Tuesday, July 1, 2008

The Long Tail of International Trade?

I've recently completed reading Chris Anderson's The Long Tail: Why the Future of Business is Selling Less of More, a fascinating look at how the internet and the companies who know how to use it (think: Amazon, eBay and Google) are catering to niche consumer demand in a way that is revolutionizing not only commerce but culture. Anderson focuses almost exclusively on domestic concerns, but if his theory holds true, the implications for international trade are also enormous and merit further study.
We probably do not need yet another book explaining how the internet has changed everything. The Long Tail goes far beyond describing the digital age, however. Anderson focuses on an economic phenomenon, which he dubs "The Long Tail". The Long Tail gets its name from distribution charts which plot out consumer demand. Not surprisingly, what the graphs demonstrate is that there is high demand for popular (and generic) fare that caters to a wide audience. The latest Oprah book club pick will prove an instant success with many running out to get a copy. When plotted, demand for an "Oprah book" will be at the head of the distribution curve (see chart--photo credit) . It used to be that publishing houses, movie studios and record labels focused on predicting and producing the next big thing likely to appeal to the widest possible audience (the head of the distribution curve), and bricks and mortar stores focused on stocking and supplying only those hits. But companies like Amazon and Rhapsody, a digital music online store, have literally turned the distribution chart on its head. These companies have discovered there is a lucrative market for the fringe/niche or tail of the demand curve. Music from obscure garage bands and the latest self-published e-book also find their audience. In fact, when aggregated, demand for niche products outstrips demand for the generically popular "hits."
The implications for business are enormous: Companies that can capitalize on this phenomenon by lowering their production and warehousing costs (through digital technology, for example) can stock the most niche of niche products and still find a profitable audience for it. In the long term, our culture has just shifted from the age of top-40s hits to an infinite fragmentation of the market where mini-hits prove almost more profitable than mega-hits.
Although Anderson pays little attention to it, the Long Tail's implications for international trade are significant. To the extent that our tastes diverge from the generic, products created abroad easily find their audience in any locale (consider the way Japanese Anime has become a world-wide phenomenon). But it also raises the specter that those countries unable to effectively harness the internet--the least developed and lesser developed countries--will once again be left behind. The unanswered question of Anderson's fascinating book is how do we empower those countries to find their markets?

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