Blockbusters and the long tail (part 1)

Very few entities in this world can afford to spend $200 million on a movie. That is our competitive advantage

-       Alan Horn, chairman  of Walt Disney Studios, quoted in Anita Elberse, Blockbusters: Hit-Making, Risk-Taking, and the Big Business of Entertainment (Holt, 2013)

It’s easy to dismiss the random junk on YouTube as little threat to The Sopranos. … But there is an audience for less-produced fare that can be made at a fraction of the cost of traditional TV  programming.

-       Chris Anderson, The Long Tail: Why the Future of Business Is Selling Less of More (Hyperion, 2006)

The two recent management books quoted above – Chris Anderson’s The Long Tail and Anita Elberse’s Blockbusters – are often presented as opposite sides in the debate about how technology is changing the entertainment business. Anderson, a former editor of the magazine Wired, argues that the increased capacity of online sales channels (the so-called long tail) has shifted consumption away from markets dominated by a few “hit” products toward markets with many successful niches, and that firms in the entertainment industries should adapt their business models and marketing strategies to this new reality.

Elberse, a professor at the Harvard Business School, has a decidedly different view. Drawing on case studies, market statistics, and interviews with executives in the entertainment industries, she shows that most of those industries’ profits have always come from a small number of hugely popular titles, and contends that new technology is likely to increase, not diminish, the importance of “blockbuster” products to those industries.

We have great respect for the work of both Anderson and Elberse. But, as we’ll show in this article series, we believe they focused on the wrong question, at least in regard to how technological change is impacting market power in the entertainment industries. Of course long-tail products don’t represent a threat to the “blockbuster” business model! By definition, long-tail products are products that very few people want to buy, and it’s hard to create a mass-market business whose goal is to create unpopular products. However, even if long-tail products don’t pose a threat to the blockbuster business model, we believe that long-tail processes do.

That’s what we want to explore in this article series. We’ll do that by focusing on technology’s role in increasing the entertainment options available to consumers and then asking two important business questions: How do these new entertainment options create value for consumers? How can firms capture that value?

How do internet markets create value for consumers? If you had asked this question in the late 1990s, the answer probably would have focused on the internet’s ability to reduce operating costs and increase market competition, leading to lower prices. In 1998 and 1999, we gathered data to test whether online prices were indeed lower than prices for the same products in brick and mortar stores.

Working with Erik Brynjolfsson, we focused on a set of books and CDs sold by both brick-and-mortar and internet retailers, collecting 8,500 price observations from 41 different retailers over 15 months. We found that online prices were between 9 and 16 percent lower than the prices charged by brick-and-mortar retailers – a significant source of economic value for consumers.

Although our study design allowed us to compare prices in online and physical stores, it had a major limitation when it came to measuring the overall value consumers gained from online retailers. The internet retailers in our study stocked nearly every book and every CD available, but brick-and-mortar booksellers generally stocked only the 40,000 to 100,000 most popular of the 2,300,000 books in print, and music stores only the 5,000 to 15,000 most popular of the nearly 250,000 CDs in print in 1999.

Because the prices of products that aren’t available can’t be compared, we had to eliminate from our study all titles that weren’t readily available in physical stores. Thus, although we were able to accurately measure the value online consumers gained from lower prices on relatively popular products, we were forced to ignore a potentially greater source of value provided by the internet: the value consumers gained from being able to easily find and purchase the millions of books and CDs that were too obscure to be stocked in physical stores.

How much value do consumers gain from being able to access obscure titles online? Not much, many would argue. Consumers might be perfectly satisfied with the limited selection offered in brick-and-mortar stores. It is well known, after all, that small numbers of blockbuster titles account for most sales of books, music, and movies in physical stores. Maybe this simply reflects a natural concentration of consumer tastes. Or maybe it reflects the economic characteristics of entertainment products, which, some have argued, naturally favor “superstars.”