Long Tails & Masters of Youniverse Or, Why small businesses can become endangered species.

Those of you who are into blogs or are regular readers of Wired, do not need a special introduction to the Long Tail effect or to Chris Anderson. Long Tail effect first (as far as I know) burst into public awareness when Chris Andreson wrote an article about it in Wired. In essence what it postulates is that the emergence of blogs, podcasts and vlogs will result in a transfer of economic and social power from masses to niches. Because of new media, it will be far easier to find, target, communicate to and market to small segments making it increasingly irrelvant to adopt least common denominator marketing. To quote Mr. Anderson from his blog,

The Long Tail is the yellow part of the sales chart at left, which shows a standard demand curve that could apply to any industry, from entertainment to services. The vertical axis is sales, the horizontal is products. The red part of the curve is the "hits", which have dominated our commercial decisions to date. The yellow part is the non-hits, or niches, which I argue in the article will prove equally important in the future now that technology has provided efficient ways to give consumers access to them.
The two big points of the Long Tail theory are these: 1) The yellow part potentially extends forever to the right; 2) The area under that line--the market it represents--may become as big as the hits at the left.

While the article was far more articulate and wide-ranging, I first came across this trend through a small(?) newsletter called (appropriately enough) TrendWatching. About 5 months back or so, they were talking about trends with interesting names like Massclusivity, GenerationC, Masters of Youniverse etc.

What does this mean for a small business like mine? I got one word: disaster! The way I see it is like this: the rise of long tail means that markets will get splintered into smaller and smaller segments. When it comes to splintered markets, the only companies who grow are platform owners and platform innovators. The best way to exploit splintering markets is through mass customization of products, brands and marketing systems. What is the one thing common to all these three? Platforms. Mass customization of products will prove to be enormously capital intensive; mass customization of brands and marketing systems on the other will require huge knowledge capital to effectively target and tap into chosen segments. This in turn means that the industrial eco-system will split into 2 or 3 kinds of players: Platform owners who provide the infrastructure; product innovators who license the platforms to come up with cool, new products aimed at niche markets; marketing system owners who are optimized to reach micro niches more effectively than anyone before them. In some cases, we will see a single entity doing both product innovation and marketing system creation; in very few cases we will see a single entity doing all three functions effectively and efficiently. What are the economic engines for these 3 functions? The platform ownership is driven by scale; product innovation is driven by people and knowledge and marketing systems are driven economies of scope. Where will the biggest chunk of profits go? To the marketing system owners of course. I always believed and experienced that the entity closest to the customer will enjoy the most profits and the product innovators will enjoy the most profitability.

Platform owners will be the giants of the landscape; their business is driven by long term trends, R&D, PR and driving platform adoption. Any names? Well, in technology, I think it will be Intel, IBM, Verizon, Microsoft, TSMC, ebay & Google (or some other search company). Google is in an interesting position because they of all the people will benefit the most from splintering of markets. One fall out of splintering is the emergence of search as a critical piece in the jigsaw. Search or ability to find the right customers and partners will be the glue and lubricant that will make the new reality work. In consumer products it will be TetraPak, SealedAir and P&G.

Product innovators will be organic to the extreme. They bubble up, exploit fleeting trends, micro niches and vanish just as quickly. Who are they? The best example is Hollywood! Others could be fabless designers in semiconductor industry, fashions,

Marketing system owners will be of two kinds; a physical store infrastructure backed by internet and a direct sales infrastructure supported by internet. Some names will be quite obvious: Wal-Mart, Walgreens, Metro, Tesco will definitely grow in significance and strength. On the other side,  Avon and Snap-On are two companies that bubble up right away. These two will move from a closed business model to an open business model where they bring to bear their reputation and field sales force for a variety of products developed by product innovators.

In the next post, I will describe why this trend could mean disaster to my company and countless other small firms.

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