01 The Future Is Coming With Long Tail

The Long TailWhy the Future of Business Is Selling

Less of More1

Who?

• E. Brynjolfsson, Y. Hu, M.D. Smith. “Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers,” Management Science 49, no. 11 (November 2003): 1580-1596.

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Who?• Chris Anderson,

Wired Editor, October 2004

• The Long Tail: Why the future of business is selling less of more, June 2006

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The Long Tail Market

From Mass Market to Niche Markets

4

80/20 Principle

• Vilfredo Pareto, Italian economist and sociologist, 1897

• Data show– 20% of products count for 80% of sales. – 20% of customers count for 80% of profitability – ………

• Long tail

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Why Hit Products?

• Before mass media invented, there were no hit products and “attention” was paid to everyone.

• Mass media + mass production– producers have more chance to make

great money and they have to. – Pooling

Attention economics is an approach to the management of information that treats human attention as a scarce commodity, and applies economic theory to solve various information management problems.Applications: Mass Customization, Prosumers, etc.

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Hitland vs. Nicheland

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Long Tail Market

• IT divides mass market into millions of niche markets

• Why are we limited with the lowest common denominator?– Supply and demand mismatched – buyers do not

know where the sellers are– Distribution inefficient – transporting products

may not be easy.

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Long Tail Market

• Limits of Traditional Market– Location: only serve local customers– Time: off shelf if sales not good– Inventory Cost: – Physical constraint: 24 hours a day, certain

bandwidth to transmit radio signals, etc.– ……

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Long Tail Market(cont.)

180,000160,000140,000120,000100,00080,00060,00040,00020,000

00 5,000 10,000 15,000 20,000 25,000

Ranking of songs

Dow

nloads

Rhapsody Music Downloads

The curve does not reach 0.”

• Borderless market

In Wal-Mart, only the first 4500 albums are on shelf, and the first

200 count for 90% revenue.

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Long Tail Market(cont.)

800

700

600

500

400

300

200

100

025

Ranking (in thousands)

downloads

But, if we continue

35 45 55 65 75 85 95

The area under the curve is the revenue, counting for 1/4 of Rhapsody's total revenue.

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Long Tail Market(cont.)

140

120

100

80

60

40

20

0100

Ranking (in thousands)

downloads

……continue

200 300 400 500 600 700 800

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Long Tail Market(cont.)

• Hidden majority

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New Type of Market

40%

21%

25%Total Sales Total Sales Total Sales

Products not sold at Brick-and-Mortars

1,500,000

1,250,000

1,000,000

750,000

500,000

250,000

0

RhapsodyTotal Inventory：1.5M songs

Wal-MartRegular Inventory：55,000

60,000

50,000

40,000

30,000

20,000

10,000

0

NetflixTotal Inventory：55K DVD

BlockbusterRegular Inventory：3,000 DVD

4,000,000

3,000,000

2,000,000

1,000,000

0

AmazonTotal Inventory：3.7M books

Border:Regular Inventory：100K books

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The Rise of Long Tail Market

15

6 Pillars of Long Tail Market

• Niche products are more than hit products in all markets

• Costs to reach these niche products are significantly lower.– Transaction cost, search cost…

• “Filters” help customers find niche products.

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6 Pillars of Long Tail Market

• Hence, demand curve is flattened. The difference between niche and hit products is less.

• Total sales of niche products can be more than those of hit products.

• This flattened demand curve is natural and it will not be distorted by lockstep culture due to distribution inefficiency, information scarcity, or inventory cost.

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Drivers of Long Tail Market (cont.)

• Democratize production– Business: toolmakers and producers– Blog, digital photographing, Youtube, and– Media Wiki, Liquidplanner,

Google translator toolkit, microblog, • Do we still need translator in the future? Data! AI

Learning!

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Drivers of Long Tail Market (cont.)

• Democratize distribution– Business: aggregators– Amazon.com, iTune, eBay, and– Netflix, priceline.com, lulu.com, OhmyNews

• Connect consumers and producers– Filters

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Drivers of Long Tail Market

• Democratize production– More products produced– Extend the tail

• Democratize distribution– Consumption cost is lower– Enlarge the tail

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Drivers of Long Tail Market (cont.)

• Connect consumers and producers– Business from hit to niche

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The New Producers

• Connect consumers and producers– Business from hit to niche

• Consummerism to participative producerism

The "consumer economy" is a producer-controlled system in which consumers are nothing more than energy sources that metabolize "content" into cash. This is the absolutely corrupted result of the absolute power held by producers over consumers since producers won the Industrial Revolution. ...

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Power of Collective Wisdom

• Frog Design:We are leaving the Information Age and entering the Recommendation age.

Today information is ridiculously easy to get…. Information gathering is no longer the issue –

making smart decisions based on the information is now the trick...

Recommendations serve as shortcuts through the thicket of information, just as my wine shop owner shortcuts me to obscure French wines to enjoy with pasta.

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Power of Collective Wisdom

• Attention Economy– In a world where selections are unlimited

and customers’ attention is a scarce good, CONTEXT, not content, reigns.

– Data + Filter– Google!

• Filter, recommendation and index

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Filter, Index, and Recommendation

Will discuss at “Web 2.0.”

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Quality Spectrum of Long Tail Market

Quality/Satisfaction Dynamic Range

High

Low

Quality

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Quality Spectrum of Long Tail Market

• Long Tail: wide dynamic range– Niche markets are either hit high-quality products,

or high quality products at the tail. • Traditional: narrow dynamic range

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Filters and Signal/Noise

Function Requirement o

f Filte

rs

Signal/Noise Ratio

How many swans we need to sample to find out a black swan? – Black Swan Problem.

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Pre-Filters and Post-Filters

• Pre-filters– Filter before products entering markets

• Post-filters– Filter current products.

• Post filters are used in Web 2.0 era.– CONTEXT Reign! Data Reign!

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Long Tail Economics

The End of Scarcity, Abundance, and 8/20 Principle

30

Power Low

• According to Zipf's law– given some corpus of natural language utterances,

the frequency of any word is inversely proportional to its rank in the frequency table.

– Thus the most frequent word will occur approximately twice as often as the second most frequent word, which occurs twice as often as the fourth most frequent word, etc.

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Power Low

• According to Zipf's law– For example, in the Brown Corpus "the" is the

most frequently occurring word, and by itself accounts for nearly 7% of all word occurrences (69,971 out of slightly over 1 million).

– The second-place word "of" accounts for slightly over 3.5% of words (36,411 occurrences), followed by "and" (28,852).

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Power Law

• So, the 1024th popular movie’s sales should be 1/210th of the best seller.

• But it is not true.

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Truncated Demand Curve

$ 1

$ 10

$ 100

$ 1,000

$ 10,000

$ 100,000

$ 1,000,000

$ 1,000,000

$ 100,000,000

$ 1,000,000,000

1 10 100 1000

Potential DemandActual Sales

Movie ranking

Box office sales

2005 Hollywood Box Office

Predicted Sales

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Truncated Demand Curve(cont.)

1 10 100 1000

Movie ranking

Bo

x office sale

s

Film companies only produce 100 movies a year?

Movies after 100th will not be scheduled at theaters!

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End of 80/20

• The bottom 1.2M books count for only 1.7% sales of BN Brick-and-Mortar

• But 10% of bn.com• Myth: we should focus on the top 20%

products because they count for 80% sales.

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End of 80/20(cont.)

80%

20%

20%

80%100%

Products Revenue Profit

Brick and mortar

25%

50%

25%

Revenue

33%

33%

33%

Profit

8%

90%

Products

2%

Long tail retailers

Internet only

inventory

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A Tail inside another Tail

Adult Atern

ative

Altern

ative

Contemporary C

hristian

Altern

ative

Christian

Punk

Acid Rock

Altern

ative

Rap

Africa

n Pop

Altern

ative

Country

Ambient Dub

Atmosp

here House

Acid House

Africa

n Tempo A?

Australi

an an

d South

Pacific M

usic

Africa

n Cuban Ja

zz

Africa

n Music

Altern

ative

/Punk

0

200

400

600Rhapsody Sales for “A” Category

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A Tail inside another Tail

0 200 400 600 800 1000 1200 1400 1600 1800 20000

50

100

150

200

250

African Cuban Jazz

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Taisho Tripitaka 大智度論有菩薩肉眼見小千世界，有菩薩肉眼見中千世界，有菩薩肉眼見三千大千世界

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Implications of the Micro-Structure of the Long Tail

• Filters work better in the same category. They make hits in each category.

• The better is getting better, and the worse is getting worse.

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Long Tail of Time

• Time is the fourth dimension of the Long Tail.• Filters (e.g., Google) make time irrelevant to

the popularity• Lift the red lines in the next diagram.

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Long Tail of Time

Blue line head: Hitland

Blue line tail: Nicheland

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Examples of Long Tail Business

• Google AdSense• eBay• Amazon.com• Lego (long tail + prosumer)• …• Will explain in the following lectures

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Implications of Long Tail

• Pre-Internet: The Long Tail of Metropolitans – The Rise of the Creative Class by Richard Florida

• Post-Internet: The Long Tail of Travel– Word of mouth on SNS– Online travel information– Online travel agencies

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Long Tail of TravelT

rave

l fro

m U

K

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Long Tail Web 2.0 Business Model Innovation

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LET’S WATCH

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Let’s Watch

• Head tracking for desktop VR

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Let’s Watch

• Low-cost multi-touch whiteboard

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Let’s Watch

• BMW Gina

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