I've been critical of Chris Anderson's long tail 'theory', which argued that "the future of business is selling less of more".
The quantitative evidence suggests that Anderson's thesis was a bit too aggressive. In most industries, from retail to music, the 'head' is still as important as it was decades ago.
Of course, this doesn't mean that there isn't a 'long tail' - inventories and catalogs of products that range from the less popular to the downright obscure.
Online businesses such as Amazon.com and Netflix have taken advantage of the miracle of ecommerce to offer items that consumer-facing brick and mortar businesses can't due to simple economics.
But is the recession going to change the economics of businesses like Amazon.com and Netflix?
The fourth quarter of 2008 was absolutely brutal to retailers in the United States and the situation doesn't look much better in the UK.
In an article earlier this week, the AP's Anne D'Innocenzio noted that retailers "are making drastic changes" as it looks increasingly likely that the economic downturn that has hit much of the world will keep consumers spending far less for far longer than many initially anticipated. Some even suggest that consumers will never spend as much as they used to now that the bubble of easy credit and cheap debt has burst.
Given that the holidays are over and there's no impetus for consumer splurging to increase anytime soon, retailers are rapidly overhauling their businesses in an effort to survive.
Almost every aspect of operations is being looked at and one of the ways that many retailers are overhauling their businesses is cutting out products that don't sell.
As D'Innocenzio observes:
That's the 'long tail', folks.
While it has to be pointed out that online businesses such as Amazon.com and Netflix don't face the same sort of pressures that brick and mortar retailers do when it comes to selection and inventory, warehousing lots of items that don't sell in volume does have a cost and as consumer spending falls off a cliff, I suspect that some pure play online retailers will be forced to make "drastic changes" too. After all, a sinking tide lowers all ships.
While this doesn't mean that you won't be able to find some obscure book on Amazon.com or a niche documentary on Netflix anytime soon, at some point maintaining extensive 'long tail' inventories might not make sense for even the most successful online retailers if the current environment does not soon improve, which I think is unlikely.
Again, the economics of online retailing are a bit different than offline retailing and many online retailers do have significantly more flexibility in many cases but there’s still far too much junk out there.
The reality is that just because ecommerce makes it possible to offer 'long tail' items, online retailers should still focus first and foremost on the items that drive the most business and offer the highest margins. As such, I think there are quite a few online retailers that would do well to consider making some common sense inventory cuts.
I for one think we can all do without Tony Little’s Gazelle. Getting rid of this would be a good start in my humble opinion. After seeing the Gazelle infomercial, who is going to disagree with me? I think even Chris Anderson would.
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4:16AM on 22nd January 2009
I don't particularly agree with your assessment, since online retailers are clearly different to traditional retailers and can take advantage of the long tail as there may not be any additional costs involved (dependant on their method of stocking products or direct delivery).
As the economic situation gets tougher, the popular products will need reduced margins to get a chance of selling in a competitive market, whereas it may not change the way that customers are looking for specific products - it's here that the online retailers have an advantage and can make a better margin, even on lower volumes. Yet selling 100 different items at a 30% margin is going to make more sense than selling 1 item x 100 at a 15% margin!
9:26AM on 22nd January 2009
It's worth noting that often the short tail is more expensive than the long tail. The latest blockbuster movie can cost more than $10 at the local theater. The new bestselling book is usually available only in hardcover. So tough economic times might actually encourage people to look down the long tail - at least to slightly older content that's available on DVD, in paperback, etc.
Chief Connoisseur at The Drama 2.0 Show
5:17PM on 22nd January 2009
Clive: I noted that the economics are different. You're correct that many online retailers are able to avoid carrying some of the costs of inventory.
But I think the point is that consumption has shifted in a major way. Abundance and choice goes well with a healthy consumer economy (even though that's an oxymoron, you get what I mean). It doesn't go so well when people are cutting back on discretionary spending and sticking to the basics.
Your example of selling 100 different items at 30% margin versus selling a single product 100 times at 15% margin is an unrealistic example. As noted in my past post on the long tail, observational data shows very clearly that the head is still much larger than the tail in everything from DVD rentals to music sales.
On Netflix, one study found that the top 10% of DVDs accounted for 48% of rentals and the top 1% for 18% of rentals. When it comes to actual video sales, Nielesen VideoScan found that "the number of titles with no sales at all in a given week quadrupled" between 2000 and 2005.
As consumption continues to decline and every part of the spectrum gets squeezed, expect more items to get pushed to this extreme end of the tail - 0 sales.
Logically, retailers that experience this type of squeeze may see diminishing returns from the long tail, and perhaps even losses as a result.
Finally, assuming that long tail items have higher margins is not valid. Some niche items have greater margins, some don't.
Phoebe: I don't agree that the long tail is inherently less expensive than the head. The most expensive books I've ever purchased, for example, were relatively obscure, niche titles from independent publishers.
Also, I think we need to take into account the concept of perceived value. If times are tough and you are spending $100/year on DVDs instead of $250/year on DVDs like in the past, for instance, do you perceive more value in purchasing one of the newest blockbuster DVDs or in purchasing an old obscure title that you probably would have purchased in the past anyway? I think for the average consumer, the answer is the former. Having the latest and greatest is still appealing, even if you have less of it.