So what exactly is the “long tail”?

The long tail is what happens when you remove the scarcity of shelf space from a marketplace. Essentially, the traditional retail model relies on “hits” as a way to maximize profits with limited shelf space. This concept can be seen in the “head”, where a few popular items sell in very high quantities. Given that traditional retailers only have a fixed amount of self-space, it makes sense that they would choose to stock the most popular and profitable items. Traditional retailers tend to ignore the long tail, because those items are not very profitable in a physical marketplace due to distribution and inventory costs. However, with the advent of digital marketplaces, the long tail suddenly becomes much more appealing. When there are not brick and mortar stores, and the associated inventory and distribution costs, selling long tail products can be very profitable. In many cases the long tail is actually more profitable than the head. Anderson uses examples from iTunes to Amazon to illustrate the possibilities of the long tail. He also shows how the long tail encourages the creation of millions of new niche markets.

In The Long Tail, Anderson spends a lot of time discussing digital marketplaces that sell atoms-based goods. While these marketplaces (ex. Amazon) have benefitted from the long-tail, they are fundamentally different from digital marketplaces that sell digital goods (ex. iTunes). In my opinion, Anderson lumps these two distinct types of marketplaces together too often throughout the book. If anything, the case of the long-tail is much more compelling for digital goods than for atoms-based goods. Digital marketplaces do eliminate many of the shelf-space restrictions of brick and mortar retailers. However, atoms-based goods still require some inventory and distribution (shipping) costs. With digital goods, the costs of storage and distribution are fundamentally deflationary. I believe the long tail is even longer with digital goods than it is with atoms-based goods. Although Anderson hints at the future of digital goods, I wish he would have spent more time talking about how the long tail applies to the digitalization of media beyond music (books, movies, news, magazines, etc.).

Anderson uses the long tail concept to illustrate how the digital economy is changing the way companies do business. Throughout the book, Anderson suggests that the long tail creates the opportunity for profit in new niche markets. While I agree that the internet has allowed for the creation of new niche markets and products, I’m not convinced there is as much money in the individual niche markets as Anderson suggests. The individuals creating the products and media may have access to customers through digital marketplaces they would not have otherwise had in a traditional retail setting, but they aren’t the ones really benefitting from the long tail. Anderson suggests that anyone and everyone can benefit from the long tail, but I would argue the long tail benefits the aggregators like iTunes, Amazon, Google, etc. much more than the individual proprietors. The economic power of the long tail becomes from the ability to aggregate goods and information.

The most provocative chapter of The Long Tail, is actually the very last one, entitled – Coda: Tomorrow’s Tail. In this chapter, Anderson discusses the technology advancements in 3D printers. Essentially 3D printers allow someone to “print” a 3D good, transforming digital bits into atoms-based goods. In this chapter, Anderson allows the reader’s mind to run wild with the possibilities of an entirely digital economy, where even atoms-based goods are created on-demand from electronic bits. I thoroughly enjoyed this last chapter, and Anderson did an excellent job of alluding to the future of the long tail without making outright predictions.

In conclusion, Anderson’s The Long Tail provides a detailed analysis of the impact of the digital marketplace on the way companies do business. Anderson uses a number of examples to show how companies are making money by selling less of more. While the book has a few shortcomings in my opinion, it does provide an excellent explanation of the long tail concept. Given that the book was written in 2006, I’m impressed that so much of the content is still relevant. The Long Tail is a must read for anyone looking to understand the emerging digital economy.

Anderson, Chris.  The Long Tail:  Why the Future of Business is Selling Less of More. New York:  Hyperion, 2006.

In Part 1 of The Wealth of Networks, Benkler outlines the shift from market production to non-market, commons-based peer production. Commons-based peer production is the creation of information through non-proprietary collaboration, where no one person owns the content. In this section, Benkler uses examples like open source software and Wikipedia to demonstrate the importance of networks in this collaborative creation method. In Part 2, Benkler illustrates how networks increase autonomy, democratization, culture, and justice. Finally in Part 3, Benkler explores how the regulatory landscape is shaping the networked information economy.

One of the most intriguing parts of The Wealth of Networks is Benkler’s observation that people are not always rational. While this many come as no surprise to most people, much of traditional economic theory is based on the assumption that people behave “rationally.” Benkler argues the choices people are more complicated, and different people are motivated by different things. He carefully explains the difference between intrinsic and extrinsic motivation. While some people are undoubtedly motivated by monetary gain (extrinsic), others have social motivations (intrinsic). Intrinsic motivation is one of the main reasons commons-based peer production works. People are willing to participate in a project for reasons other than financial gain. Initially commons-based peer production seems counterintuitive to economic theory, but Benkler is able to bridge the gap. Benkler’s ability to outline the influence of society and emotion on individual economic decisions is critically important to his case in The Wealth of Networks.

In The Wealth of Networks, Benkler outlines the dysfunction of traditional mass media outlets and their coverage of political topics. Benkler uses a number of examples to show how the incumbent media conglomerates have used their power to control public perception. The Sinclair Broadcasting Group’s attempt to sway the 2004 Presidential Election is by far the most mind blogging example. This example shows the importance of democratized information in keeping our media landscape honest. The ability of an online community to influence a media giant like Sinclair to change its programming schedule shows the true power of democratized information.

Benkler also argues that networks are making a large number of small contributors more politically powerful than a few large, wealthy individuals. I can’t help but agree with Benkler on this issue. Benkler wrote this book before the 2008 Presidential Election, but this same idea – a small contribution from many – is one of the reasons Obama’s campaign was so effective. Instead of focusing on a few wealthy donors, Obama was able to harness the power of social networks to ask millions to donate just a few dollars. The strategy was incredibly successful, and nearly 90% of the campaign funding was donated online.

On the other hand, I’m not sure the democratization of political information will necessarily have all of the positive outcomes Benkler suggests. While no one will argue freedom of information is a bad thing, democratization is ultimately about choice. People can choose the information they consume. However, sometimes people are not always receptive to new ideas. Perhaps not beginning “forced” to listen to both sides of the story will have unintended consequences. Instead of learning about new political ideas, people will simply choose to consume information that resonates with their existing political beliefs.

Finally, Benkler does an exceptional job of presenting a fair and balanced case. He shies away from making broad, sweeping ethical or moral judgments even when they would be quite easy. Instead he evenly presents the facts and outlines their consequences. He suddenly pushes the reader in favor of limiting intellectual property regulation, but ultimately lets the reader make-up his/her mind. I was impressed that Benkler went as far as to acknowledge corporations’ rationale for protecting IP-dependent business models – Essentially you can’t blame corporations for trying to maximize shareholder value through restricting access to its information.

In conclusion, Benkler presents a very compelling case for limiting intellectual property regulation. He uses countless examples to make his case, but ultimately leaves the final verdict in the hands of the reader. The Wealth of Networks has certainly encouraged me to think differently about impact of copyright, trademark and patent legislation. While The Wealth of Networks is certainly not for the faint of heart, I highly recommend it. Its almost 500 pages are definitely targeted at an academic audience, but it is a great read for anyone interested in the societal, political and legal matters swirling around the evolving digital economy.

Sources:  Benkler, Yochai.  The Wealth of Networks: How Social Production Transforms Markets and Freedom.  New Haven: Yale University Press, 2006. 

Besides my profession, the university institution has an interesting dynamic when it comes to networks. On one hand, faculty and institutions have developed a culture that is very receptive to collaboration and the free sharing of ideas. In contrast, institutions have not always been accepting of new technology. At many universities, the educator-student dynamic hasn’t changed much over time. The professor stands at the front of the room and lectures, while the students listen and take notes. Obviously there are a number of exceptions (like blogging your homework), but in many cases universities are resistant to change.

Vest suggests that technology will not eliminate the need for universities and professors through distance learning. Instead, the internet and technology will make it easier for faculty and students to collaborate and share ideas – something universities have been good at for centuries. One of the best examples of collaboration is the development of MIT OCW (Open CourseWare). The web-based publishing platform allows faculty and students from around the world to access scholarly content for free. Vest sees this model extending to journal publications and even web-based laboratories in the future.

Vest’s argument for the Global Meta-University aligns quite nicely with Benkler’s concept of commons-based peer production. While Benkler uses more common examples like Wikipedia and open source software to demonstrate the value of peer production, Vest clearly shows how this concept translates to academia. After reading Open Content and the Emerging Global Meta-University, I believe educators will be more receptive to the commons-based peer production model than other groups because of their established cultural value of collaboration.

Anderson uses three inarguable facts to lay the foundation for his case:

• The cost of bandwidth is cut in half every nine months.
• The cost of hard drive storage is cut in half every twelve months.
• The cost of computing power is cut in half every eighteen months.

Anderson argues these trends imply the cost of distributing content is rapidly approaching zero. He outlines four key business models that have been made possible by these decreasing costs: direct cross subsidies, three-party markets, freemium and non-monetary markets. Anderson uses a case study method to build his argument for a free digital economy, demonstrating how organizations from Google to Wikipedia have used these business models successfully.

Throughout Free, Anderson argues that the decreasing marginal cost per user will continue to fall.  While Anderson does an excellent job of explaining the marginal costs of digital distribution, he completely glosses over the topic of fixed costs. The costs of bandwidth, hard drive storage and computing power may be deflationary, but what about the fixed costs of distribution? What about the costs of building and running the massive data centers that house servers?  The initial capital expenditures required to build data centers are so high that they may prevent some companies from entering the market completely.  What about the costs of employing the top-notch developers who build the necessary systems and software?  Engineers are definitely a scare resource, and most are not willing to work for free.  My point is – bandwidth, storage and computing power are not the only costs of distribution.  One could argue that these fixed costs spread over millions of users is “too cheap to meter.”  However, I think the high fixed cost of product development and data centers are not insignificant.  The initial capital expenditures required to compete with existing digital firms present a barrier to entry for newcomers.

In Free, Anderson suggests that distribution costs will continue to drop until they are “too cheap to meter.”  Mathematically, we know the marginal costs will never actually reach zero*.  I’ve already established that there will always be fixed costs (development, data centers, overhead, etc.), and there will always be some distribution cost per user (even if they are very, very low).  Which brings me to my next point – can free every really be free?  Just because a company doesn’t charge consumers for a product, doesn’t mean that it isn’t charging someone.  At the end of the day, everything is cross-subsidized.  Let’s look at Google for example. Google doesn’t charge consumers for search, Gmail, YouTube or GoogleDocs, but it does charge advertisers. Google uses the advertising revenue it generates from search to subsidize all of its other products.  Netflix’s free trials are subsidized by the paying users. The premium WordPress accounts subsidize the rest of the site’s blogs.  Even companies that don’t make any money require cross-subsidies. Wikipedia is supported by a non-profit organization that is funded through donations.

To his credit, Anderson does pretty a good job of presenting a fair and balanced case in Free. The one glaring exception is his fanboy attitude towards open source software.  His perspective on open-source is so skewed that it actually hurts the credibility of his argument. Open source software has its merits, but Anderson’s praise for Linux and Google is so over the top that it’s not even believable. At one point in the book, Anderson even suggests that Google is a utopia where, “surprisingly fit engineers play beach volleyball and ride mountain bikes” (119).

Anderson never articulates any of the shortcomings of open source software and unnecessarily bashes software companies like Microsoft. If anything, Microsoft was probably the worst example Anderson could have used. Despite the fact that Linux has been free for decades, Microsoft still has a huge market share advantage. In just one year, Microsoft has nearly eradicated Linux from the netbook market, proving that people are willing to pay for software.  People still pay for Microsoft Office even though GoogleDocs and OpenOffice are free.  If Microsoft’s business model is old and outdated, how did it manage to make $54.8B last year?  For the record, that’s more than the entire Linux ecosystem.

In conclusion, Anderson’s Free hasn’t completely sold me on free.  The possibilities are endless when it comes to the digital economy.  There is no doubt in my mind that the decreasing costs of distribution are making new business models feasible, but I don’t think all digital information will be (or even should be) free.  I believe the digital economy of the future will be a mixture of paid models and cross-subsidized “free” models.  Even though I was rather critical of Free, I still recommend reading it.  Anderson’s argument is thought-provoking and challenged me to think about the evolving digital economy.

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*The decreasing costs of bandwidth, storage and computing power can be summarized by an exponential decay equation.  Basically, no matter how many times you half a number, the result will always be greater than zero.  Suppose the cost of unit of storage is $4.  After one year, the cost is $2.  After another year, the cost is $1.  The number will keep getting closer to zero ($.50, $.25, $.125, etc.), but it will never actually reach zero. 

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Anderson, Chris.  Free:  The Future Price of a Radical Price.  New York:  Hyperion, 2009.

In this model, the subscriptions are just part of the overall revenue stream.  In fact the subscription fees rarely cover the cost of producing the media.  Advertisements are a second source of revenue and help subsidize the production costs.  Interestingly enough, advertisers are actually willing to pay a premium to advertise to paid subscribers.  Advertisers are betting the people who pay for the magazine on a regular basis are a more captive audience.  You could say they are betting on a higher return on attention. 

I bring all of this up because last weekend I saw The September Issue.  The September Issue is a documentary about Vogue magazine’s largest issue of the year – you guessed it, September.  The film does a fantastic job of showing the amount of production (and associated high fixed costs) of producing the content.  It also highlights the impact the magazine and its editor, Anna Wintour, have on the fashion industry as a whole.

The movie got me thinking.  Will magazines like Vogue be replaced by digital substitutes?  You can make the argument that Vogue is iconic, but so was the New York Times.  How is Vogue different?  Is it because fashion is more exclusive & allusive than news?  Is it because Vogue is more about images and less about text? 

Those are some of the great questions to ponder if you check out the movie.  I highly recommend it.  If you aren’t a fashionista- don’t worry, my boyfriend really enjoyed the movie too. 

It’s playing at the Seven Gables Theater not too far from UW.  Here’s the trailer:

As a person with a business degree, this is certainly not my first economics class. When I was doing the pre-reading I thought to myself, “I’ve done this before- supply and demand, elasticity, marginal utility. Piece of cake.”

Here’s a few things I realized in our class discussion yesterday:

Now I’m not a person who generally likes rules, but I think economic rules might be one of the few exceptions.  When I studied economics in the past it was always so convenient to assume things like:

• Individual buyers and sellers can’t influence price
• Products and services are identical
• No barriers to entry and exit
• Perfect information

It turns out those assumptions work pretty well for doing homework problems in an economics textbook, but they don’t really hold up in the real world.  I could list more than a hundred markets that don’t meet any of these criteria.  As we discussed in class yesterday, there are actually few true“free” markets.  Then you throw digital media into the mix, and economics just got a lot more complicated. 

Normally I would be a little freaked out about a class that is about break all of my beloved economic rules, but I am actually really excited.  I’m looking forward to studying economics with a fresh perspective. 

Goodbye nice and neat textbook examples.  Hello messy, real-world markets. Rules were meant to be broken right?

I have to say, the class yesterday got me really excited for the fall quarter.  My class members seem to have very diverse perspectives and  backgrounds, so I’m sure I will learn a ton from them.

Here’s just a few things that I hope to learn:

How has digital media benefited businesses?  When there is a paradigm shift there are always winners and losers.  When music went digital, traditional music companies suffered while companies like Apple flourished.  We are just now seeing the same thing happen to traditional print media (newspapers, books, magazines).  I am interested in learning more about the factors that have made the “winners” successful. 

How can you make money with digital media? In the past, people relied on professional authors, TV anchors and journalists to provide information. Now much of the content is generated by users and provided for free through blogs and sites like Wikipedia. Many companies are developing new creative business models to generate revenue from free content.  I am hoping to learn more about these businesses make money.

How has digital media and communication impacted economics?   Yesterday we briefly discussed how digital media has essentially eliminated scarcity in the marketplace.  I am one of those weird people who actually enjoyed taking economics in college.  I’m excited to revisit the topic of economics now that one of the fundamental assumptions has changed.