The FinanSer: Arguing about the Head and the Tail

Anita Elberse has created a great discussion in the Harvard Business Review this week about the Long Tail, the theory expounded by Chris Anderson, editor of Wired Magazine.

The theory goes that you can make as much money as an online retailer from the 80% of specialised products that sell occasionally, the tail, as retail merchants make from focusing upon the limited best-sellers in the head of the sales line.

Anita states:

"In 2006 just 20% of Grand Central’s (book publisher) titles accounted for roughly 80% of its sales and an even larger share of its profits."

She also goes on to look at Rhapsody, the online music store, and finds:

"The top 10% of titles accounted for 78% of all plays, and the top 1% of titles for 32% of all plays."

As a result, she concludes that:

"For Chris Anderson, the strategic implications of the digital environment seem clear. 'The companies that will prosper,' he declares, 'will be those that switch out of lowest-common-denominator mode and figure out how to address niches.' But my research indicates otherwise."

Chris Anderson has already posted a response on his blog:

"She finds the top 10% of titles (out of more than a million in that data sample) accounted for 78% of all plays, and the top 1% account for 32% of all plays. That sounds pretty concentrated around the head, until you reflect, as she notes, that 'one percent of a million is still 10,000--[...]equal to the entire music inventory of a typical Wal-Mart store.'

"This is a good moment to remind everyone of the normal definition of 'head' and 'tail' in entertainment markets such as music. 'Head' is the selection available in the largest bricks-and-mortar retailer in the market (that would be Wal-Mart in this case). 'Tail' is everything else, most of which is only available online, where there is unlimited shelf space.

"So in the data she cites, the head of the online music market represents 32% of the all plays, and the tail represents 68%. That's certainly no challenge to the Long Tail theory; indeed, it's even more tail-heavy than the data I cited in my book (probably because I used a more generous estimate of 50,000 tracks for Wal-Mart's inventory)."

Nothing like a good argument is there?

Why am I bothered?

First, because the Long Tail is an important theory about modern retailing.

Second, because it plays to the heart of online channels and why we virally network socially through blogs and virals in a networked world.

Third, and most important for readers in banks, is that there is a Long Tail in banking that's emerging through prepaid cards and mobile telephones. Take note of the views of both Anita and Chris, as they are crticial discussions in how to make money in these markets.