The Long Tail

Long Tail gets its name from a power law curve showing popularity rankings. It shows that a few popular items in the head of the curve, the ‘hits’, are balanced by a larger number of less popular items in the long tail, the ‘niches’. The term’s progenitor, Wired editor Chris Anderson, applied the idea to companies like Amazon.com and Netflix to explain their massive growth in the dot-com era.

Anderson argued that by combining infinite shelf space with powerful recommendation and filtering algorithms, these retailers can realise significant profit from these low-volume items not available from brick-and-mortar stores. In this way, they can break from the traditional 80/20 rule of economics applied to retailers with limited shelf space, which suggested a hit- based economy where 20% of products made up 80% of the sales.

In a Long Tail marketplace, recommendation systems (“customers who bought this item also bought”) make it easy to go “down the tail” and find related but less well known products. In this way, the balance of hits to niches changes and the long tail can become a sizable percentage of the business. The more the costs of offering a single item fall, the higher the profit margins become, making the Long Tail a very attractive proposition.

As an article in 2004, the Long Tail received a lot of attention from industry leaders like Jeff Bezos, CEO of Amazon.com and Eric Schmidt, CEO of Google. These big names liked the concept and spread the word, prompting Anderson to extend the article into a best-selling book in 2006.

Four years on, proponents of the Long Tail concept are continuing to find new companies, markets, and situations where the Long Tail applies. These new examples have fortified Anderson’s original set, and have proven that pursuing the tail is a legitimate business strategy. Examples of the Long Tail have been found in pretty much every internet market available, from books, to fashion, to video games.

Amazon.com is the canonical example of a Long Tail business. Learning the lessons of warehouse-based businesses like Sears in the 1890s, Amazon.com provided unprecedented choice for internet consumers in the 1990s; first for books and then for everything else. Their diverse, ever-expanding inventory and intelligent recommendation systems ensured their meritorious rise to prosperity and influence even as the dot-com bubble burst around them. Today, Amazon is a market leader, employing 30,000 people with revenues of over 24 billion dollars.

Amazon isn’t just resting on its laurels, however. It’s diversifying its assets in order to reach even further down the tail. Sales of its Kindle e-reader and associated e-books have been a great help to the company as of late, with revenues rising by 68% in the ‘electronics’ category. Widespread adoption of the Kindle will help Amazon’s Long Tail goals in the long run too; as paper books will be replaced to a certain extent by e-books, the retailer can expand its library almost cost-free and use the warehouse space for other goods.

Books aren’t the only products riding the Long Tail online though; fashion is another area where the unique environment of the internet has led to a very strong Long Tail market. Through fashion aggregator sites like Kaboodle.com, users can find a wide variety of products from increasingly niche fashions.

For example, even wearers of Elegant Gothic Lolita, a Japanese fashion subculture with only afew thousand participants worldwide, can find hundreds of products online. By providing followers of niche fashions a place to share their discoveries and promote their chosen style, these aggregator sites can push buyers down the long tail.

These sites often use social networking techniques to keep users active and buying. On Kaboodle, users are encouraged to make lists of their favourite items to share with their friends, and are rewarded with achievements and status for doing so. These lists are then used to recommend new items to users, in much the same way as Amazon’s recommendation engine. This recipe of Long Tail aggregation and social shopping has proven to be a great success, and was purchased by Hearst in 2007 for an estimated forty million dollars.

Another Long Tail success story is Steam, the leading PC download service produced by Half- Life developers Valve. The service, which launched in 2003, currently stocks over 1,200 games and boasts over 30 million active users. As well as stocking hit titles, Steam is able to offer older and lesser-known games to their massive user-base, and is growing all the time.

Steam’s success has also been due to their initiative in adding social tools to the distribution platform. By offering gaming servers and friends lists on the same service, Steam has given users a heavy incentive to remain active on the network, and therefore be alerted to the frequent sales and new releases. They have also cleverly tied the network into their achievement system, so users can see their friend’s games and achievements and be encouraged to buy games in that way.

With the lion’s share of the PC digital download market, Valve now sits in a commanding position. Game developers want to sell to Valve’s huge market, and gamers want their favourite games to be available on Steam. As big box retailers have started to skew away from stocking PC versions of multi-platform games, Steam has picked up the slack and become absolutely massive because of it. Just a few days ago, two unnamed high street retailers threatened to not stock games with Steam support, as they believe the service is just too effective at capturing consumers.

On consoles, Microsoft’s Xbox Live Arcade has also seen massive growth. Xbox Live Arcade launched with six titles and has since expanded to 347 titles, and has added filtering mechanisms that remove poorly performing games and allow players to rate each one. Like Steam, games are delivered digitally and so the cost of adding additional titles is almost nothing.

Video game retail is one of the most obvious playgrounds for the Long Tail, and the services above have been excellent examples of the Long Tail in action.

Some other markets haven’t had the same level of success. Whilst the Long Tail concept proved popular in the first few years of its popularity, many businesses have since reported that their statistics don’t match those suggested by the Long Tail model. Even worse, companies that do find the data matches the model, find that the Tail isn’t as lucrative as it’s been made out to be.

One notable example was that of online album and single sales in the UK; researchers Will Page and Andrew Bud in 2008 showed that 80% of single sales came from just 52,000 tracks, suggesting an incredibly thin Long Tail. The same study also showed 85% of albums sold online didn’t sell a single copy. Chris Anderson admitted that the sales data didn’t support his theory, but remained adamant that the concept still had merit in a great many other markets.

Another, more damaging release was also made in late 2008 by early Long Tail supporter and Google CEO Eric Schmidt during an interview with McKinsey Quarterly, where he stated that “the vast majority of revenue lies in the head.” Following this, Anderson seemingly gave up the ghost, quoting the exchange and admitting on his blog that “it’s hard to make money in the tail… perhaps that will never change.” Despite this, he later maintained that the Long Tail model was relevant for many markets.

With two simple rules, ‘Make everything available’ and ‘let me find it’, the Long Tail model is an alluring prospect for any new company. However, having a Long Tail strategy alone is unconvincing, with Schmidt telling McKinsey Quarterly in 2008 that “while you can have a long tail strategy, you better have a head, because that’s where all the revenue is… you need the head and the tail to make the model work.”

The theory of the Long Tail has been used by companies all over the world to try to outperform the competition. From Amazon.com (and its regional copycats like Beirut-based neelwafurat.com) to digital distribution services like Steam and aggregator sites like Kaboodle, the Long Tail has remained a powerful and successful model for many businesses.

Since Chris Anderson’s publication of the original Wired article in late 2004, the term has entered the commercial lexicon and become a well studied phenomena. While the model shown to be less accurate overall than initially thought and has suffered a few blows, overall it has shown to be a relevant and a useful tool to describe at least a portion of many internet businesses, something that’s valuable to interested laypeople, entrepreneurs and industry analysts alike.

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References:

Anderson, Chris. (2009). The Longer Long Tail. London: Random House Business.

Anderson, Chris. (2008). Does the Long Tail create bigger hits or smaller ones?. Available: http://www.longtail.com/the_long_tail/2008/11/does-the-long-t.html. Last accessed 12th Nov 2010.

BBC. (2010). Amazon Profits boosted by Kindle. Available: http://www.bbc.co.uk/news/business- 11602923. Last accessed 12th Nov 2010.

Dring, Christopher. (2010). Retail threatens Steam ban. Available: http://www.mcvuk.com/news/41746/Retail-threatens-Steam-ban. Last accessed 12th Nov 2010.

Manyika, James. (2008). Google’s View on the future of business: An interview with CEO Eric Schmidt. Available: http://www.mckinseyquarterly.com/Googles_view_on_the_future_of_business_An_interview_w ith_CEO_Eric_Schmidt_2229. Last accessed 12th Nov 2010.

Orlowski, Andrew. (2008). Chopping the Long Tail down to size. Available: http://www.theregister.co.uk/2008/11/07/long_tail_debunked/. Last accessed 12th Nov 2010.

Foster, Patrick. (2008). Long Tail theory contradicted as study reveals 10m digital music tracks unsold. Available:

http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/music/article5380304.ece. Last accessed 12th Nov 2010.

Simeonov, Simeon and Gordon Could. (2007). Social Commerce Goes Mainstream: an Industry Insider’s Take on the Kaboodle Acquisition. Available: http://blog.simeonov.com/2007/08/11/social-commerce-goes-mainstream-an-industry-insiders- take-on-the-kaboodle-acquisition/. Last accessed 12th Nov 2010.

Valve. (2010). Steam Surpasses 30 Million Account Mark. Available: http://store.steampowered.com/news/4502/. Last accessed 12th Nov 2010.

Lovely highlight image is http://www.flickr.com/photos/kclama/472357205/

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