Fat Cat, Long Tail, Trial and Error

I'm struggling slightly with John Kay's latest article "Counting errors: from the fat cats to long tails."

I understand the point about power laws, and to be careful making assumptions that one is dealing with "normal" data in any given scenario. But a problem I have with this article is John's claim that the long tail of book sales, is "truncated" because books that would only sell 1,000 copies don't get published.

"If book sales are governed by a power law, then if 10 American books sell 1m copies in a year, and 400 sell more than 100,000, then about 16,000 titles will sell more than 10,000 copies.... The rule would predict there would be 640,000 books selling more than 1,000 copies. There are not, and for an obvious reason. Most titles that might sell 100,000 books get published but most titles that would only sell 1,000 do not."

But surely lots of books get published that don't (initially) sell 1,000 copies, because publishers don't accurately predict sales. And surely that's the real point here: only 10 books might sell more than 1m copies a year, but you don't know ahead of time which 10 books. So it's still worthwhile listing on digital platforms titles that initially sell very poorly, because they might yet resonate with enough people who share the same taste and 'work their way up the tail'.

Similarly, John claims that:

"Companies that would have only a few thousand pounds of sales do not continue to exist: people who would have incomes below a certain level are supported by social benefits. To choose appropriate models you need to understand both the maths and the business environment. Media industries and financial institutions have both been unsuccessful in marrying these two skills."

This may be true, but the challenge of non-normal data is that you can't accurately predict which company will not continue to exist, or which people who are on low incomes today might strike it rich tomorrow, like J K Rowling (or they could be wealthy benefits cheats). You can't write off anything or anyone until it or they have actually failed.

On this basis, the conclusion ought to be that participants in the media and financial industries should be prepared to experiment - and fail - a lot before reaching any conclusion about what will necessarily be successful. That was one of my takeaways from The Black Swan.

Or am I missing something?

Enable Best Customers to Create Financial Services

All vendors and platform operators feel an obligation to look after their best customers. But to what extent are those customers really allowed to influence product development?

In the course of researching a presentation on the long tail of payments services for GikIII (a two day workshop on the intersections between law, technology and popular culture), I've been struck by how these observations combine to emphasise the same point:

• There is value in marketing "long tail" products if adding selection is cheap (as it is online): Anderson;
• Compared with heavy users of online retail services, light users much prefer better selling products; both prefer “hit” products more than those in the tail; but it is the heavy users who venture into the tail: Elberse;
• Successful Web 2.0 businesses are those that facilitate an 'architecture of participation': O’Reilly;
• "Lead-user product development can be a far more effective means of innovation than conventional product development in a closed system": Sheahan (citing von Hippel, of course) and giving various illustrations of the same concept in Threadless, Jones Soda, LEGO's Mindstorms Users Panel, and of course Linux.

Suggestions that even "excellent retailers" have run out of ways to improve the online shopping experience, and the only scope for real innovation is on the buy-side, are way overdone. But it must be true that improved tools for buyers as well as, e.g. 'power sellers', are an important set of features in the overall consumer experience mix. And it should also follow that enabling your prolific buyers to add to the range of products available for all buyers is a powerful step to take. Some of those products might even prove to be popular enough to work their way up the 'tail'.

In the payments context, it's interesting that recent research by Datamonitor suggests financial institutions are too mired in last century's anxieties to let their online customers loose with a bunch of web-based tools.

Seems my 2008 predictions for the SCL are still holding up nicely!

"Platform" as "Markets"?

A hat tip to The Bankwatch for pointing out Umair Haque's interesting post "What Apple Knows That Facebook Doesn't".

My sense is that there's really not much in this, and there are more similarities between the Apple and Facebook approaches than substantive differences.

I understand Umair to be saying that Apple has adopted a "market" business strategy, whereas Facebook is taking a "platform" approach. Apple facilitates an increase in flexibility and utility for its customers, while Facebook channels its users into functionality of its choosing and exposes them to advertising. Apple will dominate, Facebook is somehow doomed. Specifically, Apple's approach will alter the basis of competition, irrevocably alter the market by unleashing a domino effect and open the value chain to myriad new entrants.

But how does this improve on O'Reilly's explanation that the success of Web 2.0 businesses stems from their "architecture of participation"? He sees the internet as a "platform" but with a different set of rules for success. So it seems we should see platforms as a feature of markets or certain market phases, rather than "platforms as markets", as Umair would have it. Perhaps this is nothing more than saying that markets consolidate around 2 or 3 large participants (platforms?) and fragment again over time.

And you could easily switch Umair's examples.

Facebook has actually made the internet and internet technology more usable for people who want to network, socially or otherwise. Yes, there are crappy apps, but VC's are funding some of those because of their ability to acquire signficant numbers of users overnight, hence the notion of the Facebook economy. It may be hype, to some extent, but what VC-fest isn't? The basis of competition has changed, because you can launch a business today with a tenth of the funding you needed 3 years ago. The domino effect might be seen in the way incumbents are forced to enter the social network services space and in the numbers of start-ups and early phase businesses relying on low-cost services like cloud computing to reduce their "burn", helping making those services viable in turn. Similarly, Facebook is encouraging new entrants, and opening up the long tail of apps and content for all those niche communities you see in the groups.

Apple, on the other hand, sought to make its iPod and now the iPhone the dominant platform in its space. Apple drip-feeds new functionality, new versions and content deals with the majors as a way of trapping people on those platforms. The result is a standards war between device manufacturers, by any other name, and it's boring for anyone who wants truly interoperable mobile applications and music that will play on any device.

Actually, I sense that the approaches of Facebook and Apple may be more similar than different. Each has created an architecture of participation, and time will tell which is more successful at sustaining it - perhaps both will be.

The Long Tail of Banking: Define "Head" and "Tail" - Part 2

Fascinating post by Chris Skinner on The Long Tail of Banking.

In any such discussion, it's important to define the "head" and the "tail". In essence, Chris says:

"The Long Tail in banking would be a mass market of niche microgroups that incur no cost overheads to manage but, for each transaction, creates a small profit... You want to reach people who were previously underserved, because it would not be profitable....We are talking about children, students, the unbanked, the underbanked, the grey market, the welfare market, the pensioners, the migrant workers and more. And we are talking about social lending and saving, [e-payments], prepaid and mobile.... we need to look at prepaid and mobile for these folks."

I understand Chris to be saying that current bank customers are the "head" and everyone else as the "tail", and that the "long tail" challenge is how to get existing bank products (e.g. prepaid cards and mobile payments/banking) to the tail.

However, I view the "head" and the "tail" in terms of the breadth of product selection and related customer need, not the customers themselves. The long tail challenge being how to enable customers to find or create the product that is right for them personally. As Chris Anderson explained in his response to the recent HBR long tail review:

""Head" is the [product] selection available in the largest bricks-and-mortar retailer in the market... "Tail" is everything else, most of which is only available online, where there is unlimited shelf space."

The reason why Web 2.0 is now disrupting traditional retail banking is that banks and their direct competitors have followed a traditional "blockbuster" approach - marketing comparatively few, very inflexible products (the "head") and relying on those to attract most of the market, rather than trying to market the "tail" of products that would solve every person's individual savings, investment, borrowing and payments needs. Online facilitators, like Zopa and Kiva have spotted this, and created the means to enable consumers to create, or find, and buy the financial product that is right for each of them personally, in the same way that they can now design their own holiday instead of taking a package holiday. Using these facilitators, consumers effectively create thousands or even millions of "products".

Currently, the scale of participation in social finance platforms, and the resulting liquidity levels, only makes a long tail strategy feasible in the markets for retail savings, microfinance and personal loans. But at scale there is no reason why people can't finance each others mortgages, mutually assure general insurance type risks or offer short term trade finance for SME's and so on, depending on their individual need.

Of course, the financial wholesale or capital markets already operate like this, and long ago evolved "products", like spread-betting and CFD's, and user experiences, like City Index, that are better suited to individuals rather than large market counter-parties. Worth noting that BJSS, who helped build the Zopa platform, also developed various financial markets trading platforms.

I take Chris's point about mobile being critical to reaching the long tail, but viewing any one access technology as a gateway in itself risks a slide into "blockbuster" thinking rather than long tail thinking. To access the long tail of individual requirements, the market has to be as porous as the participants need it to be to create their own "product" whenever and wherever is convenient or useful for them. In practical terms, you should be able to (and now can) share or publish your loan request or "listing" via your pc or mobile to all the social network platforms, in the same way you can share a blog that you like.

The role of technology in creating the long tail of products that meet individual customer requirements in the payments space is perhaps a little different. The act of payment itself is very simple and doesn't need to change. But the "blockbuster" approach has meant that banks and other payments providers have treated payment as an isolated act, and supported it with a few inflexible products. Whereas, from a customer standpoint, payment is always embedded in a longer process, activity or scenario. In-store payments aside, it has been a real struggle to enable individuals to make payments and money transfers when and where they want to. Integrating payments with online shopping carts and ordering pipelines to create a satisfactory customer experience occupied the first 10 years of e-commerce development, and many still get it wrong. Mobile payments (not to be confused with mobile banking) has had several false starts and still suffers from a lack of standards and interoperability. This makes it tough to enable each user to make up his or her own payment solution to suit a specific scenario. But at least providers are now focused on solving real user problems in real scenarios - like enabling you to find a product and buy it while you're on the move or remittances from foreign workers stuck in remote compounds.

Mobile banking, on the other hand, still suffers from the old blockbuster thinking - merely offering access to the same old, inflexible bank products, rather than enabling users to make up their own. I'm sure the long hand of the Web 2.0 trend will enable consumers to get there eventually.

The Long Tail: Define "Head" and "Tail"

Fascinating post by Chris Anderson responding to a Harvard Business Review analysis of sales patterns in the music and home-video industries to see if they support or undermine the Long Tail theory.

In short, depending on your definition of "head" and "tail", the data could be used either way. A somewhat obvious point to make about any stats, but nice to see the pro's slanging it out, and good ammunition for responding to use of "Long Tail" buzz words in pitches.

The slightly longer version is that HBR finds that the "blockbuster theory" holds even for e-commerce:

"A balanced picture emerges of the impact of online channels on market demand: Hit products remain dominant, even among consumers who venture deep into the tail. Hit products are also liked better than obscure products. It is a myth that obscure books, films, and songs are treasured. What consumers buy in internet channels is much the same as what they have always bought."

Hence, even online businesses should focus their resources on promoting hit products rather than obscure products.

However, Chris Anderson points out that:

""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."

Using that definition, the data supports more "tail heavy" consumer demand on the sites analysed.

View or join the ongoing debate!