The Long Tail and the Decline of Scarcity

The long tail theory argues that because online storage and distribution costs are low, companies can offer more niche products that it wouldn’t have paid to sell in brick-and-mortar stores. Because market reach is significantly larger online and more products can be offered (especially in digital markets where the cost of making digital copies is next to zero), companies can make money off products for which there is typically no high demand. That is fewer purchases of many niche products will bring in more revenue that many purchases of a few popular products. Ultimately, long tail is all about exploiting the advantages of digital products (zero perfect-copy-cost) and their overabundance.

Anderson argues in his article that in a long tail economy it makes sense to dump as much content as possible onto the market and that this content is offered for less. Given his emphasis on the role of recommendation systems in matching niche content to its intended consumers, there is also an implication that recommendation systems continue to improve, becoming more efficient. Streaming sites are particularly good examples, including Netflix and iTunes. Although Anderson fails to mention that Netflix pays licensing fees so its selection is actually limited by offline legal arrangements.

Moreover, in a study, examining the 80-20 split Anderson mentions as increasingly extinct online, researchers found that Netflix subscribers tend to stream top 500 titles rather than niche offerings. So the long tail doesn’t subsidize its business (though it certainly contributes). However, because Netflix is offering a subscription instead of per-pay-download, it ultimately doesn’t matter what viewers watch – the company still makes its money. Volume matters more – this is the economics of abundance.