Heads, Long Tails, and Light Consumers

I'm currently reading Blockbusters by Anita Elberse and wanted to summarize a few thoughts on the book. Blockbusters, by Anita Elberse (Henry Holt and Company, 2013).

Elberse talks about the general effectiveness of blockbuster strategies, or the idea of a company focusing most of its resources -- including its marketing and talent funds -- on just a few products or services, whether it's movies, music, books, or electronic hardware. She makes a strong case for focusing on the "head," or sales driven by a few blockbuster products that are expensive to develop and market, versus focusing on the "long tail," or sales from targeting multiple niche market segments with a range of specialized products. Big profits are driven by the head and not the tail. Id.

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Citing William McPhee's Formal Theories of Mass Behavior, Elberse also makes the interesting point that "light consumers" who buy less frequently and know less about product alternatives tend to opt for the most popular choice. Companies with blockbuster strategies naturally monopolize light consumers. Id. "Heavy consumers" who buy a product frequently are more aware of their alternatives and are typically the ones who choose niche, long tail products. Id.

Ironically, McPhee found that heavy consumers tend to appreciate popular products more than the obscure products they often buy. Id. This suggests that heavy consumers of obscure niche products are prime candidates to eventually switch to more popular blockbuster products.

Elberse notes that YouTube and Netflix formerly seemed interested in pursuing long tail strategies, trying to provide a niche offering to every market segment. This strategy was enabled by the negligible transaction and search costs associated with digital goods. YouTube and Netflix initially seemed to believe that long tail sales would widen and lengthen because consumers would value niche offerings more than blockbuster offerings, leading to declining sales in the head and growing sales in the tail. This apparently hasn't occurred. Id. YouTube has since shifted its focus to premium "channels" from well-established stars/brands like Jay-Z, while Netflix is spending big on premium content produced in-house, like the House of Cards series with Kevin Spacey. Id.

The implications for companies like Apple seem pretty clear. Focus your resources, including your marketing and talent funds, on just a few blockbuster products, thereby monopolizing light consumers while also attracting heavy consumers. Heavy consumers may start with a niche product but they're likely to appreciate the blockbuster product more, making them prime candidates for product switching.

Addendum (added 8/26/2015):

The effectiveness of blockbuster strategies versus long tail approaches should also be good news for premium content producers like Disney, ESPN (a Disney subsidiary), and HBO. Regardless of whether consumers get this content through cable providers like Comcast or over-the-top services like Apple TV or Roku, premium, blockbuster content should remain a healthy source of profits.

The author owns stock shares of Apple.

Chance Favors the Prepared Mind (Company)

Steve Jobs had a prepared mind which allowed him to see and take advantage of opportunities. Jobs also prepared Apple and its executive team to see and take advantage of opportunities. Apple's vertical integration is a form of preparation which allows the company to opportunistically follow the river. Following the river refers to a company's ability to intuitively adapt to the natural evolution/flow of products and technologies, such as the way music went from CD's to downloads to streaming, or the way television is moving away from cable toward over-the-top broadband options like Apple TV, Netflix, and HBO Now. Vertical integration gives Apple the flexibility and in-house capabilities needed to follow the river. Integration, intuition, and jobs-to-be-done thinking allow Apple to create new product categories and meaningful product improvements in response to the natural evolution of products and technologiesSee post titled Focus, Functional Toys, Tradeoffs, and Following the River.

Apple prepares for new product categories and meaningful product improvements by hiring the best people and by developing/acquiring and integrating the key product technologies (fingerprint technology resources/processes, mobile chip technology resources/processes, and so on). Apple also applies follow the river learning from prior products to help it develop new product categories. iTunes learning leads to the iPod, iPod learning and Apple's computing capability lead to the iPhone, and iPhone learning leads to the Apple Watch.

When an integrated company like Apple follows the river, relying on capabilities and learning from prior products to develop a new product category, it can be difficult for companies that haven't followed the same river to compete. Feature phone makers couldn't compete with the original iPhone because they didn't follow Apple's river -- companies like Nokia and Motorola never developed products like iTunes, the iPod, and the PC, so they lacked the capabilities and learning needed to develop a small, handheld computer that also functioned as a phone and music player. Traditional luxury watch makers are facing the same problem in trying to compete with the Apple Watch.

The author owns stock shares of Apple.

HBO, ESPN, and Jobs-to-be-Done

There's a rumor Apple is going to simplify TV through fewer, more relevant channels and make TV more affordable and customizable. Applying the lens of low end disruption theory:

  • The standard cable package with ESPN and HBO overserves many customers -- it's too expensive with more TV channels than they want. These customers want something simpler and more affordable.
  • Apple can use an asymmetric business model to offer overserved cable customers: (1) more affordable television that's customizable and/or more focused on the best content (like ESPN and HBO); and (2) a simpler, more usable interface that makes it easy and convenient to watch desired content when and where you want. These are unmet jobs-to-be-done that cable companies and content providers are currently ignoring.
  • Apple's asymmetric model likely involves reducing/eliminating the middleman role of cable companies by allowing users to subscribe to content directly (from a content provider like HBO), with small margins for the Apple TV and small margins for Apple in its assumed role as content provider middleman. Apple still benefits from this asymmetric model because Apple TV and the company's role as content middleman facilitate the sale of "sticky," highly profitable ecosystem hardware like iPhones, iPads, and Apple Watches.
  • Content providers may benefit from this model because it will motivate them to focus on creating, nurturing, and producing the best content and the best channels -- content that actually generates meaningful subscription/advertising revenues -- rather than creating sub-par content/channels that providers package and sell to cable companies through affiliate fees. Some of these sub-par channels probably can't survive without packaging and affiliate fee support: they can't survive unless they're packaged with better content/channels, with cable companies forced to pay the content provider an affiliate fee for the whole package (kind of like an unprofitable product subsidized by a profitable product). If sub-par, packaged content that can't survive on its own is subsidized through affiliate fees then this may artificially inflate end user cable subscription fees. If end user cable fees are artificially inflated due to subsidized content then Apple's asymmetric model may improve affordability more than anticipated.
  • Another factor driving a more affordable business model for the distribution of television content is the way mobile devices are competing for user attention. Paid or advertising-reliant TV content providers (ESPN, HBO, ABC, CBS, NBC, etc.) are currently seeing user time and attention shift to free content on mobile devices (YouTube, social media, news, entertainment, etc.). To benefit from this shift rather than be harmed by it, traditional TV content providers must look for ways to: (1) make television content on mobile devices widely available and easily accessible; and (2) offer affordable subscriber options that can compete with free mobile content. Content providers can benefit from an asymmetric model because more affordable/accessible/customizable content, available across TV's and mobile devices, will likely increase the viewer base for content providers, increasing the subscription and advertising revenues these providers receive.

See Concepts page and discussion of Clayton Christensen.

The author owns stock shares of Apple.