Power Law Functions – Explaining
At some point last year, I realized just how little I knew about the Internet. I had lived in a world that dealt originally with email advertising in newsletters to registration paths. I grew up, if you will, in a time where search had yet to prove itself and the rest of us had our heads down trying to find a way to make a buck. We didn’t think about the next big thing, and spent little time trying to understand the changing landscape. Yet, the changing landscape is exactly what provided many of us an opportunity in the first place. It’s only natural that as the web changes again, a new type of opportunity exists. Chris Anderson, editor-in-chief of Wired Magazine, coined the phrase which describes among the leading, if not at the very least most talked about, type of opportunity in today’s changing landscape, The Long Tail.
By now, it’s almost expected that everyone know about the long tail, the term itself having almost become hackneyed. The reality is that not everyone does, just as I had no idea what tagging or even Flickr was not ago. Not being a statistician, economist, or formerly schooled in business, it took some digesting the concept. Now, I find myself using the notion of The Long Tail quite frequently. For those who have, no doubt, heard of this long tail mumbo jumbo and wanted to know more, only to be overwhelmed by the academic and industry information on the topic, these two articles are for you.
Like many people, I found myself heading (via Google incidentally) to Wikipedia, and in reading their summary of The Long Tail, another concept worth covering comes up first – the 80/20 rule, also known as the Pareto principle. Older and more widely used than The Long Tail, it has equal if not greater addictiveness. Once used, you will hold yourself back from finding examples of it in life and using it in work. In short the Pareto principle is an extrapolation of the finding by Italian economist Vilfredo Pareto that 80% of the income in Italy was earned by only 20% of the people. If you work at an ad network, just think of your clients; chances are a handful of the publishers drive the majority of the volume; similarly, the majority of revenue comes from a handful of advertisers.
The Pareto principle is known as a “power law” function for the shape of the graph and the unequal weighting of one side of the curve. Power law functions look like the right half of the bell shaped normal curve, but with an even steeper initial drop. Think of a plastic drawing aid that helps create quarter-circle images. (There is a nice looking example in Part 2.) Power law functions, especially the Pareto principle have increased in popularity as more and more systems seem to follow this type of distribution. There are books, seminars, you name it on how to apply the Pareto principle to your life.
What the Long Tail author Chris Anderson suggests is that technology has started to change the power law curves that define so many of life’s systems. In other words, no longer do many systems we thought followed the 80/20 rule have to. He gives the example of Robbie Vann-Adib, CEO of Ecast who asks "What percentage of the top 10,000 titles in any online media store (Netflix, iTunes, Amazon, or any other) will rent or sell at least once a month?" The right answer according Vann-Adib and the article is not what most would think, this is to say that it no longer has to fit within the 80/20 paradigm. As to how many will rent, it turns out almost 99% will. That demand fits across a wider spectrum than previously imagined talks to only one piece The Long Tail economics. The other major component comes when you combine the size of the 20, the non-hits (to use music speak), i.e. the tail. The sum of the tail can equal and exceed the sum of the head, the assumed threshold for worth.
Creating and capturing the tail is big business. Take this example given by Mr. Anderson: The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon’s book sales come from outside its top 130,000 titles. All of the sudden, the small guys mean something, and it’s only possible through technology. The top businesses online today all leverage the tail, be it Google and its aggregation of advertisers or eBay and its aggregation of products. In his mind, The Long Tail is about three things – 1. Making everything available, 2. Low prices, and 3. Helping consumers find information. In Part 2 of this week’s Digital Trends, we continue with the idea of The Long Tail and take a straightforward approach to its components and our take on how to identify such a system.
