The most comprehensive empirical study of digital music sales ever conducted has some bad news for Californian technology utopians. Since 2004, WiReD magazine editor Chris Anderson has been hawking his “Long Tail” proposition around the world: blockbusters will matter less, and businesses will “sell less of more”. The graph has become iconic – a kind of ‘Hockey Stick’ for Web 2.0 – with the author applying his message to many different business sectors. Alas, following the WiReD Way of Business as a matter of faith could be catastrophic for your business and investment decisions.

Anderson bet that the orange portion – the “Tail” – has more value than the red portion – the “Head”. But it doesn’t.

Examining tens of millions of transactions from a large digital music provider, economist Will Page with Mblox founder Andrew Bud and Page’s colleague Gary Eggleton, looked to see how large and valuable the “Tail” of digital music may be. They produced a spreadsheet with 1.5 million rows – so large, in fact, that it required a special upgrade to their Excel software (and more RAM) – and the three revealed their work at the Telco 2.0 conference this week.

They discovered that instead of following a Pareto or “power law” curve, as Anderson suggested, digital song sales follow a classic Log Normal distribution. 80 per cent of the digital inventory sold no copies at all – and the ‘head’ was far more concentrated than the economists expected.

“Is the ‘future of business’ really selling more of less?” asks Page. “Absolutely not. If you had Top of the Pops now, you’d feature the Top 14, not Top 40.”

As Andrew Bud explains:

“The Long Tail’s argument is that the pattern of consumption for media is bent out of shape by the limits of the shops selling them. Digital media lets the nature of people’s demand flow free. Well, we now know what the shape of that demand curve looks like.”

Bud told the conference that the basic shape of consumer demand for digital music clearly fits the Log Normal distribution, “with eye-watering accuracy”. That’s no surprise, he says, because so many sales curves he’s seen over the past ten years follow this distribution.

“Now we’ve seen what happens when tens of millions of choices are thrown in the air and people can go pick them up. What was astounding was the degree of inequality between the head and the tail – by a factor of three. It’s specifically the Log Normal shape that leads to a rather poverty stricken Tail.

“There are Tails where the Tail lives as a kind of welfare state. Not this one. You starve in this Tail.”

Brown’s 1956 lognormal curve fits digital sales data much better than “The Long Tail”

This really isn’t the upbeat fairy tale message Anderson has spent four years selling on the conference circuit.

However, as he took his “message” to Davos and beyond, the Long Tail has gradually developed into a ‘Policy Based Evidence Making’. Having convinced himself of the truth of his hypothesis by looking at one US music service, Anderson widened his search for facts that might fit his theory. But he didn’t examine the numbers closely or critically enough, say the economists.

“You need to consider much more than just some flimsy volume-based Rhapsody data if you’re going to say the world’s changed,” says Page. “For instance, understanding value both in terms of retail spend and then marginal profitability to the artist and songwriter would have been a logical extension”

In another surprise, 80 per cent of the revenue came from 52,000 songs. What’s eye-catching about the number? Well, the typical inventory of a conventional high street record store was around 4,000 CDs. Or … around 52,000 songs.

Old Rules rediscovered

Page says the breakthrough had come via Andrew’s father Martin Bud, a businessman and researcher whose work had informed a now obscure tome with a distinctly unsexy name. John Goodell Brown’s Statistical Forecasting for Inventory Control was published in 1957, and is now out of print. But it forecast the digital world far closer than anything in WiReD.

“In many ways, we’ve been in the Long Tail business since 1914″, says Page, referring to the UK copyright collection society the MCPS-PRS Alliance, where he is chief economist. “That’s what collective rights licensing is. It doesn’t matter if a song is a hit or niche, once it’s been licensed under a blanket agreement so there are no barriers to using it.”

And neither lead economist agrees that the Tail will be any more prevalent when P2P file sharing is taken into account. If anything, it’s more pronounced, Page suggests:

“Look at Radiohead’s experiment. Even when they reduced the price of copyright to free, there were 2.3 million downloads in the first three weeks – and 400,000 in a day. This was perhaps the most pirated piece of music of all time – and yet every fan could get it legally without paying. So the black market could potentially be even more concentrated.”

New World, Old Rules

For Page, the grain of truth in the digital music revolution is buried beneath a mountain of nonsense.

With cheap production tools and the internet as a new distribution channel, some costs of production are indeed lowered, and some artists can indeed cut out (or “disintermediate”) the middle man. But those old rules still make a significant difference to your business strategy.

“In particular, the division of labour and economies of scale still have tremendous relevance to understanding today’s market”, Page notes.

The division of labour means it can benefit you to employ a specialist intermediary, while economies of scale mean the bigger you are, the better terms you can negotiate.

“What’s interesting, from a collecting society’s perspective, is that when you have a dramatic increase in both rights holders on one side – more artists and songwriters – and rights users on the other side – an explosion of more digital music start ups – then, regardless of what the Long Tail is or isn’t, the case for a common platform grows. This common platform pools rights, reduces transaction costs and prevents fragmentation – and everyone sees benefits.

“Otherwise those start ups won’t get started – and those performers and songwriters won’t get paid”.

WiReD‘s faith-based economics

Bud is surprisingly generous about Anderson’s book.

“It’s an excellent book and thoughtfully written. But The Long Tail receives very little numerical examination. Saying the Tail has great value is not borne out by the evidence in this case.”

Anderson’s inspiration was the desire to put a positive spin on a depressing observation. An essay by Clay Shirky suggested that weblog readership followed a Pareto Curve (or “Power Law”) – which dismayed many early Web 2.0 evangelists. Early bloggers began to lose faith. The Long Tail helped bolster morale – although its success owed much to sloppy thinking – and in particular, metaphorical logic.

This supposes that because one thing is like another, it exhibits the same characteristics. For example:

• Oranges are nutritious
• Billiard balls are like oranges
• We should eat billiard balls

To see how far this can travel, once borne on the heady vapors of Web 2.0, take this passage by Jack Schofield in The Guardian from 2006:

“The Long Tail is making an impact because it is a powerful idea that provides us with a new(ish) way of looking at the world. Copernicus did the same thing for many people when he pointed out that the earth went round the sun, not vice versa, though no planetary bodies were physically moved in the process.”

The propensity of journalists – even highly experienced journalists – to fantasize about the world rather than examine it critically is one of the defining features of modern technology coverage.

As Andrew Bud puts it –

“The Long Tail created a Movement, and it’s the Long Tail ‘Movement’ that’s in trouble.”

Page is making a habit of debunking the WiReD clique that is the source of so much bad business advice. We published his response to Kevin Kelly (WiReD‘s founding editor) – Can 1,000 fans replace the music business? – here earlier this year. More of his work can be found online here. ®

[Disclosure: your reporter’s explanation of Californian technology utopians was credited in this presentation]