Anderson's Long Tail

Chris Anderson launched in 2004 the Long Tail hypothesis in an article in Wired Magazine, which he reworked into the book The Long Tail: Why the future of business is selling less of more. It is based on the graphical representation of a Pareto distribution. Vilfredo Pareto was an Italian economist who saw that in 19th Century Italy 20% of the population controlled 80% of the country's wealth (this is why it is also known as the 80/20 rule). George Zipf saw the same phenomenon in the use of words. The most commonly used words (such as "the") account for the largest proportion of use. The frequency of words is inversly proportional to its rank in the frequency table. When you display this graphically you get what is known as a Powerlaw distribution. The high use of a limited amount of resources can be found in the "Head", while the low(er) use of a huge amount of resources can be found in the "Long Tail".

Anderson noted a similar distribution in online shops like iTunes (music) and Netflix (movie rentals). In bricks-and-mortar retail stores the amount of available items are limited because of real world limitations to shelf space and distribution issues. In the digital realm, the cost of an SKU is virtually zero. This means that the less mainstream items can also be placed in inventory. His research showed that in these cases selling a little of a lot can also contribute to profit. Simply put, business is ruled in most cases by a given level of scarcity. Thus the most viable business model is one that focuses on selling as much hits as possible, whilst avoiding losses. Anderson postulates that when confronted with more choice, people tend to buy more and with more variety. Niches become more important and generate revenue. In order not to be swamped by the multitude of niches good filters are absolutely mandatory. Filters are not the same as the traditional cultural gatekeepers.

Even though I'm not sure how pervasive the concept of the Long Tail is in the world-wide economy, I am convinced that (for now) in certain sectors and/or for certain ways of doing business it is a force to be reckoned with. Long Tail economics is an important new business model. The classic examples of Amazon, iTunes and Google have shown its viability. Anderson states his case in a convincing well written way. For anyone interested in how the internet is changing our way of living, this book is a must read (together with Weinberger's books). It is a perfect introduction to a new way of thinking about business. The natural follow-up read is Wikinomics, which provides a complementary insight. In short: heartily recommended.