Music Insider: How to Unlock the Value in Telcos

The just released report about "how telcos and the music industry can unlock value from music service partnerships" is worth to check out. The report is created by three of the main characters behind the music service TDC PLAY and published by the leading digital music business information and strategy company Music Ally.

A Discussion of the Long Tail within Digital Music Consumption

The Distribution of Demand: What kind of a law?

Chris Anderson describes The Long Tail as a power law that is not limited because of limited shelf space or disitribution channels, which is often the case in traditional markets, while a power law of Internet-based market is not limited thereby. A power law is a particular mathematical relationship between two quantities, incidents and frequency of occurrence events such as music tracks and the number of music downloads. A power law is, according to Chris Anderson, present when a small fraction of the numbers are representing a large proportion of the number of downloads.

An example is the Pareto 80/20- rule, often used to explain that 20% of products traditionally generates 80% of revenue. According to Anderson occurs power-laws on consumer markets where the following three conditions are present: (1) Variation and (2)varying quality of supply and (3) network effects (eg Word-of-mouth), which reinforces the difference in quality. Put another way success creates more success, which incidentally corresponds to Pareto 80/20-regel. According to Anderson was the 80/20 rule a possibility earlier, but the Long Tail is altering this situation today, and Anderson calls for not allowing a power law dominating the market: "While the 80/20 Rule is still alive and well, in a Long Tail Market it has lost its bite. ". One example highlighted is an online clothing store, where only 71% of sales came from 20% of the products. This means that sales in the increasingly come from niche products compared with 80/20- rule.

Chris Anderson acknowledges, however, demand in practice often is a power lawdistribution "... some things will sell a lot better than others, which is true in Long Tail markets as it is in traditional markets". The attentive reader has noticed that Anderson's arguments about a power law is contradictive. On the one hand, he uses a power law to demonstrate that there is a latent demand on the Internet, and therefore very positive about this "law". On the other hand, the urges to that "one" should not follow being dominated by a power law in Long Tail markets. This dispute leads on to Anderson's argument for why a power law does not dominate in a Long Tail market. As he writes: ".. why don’t network effect recommendation systems, which are essential in driving demand down the tail, actually do the opposite: drive content up the Tail, further amplifying hit/niche inequality? That’s what you’d expect with more powerful network effects, yet what we actually see in Long Tail markets is flattened powerlaw, with less of a difference between hits and niches”. The explanation from Anderson is that filters and other recommmendation mechanisms work better on niche level of individual genres and subgenres, while the effect is somewhat less across genres. It is an exception if the numbers in the less popular genres break through as a hit. Rather, it is more normal for the tracks in a popular genre becomes popular, but since there is hereby created a greater competition among several hits from other genres, it is rare that the tracks breaks through the really big hits. According to Anderson, it is thus network effects that will contribute to the demand becomes more niche-oriented in terms of popular products. Industries Anderson examines consists of entertainment and media industries and argues that "the long tail" exists in all industries. As an example of a Long Tail business highlights Anderson, the U.S. online music service The Rhapsody. In short, Anderson is convinced that companies should not only base the business in the most popular products, but include niche products, as they themselves today may represent a significant market share.

Another Analysis
Will Page, UK economist, conducted in 2008 an analysis of downloads in a period of an Internet-based music store in the UK. Apart from 13 million available tracks were 52,000 tracks (equivalent to 0.4%) for 80% of all downloads. The analysis showed, in other words, a shift in demand against a long thick tail did not exist. It showed in fact the opposite: It followed a lognormal distribution curve. Page's argument that no distribution follows a power law distribution, but lognormal (hits concentrated) is Matthew effect explained in detail below. Page's theoretical starting point is Robert Brown (1959) "Statistical Forecasting for Inventory Control", where the lognormal distribution is used as a method to analyze stock holdings. Within empirical data on the consumption of digital music exists in other words, an example of two completely opposite analysis: Chris Anderson's power law distribution on the Internet and Pages lognormal distribution.

Power Laws, Matthew effect & Distribution of Demand

In the following subsections the three closely related factors: distribution of demand, Matthew Effect and Power Laws are discussed in relation to the demand of digital music (e.g. songs bought on Itunes or TDC Musik/TDC PLAY).

Power Laws
Power Laws in economics was introduced by Vilfredo Pareto already in 1897. Pareto found that across different communities, countries or ages, the distribution of income and wealth followed a "power law". This power law showed that a small proportion of the population accounted for a disproportionate share of income and wealth in the countries concerned. The same type of law in a different context (the use of different words) took George Kingsley Zipf in his "Human Behavior & The Principle of Least Effort" (1949).

More generally, Zipf's and Pareto's laws are two different ways to represent the same phenomenon of power law. The phenomenon has since been found in other sciences. Caldarelli (2007:85) explains the power-laws by that they are expressed in self similar system, a system or object that is the same regardless of the observation scale increases or decreases. There are several power-law-generating mechanisms, some more complex than others. The mechanism that has relevance to consumer behavior is self-reinforcing processes, or in technical terms multiplicative processes.

Multiplicative processes & Matthew Effect
One of the most successful applications of a multiplicative process is found in preferential attachment. Generally, there is among scholars agreement that the first to introduce mechanism of preferential attachment was G. Yule (1925). Although Yule used the mechanism to explain the relative abundance of species and genera within biology world is the mechanism since used within e.g. behavioral economic theory in form of Simon's model named after Herbert Simon, who was one of the pioneers of behavioral economics' took in the 1950s onwards.

Interestingly, the mechanism is found in several independent studies across fields and time, and particularly in studies of how the network grows, the mechanism is often used as a reason. That is precisely why the mechanism has come to their several names: Yule process, Rich Gets Richer, Cumulative Advantage, preferential attachment and Matthew effect. In literature, the mechanism is often an argument for why a power law arises. Interestingly enough, one of Will Page's arguments is that the distribution of music demand is not power-law distributed, but lognormal distributed precisely the Matthew effect. As mentioned above Page's use of lognormal distribution for the demand is based of Robert Brown's book from 1959. Interestingly enough, Brown describes Zipf's Law as a plausible model for why the demand follows a lognormal distribution. Whether it is or other distribution, and the living used in the analysis of music consumption clarified below.

Lognormal or Power Law - distribution?
Often derived from simple power-laws and processes in nature are often phenomena is normally distributed, reflecting the central limit theorem. Because of this theorem, it is by multiplicative processes expected that the variables (here the consumption music downloads) either follows a power law or lognormal distribution (which can look like a power law). Distribution shall have the same form and can therefore in many cases confuse. Mitzenmacher (2004) finds that the two types of distribution in some cases are cohesive, such that the power law applies in the "tail", while the lognormal distribution applies to the second part of the "body" in a data set, which Tucker & Zhang (2007) supports. Although they do not differentiate between the two disitributions they find both a "Tail" and a "body" in a study of the popularity of websites that sell wedding services. Clausen et al (2009) finds that for some datasets can both apply a power law, lognormal and exponential distribution.

In studies in several scientific fields researchers have found different distributions may be due to unique circumstances in the respective analysis. This suggests that a power law is not a universally applicable law. As Clausen et al. (2009) claims: "Regardless of the true distribution from which our data was drawn, we can always fit a power law". Clausen et al. (2009) questions then the importance of a distribution proves to be a power law distribution or a lognormal distribution. Whether this is a problem for the examiner depends on the scientific objective of the study. As shown in the above subsection Matthew effect may exist in both distributions, which helps to emphasize the importance to investigate which factors are the basis for the Matthew Effect than it is to clarify the distribution demand for digital music follows. The argument is that understanding is important in relation to the use of filters and parts functions on the Internet and their impact on demand.

As a result of the above the question is whether the term "The Long Tail" is more wrong than correct when referring to the distribution of demand of goods like digital music.

Sources:
en.wikipedia.org/wiki/Behavioral_economics, September 5 2009
www.theregister.co.uk/2008/11/07/long_tail_debunked, June 19, 2009.
www.telco2.net/blog/2008/11/exclusive_interview_will_page.html, June 10, 2009
Anderson (2006): The Long Tail.
Caldarelli(2007:100)
Clauset, A. et al. (2009:14): Power‐law distributions in empirical data.
Goldstein et al. (2004)
Mitzenmacher(2004)
Malchow‐Moller & Wurtz(2003:123)
Simon, H.A.(1955): On a class of skew distribution function, Biometrika, 42, pp. 425‐440.

TDC Play delivers 250m downloads in Denmark

From MusicWeek: Danish telco TDC has delivered over 250m downloads since launching its music subscription service in April 2008.

Reviews and comments on Chris Andersons new book: FREE: The Future of Radical Price

The author of the bestselling "The Long Tail - why the future of business is selling less of more" from 2006 has written a new book about called " FREE: The Future of Radical Price". Read some of the comments and reviews on the following links below.

Download the audiobook "FREE: The Future Price of Radical Price here.

Reviews of the reviews "Free: It Works, It Cries, It Bites" by Alex Iskold

Review by Malcolm Gladwell, The New Yorker

Chris Andersons answer "Dear Malcolm: Why so threatened?" to Malcolm Gladwells review

Review by Emma Duncan, The Guardian

Review in Publishers Weekly

Comments on Freemium.eu

Review and blogdiscussions about Andersons' FREE - By Mike Masnick on techdirt.com

Blog about free and technology by Kevin Kelly at The Technicum Blog

Review of "FREE: The Future of a Radical Price" on www.dseneste.dk ( in danish, so use Google Translation Tools)

Resume of some of the "FREE-debates" on "Cathy Davidson's HASTAC blog on the interface of anything"

What has changed in the Lead User Concept?

The Lead User Concept

The concept of LEAD USER is mentioned first time by Eric von Hippel in his article from 1986. The article's primary purpose is a characteristic of LEAD USERS and a way to find LEAD USER in connection with market research companies and involvement of LEAD USERs in the development process. According to Von Hippel LEAD USERS of a new product, service or process is characterized by two characteristics: (1) LEAD USERs see needs that will be general in the markets, but they see them long before the majority of other users. (2) LEAD USERs draw from their position significant benefits of having a solution for these needs. This means that LEAD USERs whose current (strong) needs become general in a market months or years later and it by involving LEAD USERs the company achieve development benefits early in the process. Therefore LEAD USER-theory represents a criticism of previous methods used in connection with R & D activity. Von Hippel and Urban (1988) demonstrate empirically that the LEAD USER-method can identify LEAD USERs and names LEAD USER-innovation for the customer-focused paradigm where LEAD USERS are used actively as part of the company's market research and R & D activities. Since then, other contributions have come a long(eg Coyne: 2000; Herstatt & von Hippel: 1992; Intrachooto: 2004; Lettl et al.: 2008; Von Hippel: 2007).

Lilien et al. (2002) demonstrates that LEAD USER as idea generator which gives better results than traditional methods. The results were measured by sales, market share and product novelty. Lettl et al. (2008) describes a case study of 4 LEAD USERs, where the LEAD USERs take risks to radical innovations that incumbents do not want to take. Enkel et al. (2005) use the LEAD USER method in conjunction with the integration of customers in innovation processes and Lettl et al. (2008) demonstrates how LEAD USERs without being in a company develop radical innovations. Unlike documenting empirical case studies of LEAD USER method of construction and engineering industries, the benefits of using LEAD USER method is limited so long that it can not find customers with the right knowledge and capabilities and selection of the right type of customer (Intrachooto : 2004; Standard et al.: 2005). Another criticism is that it is uncertain whether LEAD USERs’ needs always correspond to the needs of the ordinary user. As a way to find sources of innovation, the usability is therefore limited, if not innovation focuses on individual needs, combined efforts for innovation creation is not mandatory, and the size and complexity and make it impossible to test for a single person (Intrachooto: 2004). A knowledge perspective on this issue draws Carlile (2002), demonstrating that knowledge, which contributes to solving the problems in a function to prevent the problem solving and knowledge creation across functions.

The LEAD USER concept is a part of the user-driven innovation. User-driven innovation covers different types of users involved in the development of products, processes or services, and the concept has been observed since the 1960s (Enos: 1962; Freeman: 1968; Von Hippel: 1976). One of the advantages of involving users in the development process is that a greater proportion of the user's tacit knowledge is activated and brought to the company rather than if the user is not involved. There are several definitions of user-driven innovation and who the user is. Eg. Jon-Arild Johannesen define user as the next participant in the next step. This means the users exist across the value chain, from suppliers to employees in the company and the customers who purchase the product. User and LEAD USER is not the same as LEAD USER-driven innovation because that perspective includes only experts in the relevant field development (von Hippel: 1986; Lettl: 2008). Another angle on the "users" is to distinguish between consumer and producer. Von Hippel describes the 2007 users (not lead) as firms or individual consumers who expect to benefit by using a product or service. Unlike manufacturers expect to benefit by selling a product or service (von Hippel: 2007). Eg. profit suppliers of innovation-related materials innovation by selling the produced materials. Following this observation it is not only users, but also non-users (non-users), who contributes with knowledge in innovation networks (Von Hippel: 2007). These distinctions give respectively (1) to analyze the business as well as individuals who LEAD USER and is therefore a development of LEAD USER method of 1986, as udelead userkkende is Undertaking as innovator and (2) relevant knowledge in development found in other than experts (LEAD USER). The presence of certain types of consumers, in other words, plays a crucial role in ensuring an innovation created. It is particularly pronounced when consumers possess specific knowledge about the product to be developed (Jeppesen & Molin: 2003). The former is supported by the fact that it is often LEAD USERS who lead and head the development of radical innovations and not to the same degree of business (Lettl et al.: 2008).

Lead User in Networks
It is very rare that researchers of LEAD USERs use the network as the analytical perspective and as organizational form. Eg. analyzes Lillie et al. (2002) LEAD USER project teams in an organization (3M). However LEAD USERs is in terms of the newer LEAD USER-literature (Lettl et al.: 2008) defined by beeing Innovation Networkers(IN). Innovation Networkers is LEAD USERs with an entrepreneurial nature, which establish and lead the innovation network which includes experts from universities, research institutions and commercial companies for production, sales and marketing. In this way LEAD USER creates a situation which is usually initiated by companies in connection with LEAD USER projects. The participants in the network contributes with knowledge throughout the innovation process and is a necessity for a transformation of the product for salable product possible. In all four case studies of Lettl. et al.(2008) demonstrated that LEAD USER involved participants with other skills and knowledge to ensure innovation success (eg, individuals, knowledge and production organizations). Lettl et al. (2008) summarizes the background to why LEAD USERs initiated the network as followed: "high pressure problem, a conceptual solead usertion at hand, the relead userctant position of established manufacturing firms as well as a lack of competencies and resources were two antecedent the networking acitivities observed among LEAD USERS “, p. 226. This, plus the potential for opportunity recognitionis increased by previously acquired knowledge (Lettl et al. 2008) indicates that the authors are of the opinion that the sum of powers in the network more than the individual user or team skills.

Conclusion and Criticism of Lead User
Since Von Hippel (1986) introduced its LEAD USER method it has been empirical tested withl results that both supports and rejects the applicability of the method. One possible reason for the approach in practice has not always worked may be that Von Hippels early empirical work has focused on high-tech companies, and is therefore not valid for all types of industries. The LEAD USERmethod also states, that is the experts who help to create the best innovations in a given field (Von Hippel: 1986; Lettl et al.: 2008). It can be discussed whether "leading-edge" positions are necessary in the production, sales and marketing skills(Intrachooto: 2004). Eg. It is seen in the recent literature that innovation can be initiated by both users and enterprises (Lettl et a. 2008).

From a timing perspective, the above discussion indicates that LEAD USER- literature has moved from being a customer-focused paradigm, where only the LEAD USERs contribute to innovations in the direction of being a network-oriented approach, (1) where the knowledge and skills from other players than lead users are necessary elements in achieving successful innovations (2) where not only are companies who initiates innovation, and (3) the LEAD USER-method require specific conditions to work ((Intrachootoo: 2004).

About InnovationDK

The purpose of this innovation-blog is to increase and share the knowledge about innovation, entrepreneurship and innovation management.

On the blog you find knowledge about innovation with a particular focus on innovation management. The blog is addressed you who seeks inspiration, a good discussion or opportunity to contribute with relevant knowledge about innovation. In other words feel free to read or contributing with your viewpoints.

The contents of the blog is build on academic knowledge and a couple of years practical experience in innovation and entrepreneurship. The academic knowledge about innovation takes-off in my ongoing Master of Science in Innovation Management at Aarhus University(AU-HIH) ( the title in danish: Cand.Oecon i Innovationsledelse). The practical experience in entrepreneurship and innovation includes onsite development(e.g. website, webstrategy) primary with in music and ICT(Information and Communication Technology).

This means that the articles on the blog naturally takes off in the ICT and music industry seen from an "online"-perspective. In a longer term the plan is include the biotech industry and what central issues you and I find relevant.


The dk in the innovationdk is the country code for Denmark . This does not mean that the blog only addressed danes or only contains relevant information about innovation in Denmark. Definitely not - It is meant to signal that I am from Denmark and therefore from "The Danish School of Innovation".

I believe that the ICT can and will be an even more central part of securing our future regarding the decrease in the labour force.
I also believe in open knowledge sharing by the use of the Internet(web and wap). My hope is you find your visit on the blog worth it.


See you on the wall!

/Rune