TCS Daily


The Long Tail is Wagging the Dog

By Glenn Harlan Reynolds - July 19, 2006 12:00 AM

Wired editor Chris Anderson's new book, The Long Tail: Why the Future of Business is Selling Less of More comes out at an opportune time. Big businesses -- especially big media businesses -- seem to be sluggish, but the economy is booming. Why?

One reason, as I've suggested here before, may be cottage industry, which I've written about here before on more than one occasion, and Anderson's book explains a lot about why that's happening. Lower costs of doing business, and lower costs for customers to find sellers and vice versa, mean that the minimum efficient scale for many enterprisers is quite small. This lets all sorts of niche markets flourish that couldn't exist back in the old days.

I find this idea congenial, since it's not far from the argument I made in my own recent book, An Army of Davids, though Anderson's emphasis is rather different from mine. And just last week I had an experience that suggested Anderson is on the right track: I spoke with a University of Tennessee undergraduate who has paid her way through college by buying adult diapers from a factory in China (cheap) and reselling them at a steep markup to the adult diaper-fetishist market in the United States. All her business is done on the Internet, and it's done well enough, at least, to pay for college. Talk about your niche markets!

With over three quarters of a million people making all or part of their living from eBay, there are a lot of stories like this out there, though most aren't quite so outre.

Then, just the other day I spoke to a couple of brewers. They make their living at a local brewpub, and they seem to do pretty well. They also like their work a lot, and they noted that ten or fifteen years ago there were hardly any jobs like theirs. There still aren't a whole lot, but there are now several brewpubs and microbreweries in most towns of any size, each employing brewers. Another case where small-scale production and employment are offering opportunities that didn't exist just a few years ago, though in this case it owes something to consumer tastes as well as to improved technology.

Now, it's possible to make too much of this trend: Most people won't make a living off of eBay, and it takes an awful lot of breweries to employ as many people as a single auto plant. But all these different niches add up, and it's also virtually inconceivable that all those brewers could be laid off at once, while it's quite common for everyone in an auto plant to suddenly wind up out of work.

It seems to me that while big enterprises will always be with us, we're going to see a much more vibrant small-business (and even micro-business) sector over the next decade or so. I also suspect that neither the culture, nor the people who purport to measure and manage the economy, are really up to understanding the impact of this trend. I would say that there's a good book in it, but Anderson has already written one.

We did a podcast interview with Anderson last week, and you can listen to it here. In the interview he stressed that -- despite what some reviewers have suggested -- he's not really predicting an end to hits. Since his book was in the Amazon top 10, I guess he's right!

Glenn Reynolds is a TCS Daily contributing editor.
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18 Comments

Household vs. Employer surveys
This is one reason why the household survey is becoming the more accurate indicator of total employment, vs. the employer survey.

The employer survey does not capture the self employed and most small businesses.

efficiency
The efficiency of scale for big business drops off at some level just as it does for big govt. Big businesses lose money but big govt steals from the working class. Time for a new Declaration of Independence - 50 of them.

Article is a Panacea
This train of thought just seems to be one of those utopian management theories that pop up every once in a while leave out a couple of things.

When industries start up, they tend to favor the custom designed products and risk-seeking managers. That is also true for consumer goods.

As an industry matures, economies of scale and the learning curve kick in-and market share determines destiny. Additionally the product involved may favor more or less customization.

A useful analogy would be the US locomotive industry from say 1925-1960. Baldwin and Alco were dominant builders at the onset of that time. They lived and died by building custom designed steam locomotives. If you wanted one or 500, they’d do it and build to spec. When diesel-electrics came along, the need for customization disappeared. Diesels were far more flexible. Baldwin in particular continued to adhere to the custom design mentality,creating new "learning curves", while EMD churned out a limited number of designs. GM’s Richard Dilworth allowed basically only two forms of customization, paint scheme and gearing. EMD won, Baldwin exited the business in 1956, eventually became part of Armour (the spam folks) and died in the 1970's.

There may be an increasing tendency for customization because of the lower design and setup costs, but there'll always be things that will be produced with limited designs to reduce fixed costs.

billwald did not say that there was no efficiency of scale
He just commented that there are also inefficiencies of scale. This is not a controversial statement.

Technology has made it possible for smaller firms to better compete against bigger ones. This is also, not a controversial statement.

Technology, most specifically computer technology, has reduced the optimum size of allmost all companies.

Disagree-Cuts Both Ways
Technology, most specifically computer technology, has reduced the optimum size of almost all companies.

Technology has also removed diseconomies of scale and scope, which has allowed and in some cases required massive consolidation.

I give you:

The Big 3 automakers. What happened to Studebaker, Packard, Willys, Nash-AMC, Chrysler before D-B? Volvo (on its own) Saab (before GM)

WalMart (What happened to thousands of local department and sundries stores)

The Big 4 Accounting Firms. (That was big 8 no so long ago)

Banks. Capital One, Wachovia, Chase are all the result of a 25 year trend of consolidation, in part due to repeal of archaic banking laws, but made possible by faster CPU's and bigger hard drives. Thankfully, we still have some community banks and credit unions to preserve alternatives.

Passenger Jet Manuf. What happened to Douglas, McDonnell Douglas and Lockheed? All exited market, not replaced by many smaller firms but two, one of which is a GSE?

My point is, it cuts both ways.





The Fractured States of America
I like your idea that we should have fifty declarations of independence. We should be on the lookout though for aggression on the part of the occasional trouble makers.

Take South Dakota, for instance. Remeber when they wanted to change their name to just "Dakota"? They obviously harbor invasive designs on the North. And without a United States military response, the only thing standing between peace and their achievement of their nefarioua aims would be (gasp) the men in the blue helmets-- the United Nations peacekeepers.

Remember the Bismarck! Free the North Dakotans... they're not just "another" Dakota.

Economies of scale
The same technologies that allow big companies to communicate with their divisions more efficiently, also allow small companies to communicate with each other more efficiently.

Wal-Mart grew big because they built a proprietary communication network that allowed their stores to directly order from suppliers when stocks ran low. They also developed a more efficient delivery system.

Nowadays any store, of any size can do the same thing by by using the internet.

In a big company, you have to use the company's accounting dept, instead of hiring the best available accounting service. In a big company, you have to get approval of more people before you can do anything.

Technology helps all companies, big and small, but it helps the small more.

In other words, the times they are a changing...
So why is it that one should invest in the fautering stock market again?

because, year in, year out, it's the best investment.
This year it falters, next year it does well. On average, there is no better place to park your money.

Your money is your Working Capital. Don't park it anywhere...
When lots of experienced middle managers suddenly found themselves unemployed (again) in 2001 we looked around and realized that ONE: We knew how to run a business. And that TWO: We had some money to work with this time.

Lots of us started companies that are now, five years later, still operating and earning a profit.

Yes, the internet helped. The realities of the Post Industrial Society helped. Large companies leaving "sweet spot" niches available helped too. But it was the existance of start up capital and working capital in our own personal portfolios that made this possible for the majority of us who could not even think about taking our projects to Sand Hill Road.

Those of us in manufacturing already knew how to operate offshore with little or no investment in capital goods.

Most of us started businesses in industries that we already knew something about. Many of us were Baby Boomers who would never work for other people again anyway. But we were not wealthy enough to simply stop.

If you leave your money in a bank or in the stock market then it becomes working capital for someone else and you will receive the smallest possible share of the upside.

Great points and bon chance!
I have come to beleive that the bankers market is pretty much over. People are cathcing on to the idea that the Dow Jones, the Standard and Poor, etc. indexes are artifically opimistic.

For example, the Dow has not progressed much since 2000. The index level about the same now as it was then. So if you are invested in the ajor stocks, your assets have not improved. In fact, they have probably declined because a) the cost of living has improved, and b) compaies that do not perform (ie, go bankrupt) are removed from the indicies and replaced with companies whoes stocks are improving. Por example, Enron, Kodac and Xerox are no longer on the DJI index.

So if you had money to invest, and you went with a mutual fund that tracked the DJI, you would be much poorer now than 2000 due to cost of living increases and index component replacements.

Besides, if you park your money in the bank, you are not helping the overall infrastructure.

In case you haven't noticed, something has happened since 2000
Little things like the popping of the dot com bubble, and 9/11.

By taking short time period samples, you can prove anything.

For example, if I just took the period 2003 to 2005, I could prove that someone who invested in the stockmarket would be a billionaire before he died.

But then cherry picking from the historical record is what liberals do, not people who think.

The market is over.
It is not about 9/11 nor the IT-bubble (which really wasn't a "bubble" as much as it was bankers and businessmen cashing in on the greed of investor who were sorry they missed out on the real players, Intel, Microsoft, Cisco, etc., and so were begging for any chance to make more money more money more money, YA!) Your so-called “bubble” was simply a scam based on investor greed. They wanted to invest and the scammers answered the call. Same as it ever was.

Today’s unstable market is about an industry that lies and cheats. About 30% of Dow Jones indexed corporations have charged and/or convicted of illegal actions. That son of a deregulator, AKA our illustrious leader, did too little too late to regulate the investment banking industry.

So unlike you, I am not willing to turn a blind eye to the ills of the past. I am not so greedy as to be stupid with my hard-earned money.

But I am really curious as to just how bad the market really is. You talk like an expert in this area. So answer me this; how many corporations have been pulled off the stock exchanges since January 2001? How many indexed corporations have been pulled from the DJI these past 6 years? Who were they and what are these corporations doing now?

You see, when they are pulled off, their losses no longer appear on the record. So although the market looks as if it is treading water, in fact it is declining.

You say that there was a technology bubble. Yet I see Intel and Microsoft on the DJI index. They were not on there in the 90s. So I guess it really wasn’t a bubble, was it?

No, you have better do some homework, my naive friend. Listening to the investment bankers pleas for mercy has warped your sense of reality.

every time the market slows or falls, stephen declares that the economic world is over
the fact that stephen hates everything to do with capitalism has nothing to do with it.

Theoretically
Yes, but the trend has been consolidation in retailing.

I remain convinced-the trend is currently to mass-merchandizing, consolidation, etc. It appears that benefits of tech have not yet freed the local retailer.

and in actuality
The biggest growth area in retail, is internet shopping.
The internet is the perfect medium for the small guy to eat the big guys lunch.

bubbles
"which really wasn't a "bubble" as much as it was bankers and businessmen cashing in on the greed of investor who were sorry they missed out on the real players, Intel, Microsoft, Cisco, etc., and so were begging for any chance to make more money more money more money, YA!"

What the heck do you think bubbles are?
You know even less about economics than you do atmospheric physics, and that's saying a lot.

more on bubbles
"You say that there was a technology bubble. Yet I see Intel and Microsoft on the DJI index. They were not on there in the 90s. So I guess it really wasn’t a bubble, was it? "

Are you stupid enough to actually believe that a tech bubble would only include two companies?

Forgive the rhetorical question. Of course you are.

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