NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, July 25, 2007

Niche products rather than the mass market: Chris Anderson, editor-in-chief of “Wired” magazine and best-selling author explains the business of the future.

Steven Soranno: Innovation is commonly believed to involve a high degree of creativity and thinking outside the box. In that sense, it can be thought of as more of an art than a science. What does innovation mean to you?
Chris Anderson: Innovation is advancing the ball. It is evolving or creating something that did not exist before. Innovation typically works through the process of cross-fertilization. Newton said: “If I have seen further, it is by standing on the shoulders of giants.” It is now far easier to stand on the shoulders of other people?s ideas, other people?s work, other people?s contributions, and advance the ball. I think there has never been a better laboratory for cross-fertilization than the Internet.

Is the impact of digitization on the global economic structure historically unique?
Digitization is a stepchange in the economics of replication and distribution. We have seen other such changes in the past, such as Gutenberg?s press, but there has never been anything that has dropped the cost of replication and distribution as rapidly and as low as digitization. And what that does is make information, broadly defined, a costless economy, which is to say that it has near zero marginal cost. When things have near zero marginal cost, it completely changes the game. As a result, we now have essentially unlimited access to information. Now obviously, without the likes of Google, it would not be as useful as it could be. So, making sense of information is still a scarcity in the marketplace, but the access to information itself is increasingly becoming ubiquitous and free. And that is the environment in which innovation and cross-fertilization can happen.

On the surface, your “Long Tail” thesis and C. K. Prahalad?s “Bottom of the Pyramid” appear similar. Both stating, with a broad stroke, that new technologies are one factor helping unlock the innovative and entrepreneurial spirits of millions of economic value niches, generating new economic paradigms that have far greater productivity curves than would be achievable under the industrial revolution, mass-market paradigm. How would one compare both theories?

I went to India for a week to do just that. Basically, the difference between the two is that the Bottom of the Pyramid is about commodification ? taking a small amount of products and making them very cheap ? while the Long Tail is about “nicheification,” which involves changing the economics of the marketplace so you can offer a large number of products to satisfy minority tastes. Both theories are based on the notion that if you break the economic and physical bottlenecks of distribution, you can reach a huge, previously neglected market. They both recognize that millions of small sales can, in aggregate, add up to big profits. And they?re both focused on ways to lower the cost of providing goods and services so that you can offer them at lower price point while still maintaining margins. But the Bottom of the Pyramid is focused on taking a single product or service and finding ways to make it cheap enough to offer to a larger, poorer market. This is why I think it?s essentially about commodification. By contrast, the millions who find themselves in the tail are no poorer than those in the head. Indeed, they are often drawn down the tail by their refined tastes, in pursuit of qualities that are not delivered by one-size-fits-all. So the Long Tail is made up of millions of niches. The Bottom of the Pyramid is made up of mass markets made even greater. Both lower costs to reach more people, but they do so in different ways.

Continue reading “The YouTube Effect Is a Wake-up Call”