I am as guilty as, well, nearly everyone else of sloppily defining the "80/20 Rule" to mean whatever I want. Pareto's principle really is an all-purpose widget, broadly applicable to almost anything humans do (and, of course, the behavior of atoms in a Bose-Einstein condensate). But it's time to crisp things up, at least as far as the Long Tail goes.
The general articulation of the principle is: "for many phenomena 80% of consequences stem from 20% of the causes." (Vilfredo Pareto [shown] first articulated this in 1906 when he noticed that 80% of the property in Italy was owned by 20% of its population).
In my original piece I explained it as follows:
The 80/20 rule is all around us. Only 20 percent of major studio films will be hits. Same for TV shows, games, and mass-market books - 20 percent all.
We're stuck in a hit-driven mindset - we think that if something isn't a hit, it won't make money and so won't return the cost of its production. We assume therefore that there is little demand for the stuff that isn't carried by Wal-Mart and other major retailers; if people wanted it, surely it would be sold. The rest, the bottom 80 percent, must be subcommercial at best. We assume, in other words, that only hits deserve to exist.
So in this case I was using 80/20 to refer to the notion that 80% of the revenues come from 20% of the products. Furthermore, I was echoing the Hollywood mantra of hit-driven economics: the top 20% of films will make virtually all the profit, subsidizing the loss-making bottom 80%. Like this:
In other words, if you could only know ahead of time which films would be hits, the economically rational decision would be to make just 20% as many of them. And, indeed, this is largely what DVD rental and retail outlets do: since they do know which films were hits in the box office, they mainly stock and push just those. As a result, theatrical hits from the past year make up 90% of the transactions in even video superstores (other titles are stocked, but in smaller numbers and are not promoted).
The stores do this because shelf space is expensive, attention is scarce and there are few good ways to offer consumers information about products to help them with their choices. Ironically, the real world, despite its ability to flood our five senses, is still a pretty narrowband information channel when it comes to things like "people like you bought...", "IMDB says..." and "rank by...".
My thesis in the continuing research on the Long Tail is that as distribution and information bottlenecks diminish, many 80/20 markets will become closer to 50/50 markets. What I mean by that is that the demand curve will flatten somewhat, so that the few "hits" that now generate 80% of the revenues will instead make up about half the market, and the many niches that now represent 20% of the revenues will, in aggregate, make up the other half. The reason is that more goods will be available and they will become easier to find as information about products gets richer and recommendations drive demand down the tail.
That's revenue. The profit implications could be even more dramatic. We're seeing that in many markets (especially those for digital goods that can be delivered online) the retail margin on small sellers can be as high as for the blockbusters. The marginal cost of storing and delivering a track on iTunes is the same tiny amount whether it's top ten or bottom half-million. Because storage space is essentially free, the market can become non-discriminatory: 10 sales each of 1,000 niche tracks is, to first approximation, economically identical to 10,000 sales of one hit track. So rather than all the profit coming from the top 20%, it too can evolve to be split evenly between hits and niches. Thus the Long Tail can, in aggregate, be as profitable as the head.
However, here's where it gets tricky. In the above definitions, I've been referring to 80% and 20% of the existing markets. But the Long Tail is about expanding those markets to include products and customers that are currently "sub-economic"--traditionally not worth carrying or otherwise including at all. How does that fit into the traditional 80/20 construction?
Good question. I'm afraid I may have confused many people on this
point, because in the charts in my original piece I imply that the Long
Tail refers exclusively to products that are not available in standard
retail, which is to say outside the existing 80/20 world entirely.
That's one perfectly reasonable definition of the Long Tail (see
below), at least for products that have a retail presence, but it
doesn't help us in our quest for 80/20 clarity. The fact that in the
Netflix example this beyond-retail category happens to represent 20% of
rentals only muddies the waters further. No wonder interpretations of
this point have been all over the map.
(In all the Long Tail markets that I've looked at so far the revenues from products not available in traditional retail range from 10%-30% of the total. Those figures have all risen since my article last year, but I'll save the latest numbers for the book. Also note that I've revised my Amazon estimates after more consultation with them. )
Making matters worse, virtually none of the media markets I've looked at actually show an 80/20 distribution today. In most instances, they're much more hit-driven: typically a single digit percentage of products represent 80% of the revenues. In other words, the 80/20 Rule not only won't hold in the future, but it doesn't even hold today. Argh!
Needless to say, this is a mess and I'm going to have to be a lot clearer in the book. As I see it there are two possible solutions:
- Keep my definition of the head category constant even as the tail
expands, so I'm at least comparing apples to apples. Thus my thesis
would be: As more niche products become available, the hits (whatever
percentage of the total number of products they may be) that now make
up 80% of the revenues will decline to 50%. And the niches will grow to
make up the rest.
- Find another way to draw a line between head and tail and simply observe how the expansion of one affects the other and the market as a whole. Inevitably, that's going to be subjective and will be different in each category. Also, in most cases it won't fit neatly into either the 80/20 or 50/50 rules. As in the Netflix example above, I could use typical bricks-and-mortar inventory to represent head, and the rest tail. In TV, I could use Nielsen-ranked shows (the top 100) to define the head. In music, perhaps the best metric is the Soundscan top 1,000 (the Billboard 100 is probably too few to be a fair representation, given how many albums are released each year). For advertising, companies that spend more than $10,000 a year on ads. And so on...
Number 1 is conceptually neat but somewhat arbitrary in its line-drawing. Number 2, while reflecting real-world dividing lines, doesn't fit neatly into a Pareto context. On balance, I'm leaning towards Number 1--neat is good--but we'll see how the next batch of data comes in to see if it's doable. Rigor is great, but plenty of people smarter than me have ended their careers still trying to turn their ideas into the grand unified theory of everything. Me, I'll happily settle for almost everything.