The Internet and the death of the 80/20
Kevin Laws
Principal,
PacRim Venture Partners
PacRim Venture Partners
The 80/20 rule is a rule of thumb every startup should know. Economizing on time, management effort, and money has to be second nature. They should constantly be going after the 20% of the effort that provides 80% of the benefit. They should constantly be focusing on the 20% of their products and customers that provide 80% of the revenues. Or should they?
Entertainment has Discovered the Long Tail
Chris Anderson’s observation in a recent Wired Magazine article is that the 80/20 rule exists in the physical world because you chop off the long tail. In music, for example, Britney, Santana, Madonna and a few others represent the very few artists (well, more like 1%) that account for huge sales. However, there are literally hundreds of thousands of smaller artists that have tiny sales. Historically, these artists have never been carried in record shops (except maybe one or two local ones), were not featured on top radio stations, and were never promoted on big concert tours. Since they were in the tail and record companies were following the 80/20 rule, they never got exposure and a chance to increase their sales. The real world “chopped them off” of the long tail, since a record store only carries thousands of titles, not hundreds of thousands.
This meant that the 80/20 rule was self-reinforcing. Because they weren’t promoted or available, they never moved beyond their few copies. Hollywood never saw their sales since they were all independent.
However, many of the Internet media companies are different. They started out just being a better way to shop (or rent movies). They sold the same things everybody else did, but at better prices. Then a funny thing happened—suddenly they noticed that more and more sales were coming from the tail. That is, they were selling a lot of the items that physical stores didn’t carry. In hindsight this is completely obvious—of course you are in competition with every single bookstore in the nation to sell Clinton’s “My Life,” but if you want Gerd Gehringer’s “The Adaptive Toolbox,” there’s only one place to go: the Internet. Chris cites numerous examples in his article: over 50% of Amazon’s media profits come from sales past the top 100,000 titles. More than 50% of Rhapsody’s business is streaming songs past the top 10,000 tracks. Once they started focusing on the long tail, new recommendation tools appeared. They helped “push you down the tail” by bringing little known artists to your attention when you purchased the big guys. When tallied, all of those little-selling items and all those little customers across the nation can exceed the online sales from the biggest sellers.
Entertainment has Discovered the Long Tail
Chris Anderson’s observation in a recent Wired Magazine article is that the 80/20 rule exists in the physical world because you chop off the long tail. In music, for example, Britney, Santana, Madonna and a few others represent the very few artists (well, more like 1%) that account for huge sales. However, there are literally hundreds of thousands of smaller artists that have tiny sales. Historically, these artists have never been carried in record shops (except maybe one or two local ones), were not featured on top radio stations, and were never promoted on big concert tours. Since they were in the tail and record companies were following the 80/20 rule, they never got exposure and a chance to increase their sales. The real world “chopped them off” of the long tail, since a record store only carries thousands of titles, not hundreds of thousands.
This meant that the 80/20 rule was self-reinforcing. Because they weren’t promoted or available, they never moved beyond their few copies. Hollywood never saw their sales since they were all independent.
However, many of the Internet media companies are different. They started out just being a better way to shop (or rent movies). They sold the same things everybody else did, but at better prices. Then a funny thing happened—suddenly they noticed that more and more sales were coming from the tail. That is, they were selling a lot of the items that physical stores didn’t carry. In hindsight this is completely obvious—of course you are in competition with every single bookstore in the nation to sell Clinton’s “My Life,” but if you want Gerd Gehringer’s “The Adaptive Toolbox,” there’s only one place to go: the Internet. Chris cites numerous examples in his article: over 50% of Amazon’s media profits come from sales past the top 100,000 titles. More than 50% of Rhapsody’s business is streaming songs past the top 10,000 tracks. Once they started focusing on the long tail, new recommendation tools appeared. They helped “push you down the tail” by bringing little known artists to your attention when you purchased the big guys. When tallied, all of those little-selling items and all those little customers across the nation can exceed the online sales from the biggest sellers.
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Reader's comments(4)
1:
80/20 rule works only in cases where there is limited resource. A shop keeps only thousand titles because it is constrained by space and can't keep 100s of thousands. It is anybody's guess that in situation like this you would like maximize your sale by keeping things that people like. Internet has no such space limitation plus it is easier to search on internet than in a physical store. So that's why internet doesn't follow 80/20 rule.
Posted by:Avinash Kumar - 21 Aug, 2009
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