There are several well-known online companies that are built on this business model: Amazon, iTunes and Ebay. They each offer a wider selection than physical stores are capable of and have enlarged the market for their products as a result. These companies are often referred to as aggregators, as they pull together lots of products under their virtual roofs.
The long tail has been criticized as a theory. Anita Elberse is a marketing professor who's written something of a rebuttal. There's also a blog called Whiskey's Place that predicts an end to niche markets in the shrinking economy.
While the aggregators have a successful business model, creators who live in the long tail have yet to find one. As a retailer, if you have 100,000 items that each sell one unit a year, you're making money. A creator may only have 1 item, and selling one unit a year isn't going to provide much income. While creators eventually develop a backlist, even somebody prolific is going to be limited to 20 or 30 items.
So is the long tail just a pipe dream as a viable business model for creators? Seth Godin has written an interesting analysis about the nature of the curve, breaking it into three profit centers. His piece is interesting from a big business standpoint. Kevin Kelly looks at Godin's three profit centers and talks about how they relate to creators.
I've been wrestling with this for a while and I think the only advantage to the creator that I can see in the long tail is that aggregators can invent or produce a long tail domain that was not present before. Like Seth's Squidoo does. Before Squidoo or Amazon or Netflix came along there was no market at all for many of the creations they now distribute. The proposition that long tail aggregators can offer to creators is profound, but simple: you have a choice between a itsy bitsy niche audience (with nano profits) or no audience at all. Before the LT was expanded your masterpiece on breeding salt water aquarium fishes from the Red Sea would have no paying fans. Now you have maybe 100.
One hundred readers/watchers/listeners is not economical. There is no business equation that can sustain profits for continual creation from so few buyers. (It can of course support the business of aggregation above the level of creation.) But the long tail niche creation operates perfectly well in the realm of passion, enthusiasm, obsession, curiosity, peerage, love, and the gift economy. In the exchange of psychic energy, encouragement, meaning of life, and reasons to live, the long now is a boon.
That is not true about profits. Economically, the more the long tail expands, the more stuff there is to compete with our limited attention as an audience, the more difficult it is for a creator to sell profitably. Or, the longer the tail, the worse for sales. But if we view the long tail as a market of a different type, as a market of enthusiasm and connection, then as the long tail expands, this increases the chance of two enthusiasts meeting, and so the longer the tail, the better. The first two pockets of the curve are trying to maximize profits; the last pocket of the long tail is trying to maximize passion and connectivity.
There is one further indirect advantage to the long tail. Since your creation now exists in a market (where it would not have existed at all before) it can, if you are lucky, start to migrate uptail. With creativity you may be able to move your creation out of the economic doldrums of the long tail up into section #2, where 1,000 true fans and other mid-level success lies. As I argue in 1,000 True Fans, this is where you want to be as a creator. Seth calls it the pocket of " the profitable, successful niche product" and I agree with him that this pocket #2 rather than pocket #1 is where you want to aim for.
So the long tail is no magic bullet. However, as this comment on Chris Anderson's site shows, opportunities come out of the tail that wouldn't exist without it. The big question for creators is how big an investment to make relative to the expected (or unexpected) return. With animation being so labour intensive, maybe it's the wrong medium for niche markets. I hope somebody proves me wrong on that. The link in the above quote for 1,000 True Fans is very worth reading, and might be the only strategy that's going to prove viable for long tail creators.