A new working paper from Wharton Operations and Information Management professor Sergei Netessine and doctoral student Tom F. Tan challenges Chris Anderson’s popular theory of the Long Tail:
“Using data on movie-rating patterns, new Wharton research challenges current thinking on the Long Tail effect — a widely publicized theory that suggests the Internet drives demand away from hit products with mass appeal, and directs that demand to more obscure niche offerings,” says Knowledge@Wharton.
In brief, Anderson’s theory that Internet distribution and increasingly sophisticated recommendation engines enable consumers to find obscure, niche offerings and thus demand spreads and product/content producers can rely less on swinging for the fences with big hit offerings. Smaller demand for a greater range of offerings makes up the revenue that would have come from big hits.
The Wharton paper finds that the Long Tail works in some instances but not all — particularly when Internet channels are the sole method of distribution. Netflix, whose data was used for the research, still has to mail DVDs, Amazon has to warehouse and mail books. In other words, variety has costs.
“For example, take a company with 1,000 different items in which the top 100 — or 10% — account for 50% of sales. If 99,000 more items are added to the catalog and sales of the top 100 fall to 25% of the total, it may take another 900 items to make up the next 25%. In this case, Anderson would argue that sizable demand has shifted down the tail toward more people selecting fewer products. In relative terms, however, 1% of the products now constitute 50% of the revenues, which would make it appear that there was a greater importance of the hit products.”
And, the authors note, the number of products available has skyrocketed in recent years thus making it more difficult for consumers to find the obscure ones. In fact, the 80/20 rule has become the 90/10 rule when it comes to movies:
“Using Netflix data, Netessine and Tan show…demand for the top 20% of movies increasing from 86% in 2000 to 90% in 2005.”
Missing, it seems to me, is the cost of producing the original content. As the research was based on analysis of Netflix data, let’s talk about movies. A major motion picture costs millions of dollars to produce. The cast, crew, director, writers, and all of the rest of the parties who get the film “into the can” won’t wait to be paid until the Long Tail gets suitably thick. They get paid upfront and those costs, and in theory initial profit, are covered by relatively fast returns through traditional channels such as ticket sales at movie theaters, the rights to sell DVDs, foreign theater distribution rights, etc. The Long Tail thus can only kick in after someone has made money on a hit or written off the loss.
Also not included, at least from what I’ve seen, are the merchandising fees that retailers (on-line and off-line) charge product companies for preferred placement on shelves or Web pages.
Anderson was given copies of the paper while it was in development and disputes its finding. He stands by the Long Tail and dismisses these findings as mere academic analysis that focuses on relative rather than absolute demand. He offered an alternative analysis that showed greater demand at the middle of the tail and significant revenue from the long end — the point beyond which traditional retailers stock inventory.
What do you think? What have been your experience with Long Tail strategies?
