Worthy Articles: The World's Power Law Crazy, Lawdy So Am I

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The World's Power Law Crazy, Lawdy So Am I

via The Stalwart by Joseph Weisenthal on Jun 12, 2007

Over the past few years, there's been more talk about the so-called "long tail" than most people could reasonably expect to stomach. Sure, it's a useful concept, but at some point you have to have move on in your thinking. Lately, it seems, everyone is talking about power laws, black swans, kurtosis, and non-Gaussian distributions. These are related concept to the long tail, except that they're more interested in the heads (and their frequency, size and significance), than the tail. Even the US Treasury is reminding hedge fund investors that just because we haven't had a .400 hitter (in baseball) in several years, it doesn't mean there won't be another one right around the corner. I've been on this kick for some time. A key characteristic of power law distributions is that the "average" of the pool doesn't mean anything. Sure, you can mathematically compute the average, but it doesn't give you any usable information on the whole dataset.

Of course, there's been a lot of talk about how to exploit (or protect yourself against) these market dynamics (which are arguably becoming more pronounced). One way to take advantage of this is to be YouTube. Create a platform that serves as a petri dish for all kinds of media, some of which will break out and be huge (Coke & Mentos videos), while others will languish in obscurity. There's just one problem, being YouTube is tough. Not every business can be a platform, unfortunately.

Another approach is to be a fast responder. In other words, acknowledging that there's no way to predict what will explode (they're black swans after all), you have to be ready to ride the top of wave comes next.

The best recent example I can think of is Toyota and its Prius line. Regardless of whether the Prius is actually as environmentally friendly as its thought to be, there's no doubt that it's been an extraordinary hit. Last week, the company announced that it's sold its millionth one. The rise of hybrid vehicles (which is related to a number of things including the Iraq War, 9/11/ and global warming) was really difficult to anticipate back in 2000. No company trying to figure out what the "average" car buyer was looking for could've ever been expected to predict the demand for hybrid cars. As such, the Detroit automakers were caught completely off guard. Even seven years later, they're still not moving the dial in this market. It's not that Toyota anticipated selling so many Priuses, but that the company was prepared to handle the wave of demand for them once they did start taking off.

There would seem to be two kinds of business that can thrive in markets with this type of model. Companies like Google harvest tiny dollops of profit scattered widely across the land. And companies like Toyota are prepared to react to the unexpected spikes, which nobody can predict, but only react to.