
Your book analyzes how the Internet economy has changed the conventional economy. What's the distinction between the two these days?
I wrestle with this a lot. Wherever technology touches the economy, there will be profound changes. Is Netflix an Internet company or a bricks-and-mortar company? Well, it uses the Postal Service, so it must be a hybrid. There's a distinction between physical products and digital products, but it's also like asking about the electricity economy and the nonelectricity economy. There's no distinction anymore.
So what is the long tail?
It's about life after the blockbuster. All our lives, we've seen the world through the lens of hits. Not because that's all we want, but because distribution channels have been so limited. If you have limited shelf space, you only tend to offer the products that sell the best. But as the physical marketplace has turned into a digital marketplace, there's a lot more shelf space. Distribution costs have gotten so low you can offer practically everything. The marginal cost of the songs on iTunes, for instance, is almost nothing. Hits are going to have to share the stage with nonhits.
Your analysis is somewhat technical. The phrase "long tail," for instance, refers to the shape of a particular type of demand curve. Can you explain the math in plain English?
Sure. Think of a demand curve shaped like a ski slope. On the left-hand side it starts high, then it drops down pretty quickly and levels out on the right side. The left side is where a few products sell a lot. The right side represents the nonhits. If you are limited in what you can offer, you offer the hits on the left. But there are many more nonhits. In fact, the curve goes on almost forever. That's the long tail.
Looking back, what have been some of the key transition points?
In the book, I go all the way back to 1896 and the Sears, Roebuck catalog. The radical technology then was the railroad, which was supposed to bring Amazon-size variety to the Kansas prairie. Which must have seemed amazing back then. Cable TV, digital TV--that brought an explosion of choice to television. A key one clearly was Amazon.com, where they offer practically everything. And it's not just about a massive increase in variety; it's also about a massive increase in findability. In a physical store, it's often hard to find obscure products, if they're even there. The ability to search on the Web lets us find the variety.
How is this changing well-established industries?
The music business is ground zero for the long tail. Record labels have struggled tremendously to adapt to a world where people just don't need them as much. We have a whole generation now that has never gone into a record store. People get music from MySpace. I'm not even sure what a label means anymore. ... It could be a single band putting out its own music. The question for record labels is what can they offer artists that artists can't do for themselves.
What's an example of a traditional company that has benefited from the long tail?
An example I like a lot is Lego. I have four kids--the oldest is 9--so I'm slightly obsessed with Lego. They sell a few dozen mainstream products in stores. But on their website, they have more than 7,000 products--for enthusiasts, train sets that just don't sell in stores. Best of all, they let you design your own Lego kit, and they ship it to you in a box that you also design, and then other people can buy your design.
KitchenAid is another one. In a typical store, KitchenAid products only come in a couple of colors. But on their website or on Amazon, there's a drop-down menu that lets you pick from dozens of colors. At the beginning of every season, retailers always try to guess what the popular color is going to be. And there's always one they miss. Last year it was tangerine. Nobody knows why, but it was tangerine. The way KitchenAid does it, you don't have to guess. You just put it out there and see what sells.
Are some products or industries resistant to the long tail?
Certainly. I looked at the car companies, where the obvious implication is mass customization. But it turns out that in cars, the most important thing is quality. When you start adding variations at the factory, it tends to lower quality. That doesn't work for the car companies.
So if you were an entrepreneur hoping to take advantage of long-tail economics to start a new business and make a lot of money, what would you do?
That's what all my buddies want to know. It's too hard to answer. I'm going to take a pass on that one.
A review of The Long Tail and an excerpt are at www.usnews.com/longtail
This story appears in the July 24, 2006 print edition of U.S. News & World Report.