The so-called Long Tail effect is alive and well and apparently living in my computer. That's what I discovered last weekend, noting that services from Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN) helped me burn a hole in my wallet. The electronic recommendation revolution is yet another way Internet retailers can drive sales, and investors should be excited by the possibilities -- so long as the retailers don't go too far.
Unless you were living under a rock, you know the Northeast had a powerful snowstorm last weekend. Although my hometown of Alexandria, Va., wasn't hit too hard, dicey road conditions and icy gale-force winds certainly didn't make shopping outdoors seem too appealing. So on Sunday, I made what my wallet might consider a big mistake: I opened up Apple's iTunes software.
I noted with interest that the iTunes Music Store has a beta feature called Just For You, which suggested albums I might be interested in based on past iTunes purchases. Was it accurate? You bet. I bought a few albums, EPs, and singles. (A related innovation called the MiniStore, which makes suggestions based on the song you have selected in your Music Library, debuted in the most recent version of the iTunes software.) A glutton for punishment, I moved on to Amazon and clicked on my personal store, which also listed recommendations based on past purchases. Did I bite? You bet.
Apparently I'm a poster child for the Long Tail, given the money I hand over to iTunes, Amazon, and Netflix (NASDAQ:NFLX), another online site known for its customized recommendations. If you're unfamiliar with the term, popularly believed to have been coined by Chris Anderson of Wired magazine, the Long Tail theorizes that digital media will significantly change the traditional hits-driven retail business model. In part, it supposes that Internet-based services and retailers can crunch data regarding customer purchases in order to make product recommendations, expanding the market beyond mere "blockbusters" into lesser-known yet similar items.
It's certainly not a new idea. I occasionally use a program on my computer called MyStrands, which analyzes iTunes playlists to generate recommendations. Meanwhile, there's been a lot of buzz around Fool HQ about an Internet-based service called Pandora, which has created The Music Genome project to make recommendations. Both services are free.
Of course, there's always a "but." There are privacy concerns inherent in any data collecting. Look at Google's (NASDAQ:GOOG) refusal to turn over to the government the search data it keeps on its users. Meanwhile, Sony (NASDAQ:SNE) went way over the line when it planted secret software on customers' machines to track illegal copying. Apple, too, faced some low-pitched rumbling over the MiniStore; some users claimed that it exhibited spyware-like behavior, sending info back to Apple without notifying users that it was doing so. Apple now includes disclosures and has assured customers that it discards the gathered data.
These types of offerings can represent a win/win between Internet retailers and their customers, offering an expanded universe of possibility for both. Such accurate recommendations add much more than convenience to Internet-based shopping. As long as the companies in question make sure they're very carefully creating their services and policies with a close eye on privacy concerns, the opportunities they're creating in e-commerce seem more exciting than ever before.
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Amazon.com and Netflix are Motley Fool Stock Advisor picks.
Alyce Lomax does not own shares of any of the companies mentioned.
