(originally published 10/21/2006 on zachmortensen.net)
If you have not already done so, you must pick up a copy of Chris Anderson’s excellent new book, The Long Tail (or at least visit his blog). It will likely change the way you think about many markets, but I’ll comment on how it applies specifically to healthcare IT.
The idea behind The Long Tail is that aggregate demand in a market of many different goods is a powerlaw distribution, as pictured above. For example: In a given market, for every unit of the most-popular good that consumers demand, they demand 1/2 units of the 2nd-most popular good, 1/3 units of the 3rd-most popular, and 1/n of the nth-most popular. Note that demand never reaches zero, which leads to the rather sensational conclusion that there is a market for everything, no matter how obscure.
Anderson uses real-world data to illustrate how this type of distribution applies to books, movies, television shows, and music, to name a few products in industries where such data are readily available. Powerlaws are not unique to marketing, nor are they by any means new. Anderson concedes that Pareto applied the idea to macroeconomics in the 19th century when observing the distribution of wealth in a population, and in the early 20th century Zipf found the same pattern in languages. Anderson certainly deserves credit for applying these principles to marketing in general and explaining in particular the rise of Long Tail business like Google (advertising), Amazon, Netflix, and iTunes.
A Long Tail certainly exists in the healthcare IT market. The "Short Head" of the market is easy to spot: Meditech, Cerner, Epic, McKesson, Siemens, and Eclipsys. These vendors produce the "hits", products that are the most universally appealing across the market. They account for the lion’s share of the revenue generated in the industry and occupy a proportional amount of square footage on the exhibit floor at each HIMSS conference. Nevertheless, there are another 608 vendors registered for the 2007 conference exhibit, a Long Tail if ever there was one.
Mr. HIStalk, the venerable pioneer of the healthcare IT blogosphere, recently penned an article for Inside Healthcare Computing in which he argued that the "big three" of healthcare IT — Meditech, Cerner, and Epic — would achieve increasing dominance of the market because of the superior level of integration offered among their product lines. I’ll argue the contrary based on a few key ideas from The Long Tail:
1. The enabling force of the Long Tail is the democratization of tools of production. Anderson explains that a world in which television, music, and movie studios were the only ones who had means to produce content was a world in which the hits were destined to reign, if for no other reason than a lack of choices beyond this mass-market fare. As advances in technology made the means of production more affordable, those markets began to become more highly differentiated, meaning that the "tails" of their demand curves began to lengthen as more diverse products were brought to market.
The sheer number of vendors exhibiting at this year’s HIMSS conference makes it awfully hard to imagine that the democratization of the tools of producing healthcare IT products has not yet begun, and the fact that 80 or more of these vendors will be first-time attendees this year shows that innovation is alive and well on the periphery of the demand curve. Consider the acquisition of Azyxxi by Microsoft — a business whose strategy has long been to provide "horizontal" tools for vertical markets rather than compete in those markets directly — and you can imagine that the tools of producing healthcare IT products may yet become much more democratic in the very near future.
2. Given democratized production, the proliferation of products in the tail makes it difficult to distinguish those of high quality from those of marginal quality. A common misconception is that Long Tail products are all of poor quality, otherwise they would be hits. In fact, the quality of some products in the tail far exceeds that of those in the head.
Case in point: Go shopping for an audio system at Wal-Mart. You will find many different products from a few vendors, and the products will have a fairly narrow distribution in terms of quality. You won’t find products that will go up in smoke as soon as you plug them in, but if you are a true audiophile, neither will you find any products of high enough quality to satisfy you. Like many other businesses that market the hits, Wal-Mart seeks to be an optimal tradeoff of convenience and consistent but mediocre quality to reach as large a market as possible. As much as their executives may disdain the label, at least two of Mr. HIStalk’s "big three" are currently locked in a horse race to see who will become the Wal-Mart of the healthcare IT industry.
What if you’re not satisfied with the choice of goods available at Wal-Mart? There’s a brave new world out there in the Long Tail, and chances are that you’ll find what you’re looking for there if you have a good filter to help you know where to look.
The CCHIT certification that will be available for inpatient EHRs in May 2007 may prove to be just such a filter, a signaling device that a prospective buyer can use to filter out products that meet the commission’s functionality standards. Rather than serve as a barrier of entry into the market — perhaps as the market leaders would have hoped, a strategic lever to compensate for the force of democratized production described above — the certification may in fact guide buyers to consider products that they would otherwise have not, and some of those lesser-known products (and vendors) will no doubt be of higher quality than the "hits" everyone is familiar with today. As has occurred in each of the industries profiled in The Long Tail, effective filters in the healthcare IT industry will drive more demand from the head into the tail, reducing the magnitude of the hits and "fattening" the tail as they match supply with demand more efficiently.
3. Finally, Anderson notes that powerlaws are fractals. That is, they have similar shape regardless of scale. Zoom in on a section of a powerlaw, and it looks like a powerlaw. Zoom out by orders of magnitude, and it still looks like a powerlaw. The implication is that a Long Tail is composed of infinitely many Long Tails added together, so no matter how many times a market is segmented, there will always be many, many niches to be exploited given democratized production and efficient filters.
After all, isn’t healtchare IT just one small-but-fast-growing segment of the broader IT and services market? Don’t IBM, Oracle, and Accenture consider Cerner to be a niche player? Can anyone honestly assert that the same economics that justify Meditech, Cerner, and Epic as viable niche businesses somehow don’t apply to the 600+ companies currently thriving in just a few of the infinitely many niches that these "big three" and others have created?
The short answer to that last question is, of course, no; although many have tried and will continue to try to argue the contrary. The long answer unfortunately leads us down a rather fascinating but esoteric path not for the faint of heart, one that will have to wait for another day in the life of this busy blogger.