Inside the 'New Economy'

By Richard J. Newman
U.S.News & World Report

July 16, 2006

The Internet has changed virtually everything about human existence. But how, exactly? Chris Anderson, editor of Wired, took on part of the question by studying how Internet companies differ from traditional businesses. In his new book, The Long Tail: Why the Future of Business Is Selling Less of More, Anderson describes how revolutionary changes that began with the Internet are rewriting some of the most basic rules of free enterprise and empowering the consumer.

Your book analyzes how the Internet economy has changed the conventional economy. What's the distinction between the two these days?

I wrestle with this a lot. Wherever technology touches the economy, there will be profound changes. Is Netflix an Internet company or a bricks-and-mortar company? Well, it uses the Postal Service, so it must be a hybrid. There's a distinction between physical products and digital products, but it's also like asking about the electricity economy and the nonelectricity economy. There's no distinction anymore.

So what is the long tail?

It's about life after the blockbuster. All our lives, we've seen the world through the lens of hits. Not because that's all we want, but because distribution channels have been so limited. If you have limited shelf space, you only tend to offer the products that sell the best. But as the physical marketplace has turned into a digital marketplace, there's a lot more shelf space. Distribution costs have gotten so low you can offer practically everything. The marginal cost of the songs on iTunes, for instance, is almost nothing. Hits are going to have to share the stage with nonhits.

Your analysis is somewhat technical. The phrase "long tail," for instance, refers to the shape of a particular type of demand curve. Can you explain the math in plain English?

Sure. Think of a demand curve shaped like a ski slope. On the left-hand side it starts high, then it drops down pretty quickly and levels out on the right side. The left side is where a few products sell a lot. The right side represents the nonhits. If you are limited in what you can offer, you offer the hits on the left. But there are many more nonhits. In fact, the curve goes on almost forever. That's the long tail.

Looking back, what have been some of the key transition points?

In the book, I go all the way back to 1896 and the Sears, Roebuck catalog. The radical technology then was the railroad, which was supposed to bring Amazon-size variety to the Kansas prairie. Which must have seemed amazing back then. Cable TV, digital TV--that brought an explosion of choice to television. A key one clearly was Amazon.com, where they offer practically everything. And it's not just about a massive increase in variety; it's also about a massive increase in findability. In a physical store, it's often hard to find obscure products, if they're even there. The ability to search on the Web lets us find the variety.