OOPS!! The Proof is not in the Pudding!

David Saad · July 21, 2008 · Short URL: https://vator.tv/n/335

But who Cares, Eat It

Have you noticed how quickly high-tech industry insiders, including opportunistic entrepreneurs such as myself admittedly, rush to adopt the next "next thing" without truly analyzing its merit?!!!

This behavior is caused by the desire to exploit the new "thing", to be the first to market even though it is often more of a disadvantage, and to claim notoriety.

The culprits are not limited to entrepreneurs. Investors are equally guilty of rushing in search of new exceptional high returns.

On the other hand, I can't help but to wonder what would happen to innovation if we were to hold back for the sake of avoiding failures.

The list of such cases is too long to mention, so I shall restrict my examples to three most recent popular ones, namely: The Law of the Few, The Wisdom of Crowds, and The Long Tail. As I was examining those three cases, I searched for the proof, but oops, it turned out that the proof was not in the pudding, yet, I found myself continue eating.

The Law of the Few

Few years after Malcolm Gladwell cited his theory of the Law of the Few in his bestseller entitled the Tipping Point, here comes Duncan Watts, a bright professor at Columbia University, a network theory scientist, a sociologist, an author, and a researcher at Yahoo, challenging this theory with his empirical study that claimed that influencers seems to have caught the influenza, and are not as influential after all because markets are highly unpredictable. Duncan's point is not that viral marketing is not viable, it certainly is, but it is unpredictable, unreliable, and unlikely to be repeatable even though it is highly effective when it works. A good reference of this showdown between Gladwell and Watts would be the excellent posting entitled "Is the Tipping Point Toast" by Clive Thompson.

As you would expect, marketers dismissed Duncan's results because of their desire to influence influencers knowing that they can't control viral campaigns like they can with traditional advertising campaigns. Similarly, Duncan is not particularly regarded by vendors who offer products and by agencies who offer services that attempt to give marketers a grip on influencers. Amazingly, with the advent of social media, some marketers still think that they can control consumers like they used to. After being in the viral marketing space for a while, and have been one of those vendors with a company called Calibra, I now agree with Duncan Watts, and yes, you can accuse me of flip-flopping.

The Wisdom of Crowds

Then came James Surowiecki, a New Yorker columnist, with his wisdom of crowds theory which says that the collective opinion of few people is likely to be smarter than the opinion of a single person or expert. While I am a proponent of this theory, in my article entitled "The Opinions of the Few", I challenged the current implementations (not the theory) of the wisdom of crowds citing that all current systems, including Clupedia admittedly, breach the basic principles of the wisdom of crowds and offer nothing but the opinions of the few. Of course, I am sure that there are number of companies in the space who would strongly disagree with me, especially those who aggregate reviews and somehow by magic, they come up with a score based on fictitious criteria (i.e., consumer report 2.0 - "millions reviews, one score"). Those are not reliable systems but marketing gimmicks waiting to be unraveled.

The Long Tail

In October 2004, Chris Anderson coined the expression The Long Tail in his article in Wired Magazine. The Long Tail theory claims that when the distribution and inventory costs of goods are low enough, and when a large base of customers have access to easy search capabilities, there could be profits, possibly more profits, to be made by selling many rare items to few customers (referred to as The Long Tail) versus selling popular items to many customers. The study of such distribution systems actually started way back in 1946 which led to power law or Pareto distribution - the original source of the 80/20 rule as we commonly know it (the 80 consisting of the masses or the long tail, while the 20 consisting of the richest or the blockbusters).

Anderson argued that the long tail offers consumers the opportunity to better satisfy their particular taste and needs versus being content with the common denominators which are the hits. Therefore, smart companies should stop relying on blockbusters and focus on the long tail. In particular, online stores who focus on niches are in better position to compete against brick-and-mortar stores who cannot afford but to carry blockbusters.

Rolling forward about half a decade later, the first company that truly capitalized on The Long Tail was Amazon followed by Netflix. Nowadays, a host of companies jumped on the band wagon. So, Should You Invest in the Long Tail? is what Anita Elberse, Associate Professor at Harvard Business School, rhetorically asked in her paper published in Harvard Business Review. When selection is vast and search is easy, how do sales volumes stack up? Do they skew toward the head of the distribution curve or toward the tail? Her empirical study showed that blockbusters still rule our world due to the following reasons:

People are social. They want to share their findings and their tastes. They can't do so if their taste falls in obscure niches. Vice versa, because people are social, they form their taste based on the crowd. There is indeed a social value in listening to the same music, watching the same movies, reading the same books, and wearing the same jeans as the rest of the crowd.

Poor quality is not a substitute for good quality. Why would people listen to the world's second-best recording of Carmen when the best is readily available? Thus, even a tiny advantage over competitors can be rewarded by an avalanche of market share.

Products in the long tail are not the only ones benefiting form the low cost of production and distribution. Indeed, blockbusters are profiting too, maybe even more so than their counterparts in the long tail.

Although no one disputes the lengthening of the tail (clearly, more obscure products are being made available for purchase every day), the tail is likely to be extremely flat and populated by titles that are mostly a diversion for consumers whose appetite for true blockbusters continues to grow.

She concluded by saying that it is therefore highly disputable that much money can be made in the tail. The companies that will prosper are the ones most capable of capitalizing on individual best sellers. This is why book publishers and music labels continue to compete fiercely in bidding wars to secure blockbuster titles.

In Debating the Long Tail - Harvard Business Online's Conversation Starter, Chris Anderson hit back: "it all depends on where you say the "head" is and where the "tail" is located. My point is not to suggest that Elberse is wrong and that I'm right, it's only to point out that different definitions of what the Long Tail is, from "head" to "tail", will generate wildly different results.

Tom Foremski from Silicon Valley Watcher and a former Financial Times reporter (Choking On The Long Tail - The Unbearable Burden and Long Tail Economics - Bonanza Or Bogus?) joined the conversation by saying: "Well, if you get widely different results depending on where you slice the head and tail then there really is no "Long Tail." You can prove or disprove the concept as much as you wish. As a business, you want to be in the "head" because that's where the profits are the fattest. You don't want to be in the "tail" you'll get there anyway. If you are a startup, start well in the "head" is my advice. Don't try to build a "Long Tail" business or you'll get your head handed back to you."

There you have it.

This article is not about any of the theory listed above but rather about the behavior of entrepreneurs and their investors to rush to commercialize new theories. If we are cautious, we might obviously avoid some costly mistakes, but if we are too cautious, we might hinder innovation, and in the process miss out on some great opportunities.

I am now reminded of the blockbuster (ironically) movie Wall Street with Gordon Gekko's (Michael Douglas). If you recall, he had two infamous tag lines in that very cool movie: "every dream has a price" and "greed is good".

Guess on which side of the fence I stand...