Friday, February 04, 2005
Long Tail Economics
AndrewSW thinks the LT is a function of Web 2.0. I'm not sure about the zero-overhead conclusions he reaches, but the premise is a keen observation - right on the money.
Let's put the LT into a bit of econ framework. The LT is a function of the exponentially dropping cost of the means of production of media - part of which is Web 2.0. These costs used to be a significant barrier to entry.
For example, a decent recording studio about ten years ago cost about $100k. Now, it's about $5k - a Powerbook plus a couple of software packages and maybe a guitar or drums. And, of course, Web 2.0 - which in this case is cheap music distribution (given MP3, p2p, etc).
Since production costs have dropped much faster relative to prices, the potential to earn significant margins is drawing significant numbers of new entrants into fragmenting media industries. These are the much-discussed prosumers, who are engaging in a simple form of arbitrage.
As new entrants are attracted, margins will again begin to erode, probably to levels even lower than the previous state of a relatively concentrated media industry - because the level of rivalry relative to the size of the market will increase. However, it's probable that lower margins will sustain a vibrant media industry, because bigness - scale economies in distribution, marketing, etc - becomes a liability in the LT world (requiring costly coordination relative with little marginal benefit).
This is all pretty basic. The really interesting bit about the LT is that the costs of the means of production and distribution are falling across several industries simultaneously - that is, technological convergence is blurring and shattering industry boundaries at the same time as it's destroying entry barriers. Think about it this way: p2p virtualized music distribution at the same time that advanced DSP virtualized music production.
I think this kind of simultaneity is pretty rare. In fact, the speed with which this is happening makes me think of internet time. Remember internet time? It seems pretty appropriate when talking about the accelerating speed of change in the media industry in terms of the LT.
Maybe there's a positive feedback effect at work - will be thinking about this framework in the context of increasing returns. Hmm.