The Long Tail: Essential Reading for Media and e-Commerce Investors

by: Mick Weinstein

Chris Anderson's new book The Long Tail: Why the Future of Business is Selling Less of More has quickly risen to claim a well-deserved slot on the New York Times' non-fiction bestseller list.

The book expands upon and enhances points Anderson put forth in seminal articles published in Wired, the tech journal he edits. Those articles (see the first and the second) made a splash among both tech enthusiasts and e-commerce professionals as Anderson managed to crystallize key developments driving the growth of online retail pioneers such as Amazon and Netflix.

We at Seeking Alpha have considered the concept important enough to devote a category of articles to the topic since early 2005.

What's it all about? Richard Akerman summarizes the business implications of the Long Tail principle in one sentence:

If your marginal cost of providing new goods is near-zero, you can make money by providing more goods, as long as people can find them.

That is, digital storage joined with smart filtering software and broadband internet have made it economically feasible for e-commerce sites to provide a vastly greater number of products under one 'roof' than any bricks-and-mortar retailer ever dreamed of. Moreover, the market for that massive 'long tail' of items -- that individually sell far less units than the 'short head' of mass market hits -- can actually end up rivaling the profitability of the hits. The principle, derived from distribution curves and tools such as 'power laws' long used by statisticians, is best captured visually:

Whereas your local bookstore can only carry on its shelves the red 'body' (or 'head') of this distribution, an online book merchant like Amazon can offer both that plus the 'long tail' of less popular items on an individual basis. The same holds for your local music store vs. Apple's iTunes. On the whole, Anderson demonstrates, the Amazons and iTunes of the world can and will continue to leverage this into paradigm-changing business models.

We're now feeling the impact of the Long Tail both culturally and economically. For example, the blockbuster-centered market that until recently characterized the entire movie business is gradually losing its dominance within a sphere increasingly characterized by niche sales. While, as Carl Howe describes, this does not currently apply in the physical market of the local cinema (where the studios limit supply to maximize gain), it is readily apparent in the video rental market and even more so in the emerging video download market.

Moreover, the phenomenon of ultra-cheap media production and publishing (it now costs almost nothing to launch a blog that can reach millions worldwide) could signify nothing less than a sea change in the way ideas and products emerge, disseminate and gather influence. The virtual choke-hold previously enjoyed by large media corporations over capital-intensive means of production has given way to millions of new producers, citizen journalists and niche experts who, in the aggregate, challenge the market dominance of the media giants as they gain 'mind share' and market share.

Some reviewers of Anderson's book (such as Lee Gomes in the Wall St. Journal) have misrepresented Anderson as glibly claiming that 'hits are dead' -- a position Anderson has never taken. Rather, Anderson clarifies:

What is dead is the monopoly of the hit. For too long hits or products intended to be hits have had the stage to themselves, because only hit-centric companies had access to the retail channel and the retail channel only had room for best-sellers. But now blockbusters must share the stage with a million niche products, and this will lead to a very different marketplace.

While principles of the Long Tail are applicable to many fields of production and collection in our digital age, Anderson's lucid volume focuses more on the business aspects of the phenomenon. It is, therefore, a must read for anyone who is involved in -- or invested in -- the industries it influences, which include nearly every contemporary field of e-commerce and digital media.

If you are an investor in any of the following companies and want to understand the opportunities and challenges they face going forward, you'll want to read Anderson's book: Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), eBay (NASDAQ:EBAY), Google (NASDAQ:GOOG), Audible (ADBL), Apple (NASDAQ:AAPL), News Corporation (NASDAQ:NWS), Disney (NYSE:DIS), IAC/InterActiveCorp (IACI). That's by no means an exhaustive list; just about every company involved in media and e-commerce is impacted by the phenomenon.

Random House, the publishers of The Long Tail, have generously granted us permission to publish two chapters of the book here on Seeking Alpha -- click through to view:

Introduction: The Long Tail

Chapter 7: The New Tastemakers -- Filters Rule: Examines the all-important role of the software filter to create order and accessibility out of the long tail of products.

For more, see Random House UK's site on the book. Follow ongoing discussion of the concept and the book on Chris Anderson's blog.

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