Business Leaders: Chris Anderson
As technology continues to revolutionise business, we look at the theory behind the pioneering tech journalist and niche market advocate
Name: Chris Anderson
Expertise: Technology journalism and commentary on the evolution of our digital world
Known for: Editorship of Wired magazine; advocating that companies should focus on niche markets
Best-known titles: The Long Tail: Why the Future of Business is Selling Less of More (2006); Free: The Future of a Radical Price (2009)
Who is Chris Anderson?
Chris Anderson started his professional career as a research physicist, before moving into science journalism with Nature and Science. He then worked for The Economist in a number of positions including technology editor and US business editor before taking over the editorship of Wired in 2001.
His books have both been bestsellers. His interests include music and robotics.
What is Anderson known for?
The phrase ‘the long tail’ derived from an article by Clay Shirky. Essays by Anderson published in Wired culminated in The Long Tail book in 2006. The long tail concept showed that the traditional blockbuster/bestseller/hits model would become less ubiquitous as the price of manufacture, distribution, storage of products was combined with increasingly powerful intermediaries and opinion-formers. The argument explained the growth of businesses such as Amazon, Netflix and countless specialist niche businesses (often small or privately owned) in the internet age. This was in a world where everyone was still making it up as they went along – no one knew what the next big thing in the internet would be or why. More importantly, there was a struggle to understand how big players and small players were to make money from the new technology.
In a world where rapidly changing technologies make the world more connected and interconnected, The Long Tail was the first book to explain exactly how the ability to reach niche markets would create big opportunities.
In a nutshell, The Long Tail examines how the economy (and culture) is increasingly shifting away from the bestsellers, so from a relatively small numbers of ‘hits’, at the head of a demand curve and towards a huge number of niches in the tail.
The Long Tail is about the consequences of how western economies and cultures in particular are shifting from mass markets to millions of niches. It records the effect of the technologies that have made it easier for consumers to find and buy niche products. This is all thanks to the ‘infinite shelf space effect’ and the new distribution mechanisms (from digital downloading to peer-to-peer markets) that break through the traditional bottlenecks of broadcast and bricks-and-mortar retail.
As the cost of production and distribution crashes, especially in the online world, there is now less need to treat consumers as one homogenous group. Without the old constraints of limited shelf space and without the old bottlenecks of distribution, narrowly targeted goods and services can thrive and be as attractive as, or even more attractive than, the mainstream hits.
Traditional retail economies can only stock a limited number of products on expensive and limited shelf space; they stock the likely hits and bestsellers to maximize stock turnaround and sales. Online retailers, on the other hand, can stock just about everything and the number of niche offerings available can outnumber the mainstream hits. In the past, these millions of niches of the long tail had largely been neglected in favor of the small number of bigger hits.
The theory in summary
- The true shape of demand has been disguised by the limited short tail of hits that retailers were prepared to promote. However, when consumers have infinite choice the true shape of the demand curve is revealed; it turns out to be less hit-centric than previously believed. People will gravitate towards niches because they better satisfy their narrow interests.
- The cost of reaching niches is falling dramatically thanks to a combination of forces including digital distribution, search technologies and broadband penetration. So, it is nowpossible to offer a far greater range of products.
- Simply offering a greater variety does not shift demand. Consumers must be able to find the niche that suits them. Tools such as recommendations and rankings, referred to as ‘filters’, can drive demand down the tail.
- Once there is massively expanded variety (and filters are in place) then the demand curve flattens – the hits are still there but they become relatively less popular (as the niches become relatively more popular).
- All the niches add up – and collectively they can compete with the hits.
- At this point the natural shape of the undistorted demand curve is revealed – undistorted by bottlenecks, scarcity of information and limited shelf space. A far less hit-driven demand reveals itself.
In virtually all markets there are far more niche products than hits, and the ratio is growing exponentially as the tools of production become cheaper and more readily available. Anderson describes the three forces of the long tail as ‘make it, get it out there, and help me find it’.
- Make it. Democratising the costs of production: toolmakers and producers (e.g. digital video, desktop music, video editing, blogging tools) become mostly free or virtually free.
- Get it out there. Democratising the costs of distribution: aggregators emerge (e.g. Amazon, eBay, iTunes, Trip Advisor).
- Help me find it. Connecting supply and demand: filters (e.g. Google, blogs, recommendations and bestseller lists).
Anderson looked at retailers in movies, music and books and asked the following.
- What is the size of the long tail (defined as inventory not available offline)?
- How does the availability of so many niche products change the shape of demand? Does it shift away from the hits?
- What tools and techniques drive the shift and what are the most effective?
How real companies use Anderson’s concepts
Anderson cites earlier research by Brynjolfsson, Hu and Smith that showed that a significant portion of Amazon.com’s sales came from obscure books that are not available in bricks-and-mortar shops.
Hits tend to have relatively low profit margins because of the high set-up costs and their high failure rate. Hits tend to be sold at discounts because of the competitive nature of retailers chasing the consumer dollar. Niches, on the other hand, can be sold at full price – partially because of their scarcity. As an example, retailers might sell the latest Harry Potter book as a loss leader but sell other less-known books at full price. It is conceivable that they make more from low unit sales of a relatively unknown author (at a high profit per unit) than from the big hit sold at a loss.
Long tail aggregators (Netflix, Amazon, iTunes) often dominate their category. Of course the long tail isn’t just found in media and entertainment. Think about eBay (the long tail of physical goods) or Google (the long tail of advertising), Grameen Bank (the long tail of banking).
The book is as relevant today as when it was written. It should be noted that the long tail concept is often misunderstood (like the 80/20 rule) and hence quoted out of context. Many new entrepreneurial businesses are now emerging and taking advantage of the collapse of production, storage and distribution costs alongside the increasing power of aggregators and filters.
Anderson identified this new world and gave it a name. Small businesses can take advantage of it and larger businesses have to adjust their strategies to recognise that the old models are no longer as effective as they once were. It will never be 1998 again!
Business Gurus, edited by Ian Wallis and published by Crimson Publishing, is available to order now.