Innovation

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GLOBAL INVESTOR FOCUS <strong>Innovation</strong> — 16 theories are based on the notion that if you break the economic and physical bottlenecks of distribution, you can reach a huge, previously neglected market. They both recognize that millions of small sales can, in aggregate, add up to big profits. And they’re both focused on ways to lower the cost of providing goods and services so that you can offer them at lower price point while still maintaining margins. But the Bottom of the Pyramid is focused on taking a single product or service and finding ways to make it cheap enough to offer to a larger, poorer market. This is why I think it’s essentially about commodification. By contrast, the millions who find themselves in the tail are no poorer than those in the head. Indeed, they are often drawn down the tail by their refined tastes, in pursuit of qualities that are not delivered by one-size-fits-all. So the Long Tail is made up of millions of niches. The Bottom of the Pyramid is made up of mass markets made even greater. Both lower costs to reach more people, but they do so in different ways. To what extent is digitization geographically long-tailing innovation, spreading the value chain from developed economic bastions into less developed markets? Chris Anderson: On my blog I have been debating with Richard Florida, who wrote a book titled “The Rise of the Creative Class.” His idea is that there are spiky concentrations of innovation and creativity in places like Silicon Valley and elsewhere, and that creativity tends to be geographically concentrated. Which is true, but we must be careful not to miss the innovation and creativity that happens in non-spiky places, outside Silicon Valley and New York City. I largely look at the Internet as a way to tap the long-tail talent of all those smart, creative, innovative people who do not happen to live in New York or Silicon Valley. The winners of the Google programming contest, when you map them out, tend to come from all over the place, from Madagascar and Slovakia … rarely the kind of places one would expect. Looking at innovation from a different angle, that of its impact on modern business structures, are mass-market models at serious risk of being crowded out of developed markets by long-tail effects? Average number of downloads per month from Rhapsody 7,000 5,000 3,000 1,000 Songs obtainable from Wal-Mart and Rhapsody Songs only obtainable from Rhapsody Bye-bye blockbuster: Hello “nicheification” In his bestseller “The Long Tail: Why the Future of Business is Selling Less of More,” Chris Anderson describes how niche products are outperforming mass market-oriented blockbusters, in terms of overall revenues, thanks to Internetbased sales channels such as Amazon and US music provider Rhapsody. The illustration below shows how “long-tail” products that used to find a buyer perhaps only once a year are now generating more sales, given the ease of access to any number of products in the virtual realm without the need for expensive storage space. Here are the rules of the long tail: 1. Move inventory in … or way out. 2. Let customers do the work. 3. One distribution method doesn’t fit all. 4. One product doesn’t fit all. 5. One price doesn’t fit all. 6. Share information. 7. Think “and,” not “or.” 8. Trust the market to do your job. 9. Understand the power of free. Source: Erik Brynjolfsson, Jeffry Hu, Michael Smith 1 100,000 200,000 300,000 400,000 500,000 Titles ranked in order of popularity
GLOBAL INVESTOR FOCUS <strong>Innovation</strong> — 17 Chris Anderson: Absolutely. It is important to remember that though this is not the end of the “hit,” neither is it the end of the mass market. It is the end of the monopoly of the hit. Traditional retailers now have to compete with long-tail marketplaces that offer a near-infinite number of products for a near-infinite number of tastes. Music is the classic example. We will see a very small number of dedicated music stores going forward, while we have already seen Tower Records disappear. The question is: “what can a Wal-Mart do to take advantage of minority tastes and niche products?” There are many possibilities, but the main answer is: “not much.” Inadequate answers include things like using WalMart.com for the long tail (niche markets) and Wal-Mart the store for the short head (mass markets). Another is the attempt to bridge the long tail and the head with in-store kiosks so that the consumer can, for example, see product varieties on the flat screen at the end of the aisle. Those things are all a step in the direction of bringing the long tail into the shopping mall, but they will not transform the retail experience. They are really marginal steps in this direction. Is there a “light” versus “heavy” issue in digital economics? Chris Anderson: Pure long-tail markets are ones in which marginal costs are essentially zero, and that involves digital products. Then there are hybrid markets in which there are physical products but a digital catalogue – that would include the Amazons and eBays – in which the economics of the atom are not radically different from the paper catalogue era. But the search, discovery and opinionshaping are transformed by Internet economics, where there is a digital catalogue of physical goods. Sometimes, those physical goods are not housed in any one place. eBay has no warehouses. It has distributive inventory, which tends to, at least from eBay’s perspective, superimpose the economics of bits on to the world of atoms. “We will see a very small number of dedicated music stores going forward. We have already seen Tower Records disappear.” So digital technologies bring efficiencies that generate higher systemic productivity and lower prices. Chris Anderson: Exactly. Digital catalogues bring information efficiencies – “findability,” recommendations, opinionshaping and customer support – which encourage people to march down the tail in search of unique products. Most investors would regard the week of 20 March 2000 as the one in which equity markets reached all-time highs. The S&P 500 declined 37% in the next 18 months, and the Nasdaq 100 dropped 75%. But something else happened that you believe could be just as important, but that most investors missed. Chris Anderson: The poster child of long-tail marketing is the music industry. On 21 March 2000, the band *NSYNC released their second album, “No Strings Attached,” which set a record as the best-selling album of all time, one million copies sold the first day, 2.41 million in the first week. That was the high-water mark of music’s blockbuster era. No album has sold as well since. No album ever will sell as well. The number of gold, silver and platinum albums has fallen by more than 60% since then, even though music industry sales have been largely flat. That week really marked the end of the blockbuster culture in music, which is the leading proxy for other blockbuster cultures. Might investors have misunderstood the secular narration of the late 1990s because they did not realize the encompassing and penetrating economic effects that digitization was beginning to have – long tail being one effect only more recently understood, thanks, in large measure, to your efforts?
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