figures and profits. Whereas the 6 1 hardcover titles Grand Central put on its 2006 front list, on average, incurred costs of
$650,000 and earned gross profits of just under $100,000, a
wide range of numbers contributed to those averages. Grand
Central’s most heavily marketed title incurred costs of $7 million and achieved net sales of just under $12 million, for a gross
profit of nearly $5 million – 50 times the average.
Grand Central is pursuing what is known as a blockbuster
strategy – a time-honored approach, particularly in the media
and entertainment sector. With limited space on store shelves
and in traditional distribution channels, and with retailers and
distributors seeking to maximize their returns, producers have
tended to focus their marketing resources on a small number of likely best sellers. Although such an approach involves
substantial risk, they expect that the occasional hit’s huge payoff will cover the losses of many misses, and that a few big
sellers will bring in the lion’s share of revenues and profits. In
2006 just 20% of Grand Central’s titles accounted for roughly
80% of its sales and an even larger share of its profits.
Much has changed in commerce, however, in the decades
since the blockbuster strategy first took hold. Today we live in
The Long-Tail Theory in Short
a world of ubiquitous information and communication technology, where retailers have virtually infinite shelf space and
consumers can search through innumerable options. When
books, movies, and music are digitized and therefore cheap
to replicate, the question arises: Is a blockbuster strategy still
effective?
One school of thought says yes. Well represented by the
economists Robert Frank and Philip Cook, in their 1995 book
The Winner-Take-All Society, that school argues that broad, fast
communication and easy replication create dynamics whereby
popular products become disproportionately profitable for
suppliers, and customers become even likelier to converge
in their tastes and buying habits. The authors offer three reasons for their view: First and foremost, lesser talent is a poor
substitute for greater talent. Why, for example, would people
listen to the world’s second-best recording of Carmen when
the best is readily available? Thus even a tiny advantage over
competitors can be rewarded by an avalanche of market share.
Second, people are inherently social, and therefore find value
in listening to the same music and watching the same movies
that others do. Third, when the marginal cost of reproducing
and distributing products is low – as it certainly is with goods
that can be digitized – the cost advantage of a brisk seller is
In The Long Tail: Why the Future of Business Is Selling Less of More (2006), Chris
Anderson puts forth two distinct but
related ideas. The first is that merchandise
assortments are growing because when
goods don’t have to be displayed on store
shelves, physical and cost constraints on
selection disappear. Search and recommendation tools can keep a selection’s
vastness from overwhelming customers.
In the diagram at right, all possible offerings in an imagined product sector are
ranked by their sales volume, with the gray
part representing products that are unprofitable through brick-and-mortar channels.
The long tail, in other words, reveals a
previously untapped demand.
For goods like music, video, and information, which can be digitized, distribution
costs approach zero, so the tail can be
extremely long. Apple’s i Tunes Store lists
millions of albums and songs; Amazon offers more than 250,000 albums, whereas
even the largest off-line music stores typically stock only about 15,000.
The goods in the long tail include former
hits as well as true niche content. Most
of the latter was never released through
traditional distribution channels or consists
of orphans of unbundling activity (as with
individual tracks in the music industry).
Anderson’s second idea is that online
channels actually change the shape of the
demand curve, because consumers value
niche products geared to their particular
interests more than they value products
designed for mass appeal. As internet
retailing enables them to find more of
the former, their purchasing will change
accordingly. In other words, the tail will
steadily grow not only longer, as more
obscure products are made available,
but also fatter, as consumers discover
products better suited to their tastes.
Anderson believes that obscure
products will erode the immense share
traditionally enjoyed by a relatively small
number of hits. He predicts that “fickle
customers” will “scatter to the winds as
markets fragment into countless niches.”
A lot of small sales put together, however, can add up to something big. In fact,
Anderson boldly forecasts that the many
small markets in goods that don’t individually sell well enough for traditional retail and
broadcast distribution will together exceed
the size of the existing market in goods
that do cross that economic bar. In other
words, the shaded area under the curve
will become bigger than the white area
over time.
SALES
Theory: Online Channels Will Fatten the Long Tail
Standard
demand curve
Hits
Growing sales
and profits
Niche
products
