Domic Muren, who's behind IDFuel, a good industrial design blog that I follow, applies the LT to design for niches. He distinguishes between designing and selling products for what he calls the "body"of the marketplace (an unfortunate word to describe the mass market, given the confusion likely in his world, where people really do design for bodies) and for specialty retailers in the tail.
"Designing for the body is about designing for fashion, licensing, heavy TV/print promotion. It's designing for mass market, Target-Wal Mart-Big Box Store. It booms huge in sales, and then it fizzles out, eclipsed by the next boom. It's also finicky as hell. ... The Tail is about creating pockets of absolutely devoted users in a sea of others who don't get it, rather than fitting everyone out with the same taupe cargo chinos.
Before the Long Tail of specialty retail existed, you were only safe designing for the body of the market. You were only safe designing to hit as many people as you could. Now that there are so many more places to sell targeted innovative designs, you can afford to be a little more exciting. Like Uglydoll -- here's a concept which could only have been started because of long tail distribution online and in not-so-common sales locations, like CB2 in Chicago.
That's what the Long Tail is really about: Freedom. Freedom from re-using tried and tired designs re-branded with new blockbuster movies. Freedom from lowering your ideal to the lowest bidder's values. Freedom to design the things that you believe really matter. Because if they really matter to someone, the Tail connects them with it.