The Internet And the Death Of 80/20
Scarcity of attention and space were the cause of the 80/20 rule; the Internet is changing that
The 80/20 rule is a rule of thumb every startup should know. Economizing on time, management effort, and money has to be second nature. They should constantly be going after the 20% of the effort that provides 80% of the benefit. They should constantly be focusing on the 20% of their products and customers that provide 80% of the revenues.
Or should they?
Entertainment has Discovered the Long Tail
Chris Anderson's observation in a recent Wired Magazine article is that the 80/20 rule exists in the physical world because you chop off the long tail. In music, for example, Britney, Santana, Madonna and a few others represent the very few artists (well, more like 1%) that account for huge sales. However, there are literally hundreds of thousands of smaller artists that have tiny sales. Historically, these artists have never been carried in record shops (except maybe one or two local ones), were not featured on top radio stations, and were never promoted on big concert tours. Since they were in the tail and record companies were following the 80/20 rule, they never got exposure and a chance to increase their sales. The real world "chopped them off" of the long tail, since a record store only carries thousands of titles, not hundreds of thousands.
This meant that the 80/20 rule was self-reinforcing. Because they weren't promoted or available, they never moved beyond their few copies. Hollywood never saw their sales since they were all independent.
However, many of the Internet media companies are different. They started out just being a better way to shop (or rent movies). They sold the same things everybody else did, but at better prices. Then a funny thing happened -- suddenly they noticed that more and more sales were coming from the tail. That is, they were selling a lot of the items that physical stores didn't carry. In hindsight this is completely obvious -- of course you are in competition with every single bookstore in the nation to sell Clinton's "My Life", but if you want Gerd Gehringers "The Adaptive Toolbox", there's only one place to go: the Internet. Chris cites numerous examples in his article: over 50% of Amazon's media profits come from sales past the top 100,000 titles. More than 50% of Rhapsody's business is streaming songs past the top 10,000 tracks.
Once they started focusing on the long tail, new recommendation tools appeared. They helped "push you down the tail" by bringing little known artists to your attention when you purchased the big guys.
When tallied, all of those little-selling items and all those little customers across the nation can exceed the online sales from the biggest sellers.
The Death of 80/20 on the InternetIt's not just media. Once you start to think of the world in those terms, it is clear that most of the successful Internet companies fall into exactly that category: business models aggregating the untapped tail.
- Amazon makes most of their profit from the tail - they receive a higher margin because they don't have competition in that area.
- Ebay does nothing but aggregate all of the tiny, single lot size items that were not being sold at all (or just through local classifieds).
- Google and Overture are aggregating all of the advertising spending that was not happening because it could not be targeted well enough. Coke doesn't go there in a big way, but Riley's Trick Shop in Worth, IL can target you if you're looking for vampire teeth.
The current crop of private companies include some doing exactly that. CafePress aggregates all of the niche content on the Internet and makes it available as merchandise, books, and CDs. They are making millions in the areas the traditional publishers and music houses have ignored. (Full disclosure: we are investors in CafePress). The blogging phenomenon is all about the long tail in journalism, spawning tools like Technorati and Movable Type (by Six Apart, where Andrew is now working). Clay Shirky has noted that blogs are surpassing niche media in traffic (though he believes that 80/20 applies to blogs also).
More opportunities?
With Yahoo sitting on a pile of cash and needing growth engines to compete with Google, and Google sitting on cash from IPO, you can bet activity in the Internet sector is going to pick up again. For the entrepreneurs among you, now is the time to start thinking about other businesses where the Internet could help aggregate the long tail. The next Ebay or Overture will be found there.
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The Internet And the Death Of 80/20 Scarcity of attention and space were the cause of the 80/20 rule; the Internet is changing that The 80/20 rule is a rule of thumb every startup should know. We used to use... Read More
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Je trouve l'article The Internet And the Death Of 80/20 particulièrement significatif de ce qu'on constate de plus en plus souvent. Le web est en plein maturation et bon nombres de principes explicites commencent à être clairement formalisés. Je me Read More
Je trouve l'article The Internet And the Death Of 80/20 particulièrement significatif de ce qu'on constate de plus en plus souvent. Le web est en plein maturation et bon nombre de principes implicites voir intuitifs commencent à être clairement form... Read More
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See VentureBlog for a fascinating discussion on the Internet and the "death of the 80/20 rule". It's an idea which is gathering momentum as people everywhere realise that since the Internet reduces transaction and sales costs to virtually nothing that... Read More
See VentureBlog for a fascinating discussion on the Internet and the "death of the 80/20 rule". It's an idea which is gathering momentum as people everywhere realise that since the Internet reduces transaction and sales costs to virtually nothing that... Read More
See VentureBlog for a fascinating discussion on the Internet and the "death of the 80/20 rule". It's an idea which is gathering momentum as people everywhere realise that since the Internet reduces transaction and sales costs to virtually nothing that... Read More
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I think that you have hit upon a bigger issue.
It will probably drive Excel users crazy but the "long tail" data may represent the declining use of "averages" to make "rational" decisions.
But I prefer to think that given any particular set of circumstances and assumptions, there will always be more anomalies than normalities. The fact that the anomalies even pop up should be cause for additional investigation into each data point because they are near hits instead of near misses.
I suppose it is assumed to be more "time efficient" to examine normalities.
By their very nature, managers tend to look at averages instead of anomalies. It could be because effectiveness is not as highly valued as efficient replication is by the management paradigm.
Despite the claims of the "best practice" and "core competency" crowds, I have seldom seen any management system look at the circumstances for stellar performances that are indicated by anomalies. Assuming the drive for innovation will continue, it seems to me that "Give Me Irrational Exhuberance or Live in Debt" should be the watch word for the next 20 years.
Great Optimism,
I think you'll see the idea of the "long tail" take off when more content companies jump on board and open up their "catalogs" effectively. I run musicmobs.com, and have been able to put together some very effective recommendation solutions along the lines of what is talked about in the Wired article.
Unfortunately we've had to do all of our work primarily with the iTunes Music Store because they are the only place that offers an interface to sell downloads and get an affiliate cut. This is new, even for them and Apple has yet to provide some common sense hooks such as a webservices interface to create deep links.
I think you'll see more and more content aggregators provide the appropriate interface, so that others can put together "mining" solutions to help them push their catalog.
Very interesting article. I had imagined that the opposite was happening because of the way so many internet sites have the 'top 10 hourly' type of lists (not just Amazon). With this, I assumed that it would tend to reinforce and amplify sales of the most popular things - a bit like the way people gather round a crowd in the street, wondering what it is that has brought the crowd there.
I guess if what you are saying is true, then a lot more people will make money from their creative output (but just less of it). But that will help make a more equitable world.
I just put up some similar thoughts about staying small (and indirectly going for the tail).
http://www.37signals.com/svn/archives/000881.php
This is a phenomenon I've been observing for a while, but it hadn't struck me quite as clearly until you articulated it. Good post.
I'm all for seeing the obscure, but good stuff become as successful, if not more, than the overly marketed new releases from mainstream artists / authors.
One idea I would like to see developed is an extension of the venture capital scheme to small business and investors.
Right now if I wish to start a small business I either have the money, have contacts or borrow from banks. One advantage many immigrants have is that have non bank networks, some quite sophisticated for partners or loans.
For those without these it's often the bank, but many with plausible ideas either don't want to risk everything or can't get loans.
A system where ideas could be proposed, to a degree vetteed (perhaps a thousand dollar fee for various parts of the process including help in a first stage business plan) then presented publicly as an offering in a templated simple corporate structure (sorry for the awkwardness I'm in a hurry) would be the general scheme.
I for one woluld like to be able to put a thousand dollars into (for example) a local African restaurant and would invest a significant fraction of savings (say 10 percent) in a variety pf small enterprises I had confidence in. One advantage of public presentation is that lots of public brainstorming could be done. Lots of kinks could be worked out before hand.
The goal would be venture capital for business of all types, even small ones with relatively limited growth and profits along with a much broader swath of investors.
Issues might not only be direct profit, but control of econmomic environment. For example if a presents a plausible plan for x business and a set of downtown businesses decide that x might add an important component to their mix,then they each might invest 1 or 2% to get the coveted coffee shop or bookstore. Similarly as an individual I could invest in enterprises I wanted.
The goal would be to develop capitalism as a more perfect market.
In point of fact Amazon does have lots of competition. It's simply that they are in small pieces and less visible. One well established competitor in the used book market is abe.com This queries thousands of small stores, buying there you support them and often get better price and selection.
The large tail is acting in many areas and potentially in all. Commentary and ideas are expressed in tens of thousands, probably hundreds of thousands of small publications, many devoted (and most supporting) the linking of others. It is said that about 5% of the population uses these heavily. And while many are certainly just excuses for people to confirm their prejudices (like talk radio) most are to some degree open to questioning and other ideas.
The people involved will be more influential than average and in this and almost every other interest groups go through the primary steps in organization almost automatically. The potentials are almost unimaginable and the process of learning occurs slowly, but surely.
Once individuals do find other options they are less influenced by the powers of mass persuasion. Simply no knowing there are other options is a step.
In terms of entertainment Amazon and some others have opened the doors to small business by paying the publishers for purchases directed through their domains. What this means is that providers who specialize in areas and build followings become the "front end." It is an evolutionary step beyond the reviews and "reputations systems" that Amazon pioneered.
Right now a lot of linkage is informal, but as "search engines" (in the broader sense that includes things directed by price, pages reviewed by humans before inclusion, all manners of searching out what we desire both human and automated) the power of the current marketers will be reduced. Far more sophisticated "meta systems" than Google or pricesearch will be implemented.
I'm uncertain if the current leaders are going to be the ones who build it. For example if I search a particular product (looking for reviews) there is usually no mechanism which allows me to exclude sellers (who following Amazon typically have (typically barely used) review systems built into their commerce systems) and get only discussions of the virtues and flaws of the product, nor is there a way to select pages with some credibility and indeed I am likely to find many pages which are primarily sets of keywords designed to lure me in.
So many searches involve waste.
In areas of importance it becomes necessary to collect good sources then search them oneself. Some of this is automated in traditional scholarship (though we could use richer methods of indexing and linking) but it's often expensive to get these search engines. The rudiments are appearing quite frequently and while the learning process is slow people will start putting them together.
At some point critical mass will develop and commercially or voluntarily we will start to see both equivalents to existing institutions (eg. web pages which fell the role of existing local newspapers along with a huge variety of resources (community colge schedules, neighborhood discussions etc.) along with completely new means of media. And various "meta systems" (eg. the local rock channel, the book finder) will be a part of this and eventually compete to find key places.
It is an interesting process because so much excellant content is free. Only commercial systems with very long term goals and lots of money can compete. And despite the vast amount of useful information produced from Usenet on I've seen no major efforts to organize and edit this stuff. Yet much of it could be had for free or a pittance.
One indication of the blindness of our society is that those who recruit writers are not searching out the blogs and other places, but go through the old hiring practices. Yet for nearly 2 decades with Usenet we've had a medium showcasing writers who produce regularly, who understand at least some of the realities of publishing, who are tested objectively by the interest in their stuff.
Some rights to their work could be picked up for a song. These people are producing for free. But it seems slowly but surely they are going to have organize themselves and as that happens the traditonal commercial structures are likely to be smashed.
I mean what happens when you get a new Mark Twain who builds up audience slowly year by year and makes his money by saying, "if you need a stereo check out Jane, she's real nice, her prices are pretty good and I get 3%." Multiply this by the thousands of creators, realize that in some cases audience will build up to the point where such people are selling hundreds or thousands of stereos (and other things) a year.
At that point the tail will swallow the head.
This
A point on blogs and tails: Clay Shirky is mis-interpreting his own data when he talks about blog traffic. He points out that links follow a power-law distribution and laments the fact that this means a few blogs account for most of the links.
The key difference between power law and normal distributions is that the power law has FATTER TAILS. This means there is more action in the tail than there would be in a normally distributed world.
So his findings support your larger point that many of the interesting internet propositions involve exploiting the tail of the distribution.
Thre is yet another impact of this effect! Have you ever been thinking why *in fact* banner advertizements are working? I can tell you: because, the lousier the site on which the banner is placed - the *higher* is a temptation to leave it for something usefull and interesting! I'm telling you! I even bought some ad spaces on lousy web-sites and measured the effect! It's working!
As to 80/20 - there is also the 'opposite' rule in the real world, and it's applicable to online businesses as well, I call it a 'Fashion-house rule', namely: 80 to 90 % of income of traditional fashion-house come from the sale of fragrances! 'couture', 'defile' and super-models are just PR actions.
It works in iTunes business of Apple :) Everybody's talking about iTunes, which generated 58M*1.00USD, but not so many people multiply 1.5M*400USD = income from sales of iPod :)
Anyway, the 'tale effect' exists and it's evergrowing, you are right.
Great Article!
[I do believe it's Gerd Gigerenzer though :) ]
I'm a big fan of the 80/20 principle. It helps me out in a lot of different ways.
But this data is really surprising and provides me with some great insights. thanks for that!
Large Poisson games are games where knowledge is not evenly distributed as in Nash games. Nash games give rise to the 80/20 Pireto Effect. Poisson games would give rise to the long tail.
I Poisson games correlate to multiple cultures and cultural gradients within a given culture. These cultures could be subject domain cultures that have boundaries and "know about" knowledge that initiates the individual into the culture.
The individual players would be arranged along the long tail.
As a startup, how do you know if you should run your company on the basis of Pareto or the long tail? Ask yourself a few questions:
1. Can your company be one of the top three in your industry?
2. Is that industry structure driven by marketshare? In companies that sell consumer goods, regardless of how they sell it (dot com, or BAM), marketshare changes every week, so it doesn't structure the industry.
3. Are you a complementor?
If you answered yes to 1 and 2, and no to 3, then go with Pireto, otherwise, use the long tail.
Good bloggin!