Innovation
Global Investor Focus, 02/2007 Credit Suisse
Global Investor Focus, 02/2007
Credit Suisse
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GLOBAL INVESTOR FOCUS <strong>Innovation</strong> — 16<br />
theories are based on the notion that<br />
if you break the economic and physical<br />
bottlenecks of distribution, you can reach<br />
a huge, previously neglected market.<br />
They both recognize that millions of small<br />
sales can, in aggregate, add up to big<br />
profits. And they’re both focused on ways<br />
to lower the cost of providing goods<br />
and services so that you can offer them at<br />
lower price point while still maintaining<br />
margins. But the Bottom of the Pyramid is<br />
focused on taking a single product or<br />
service and finding ways to make it cheap<br />
enough to offer to a larger, poorer market.<br />
This is why I think it’s essentially about<br />
commodification. By contrast, the millions<br />
who find themselves in the tail are<br />
no poorer than those in the head. Indeed,<br />
they are often drawn down the tail by their<br />
refined tastes, in pursuit of qualities<br />
that are not delivered by one-size-fits-all.<br />
So the Long Tail is made up of millions of<br />
niches. The Bottom of the Pyramid<br />
is made up of mass markets made even<br />
greater. Both lower costs to reach more<br />
people, but they do so in different ways.<br />
To what extent is digitization geographically<br />
long-tailing innovation, spreading<br />
the value chain from developed economic<br />
bastions into less developed markets?<br />
Chris Anderson: On my blog I have<br />
been debating with Richard Florida,<br />
who wrote a book titled “The Rise of the<br />
Creative Class.” His idea is that there<br />
are spiky concentrations of innovation and<br />
creativity in places like Silicon Valley<br />
and elsewhere, and that creativity tends<br />
to be geographically concentrated. Which<br />
is true, but we must be careful not<br />
to miss the innovation and creativity that<br />
happens in non-spiky places, outside<br />
Silicon Valley and New York City. I largely<br />
look at the Internet as a way to tap the<br />
long-tail talent of all those smart, creative,<br />
innovative people who do not happen<br />
to live in New York or Silicon Valley. The<br />
winners of the Google programming<br />
contest, when you map them out, tend<br />
to come from all over the place, from<br />
Madagascar and Slovakia … rarely the<br />
kind of places one would expect.<br />
Looking at innovation from a different<br />
angle, that of its impact on modern<br />
business structures, are mass-market<br />
models at serious risk of being crowded<br />
out of developed markets by long-tail<br />
effects?<br />
Average number of downloads per month from Rhapsody<br />
7,000<br />
5,000<br />
3,000<br />
1,000<br />
Songs obtainable from Wal-Mart and Rhapsody<br />
Songs only obtainable from Rhapsody<br />
Bye-bye blockbuster: Hello “nicheification”<br />
In his bestseller “The Long Tail: Why the Future of Business is Selling Less of<br />
More,” Chris Anderson describes how niche products are outperforming mass<br />
market-oriented blockbusters, in terms of overall revenues, thanks to Internetbased<br />
sales channels such as Amazon and US music provider Rhapsody. The<br />
illustration below shows how “long-tail” products that used to find a buyer<br />
perhaps only once a year are now generating more sales, given the ease of<br />
access to any number of products in the virtual realm without the need for<br />
expensive storage space.<br />
Here are the rules of the long tail: 1. Move inventory in … or way out. 2. Let<br />
customers do the work. 3. One distribution method doesn’t fit all. 4. One<br />
product doesn’t fit all. 5. One price doesn’t fit all. 6. Share information. 7. Think<br />
“and,” not “or.” 8. Trust the market to do your job. 9. Understand the power<br />
of free.<br />
Source: Erik Brynjolfsson, Jeffry Hu, Michael Smith<br />
1 100,000 200,000 300,000 400,000 500,000<br />
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