In July 2006 Chris Anderson published a book called The Long Tail which illustrated how new Internet business models from pioneers such as amazon.com, Netflix and Apple have enabled an entirely new economic model for the media and entertainment industry. Even if you have not read the book, you are probably familiar with the concept. Traditional mass market economics have led to product strategies focused on developing the few blockbuster “hits” that appeal to the mass market. Niche products with smaller target markets were generally not stocked in stores, played on radio stations or featured in movie theatres due to the lack of a profitable distribution model.
Chris Anderson states that in the traditional brick and mortar retail model, selection was limited by the “tyranny of the lowest-common-denominator.” In other words, historically selection was driven by economics rather than actual end-user demand. For example:
- “Wal-Mart must sell at least 100,000 copies of a CD to cover its retail overhead and make a sufficient profit; less than 1 percent of CDs do that kind of volume.”
- “An average movie theatre will not show a film unless it can attract at least 1500 people over a two-week run, that’s essentially the rent for a screen.”
In The Long Tail Anderson proposes that entertainment industry is shifting away from the traditional mass-market model towards a broader market of niche-oriented, micro-segments. The change is made possible by the unlimited selection of books, movies and music available through Internet channels. Chris explained that the Long Tail phenomenon is not limited to just the Media & Entertainment sector, but can also be observed in the retail market with eBay; the manufacturing industry with KitchenAid; the advertising sector with Google and the software segment with Salesforce.com.
The Long Tail Concept Applied to B2B
I believe that a long tail effect also has developed in the B2B standards community. During the early history of B2B in the 1980s and 1990s, EDI was the dominant standard. There were several variants of EDI utilized in different geographies, most notably ANSI X12 in North America and UN/EDIFACT in Europe and Asia. Adoption of B2B was concentrated primarily amongst the largest of companies. And data exchange was limited to the use of third party VANs (value added networks) whose applications only supported EDI. The immaturity of technology and limited market combined to create economics discouraging the development of alternative standards. In many respects, the B2B e-commerce ecosystem suffered from “the tyranny of the lowest-common-denominator effect” throughout the first two decades of standards.
In the late 1990s, the Internet began to enjoy widespread adoption. With the Internet, the economics and technology paradigms for B2B fundamentally changed. Documents could be exchanged using Internet protocols such as SMTP, FTP and HTTP liberating B2B from the traditional private networking models. XML was created offering unparalleled flexibility to model new transaction types and business processes. New groups of non-profit organizations (Dot Orgs) were formed with the goal of developing a successor to EDI. Together these Dot Orgs have introduced dozens of new XML-based standards designed to meet the specialized needs of industry subsectors. Examples of the new standards include PIDX in the Oil & Gas market, CIDX in the chemicals industry, SPEC2000 in the aerospace sector, RosettaNet in the high tech industry, GUSI in the consumer products sector and papiNet in the forestry market. The new XML standards offer a level industry specialization and technology flexibility not possible with traditional EDI. However, the new XML standards have failed to achieve critical mass. Over 80% of B2B transactions remain EDI-based. There are a number of Darwinian arguments that could be made about EDI’s ability to fend off multiple targeted attempts to eliminate it. See my posts on EDI and Darwin (Part 1 and Part 2). XML, with its genetically superior framework, has yet to achieve significant adoption beyond 10% of the target industry segment. As a result, the state of the market for adoption of B2B e-commerce standards can be represented in a long tail diagram.
Open Office XML is quickly gaining adoption as Microsoft’s Office 2007 is deployed to more and more desktops. However, all of the other standards remain confined to niches used by only a subset of the targeted community, but each with aspirations of migrating up the tail to become a short head player.I believe that we will see a rapid transformation in the adoption of B2B standards in the coming five years. More and more industries will migrate from using EDI (the lowest-common-denominator, short head) standards towards industry specific XML (the highly specialized, industry-specific long tail) standards. There are four major transformational catalysts that are emerging to offer the potential to change the economics of standards for ever. In upcoming posts I will outline these forces and the evolution of the Long Tail of B2B Standards in greater detail….
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