Artificial Scarcity, Garbage Collection and the Long Tail

The question in everybody has been asking for a long time has been "how do you make money in a market of over abundance?" If you think you haven't asked yourself this question, then allow me to rephrase it. Here are two popular variants of that question "How do you make money on the internet where everything is free?" and "How do you make money in open source where everything is free?"

The latest guidance to an answer has been the identification of the Long Tail. In a market of overabundance and almost infinite variety there are niches of markets where demand exceeds supply. The whole of economics is based on demand exceeding supply, that is of scarcity. There is no economics dealing in markets of overabundance. Chris Anderson has an excellent entry on the "The Tragically Neglected Economics of Abundance":

Well, for starters the classic definition of economics is "the science of choice under scarcity". That's a warning sign right there. From Adam Smith on, economics has focused almost exclusively on behavior within constraints. My college textbook, Gregory Mankiw's otherwise excellent Principles of Economics, doesn't mention the word abundance. And for good reason: if you let the scarcity term in most economic equations go to nothing, you get all sorts of divide-by-zero problems. They basically blow up.

In the Long Tail there are niche markets that exist with sufficient scarcity to exploit profitably. Now, in a market of obvious abundance, one strategy that I've stumbled upon is that of creating scarcity by artificial means. Hugh Mcleod writes in his "The Tao of Undersupply":

If only 100 people want to buy your widgets, then just make 90 widgets. If only 1000, make 900. If only 10 million, make 9 million. It isn't rocket science, but it takes discipline.

Economics 101. From time immemorial there have always been unscrupulous vendros who in times of crisis would artificially inflate prices by hoarding goods. Nevertheless, this is a basic strategy that we see all over the place and even in the technology landscape.

People in technology are fixated at finding the latest and greatest mousetrap. Unfortunately, we aren't all academics where we can make a living on pure innovation. Rather, a majority of us work in a world where economic principles need to be heeded. Many technolgy companies have figured out how to earn a living and intertingly enough, they've done it not by building a better mousetrap, rather they've done it by artificially creating scarcity.

The most well known example of this is Computer Associates (CA), with a market cap of around $16 billion and revenues of $9.7 billion/year, nothing to be ashamed about. CA's earned notoriety by gobbling up old mainframe software vendors, gutting their staff and subsisting on its customers. The customer's themselves were heavily dependent on the legacy software and had difficulty extricating themselves from it. This allowed CA to milk the existing relationships for all that it was worth. (Interestingly enough, creating addiction increases demand while keeping supply fixed)

In the world of technology where there is an endless pace towards progress, abandoned and obsolete technology continues to be generated. It is the refuse of the technology market. However, like I've always said, technologists don't buy cool things, they build it themselves. On the other hand, technologists don't like taking out the trash and would rather pay someone else to do it.

The new lesson of the day is therefore: "learn how to collect garbage, you could find gold in those trash dumps". A garbage collector's work is without effort, the key then to exploiting the long tail is therefore finding a way to collect trash in an efficient and profitable manner. It's no fun collecting garbage if you can't earn money doing it! Tim Oren points this out in his post "Abusing the Long Tail":

The degree to which a Long Tail evolves depends on the degree to which costs of transactions are also reduced. Transaction costs aren't just monetary, they also include the overhead and cognitive burdens of finding, deciding on, and integrating the value of each purchase (or use of your attention), as Kevin Laws ably points out. The bigger the monetary and non-monetary transaction costs in a market, the larger the granularity of the practical transactions, the less chance for the fine grained decision making that supports a Long Tail distribution.

What are the non-monetary transaction costs of having someone else collect your garbage? My guess is that it is almost next to nothing. We can thank Google Adsense for that!

Case in point, a company called Ultsearch that made money gobbling up expired domains. Ultsearch would scan the registries for expiring domains, snatching those domains with a descent level of search engine traffic and then turning the domain into advertiser sponsored links. This garbage collection activity netted the owner a mind boggling $164.2 million when it was acquired late last year.

When collecting garbage, the longer you keep it, the worse it gets. In otherwords, the markets for servicing legacy technology continues to shrink over time. Any effort that has been expended to support these markets will eventually be thrown away. Only the least amount of effort possible should be exerted to satisfy the market. Anymore effort is a throwing money down the garbage chute. Unlike, bleeding edge efforts one can always imagine building a base to launch new ventures. Garbage collection on the other hand is not about constructing foundations, it's about creative destruction ¹.

[update] Moore's Law original magazine found:

"In the 70s, they started throwing out large quantities of these magazines," he said.

"I was in my 20s at the time and thought you shouldn't throw them out because they are recording the golden age of electronics."

He gave several hundreds of them a home first in his loft, then under the floorboards and had not looked at them since.