eBay: Long Tail Marketplace or Commodity Exchange? Part 1

eBay is in a transition period. The auction sites early success was that of one of the world’s first “Long Tail” markets. eBay’s corporate vision seems to think that greener pastures lie in the realm of what is basically a commodities exchange marketplace.

What’s the difference?

A Long Tail market describes a niche strategy of business in which the market offers a large quantity of unique items in relatively small numbers. Chris Anderson coined the phrase, and published an influential book on the subject entitled, The Long Tail: Why the Future of Business is Selling Less of More.

This Long Tail concept in a nut shell is that there is money to be made in selling obscure goods to niche markets. The graph below provides a pictorial representation of the Long Tail concept. The vertical axis represents the popularity or mass market appeal for an item. The horizontal axis represents a particular product. For example’s sake, let’s call them DVD’s. The “Head,” the part of the graph that is shaded green, represents the popular, mainstream movies. This is where a significant portion of the market is concentrated - but not all of it.

The Long Tail

Traditional markets typically are constrained to the Head (green area) because of physics:

How many products can the merchant stock in a limited amount of space?
How many customers in the local area are willing to pay for those products?

The niche strategy of business seeks to break these constraints by selling a large number of unique items.

The Long Tail

The yellow part of the graph represents the Long Tail. These are the movies that not everybody is interested in, but there are niches of people who would like to own or rent those particular titles. Your neighborhood Blockbuster is going to devote their limited shelf-space to the more popular titles in the green portion while, in aggregate, Netflix rents more videos from the Long Tail portion of the graph than the green portion.

The factors that keep most business models in the green section of the graph above deal with search, storage, and distribution. I’ll discuss these specific topics in greater detail in a future post, so let it suffice to say for now that the costs involved with marketing to small niches, storing the goods until they are sold, and distribution were so prohibitive for most entrepreneurs that most didn’t consider it a viable opportunity before the internet existed in its present form.

eBay’s early success has been in providing a marketplace for the Long Tail. The company provided a central location and a search mechanism for consumers interested Long Tail products to buy them, and a venue for Long Tail merchants to sell to this market.

The Consumer Commodity Exchange

Now eBay is heading away from their roots and focusing on becoming a venue for products that have a mass-market appeal. Even while more and more of the internet is becoming aware of the value of the Long Tail market (what Chris Anderson describes as “selling less of more”), eBay is focused on becoming what is essentially a consumers commodity exchange.

Economists define a commodity as something of value, of uniform quality, available in large quantities by different producers. Do a search for iPod or WebKinz on eBay and you’ll soon understand that these are basically a commodity.

The price of a commodity is universal and fluctuates based on supply and demand. There’s little profit for sellers of commodities unless they control some aspect of the supply or can successfully predict fluctuations in demand. Therefore, the sellers who will be able to compete successfully on the new eBay are not necessarily those who were able to compete successfully on the old eBay.

Why is eBay moving from the Long Tail market to the consumer commodities market?

More consistency over who sells in their market and what’s selling. (Does this open them up to more piracy and counterfeit risk?)
They think that’s what the consumer wants. (Didn’t Coke make the same mistake 25 years ago?)
The think they will make more revenue. (After all, Amazon is growing.)

It’s worthwhile to remember that it’s the commodity brokers that make the most money in the commodites markets. They make a commission whether the market is going up or going down. The commodities traders (the new eBay sellers) are open to constant risk when they play the market - and are usually encouraged by the brokers.

Are you ready to play the market on the new eBay?

eBay: The Long Tail Marketplace Part 2

eBay Bans the Sale of “Virtual Goods”

Study Shows Bidders Like Shipping & Handling Charges!

Auction eZine - Issue 25

What’s New at Auction Insights