There is an ancient Chinese myth that helps illuminate what happens with increasing inequality where fewer rich people concentrate more and more wealth, while other people are being deprived of resources:
There was a monster, it is said, called the Taotie, which was possessed of an insatiable appetite. It consumed every creature around it, even the earth itself, yet it was still hungry. So it turned finally to its own body, eating its arms, legs, and torso, leaving nothing but the head.“*
As we all know, in the real world a head cannot live without its body.
This story about the Taotie reminded me of the “Long tail” popularized in Chris Anderson’s book that shows a short (and fat) head that concentrates most of the markets revenue and a thinner long tail that scrapes by to get what’s left of the market.
The long tail is a simple concept with far reaching consequences. In a nutshell, there was a time not so long ago where shelf space was scarce. So retailers only stocked a small amount of products that they were sure a lot of people would buy.
And when the internet came along, shelf space stopped being a problem and tiny niche items could finally reach the market for those people who wanted to buy them. This was great for most of us who don’t conform with the mainstream taste.
Before you could only make it big in business by selling a lot of a very few commodities, like Oil Companies, Big retailers, Big Publishers or Hotels. The digital era made it possible to also make it big by selling a few of a lot of things. Amazon, Youtube, Google, Airbnb or Uber base their success on selling products, videos, ads of products and services most of us haven’t heard of.
But the digital age hasn’t expanded the short and fat head to distribute more revenues. In fact it keeps increasing the gap between the Head and the Long Tail.
- Video Producers: A full third of videos published on YouTube have fewer than 10 views
- App Developers: 94% of the revenue in the Apple App Store comes from just 1% of all publishers, and 60% of apps go un-downloaded
- Authors on Kindle: The vast majority sell less than a hundred books
- And so on, and so forth…
Kevin Kelly, argued in his article “1000 true fans” that all a creator needs are 1000 true fans to make a business. Imagine if you have a 1000 fans that buy you $100 per year, you’d be getting $100.000 a year. Not bad.
So if you get 1 true fan per day, in a little less than three years you could get to these 1000 fans, that will consume whatever you sell (which is easier said than done), nobody on Uber, Amazon or Youtube make anywhere near $100 per sale.
And this is because these platforms force pricing models than encourage the big hits, not the economic well being of their producers, because they rely on audience volume to succeed.
So the long tail economy still pushes everyone to move large quantities of inventory on a monthly or weekly or even daily basis. This is great if you are a Youtube super star, or an Amazon behemoth, but much less if you have a little following.
And this is just the main state of the economy. If we zoom in the companies, this long tail phenomenon is also true of revenue distribution among company participants.
At the short head, we can find investors and founders getting most of the revenues and profits of a company, and at the long tail, most employees get a fraction of the company’s revenues.
As we saw in the previous post calculations:
- Google made $74 billion in revenue and $20 billion in profits in 2015
- And Google has 57,000 employees (in 2015)
- So Google makes over $1 million per employee in revenue
- And it also makes $350,000 of profit per employee (once they’ve payed operating costs, interests, taxes and salaries)
- But the average salary of a Google engineer is $128,000.
If you multiply the $350,000 in profits by the 57,000 employees Google has, that means that the investors and founders give themselves a little less than $20 billion.
A bit disproportionate, isn’t it?
But right now, the head (a.k.a investors or billionaire founders) is taking most of what’s on the marketplace, concentrating wealth far beyond their needs, and leaving its employees, users and providers like Uber’s, Deliveroo’s or Airbnb’s providers with the scrapes of the wealth they’ve helped create.
And here we are. The long tail of revenues shows us that fewer and fewer hands keep concentrating more and more of the world’s wealth, and investors and rich founders are becoming little by little Tao Tie’s head. And they are squeezing their “body” (a.k.a: everyone who is not a hit but that produces great work, content and happiness to others) away from the resources they need to thrive.
So what can we do to rebalance the wealth distribution going on in businesses and avoid eating the “body” that feeds the “head”?
The Fat Tail of Revenue Distribution
Once those people in the Fat Head start earning way more than they can ever spend, why wouldn’t they share the excess profits they make go to those employees that contribute to build their companies or with the society at large that helps them gather those crazy profits?
This would create more opportunities across society and allow more people to reach success.
Or as you can see in the graph, the Short Head is now a thinner, but the long tail has become way fatter for everybody who’s not a big hit, which means, people get resources more evenly distributed:
You might think this fat tail would actually be unfair. What of those people who bring in disproportionate value, who have amazing technical knowledge? Humongous networks of valuable relationships? Amazing Sales Skills? Those people who bring a 10x performance wouldn’t be rewarded at their right value.
Well, even those people wouldn’t enjoy more money after a certain point, like $500,000 a year for example. Most of these companies argue that they want to address a problem that affects millions or better yet, billions–of people, so why not start by better distributing the wealth that goes beyond their needs and could help contribute more to the wellness of others?
Here are three ideas that could help make this shift towards a more fat tail society:
Build A Cooperative To Improve The Conditions of Everyone
Cooperatives are a great tool to distribute growth equitably among the members of an organisation.
Instead of the dividends and profits all being captured by the founders and investors, the benefits are shared among workers more equitably. The CEOs might not become billionaires as in Google, but as we’ve seen in my previous post, that it is kind of an absurd aspiration anyway.
And this has the benefit of attracting and retaining employees and external contributors, which is great whether you are a traditional business or an internet platform. You get a lot more traction because you can pay them more fairly. Stocksy is an example of this.
Stocksy is a stock photo platform that pays photographers 50 to 75 percent of every sale. That is well above the going rate of 15 to 45 percent that is typical in the stock photography industry. On top of that, the company also distributes among its photographers 90 percent of its profit at the end of each year.
Stocksy is what’s known as a multi-stakeholder cooperative, with three classes of shares: one for executives, one for staff and a third class for photographers. There is no fee to join or annual dues; members pay just $1 for their share of stock. That collaborative approach has helped the upstart thrive in a crowded and competitive market.
Stocksy’s revenue doubled last year to $7.9 million. More than half, $4.3 million, was paid out in royalties. After that and other operational costs, Stocksy last year generated its first “surplus revenue,” or what is akin to profit at co-ops. This allowed it to pay a dividend to members for the first time, totaling $200,000.” reports the New York Times
When reading the great book Ours to Hack and to Own, I found that cooperatives and their members also enjoy four benefits that reinforce an economics of fat tail:
- “Cooperative businesses have lower failure rates than other businesses, both after the first year (10 percent failure versus 60-80 percent) and after five years (90 percent still operating versus 3-5 percent). Evidence also shows that cooperatives successfully address the effects of economic crises and survive crises better.
- Cooperative start-up costs can be low. Members can contribute time and capital, offsetting costs that require other businesses to seek outside financing. Co-ops are also eligible to apply for loans and grants from a number of federal and state agencies designed to support co-op development, and are often provided relatively low-cost loans from non-governmental financial institutions like cooperative banks.
- Cooperative employees enjoy better salaries than traditional business employees. After becoming owners of a house-cleaning co-op in Oakland, the workers experienced a median income increase from $24,000 to over $40,000.
- Cooperatives are more likely to promote community growth than an investor-oriented firm, since most are owned and controlled by local residents. Since cooperative business objectives are needs-oriented, cooperatives are more likely to stay in the communities where they originate. For every $1,000 spent at a food co-op, $1,606 goes to the local economy; for every $1 million in sales, 9.3 jobs are created.”
And as you can imagine, cooperative come in multiple shapes and colors. There are cooperatives for consumers, for workers, for producers, or for all of them together:
- Consumer cooperative: If the members’ need is to buy food, high-speed internet or <PUT WHATEVER PRODUCT YOU NEED HERE>, they may form a cooperative that buys food, high-speed internet or anything else in bulk and sells them to members. The members are consumers, and the cooperative helps them access products at a fair price. For example, Park Slope Food Coop or La Louve sell high quality organic food at a lower price, and B4rn or Guifi.net** provide high-speed internet to rural areas that would otherwise be to expensive to connect.
- Producer (or marketing) cooperative: If the members are food farmers and their need is to sell their food, they may form a cooperative that pools their products, sells them under a shared brand, and gets the best price they can in the market. The members are independent producers and the cooperative helps them access markets to sell products at a fair price. For example, Organic Valley sells organic products from different farmers under the same brand.
- Worker cooperative: If the members’ need is for paid work, they may form a food processing plant that buys food, adds value through their labor, sells the food, and uses the income to pay members. The members are workers and the cooperative helps them access good jobs. For example, Mondragon is a spanish employee-owned cooperative selling financial, industrial, distribution and knowledge services, or John Lewis Partnership, a retail chain also owned by its employees.
- Multi stakeholder cooperative: If a cooperative is designed to meet multiple types of needs, it may have multiple types of members. Food growers connect to food distributors and food consumers in one holistic entity that aggregates all three pools of membership. For example, Stocksy’s platform does this for photography creators, distributors and consumers.
Transparency To Keep Everyone Appreciated and Accountable
Sunlight is the best disinfectant. And we need a lot of sunlight in this troubled world.” — Don Tapscott
Some companies like Buffer and Crowdfunder have taken the steps to radical transparency. And they admit it is both one of the most frightening and exciting things they’ve done. It means opening up and becoming vulnerable for ideas that become accessible to everyone on the team.
Crowdfunder has made employee salaries completely transparent across the organization, and Buffer has gone so far as to make the salaries publicly available. And they’ve kept going by also making revenues, metrics performance, blog performance, customer support reports and many more things publicly available.
Why would anyone do this?
Because it breeds trust. And when there is trust, people are more engaged in the business. People know what each other are making, so they understand what attributes make employees more valuable in a company. And they can see that they are treated fairly and feel appreciated. And when employees feel appreciated, they work harder.
Another nice side-effect that this has is that it makes hiring new people for a team a lot easier and more transparent. In the case of Buffer, they can tell people how much they will earn before they get into any details. They just run through the formula and can confidently explain what someone will be earning.
But it also breeds trust towards potential investors. When they started raising funding, they went about it publicly in a series of blog posts, and the fact that all their metrics were out in the open was a great indicators for any investor to self-identify and realize if it was good for them to invest in Buffer.
So transparency will help keep your company accountable towards your employees, but also motivate a higher level of engagement and trust among your members. And of course, it can ensure that everyone keeps a fat tail distribution of the fruit created as a collective company.
Open Source to Multiply and Create Local Employment
The main social benefit created by every company is to create employment and distribute wealth. So that’s a solid reason to create a business.
But most of the time, businesses think that to protect their employment and their employees’ jobs they need to start patenting and copyrighting their ideas. Is this really the best way to promote the protection and creation of employment?
There are other means to reach this goal.
One is actually to do the exact opposite. To get the tools you are creating in the hands of others. This will allow more people to create their own living. For example, WordPress has created an open source blog platform. They are now making $50 million in annual revenue by selling complementary services to their open source solution such as hosting, ads or their marketplace for plugins or themes. But going open source has enabled a huge community of developers to create a $1 billion market.
To put this in perspective. Making their invention open source has allowed the global community to create 20 times more revenue than WordPress could generate on their own. And every additional developer that builds something on top of WordPress also reinforces the platform by building more useful plugins and features WordPress wouldn’t have thought of.
If your real goal is to create employment, it is probably better to have 500 employees and $50 million in revenue and to let thousands of other companies and freelancers create their own living and another billion dollars on top of what you made.
This is more likely to create a fat-tail distribution of revenues where more people can find more success and create opportunities to employ themselves.
If your goal is to capture all the value that comes your way, you’ll be maintaining a long tail distribution that will probably end up like Taotie’s story.
When you switch to a fat tail, open and transparent business you’ll be paying your employees better, creating more opportunities around yourself, but also in attracting better and more engaged employees, helping your local communities, and lowering your startup costs and chances that your business will fail.
So if we don’t want our society to eat its own “body” as the Taotie’s head, Cooperatives, Open Source and Transparency are some alternatives you should consider putting in place in your own business or demand it to the company you work at.
*The Taotie’s story is extracted from the book Sacred Economics, by Charles Eisenstein
** Guifi is actually a Foundation, not a coop, but it uses the same principles of a consumer coop