The Long Tail Continues
In July 2006, Chris Anderson published his remarkable book in The Long Tail. His insight was that the internet fundamentally changed supply and demand curves for large markets. Digital platforms like Netflix and Amazon could aggregate niche audiences at scale – creating personalized content and services powered by direct relationship with customers, low information costs, and large-scale data analytics. The book was written years before Airbnb, Uber, Spotify, Amazon Web Services and so many other $10B+ providers of long tail digital services. On the date of publication, the combined market cap of the two heros of the story, Amazon and Netflix, was $15.3B. Today, it is $2.1T.
The ideas in The Long Tail continue to extend throughout digital economy. The forces identified by Anderson have extended to new digital marketplaces that aggregate disparate producers, rather than selling products already in existence. The ‘creator economy’ is a direct extension of the long tail thesis, with millions of small scale producers found on digital marketplaces like Youtube, Shopify, and Etsy, able to reach customers with ever less friction.
Media and entertainment markets are the same, as national broadcasters and newspapers lose audiences to new platforms and alternative sources of entertainment. As Adam Davidson writes in the Passion Economy, the drivers of success in the last century (mass production, scaled distribution) now hamper innovation and efficient delivery of products and services to ever narrower customer segments across the economy.
And, the trend has extended beyond the digital world, as physical goods markets such like consumer packaged goods (CPG) also are fragmenting to serve niche audiences at lower cost. Ever year, large CPG manufacturers like P&G, General Mills and Unilever lose more than $10B in aggregate sales to small competitors. What CircleUp calls the personalization of consumer drives continued fragmentation of a global $2T industry.
Stakeholder Capitalism
In parallel to the massive digital transformation of last two decades, there is a rise in demand for a new model for corporate social responsibility.
Nearly sixty years after Milton Friedman published Capitalism & Freedom, and fifty years since he reiterated for a wider audience in the NY Times that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud,” the model of shareholder primacy remains under attack.
The critique is no longer limited to the left. The Business Roundtable, a collection of the largest companies in America, and Larry Fink, CEO of the world’s largest asset manager BlackRock, have called for increased commitment of the American corporation to all stakeholders.
Yet, even the most ardent supports of stakeholder capitalism remain mired in details for exactly what they are advocating for. Debates continue to rage about what rights and responsibilities are being imposed on corporations, by whom and enforced how. In the academy, recent work by Lucien Bebchuk and Roberto Tallarita from Harvard, highlights the lack of coherence in any realistic stakeholder model, and the negative consequences that would result from stakeholderism. Even with the intervening half century, we still return to Friedman’s request: “The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.”
Linking Friedman and Anderson
Here is where the Long Tail thesis provides the path forward. Stakeholderism should be seen as an extension of the long tail of possible corporate organizational models. The market is, and likely will remain, dominated by shareholder primacy models for corporate structure, yet new space is emerging in the long tail of the market economy for a re-weighing of stakeholder benefits from corporate success.
The mechanism for adoption is the same. Technology today has lowered information costs, production and shipping costs across a wide range of products and services. The resulting reduced transaction costs for consumers opens the tail end of the market for new niche entrants, in the same way the internet opened up the long tail of digital markets.
With the reduced information costs, consumers are now able to educate themselves not just about the product offerings themselves, but also about the organization behind the product. Social media and other online information sources such as Glassdoor amplify efforts of consumers to both gain information and aggregate like-minded consumers for specific corporate organizational structures. What results is an added dimension for competition in the market – purchase decisions based on informed views of corporate structures as much as the product itself.
To accelerate this shift, stakeholder practitioners still need to respond to Friedman’s central critique, to answer “precisely what it [a new corporate model] implies for whom.” This question is central to the market efficiency critique of Bebchuk and Tallarita, and also the coordination challenges required for wider adoption of stakeholder models. If it isn’t clear exactly who a new stakeholder model benefits, how are potential interested consumers, employees and investors supposed to allocate their resources to the organization?
A corporate Ulyssses’ contract can credibly confer to all potential investors, and other stakeholders, how a company will allocate future success amongst stakeholders. The notion is to pre-commit the organization to certain actions prior to the time when the organization needs to take those actions. Examples could be corporate commitments to provide a percentage of revenue or profits to a certain cause, or limit executive compensation to a percentage of median employee compensation.
A prominent example of such a commitment is the Salesforce 1/1/1 model which commits the company to donate 1% of its revenue, 1% of its product and 1% of its employee time to the community. This is a clear, public commitment, made ex ante, that informs existing and potential investors how Salesforce will balance shareholder vs other stakeholder considerations going forward. All stakeholders are informed, and can contract with the company, or not, based on the decision of Salesforce to balance shareholder and other stakeholder priorities according to their 1/1/1 commitment.
The Ulyssess’ contract structure meets the Friedman critique on the ambiguity of corporate social responsibility more generally. His central concern is that the corporation be treated only as an extension of the shareholders, acting on behalf of shareholders and therefore responsible to those shareholder beyond all other potential stakeholders. The Ulyssess’ contract -- done ex ante with clarity for all potential shareholders – allows all subsequent corporate actions to act in accordance with this notion of economic freedom. The corporation pre-commits, with consent from shareholders, to narrower decision set of options and then within that frame, acts as a responsible agent to shareholders. Shareholders and stakeholders are aligned.
Where We Are Headed
Markets exist to efficiently allocate scarce resources across an economy. They cannot do this effectively if allocators of resources, including employees, investors, consumers do not understand how corporate managers will make decisions in the future. Shareholder primacy view provides a clear signal to all allocators for what to expect from managers going forward, in contrast to the ambiguous commitment to ‘balance stakeholders’ interests.’ Yet, the limitation is that many employees, investors, and consumers would prefer a different balance.
Chris Anderson’s framework for Long Tail opens the path to solving the challenge by showing how technology opens new market opportunities for providers to serve narrower corners of the market. In aggregate, these niche opportunities can add up to a significant overall portion of demand. Stakeholder models, with clear commitments made through corporate Ulysses’ contracts, already exist in this long tail of the market, and will grow in the future.
What is not known is how far the market overall will shift. Returning to Anderson’s original thesis, he noted only that the long tail provides a new growth opportunity (correctly, I might add, as shown by the 100x+ shareholder return for two companies featured in his book).
Technology is for the first time making viable products targeted at narrow audiences. He doesn’t make the claim that there will be no blockbuster movies in the future, only that the tail is now a viable new market.
For stakeholder committed vs shareholder primacy corporate models, how far the market will shift to the tail is an open question. I suspect it depends on the specific product or service. How closely buyers of the product or service treat the purchase decision as an identity issue vs a commodity offering. The cost advantages scale providers have vs small producers. There are many other potential drivers for the outcome, but, one thing is certain:
The Long Tail thesis continues, with a promising new vector of growth in stakeholder balanced companies.
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