Harvard Study Questions "Long Tail" Theory

mjasay writes "Remember 'the long tail?' That was the idea that there was gobs of money to be made in the more obscure tastes of any given market, enabled by the web. In recent research highlighted in the Harvard Business Review, however, the long tail theory comes under withering criticism. Not only is a hits-based business more profitable for vendors according to the new research, but the research suggests that consumers also derive more enjoyment from the hits, rather than the tail. In short, the researchers find that 'the tail is long and flat, and therefore that content providers will find it hard to profit much from it.'" Long Tail advocate Chris Anderson defends his theory, and it seems that most of the debate centers around how you define "head" and "tail."

This may be true. May be.

But then try to explain porn websites. There is a lot of tail to be hit there.

Re:This may be true. May be.

But then try to explain porn websites. There is a lot of tail to be hit there.

And lots of head too...

Wish I could help...

it seems that most of the debate centers around how you define "head" and "tail"."

I'd help but I'd need to link to some pages that I shouldn't browse at work...

Bullshit

I call bullshit on this. You mean to tell me that Amazon.com and iTunes Store would be more successful if they only carried the most popular 1% of their stock? How about *ANY* bookstore, not even just the online ones.

Re:Bullshit

Traditionally retailers specialized in carrying a wide breadth of merchandise, or a narrow, but deep selection of one type of item. The traditional general store sold everything from cheese to guns. Usually their margins were pretty thin.

A specialty store would focus on a wider selection of a particular type of good. So the cheese shop might have 50 varieties, and the plumbing supply place will have 50,000 plumbing parts in stock. The margins here are high, because the customer needs a particular type of a hard-to-get item.

Amazon and iTunes have a business model that scales out enough that they can pay the bills by selling high-volume, low-margin items while making a profit on low-volume high. When you build a giant, automated warehouse in the middle of nowhere, the marginal cost of storing one more book is very low.

Killing the slow-moving stock would kill Amazon, because that's where they make money!

On the other hand, carrying high-volume, low-margin items in a speciality retailer can kill the business. If a high-end steakhouse started selling $3 roast beef sandwiches, their customers would either leave, get crowded out by people buying sandwiches or stop buying $50 steaks.

Re:Bullshit

Precisely: their study is flawed, because they're basically saying that by dropping the obscure content that only 1% of their customers want, they're losing only 1% of their customer base (or less).

If they were examining a service that caters _specifically_ to that 1% niche, things would be much different. If your business involves selling purple spikey beanie babies, and you stop carrying the purple spikies, you go out of business. If your business involves selling ALL beanie babies, then you only lose the few weirdos who wanted *ONLY* the spikey ones, if and only if there is a competitor to fill in the void.

Re:Bullshit

I can see where low volume stuff isn't worth the hassle.

The whole premise of the Long Tail idea is that it's NOT a hassle for internet companies like Amazon and Apple to keep the low-volume stuff in inventory. That's what gives them an advantage over brick and mortar. If Amazon only sells 5 copies of the The "Long Tail: Why the Future of Business is Selling Less of More" a year, it only needs to keep 5 in inventory. If a chain store wants to sell the book it has to keep hundreds in inventory to ensure they have at least one in each store.

A lot of people mis-characterize the Long Tail as "making money by selling obscure stuff." That's only half of the definition. The other half is building a business where it does not cost you anything to keep lots and lots of obscure things in inventory, or alternatively, having access to millions and millions of customers, so if you sell to 1% of your market, it still adds up to something. Long tail does not work unless all of those 1% niches add up to 80% of the total market or unless you sell to 1% of a billion people. The internet helps businesses do both of these things.

Re:Bullshit

5 copies of a book sitting in an obscure corner of the warehouse (tracked by database so that it can be retrieved when it is needed) certainly isn't free, but it's *much* less expensive than keeping 500 copies chain-wide on prime shelf space. The latter also has an opportunity cost associated - putting this obscure book on the shelf means one less best-seller on the shelf, unless your store is of an infinite size :P When you can afford to sell something that only moves 10 copies a year, nation-wide, and guarantee speedy shipping, and still turn a profit, you're doing it right. Barnes & Noble et al cannot.

Hmmm

...it seems that most of the debate centers around how you define "head" and "tail".

Bill? Bill Clinton? Is that you?

I don't know about this.

Correct me if I am wrong, but the basic gist I got was that the 'long tail' theory states there is a lot of money to be made in 'niche' or 'subculture' elements, and the critics say this is wrong. I can wholeheartedly disagree. It's not easy to extract the profit from niche markets, and the long tail probably doesn't add up to the 'head' so to speak, in most cases, but there is certainly a lot of money to be made.

Take TV for instance. Your 'Heads' there may be ABC, CBS, NBC, and you could call things like The Discovery Channel, The History Channel, Comedy Central, Sci-Fi Network, etc the 'tail', as I understand it. And there is quite the potential for the 'tails', in this instance, to make even more than the 'heads'.

This is just as far as I understand it, mind you.

Re:I don't know about this.

It's not the shape, the shape is fixed...

It's a standard power curve... it agrees that the hits make up lots of the sales, the thing is how many.

Integrate from 1 - 10 off the curve, you see the sales of the Top 10 sellers... they sell a lot, they sit in the front of book stores. Go to 1-100, and you have probably only doubled sales.

Long tail observes that theoretically, the curve goes out to infinity and never hits zero, which is what the Internet makes interesting.

A mall book store can stock 5000 books, a big box book store 20000, and Wal-mart's book section, 1000. Wal-mart moves a lot of books because they stock the 1000 most popular books and move them readily. The mall book store have 5x the inventory and probably about the same in sales, because they aren't moving as many of the top 1000 because of Wal-mart. The Big box store, with 15000 moves more... maybe double the mall bookstore with 4x the inventory?

You see diminishing returns... so sales people observe the 80/20 rule, 80% of your sales come from 20% of your customers/products, etc., it's the power curve... But long tail observes that if you can only carry 100 products, 80% will come from your top 20%, but if you carried infinite inventory, the long tail exceeds the bulbous head because it's infinite.

The average bookstore apparently stocks around 15k books (when I first read the long tail argument), the most profitable books. If you looked at Amazon's sales, their "big sellers" were the sale 15k books as everyone else, so you would think 80/20 rule, that's 80% of revenue, the other 1M+ books were just there because they were slightly profitable, brought customers in, etc. Turns out, the majority of the sales were from the books AFTER rank 15K, the books that booksellers don't carry.

This brings one to two conclusions:
1. 80/20 rule is a function of limited inventory, if you take the tail to its conclusion, the tipping point is around where others drop off, with half before and half after, so the bulbous head is 80% of 50% of sales, or 40%... still important, but not the final say in revenue... Long tail means Internet changes the economics of inventory... I go to a Wal-mart OR Website for my "common" stuff, Internet for everything else.
2. Amazon.com does well on the long tail because the others can't play there. The normal shops compete for the first 15k, Amazon has a competitive advantage for the rest of the inventory, and therefore makes profits. -- This leads to the natural conclusion that the long tong tail is a natural monopoly, only one player can make money stocking it. Wal-mart owns the common 20% of items, Amazon sells the rest, and we all get out of retail because Retail = Wal-mart + Amazon.com.

Alex

Re:I don't know about this.

I haven't read the book, but your explanation is how I understand the theory.

In the case of Amazon, I think your second conclusion, that Amazon does well on the long tail because they're the only ones there, is what is actually happening.

I buy a lot of esoteric testing, stats, and linguistics texts. That, in fact, is all I buy, and I buy a lot of them. And Amazon is the only place that carries them.

Same thing goes for CDs. If I want, say, the new NIN (ignoring for the time being that the last couple NIN releases I've actually gotten from his website), I go down to Tower Records (still alive here in Japan). If I want Freezepop, I need to go to Amazon.

Actually, in both of these cases, as long as I'm going to Amazon for the relatively unpopular thing, I might as well pick up the popular thing there while I'm at it.

I guess what I'm saying is that I don't think the long tail is necessarily a model for everyone, because if everyone did it, they'd see no returns. But for any particular market, a single long-tail retailer can make a bundle. Everyone jumps in and everyone loses money. It's a function of how big you are, not what you carry. Amazon basically has no competition on the "long tail" products, so they get 100% of that business. They have the luxury of doing that because they are frickin' huge.

So, all told, it just doesn't seem to me that the long tail is something just anyone can use, which is pretty much exactly what the study found.

Makes sense

I know I "derive more enjoyment" from my definitions of "head" and "tail".

No kidding.

When you see anything being hyped on the cover of "Wired" magazine as the 'next big thing,' chances are it's a complete load of crap.

Pope's corallary to Sturgeon's Law. :)

The long tail most definitely exists in one area.

Porn. People do pay much higher sums for rather obscure or taboo things.

The problem with the "long tail" is that companies assumed it scaled. By definition it will only apply to a fringe. There is only space in such fringe areas for one or two dominant players; these players may make gobs of cash, but only in relation to their market size.

Of course large vendors aren't going to find it profitable to appeal to multiple fringe markets. The level of effort involved to support each individual small market is high and then combined with a number of markets means you end up burning through more manpower per dollar than a smaller dedicated company. It's the same problem of having too many products/SKUs/whatever, see DEC/Apple pre Jobs for an example of failing this way.

I call BS as well

For a brick and mortar store, concentrating on the sure hits makes a lot of sense. Funny story, my dad had to pick up a new alternator for a 30-year old truck. The local parts store had one in stock. The parts man looks the box over and says "Yep, had this one on the shelf for about 18 years." That's a bit longer on turnover than most businesses would shoot for. But when you're talking about cheap warehouses in the bad part of town doing all of their selling and shipping online... this whole argument could probably be solved with access to Netflix's database and a few queries. My hypothesis:

1. A huge percentage (35%?) of their business will be new releases.
2. The next biggest percentage would fall into the "perennial classics" category, i.e. the kind of movies that aren't new releases that a Blockbuster would have, movies that do a steady, dependable business.
3. Everything else would fall into the "obscure shit" category, the stuff that Blockbuster does not carry because it's too infrequently rented.

I will wager that the revenue from #3 more than pays for itself AND serves as a draw for customers who rent across all three categories. Joe Customer chose Netflix because they carry obscure Asian chop-chop flicks but will also rent Cloverfield from them since hey, he has an account.

As another example, say I want to pick up some obscure, out of print book. I hit Amazon first out of force of habit. Good news, they have it. That makes it all the more likely for me to type in Amazon when I want to buy the next top-seller I saw on the Daily Show. If Amazon didn't have the obscure books I want, I might go to some other site by default, and then they'll be getting all of my New York Times Bestseller business.

If we're talking about a brick and mortar store, the carrying cost of the truly obscure could well be too high to justify itself. With online stores, there's no excuse not to carry the obscure.

Is "the long tail" just the "anti-blockbusters"

In the "blockbuster" model you don't concentrate on "the top 10000" or even "the top 1000", you push very very few products... a dozen at most (the example they use of book publishing... they only pushed *two* blockbuster titles at a time).

The article is turning that over, and interpreting "the long tail" as being only the "anti blockbusters", the products selling a few copies a year. But once you have the product in your digital inventory you're paying virtually nothing to keep it alive, so instead of trying to figure out what the top forty next month is going to be so you can stock your stores with it, and shoveling albums out into the cold after six months on the shelves, you *can* keep it all available.

It's not a matter of "this end vs that end", it's "you don't need to worry about the ends".

WTF, is this "Promote Chris Anderson Week" on /.?

Long Tail advocate Chris Anderson defends his theory...

You mean, this Chris Anderson [slashdot.org]? The "science is now useless because we have teh cloudz" guy? Yeah, after that gem of scientific insight, lemme rush right over and see what he's prattling on about in the world of finance...

Success of the tail is dependent on the product

The success of the long tail theory completely depends on the transient nature or durability of the product mix.

Amazon makes the long tail work because Amazon is still a big fat book store (and sells other things): books have a shelf life measured in years. Books do not decay, they do not fall out of fashion, they do not get replaced by next year's model (mostly). As such, Amazon can build up a long tail of obscure books and build a brand of a bookstore where you can find anything.

Zappos is trying this with shoes. The problem here is that Shoes fall out of fashion, so I am not sure that works. I used to work for a company that sold outdoor gear-- it kinda worked as some things were durable, but even then most equipment (and especially apparel) have a shelf-life of one season (one year).

Music may work-- someone's always searching for some Captain Beefheart or TSOL-- but certainly the biggest profit (because production costs are so low for massed produced copies) are in the big-hit ranges.

It all depends on the seasonal and long-term durability of the product.

Re:Already knew this.

A lot of the bubble wasn't due to the theory. It's failure was do to bad business. The We Sell Each Product under cost's we make it up by selling more of them. Or lets do it over the web it is only 3 times as harder to do it there then a person can do at home. And the concept a CS degree will help the company more then an MBA. SCREW PROFITS WE WANT COOL TECH!

After the bubble pop the net matured a bit. People didn't jump in thinking they will be rich, just enough to get by. The moderating approach is what saved the net echonomy. the 1990's everyone was trying to get Rich! Rich!! Rich!!!

I don't understand

why are they concentrating on how *profitable* the long tail is?

As far as I see it, the long tail isn't about PROFIT, but about how much society wants the entertainment.

How many REALLY old songs would you like to hear again? Well, given that each year older adds another pile of songs, the profit in EACH TITLE is spread thinner and thinner. Because what I'd like to hear again from the 70's isn't what YOU'D like to hear from the 70's.

The long tail is showing that copyright lengths ARE damaging society. And it not being profitable enough to make a business on shows that there is NO BUSINESS LOSS in shortening copyright to a time where works are still wanted.

Really, copyright now is more about the accountants' abject fear that someone else is making money and not them.

Shit, if you're not SELLING a good, why not let someone else do it, or even just release it for free and forget about it? Because in that case, there's no money for you to make. That you don't want to spend the effort to MAKE the money in the first place seems irrelevant to your accounting brain.

So I don't understand the ribbing. It's arguing that it isn't profitable when that's not what the long tail is about. It's about demand continuing BEYOND the profitable age of entertainment goods.

Re:I don't understand

The long copyright term is not for the one-hit wonder bands, or the b-movie produced during the war to sell bonds. It's for the cream. It's for the Beatles. Cindella. The one in a thousand quality movie or band that people still think have meaning to them even now, 40, 50, 60 years later.

... or maybe it's for accounting: you own the copyright for a 2000 titles nobody bought for 50 years, but you can write them as being worth 2,000,000$ each, and then claim, in front of your shareholders, that the company is worth at least 4,000,000,000$. In fact, the company might be worth nothing, but who is to contradict you, since we all know that artists become famous and bring in money only after they die.

Re:I don't understand

... or maybe it's for accounting: you own the copyright for a 2000 titles nobody bought for 50 years, but you can write them as being worth 2,000,000$ each, and then claim, in front of your shareholders, that the company is worth at least 4,000,000,000$.

Then why not make those people/companies pay imaginary property tax on those imaginary properties?

Re:Already knew this.

So, for instance, you don't think people would mind if iTunes only carried the Top 40? Or netflix could flourish carrying offering only hit films? I don't think so.

Redbox explained

Redbox is a vending-machine movie rental system. I walk into the Wal-Mart a mile from my house, and there's this big, well, red box sitting there. It operates on the opposite of the "long tail": it only has a couple dozen of the very latest movies, has many (but not infinite) copies of each, costs $1 per night (just swipe your credit card), keep 'em as long as you want (after a month, just keep it - for $29 you've already paid for it), rental & return is rediculously simple with none of the "video store" hassle.

Instead of having everything anyone might be looking for (the "long tail" model), it has a few things that most people will probably want (say, the "dirt cheap blockbuster" model). Turnover of content is very high, so there is most likely something sufficiently interesting (for a buck a night, that's a lot) there at any time. Content range is very narrow, so customers can browse very quickly; covers of most movies available are shown on the front of the vending machine, so one can review what's available in just a few seconds (a thourough list is available by touchscreen) even while someone else is actually using the machine. And with rentals being just a buck a night, getting something or keeping something a few days is trivially cheap.

It complements Netflix/Amazon thus: instead of getting exactly what I want in a few days, I get something satisfactory right now. My "long tail" providers can find anything I specifically want within a few days, but if I simply want a couple hours' entertainment now I can get something suitable, dirt cheap, in a few minutes. And when I take a rental back, it's just too easy to pick up another. It also fills the gap between "long tail" services and TV's "you'll watch what we want when we want" model.

That the box is located at the entrance to a store which thousands of people frequent with great regularity, rather than being a special trip, completes the winning business model.