The Global Human Capital Journal

A Must-read Guide to the Importance of Web 2.0 and the Knowledge Economy

The Long Tail is a watershed book that reflects many of the profound socioeconomic changes wrought by the transition from the Industrial Economy to the Knowledge Economy. The “Long Tail” represents the splintering of the mass market—what is happening, why and how you can thrive in the new era of the niche. Moreover, it shows how the mass market was a temporary phenomenon that developed because niches were not economically viable for producers to address.

Chris Anderson is editor-in-chief of Wired, and the book has an appreciation for culture, the economics of technology and the importance of innovation. It’s also very well written: Anderson tackles some fairly abstract concepts, but the reader doesn’t trip over them. It’s possible to read the book quickly, but there is plenty of substance for a detailed, reflective reading as well. Difficult to over-recommend!

The Long Tail offers an insightful look into the byte-oriented Knowledge Economy and its movement away from the zero-sum, bits-oriented Industrial Economy—and what this holds for business and culture. The book has the technology/culture/innovation I associate with Wired, which makes it very insightful for understanding the implications of the changes. It includes numerous case studies and examples, many drawn from the entertainment industry, but also manufacturing and high technology.

Due to the book’s importance, I’ve included some detailed chapter notes before adding Analysis and Conclusions at the end.

Book Overview

By glancing over the chapters, veterans of the “Internet Boom” may be asking themselves, “Well, what’s new?” Certainly, some of the concepts like the rise of niche markets, the end of mass culture and the wonder of the Internet for connecting people are well trodden ground. Most of the criticism of the book is based on what Anderson calls “or” thinking rather than “and” thinking. Admittedly, the book is focused on the niche market, and one of its main postulates is that demand for many offerings will go “down the Tail.” However, it doesn’t presage the end of the blockbuster—it does herald the end of the exclusive focus on the blockbuster—what we’ve had in the mass culture up to now. There is no reason to not have blockbusters because it’s fun to share points in common with other people. There is a new facility to connect with other people to share and create highly unique interests. Thanks to Web 2.0, it’s easier than ever to engage and collaborate, so people will do both. The captains of the mass don’t like to share the influence, but consumers don’t need their blessing to move on.

What’s new in 2006 is what we at GHCJ call “consumer empowerment” at the hand of Web 2.0, and Anderson addresses this, er, head on. If you want to get a clear insight about how Web 2.0 and social networking will impact your business, you’ll find it here. Also realize that, although the lion’s share of the book’s examples are culled from the entertainment business, they are very applicable to all other “industries”—with a twist. Even if you’re deeply ensconced in a bits-laden business with a global supply chain, amateur consumers will create content about your business—not products to compete with your business as in digital video, music and the written word. And, by the way, only the most passionate and committed people will bother to create content. Are they not the people that hold the most promise for enhancing your offerings through innovation?

Chapter One: The Long Tail

Key concepts involves in how technology is transforming mass markets into innumerable niches:

• The changing role of locality in buying habits: when customers anywhere can buy anything, how does that change retail?
• Markets without end: anybody can list anything on eBay, which means that any object can find a market. Infinitely many downloads of music or video can be offered at zero marginal cost.
• The Long Tail means that demand is not bound in terms time or space.
• Due to several years of observation, the size of niche markets is beginning to be visible—and it’s huge. Up to now, supply and demand of niche products or services was largely invisible.

Also, Chapter One introduces the Long Tail graphic, which is a demand curve. The red part is the “Short Head” of the curve, while the yellow is the “Long Tail.” The high volume “hits” live in the Short Head. It’s the mass market that most businesses have been trying to dominate since the Industrial Revolution began giving us manufactured, cheap products. But look at the Long Tail; it has been invisible because the demand has been widely dispersed and difficult to tap. That is what technology and new social habits are changing. As the Long Tail becomes accessible (economically viable to serve), the Long Tail rivals the Short Head in size.

One of the most compelling ideas is this: let’s say a producer needs to sell 100,000 units of a product to recoup development and other costs, but in the retail model, variable costs add up when the product is distributed and it’s not selling. It has to sell within a year (“be a hit”) to be viable. In the non-retail world, producers can be profitable selling the 100,000 units over five or ten years. It requires a rethinking of how to “market.”

Chapter Two: The Rise and Fall of the Hit

Here, Anderson delves into how the limitations of distribution have led to a “hit” culture. For example, the “tyranny of geography,” including the location of stores and limited shelf space, often prevents retailers from offering niche products: most stores draw customers from a limited radius, and it is costly for them to carry products, so these economics trend toward offering (relatively) few high volume items. Whether movies, songs, clothes, or cars, companies have always strived to launch “the next big thing.” Radio has limited airwaves. It’s ingrained into producers’ and consumers’ minds and is an assumption that is seriously flawed in the Long Tail era.

Brief history of the development of hit culture, using print, photography, film, music and broadcast (radio, television) examples. Outlines their peaks and (current) waning influences. A key concept is the immense cost and risk of introducing (and distributing) new products. Due to this, “professionals” are in charge of making decisions about what products to launch, and there is a huge cultural distinction between “professionals” and “amateurs.” A book published by a major house has more cred than a self-published book.

A critical legacy assumption that is just plain wrong: if something isn’t popular, it must not be any good. The Long Tail will show repeatedly that the Web has the ability to aggregate demand across time and space, and that demand will change the shape of the economy.

Chapter Three: A Short History of the Long Tail

Up to now, “The Internet” has been the focus, but here Anderson pops the bonnet (hood) and discusses the supply chain and distribution revolution that’s been unfolding for decades (he starts with Sears). Also grocery stores, toll-free phone service and its roll in catalog sales and, of course, the Web.

Chapter Four: The Three Forces of the Long Tail

The first is democratizing the tools of production, namely through the personal computer and Internet-accessing devices. Namely, consumers are becoming producers of all kinds of content: blogs, music, video, pictures and films. The amount of content available is growing with alacrity and shows no signs of slowing. In the Knowledge Economy, this means that there are more products available, which lengthens the Tail.

The second force is democratizing distribution, which reduces the cost of consumption, largely through the Web. It acts to “fatten” the Tail because consumption increases, which moves the entire demand curve higher.

The third force is “connecting supply and demand”, and it is the most controversial in some ways because it serves to shift demand from the Head to the Tail. This force is comprised of “filters” which take the form of customer reviews, word of mouth (now digital), blogs and recommendations. These lower search costs and reduce consumers’ risk of going outside the tried and true. It enables people with very specific interests to find each other and exchange ideas.

Chapter Five: The New Producers

Anderson addresses a profound shift in culture and the economy, and this chapter is worth the price of the book alone. The chapter gives several examples of collaboration between professionals and amateurs, and a key point is that the sharply defined boundary between them is blurring rapidly. This is happening everywhere: blogs rival major media. YouTube videos have larger audiences than movies or TV shows. But it begins with a fascinating story of how professional and amateur astronomers collaborated to identify and witness the first supernova to be seen by the naked eye since 1604. He introduces the term”Pro-Am” to describe the collaboration.

Another example is “The Wikipedia Phenomenon” which serves to show how a web of collaboration self-organizes to produce incredible quality, although the nature of the quality produced by this collaboration is quite different from products created by teams of experts. Encyclopedia Britannica, for example, employs highly qualified contributors, and quality is highly controlled. The result is that any article one finds there will have a high probability of being correct within recognized parameters. In Wikipedia, however, quality varies wiiiidely. Some is patently untrue. He points out, though, that Britannica’s quality comes at an tremendous cost: slow response and the inability to provide knowledge that people want. For example, Britannica provides 80,000 articles, Encarta 4,500 and Wikipedia (English) 1,000,000. Many of Wikipedia’s articles are not available anywhere else. In addition, the average length of a Britannica article is 678 words, while over 200,000 Wikipedia articles are longer than that.

For all the insight the comparison provides, Anderson points out that Wikipedia is a different animal from Britannica. Probability is the key to understanding their difference, and it is difficult for most of us to fathom. In this sense, it has much in common with markets and how they discover prices and other things:

“To put it another way, the quality range in Britannica goes from 5 to 9 with an average of 7. Wikipedia goes from 0 to 10 with an average of 5. But given that Wikipedia has ten times as many entries as Britannica, your chances of finding a reasonable entry on the topic you’re looking for are actually higher on Wikipedia.” (pp. 70-71)

This is profound because Anderson is offering an argument for us to dismantle our pre-conceived notions about “amateur”-produced content of all kinds. The same argument holds true for blogs, videos on YouTube and music. This will also explain for non-developers (of software) the buzz behind open source development. Wikipedia is an open source encyclopedia.

Another key concept is “The Reputation Economy” which explains why people spend the time to collaborate. In the Head, people are making decisions to maximize profit and minimize risk. In the Tail, production and distribution costs are low and business motives are secondary. The primary motivator is reputation. He gives examples about self-publishing and blogging as well as the Lonely Island case study.

Chapter Six: The New Markets

This chapter traces the development of Long Tail “aggregators,” and it uses Alibris, Amazon.com, Netflix and iTunes as examples. Anderson specifies five types: physical goods (Amazon, eBay), digital goods (iTunes), advertising/services (Google, Craigslist), information (Google, Wikipedia) and communities (MySpace, Bloglines). The main point is that pure digital businesses can go further down the Tail because their cost of “carrying” inventory is virtually zero. With physical goods, even if the aggregator warehouses them in North Dakota, the cost is something, and it can’t afford to hold onto the product forever.

Chapter Seven: The New Tastemakers

Here, Anderson addresses “filters,” which are critical to the Long Tail’s viability. He includes some fascinating case studies in the music industry that contrast old and new thinking about how to bring music to market. Filters are everything from Friends on MySpace to playlists on iTunes. Yahoo! LAUNCHcast is also featured for its collaborative filtering technology.

Due to this information, the economy is shifting from “pre-filters” to “post-filters.” When information about customer desires was limited, companies paid experts to run regression analyses and focus groups to try to determine what would sell. Introducing new products was risky and expensive. These are pre-filters. Other examples are editors, music executives and film producers. However, based on these new capabilities, post-filters like reviews, producers can get real information before the product is widely launched and distributed. They also have the ability to reach niche audiences.

A key concept is that the Long Tail has a wide range of quality, similar to the Wikipedia example in Chapter Five, and the Short Head has a narrow range. The other thing is that one person’s junk is another person’s gold mine. Up to now, producers have not had any economic interest in paying attention to the variety of interests out there, but this is beginning to change.

Chapter Eight: Long Tail Economics

Although this chapter addresses economics, it is very readable and easy to understand. The graphic also represents a Pareto/Zipf distribution, commonly known as powerlaws or “the 80/20 rule.” Roughly translated, it holds that “20% of the products account for 80% of revenue.” The Short Head is that 20%, and the Long Tail is the rest. Anderson explains how the limitations of retail and distribution have always distorted markets and how new businesses are emerging to take advantage of the gap in thinking.

A key insight here is that markets are fractal. In other words, each market is comprised of millions of other markets, each with its Short Head and Long Tail (powerlaw). For example, as of writing, the “top albums” on iTunes were by Queen, Daughtry, John Mayer, Switchfoot, James Brown, The Fray, Dreamgirls (various), Nas, My Chemical Romance and Justin Timberlake. Within that market (but not represented in the top ten) is top jazz albums by Miles Davis, Medeski Scofield Martin & Wood, Billie Holiday, Madeleine Peyroux, John Coltrane, Dave Brubeck, Wynton Marsalis, George Benson and Kenny G. Jazz albums could be similarly split into “classic,” bebop or acid.

Filters are critical to making these markets addressable. For example, if “acid jazz” is beyond your usual repertory, here’s a rundown. Blogs and recommendations exist on virtually every topic, and a quick perusal of the topic at hand quickly educates people who are interested enough to type the search phrase (and the probability is high that you will get excellent information by an informal survey.

By the way, Google itself is the Long Tail of search terms because it ranks results by the number of references to each competing reference. Filters tend to do two things: they create winner-take-all situations because the most popular references quickly establish themselves by repeated mention; however, they also splinter markets into microfragments by identifying ever more specific niches.

The chapter closes with an insight about how economics in general carries extensive legacy baggage from the Industrial Economy in that many of its principles assume scarcity rather than abundance. Scarcity of shelf space, radio spectrum and raw materials. He references George Gilder who reminds us that in every major economic shift, a resource that used to be limited became virtually free and therefore was able to be wasted in vast quantities. During the Industrial Economy, that was physical force: machines accomplished in minutes what took hours, days or years of human and animal power before. Today, information is free for the first time in our existence, and the entire economy is being reorganized around that fact. But we still have scarcity; mostly of attention.

Chapter Nine: The Short Head

This chapter delves into more detail about the levers working within the Short Head because the Long Tail does not predict the end of hits, only the increased importance of niches.

A key point is that physical products, since they exist in time and space, force producers to impose categories on them (it’s impossible to shelf spaghetti sauce under the imported aisle and the tomato aisle). Online, as metainformation becomes more sophisticated, categories can emerge based on references (Google is an example). It’s another instance of post-filters instead of pre-filters.

Chapter Ten: The Paradise of Choice

The Long Tail makes everything available, so it increases choice beyond anything we’ve ever seen. Anderson references some studies that show that “too much” choice is stressful and counterproductive, but he suggests that they are flawed. People want more choice and will pay for it. However, choice without information about the alternatives is stressful. Since information is becoming free, it will increase choice and satisfaction.

Chapter Eleven: Niche Culture

The gem of this chapter is that we are shifting from an “or” culture to an “and” culture. Physical, bits-oriented products force retailers to choose between this product or that product. In the bytes world, everything is available.

The mass culture isn’t going away, but it will share our attention with the niche markets and interests that are emerging. Markets cannot be said to exist unless there is exchange of information, which is precisely what’s new in the Web 2.0 era. People have always had a mix of niche interests, but they couldn’t act on them very easily. Now anyone can connect with people all over the world on any topic; if it’s not being blogged about, start one, and people will come to you.

Another point is that we are moving from a mass culture to a massively parallel culture in which people develop highly specific interests even as they share some common (“mass”) interests.

Chapter Twelve: The Infinite Screen

A quick look at the future of video after television. In a word, it will be shorter and have more variety. It will shift from push to pull. He gives some interesting facts about the rights conundrum and how it hobbles television executives. Television produces more content than any other entertainment industry, but most of it is not available for purchase or download due to rights, which represents a massive economic cost to the industry.

Chapter Thirteen: Beyond Entertainment

Chapter thirteen features case studies of eBay, KitchenAid, Lego, Salesforce.com and Google. Highlights:

• Lego in particular has invited customers into their company, and customers are designing products (kits) and even helping the company with efficient customization.
• Salesforce.com is creating a market in which customers and independent developers are extending the platform. Web services make this feasible. Therefore, Salesforce can address the Head (enterprise software, risk adverse clients) and the Tail (niche software for highly specific needs). And both are viable.
• Google has transformed online advertising and made it available to an unprecedented audience (small business as well as Wal-mart). Its technology makes it possible for anyone to advertise, and pay for clicks.

Chapter Fourteen: Long Tail Rules

This is a prescriptive chapter for thriving in the Long Tail environment, and I hope you’ll buy the book to see for yourself. As an hors d’oeuvre, here are the rules:

• Move inventory way in… or way out
• Let customers do the work
• One distribution method doesn’t fit all
• One product doesn’t fit all
• One price doesn’t fit all
• Share information
• Thank “and,” not “or”
• Trust the market to do your job
• Understand the power of free

Analysis and Conclusions

• The Long Tail is an immensely valuable book because it explains economic transformation in an understandable way. The splintering of markets is affecting every commercial and government organization, whether or not they feel it yet. Anderson explains the drivers of change and how you can start thinking differently about approaching customers—about who they are now and who they should be. Buy it at Amazon, or check out the blog.
• Without mentioning Web 2.0 by name, the book describes the phenomenon and its importance. The computing revolution and the Internet made information abundant and free, but information by itself is of limited usefulness. Web 2.0 is making knowledge free. People are creating knowledge for fun. This is a profound change.
• In the Long Tail, Knowledge Economy, “expert” and “amateur” roles lose their sharp definitions. Experts are paid, and amateurs collaborate because they love what they are doing. Therefore, amateurs have build-in credibility, although of a different sort than experts. Most important, they are wonderfully complementary. Smart executives will ask themselves, “How can we engage passionate amateurs to discover ways to innovate and improve customer experience?”
• The context of “consumer” and “producer” roles is changing because consumers are also producers in two ways: they create knowledge products like songs, films and books, many of which have a following among their tribes and possibly far outside. Secondly, they create knowledge about products. In the Knowledge Economy, information about an underlying good creates most of the good’s differentiated value. For more on this, see The Knowledge Economy: The Ultimate Context for Understanding the Future.
• The coming explosion of free knowledge will put the onus of deciding the truth on the reader/viewer/participant. Analytical ability will be of paramount importance.
• People have always had a collection of interests, but The Long Tail shows the implications when people can gather “at the head of a pin” to share, develop and extend highly unique interests. They develop markets by creating knowledge and community. Many of these markets are economically addressable when you reexamine your assumptions about business.
• Although Anderson doesn’t specify it as such, “Production” in Chapter Four also refers to what I call knowledge—information about physical goods. Therefore, it isn’t only important that people can create text, music and video; they can also create context-specific knowledge about physical goods, thereby making those goods a part of the on-line world and market. Potentially, everything can be marketed; someone somewhere will want it. eBay reflects the democratization of production.
• Astute producers will understand that they can collaborate with customers to create sustainable innovation because customers will be in the middle of creating and managing producers’ offerings. There will be little guesswork about what customers want. The main barrier to producers will be legacy thinking and inflexible back-house business processes.
• Furthermore, in most “industries,” the degree to which customers can collaborate and share ownership of offerings with producers will increasingly become the customer experience and source of differentiation. Customers will want to give their energy, knowledge and support to help create and manage offerings. They will want to participate. Brands that enable them to do that will have high margins; everything else will commoditize with alacrity. Most markets will bifurcate.
• On the personal level, it will be interesting how the massively parallel Long Tail world will affect how people live and define themselves. For many, “preferences” and interests will be shared among a wide spectrum of people, many of whom do not know each other. Physical proximity will diminish in importance to some extent.
• Another twist is of The Long Tail is its applicability to emerging markets, although that’s not addressed by the book. Within the context of mature (rich) markets, addressable microsegments of emerging markets look like niches. Astute companies will learn how to engage niches of all kinds, and they can apply niche strategy to emerging markets as well.
• Due to increasing collaboration from “consumers,” markets are becoming “self-organizing”, and market movement and development moves at an unprecedented pace. Producers have an exceptional opportunity to retool how they bring new offerings to market and manage offerings’ life cycles. They can collaborate with “post filters” to mitigate their risks and try more daring ideas. Markets are becoming more explicit because they are increasingly defined by digital communication. As such, they are discoverable and approachable.

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