Apr 22, 2009

I want my iLEGO!

Okay, so I just finished a four day visit with various LEGO staff, MCPers, and other people of interest at WorldFest... and some of the conversations got me thinking. One discussion in particular caused me to immediately re-read "The Long Tail" by Wired magazine Editor-in-Chief, Chris Anderson. There's so much stuff in there, it's hard to know where to start, but it got me focused on the concept of micro-commerce. Years ago, the LEGO MINDSTORMS division had a well-known piece of paper hanging in an office that said "What Apple is to music, LEGO will be to robotics"... or something like that. What did they mean?

Some might say the obvious answer is iPod, but for me, the answer SHOULD be iTunes. Yes, the iPod is everywhere - in all colors, shapes, and storage capacities. It could be argued that we now have the NXT in white, gold, and black, but inside it's the same NXT. So let's look at iTunes. iTunes started out selling individual songs for 99 cents each. We no longer had to buy an entire CD with 15 or so songs, half or more of which we rarely listened to. (Has anyone else noticed that the music industry has changed to a One-Hit-Wonder model? The days of super bands is really over - we buy this song from Band 1, that song from Band 2, and on and on... I can't remember the last time I bought a full album.)

Anyway, let's try and fit the iTunes model to LEGO. It's not easy. Yes, we have the LEGO Factory where you can build your own designs, upload them, and others can select them and purchase the pieces needed to build their own. But the software is extremely limited - I'm held to a few small collections or groupings of similar parts and I can't stray. I'm not impressed.

"The Long Tail" says that we're niche consumers these days... and it's completely true. But not when it comes to LEGO. We are stuck, really, buying whatever pre-packaged models they choose to offer us. Many of them sell a ton, but LEGO appears to be missing out on The Long Tail of the market. Yes, we have Bricklink if we wish to purchase individual pieces, but there's some real issues with costs on that site... while many pieces are cheap and can be bought in bulk, other parts that might be considered "rare" are priced sky-high and out of reach of most consumers. We're talking about plastic here! Just like the diamond market, LEGO controls the flow of parts and this in turn affects pricing. I don't know what the difficulty would be for LEGO to make every variation of molded plastic it sells available for individual purchase - but this is the age of the Internet, folks... there's some talented programmers out there that could probably figure out how to create an online catalog of every item LEGO sells and a whiz-bang shopping cart system to boot. Maybe LEGO only sells 1 piece of Part#123456 a month, but if 100,000 people each buy 1 unique piece at a reasonable price, now LEGO is dipping into The Long Tail - more variety of parts sold in smaller quantities. As Chris says, a large number (the total # of parts LEGO makes) multipled by a small number (the number of people purchasing each part) is still a LARGE NUMBER!

Chris talks about Producers - about how the tools to create are democratized. Well, this doesn't exactly happen with LEGO because of intellectual property. You can't go make your own molds and sell your own LEGO-compatible parts - you'll have lawyers camped on your doorstep tomorrow morning. (But Producers do exist in another area of the LEGO world, especially when it comes to MINDSTORMS, and I'll address that in a separate post soon.) So, unless LEGO offers to make parts available for individual purchase, consumers will be held to purchasing big kits (Technic kits, for example) at big prices so they can have that one special part included in the package. Yes, LEGO is making money on the sale of that kit, but I'll bet you that they'd sell more of that ONE SPECIAL PART at a reasonable price than they will of the BIG KIT... and still make a nice profit. At least that's the argument in "The Long Tail" and I can't find a hole in the claim. My Calculus is rusty, but the area under the curve of The Long Tail is still a hefty volume (or profit) of sales compared to the "Hit" section that is basically all of LEGO's packaged kits.

The question, ultimately, is this: What do I want? (And by "I," I mean ME... the lone consumer.) I want to expand my ability to design cool robots by shopping online and purchasing those specialty items that I lack. I like Bricklink, but I'd really prefer to buy from LEGO - no offense, Bricklink sellers. I can buy 30 or 50 or 70 unique pieces from one place rather than 30 or 50 or 70 individual sellers... I have a place to ship a part back to if something is damaged and KNOW that I'll be taken care of... and I know I'm not being gouged with an unrealistic price. If LEGO monitors its sales, it'll know when something is priced too high and can immediately fix it and watch sales start to grow.

Chris has a new book coming out in July 2009 called "Free" - it's based on an excellent article he wrote for Wired magazine a while back. I won't even get started in this post to address how LEGO might take some of his concepts there and implement them - yes, another post for later... sorry.

10 comments:

Cavorter said...

While I think your argument has some merit, one thing to keep in mind about "The Long Tail" is that it applies better to some types of commodities than others. One of the reasons why it works so well with electronically distributable Intellectual Property is that the cost to store and "ship" the goods is relatively small. Apple has to pay for a datacenter or two and the bandwidth, but the sales pretty well cover those costs (though not necessarily entirely cover the physical costs along with the licensing). The problem is not putting together a great web store, LEGO has two strikes against being able to effectively take advantage of "The Long Tail" that stem from selling physical objects:
1. Physical objects need to be warehoused somewhere and that costs money. In order to have an inventory of millions of parts available for Joe and Jane Builder to be able to order on a whim there needs to be a big warehouse somewhere, and probably two or three for geographic convenience, that has employees or expensive automation that goes and finds the parts and puts them in bags and ships them. Certainly possible but it presents a significant cost.
2. Their existing production lines and processes may not be set up to fill that warehouse in a way that makes sense. With the huge number of different parts and a similarly large number of colors for those parts it would be a significant logistical problem to ensure that all of those parts in all of those colors are available in enough quantity to satisfy whatever projected demand. In any industrial production there is a large amount of cost in setting up your processes so that you produce what you need in time but also ensure that it costs the least to do so. Books, CDs, and Movies are easy with modern Print-On-Demand fulfillment systems, but I wager that LEGOs production systems are not tooled to put out 1000 of X and 200 of Y very quickly unless it's scheduled far in advance.

I think it's more likely that paying royalties on the design for a part from LEGO that you produce in whatever quantity you want on a household fabrication machine ("3D Printer") is going to happen before being able to buy anything direct from the factory.

Good post though, and certainly interesting to think about.

Fay Rhodes said...

Thanks for raising this issue again, Jim. I've heard all the arguments from LEGO defenders, but it still doesn't make sense to me.

This is particularly important to those of us who see the NXT as art.

Jim Kelly said...

Cavorter,

Chris Anderson has a name in his book for the LEGO model - I think he calls it a hybrid - a company that sells a physical item that requires storage space but something that could (or is) sold online.

Because our homes don't have true fabricators (YET!), we can't download LEGO blueprints for "printing" our own parts at home... (but the day is coming, I hope).

You bring up a good point about LEGO's manufacturing lines - making all those parts requires space, molds, materials, and personnel - totally agree. But the amount of revenue that would be generated by delving into The Long Tail would most likely easily cover the costs of keeping 30 to 50% of all LEGO parts "in stock" and available for purchase... maybe I'm wrong.

Brian Davis said...

Fay wrote: "I've heard all the arguments from LEGO defenders, but it still doesn't make sense to me."

Why not? What factual evidence contradicts it? I'm thinking in terms of evidence here.

Jim: "But the amount of revenue that would be generated by delving into The Long Tail would most likely easily cover the costs of keeping 30 to 50% of all LEGO parts "in stock" and available for purchase... maybe I'm wrong."

Sort of the same question here: Evidence? What are stocking costs, or shipping/packaging costs, and what would the per piece price end up - is it enough to take advantage of the long tail effectively? Cavorter questions the ability of LEGO to turn out small runs of parts... which from everything I've learned about their system, how you mold ABS plastics, and even distribution strategies, seems well supported (any body remember the "Spring Cleaning" packs at Wallgreens & Kroger, of all places, a few years ago? Remember the reason?). Or consider for instance the recent (really high!) price hike suffered by PaB/Factory, and the stated reasons for it.

Understand it's not the desire I question - Fay, I perhaps have even *more* use for buying parts in small specific quantities than you do (I've worked commissions in LEGO, for example). But I'm not basing conclusions here on my desire, or even my beliefs... just what the evidence supports at the current time.

As to the long tail, does Chris Anderson's book say it's always got to be the monolithic parent company that ends up directly supplying the niche market in the Tail? It would seem to me in things like Bricklink you have an excellent model of the long tail system: ready to distribute in any size lot, locally stocked, and distributed in a very flexible form (the Bricklink marketplace can adjust very rapidly to changes in supply and demand). No, it may not be as easy as "go to LEGO and click on link"... but it's not far off.

How hard are those niche markets willing to work to find what they need? The existence of professional LEGO artists and a thriving Bricklink community seems to imply a functioning system... if not the one everybody wants.

Jim Kelly said...

Brian,

Every point you make is valid, so my response here is just more discussion, not meant as a debate of your comment.

It seems to me that LEGO could easily enter The Long Tail by simply increasing its production capacity, but I'm not a LEGO production engineer, so maybe it's not as easy as it sounds... but it should be! Production costs are never going to be greater than the sale price of an item or a company would never be in business, right?

I like Bricklink - I just don't like having to cherry pick items from such a large collection of sources... LEGO should be THE SOURCE, with Bricklink around to keep them honest (and vice-versa).

I want a linear actuator - I don't want to pay $100+ for a kit to get that part. I want to add it to my shopping cart at LEGO.com, along with a few other must-have items, and not worry about the condition of my purchased item, whether or not it will actually ship on time, or if it's even in stock. I don't have to worry about LEGO putting an item up for sale just to "test the market" for what it's worth.

Supply and Demand rules here - if LEGO chooses to keep a lower stock of higher priced components, the price will fluctuate higher... likewise, millions of small black connectors can be sold for less than a penny each because LEGO's likely to have millions sitting in a bin somewhere.

As LEGO is unlikely to comment here about their inventory and production methods, it's all guesswork, but Chris' book has some fairly solid case histories that seem to me would hold true to LEGO even given its product type.

Auraelius said...

I'm a new participant in this market, so if I'm asking the wrong questions or asking them in the wrong place, please set me straight.

I have a reasonably small list of NXT/Technic parts I need for both me and a client. Maybe three dozen parts in quantities less than a few dozen each. I haven't purchased through Bricklink yet because I haven't set aside the hours it will take to 1) find out which vendors stock which parts, 2) balance the prices & availability from all the possibilities while 3) trying to aggregate vendors so as to minimize shipping costs. Since they are the only market of these individual parts, I must, sooner or later, just work through it.

Why is this market still so inefficient? Am I missing something? Is there a way to have the site take a parts list and help select vendors so as to optimize the order? Or are things really as manual as they seem to be?

Why hasn't somebody at Bricklink written this sort of purchasing assistant software yet? Is the code base open source? Do they need some help?

You've talked already about how the long tail effect becomes practical when the costs of production and distribution become very low. It also needs a very efficient market where ultra-niche consumer and producer relationships can be created and consummated with a minimum of overhead. This is what eBay and Amazon do.

Perhaps if Bricklink were easier to use (again, assuming I'm not clueless about how to use it :) it would be more popular and perhaps Lego would participate. Having a secondary market for parts would help them. Many companies participate in eBay because it reduces their sales channel costs for certain products.

Thanks for your patience and tolerance for a newbie's questions.

Brian Davis said...

[Note: Jim is somebody I consider a good friend, and for anyone who doesn't know us, trust me - we're not attacking each other or even the other persons viewpoints, just having a discussion.]

Jim - I'd *love* LEGO to allow anyone (everyone!) to special order any pieces in any colors and any amounts... and at or very near production costs. But, while this may be possible, where I doubt is that it's easy... or that it should be. That's a very significant logistical system, and would imply a significant amount of stock on-hand and waiting (or an equally sophisticated demand prediction capability to figure out when to make another run of a certain part in a certain color), as well as optimizing the size of each product run (remember, the moulding machines need to be cleaned carefully every time the pellet color is changed, resulting in waste), and a custom-made sorting and packaging system, linked to a detailed front-end internet-based browsing and ordering system... and *all* of these are going to add to the cost of the final product. In some cases fixed development cost (high, but fixed, like the custom packaging system). In some cases a per part overhead (wastage in the moulding process, storage costs of finished parts stockpiles, tax issues due to holding stock).

Of course, another solution to supplying the niche markets in the long tail is to let smaller independent suppliers handle the details in whatever way they think they can. And if the market ever gets big enough to make the parent company tempted, they move into it.

Can you see why I'm skeptical of why LEGO would do this move? I'm still amazed that LEGO Factory and on-line PaB have worked out as well as they have, and the continual change in both availability and cost indicates to me it's not a "supply everything" system, but a way of turning a marginal profit from the excess stock, a more sophisticated version of the "Spring Cleaning" technique.

Auraelius asks, "Why is this market so inefficient"? Quite possibly, because the market is so small it's not worth it to make it more efficient. It's easy to think, looking at blogs like this, that there's a *huge* demand for this sort of thing... but that doesn't mean it's a big enough demand to drive the market rapidly. Even BrickLink have ways to set up a "wish list I think (although I've never bothered to use it, as I don't find it that difficult to sift through). As to writing a script to optimize the process... can it take into account that each Bricklink store has different shipping policies, different shipping distances, different currencies (Bricklink is international), shipping costs, set their own prices, and regularly have sales with very individual structures ("50% any part that you buy all the existing stock", or "5% off all used stock (but not new), reducing by 5% every day all week until I stop", etc.)

OK, really, I'll get a life now :).

Matthias Paul Scholz said...

Apart from discussing the logistic challenges, I'd rather point out something that instantly came to my mind when reading Jim's initial post: I'm not so sure whether the iPod/iTunes analogy to LEGO really holds (whatever some LEGO managers may put on their office walls). No doubt, the iTunes concept in connection with a physical tool to use it (iPod) is economically successful to Apple, changed the way music products are bargained and has its short-term benefits for end consumers. However, apart from the fact that the long-term effects of that business model might be seen at least doubtful in regard to the devastating impact on the artists themselves (most of them are forced to concentrate on the single "killer hit" as album sells are dropping to zero, whatever that means for sustainable creativity and artistic versatility) and subsequently for the music community, Apple with iPod/iTunes plays by no means a creative role in the music community or industry itself. They are very creative (sometimes even brilliant) when it comes to electronic soft- and hardware, but as for the art of music, they are completely uncreative, just making use of it as some sort of consuming tool provider. Few songs only (if any at all) have ever been created because of the existence of iPod/iTunes, I'd presume, but a lot of will never be created because of it (due to reasons stated above).

In this analogy, LEGO rather is to be compared to the manufacturer of musical instruments rather than to a provider of electronic gadgets to consume the music; and to some extent, to the artists themselfes, as LEGO is not only a manufacturer of some plastic parts: what made and makes LEGO so valuable is that they do a lot on top of these small plastic parts, don't they?

I'm not sure if I'd be happy for LEGO to turn into something for robotics like iPod/ITunes is for music - just a provider of consuming tools...

Jim Kelly said...

Brian Davis - it is ON! (kidding...)

Great discussion going here - maybe we should alert Chris A. and ask him to chime in :)

Seriously, though - most of my "requests" are probably unrealistic - I'm writing from that perfect-world mindset where there's no such thing as shortage of materials, shortage of skilled labor, etc...

Bricklink is fine - I've used it before and so have 1000s of others... but I still believe that LEGO needs to investigate how it could possibly offer 25 to 50% of its available micro-pieces (is that an okay word to use?)... for individual purchase. This is most true for Technic pieces, where we're really limited to the NXT kit we own and whatever Technic boxed kits we can afford. I hate going into the LEGO store and not being able to buy beams and L-brackets and other Technic pieces that I need just ONE MORE to finish something... ever been there?!

LEGO is not at risk of some company coming in and replacing them... so a competitor diving into The Long Tail isn't really a possibility (unless SOMEONE at Bricklink - yes, ONE person is all that's needed - figures out how to really become profitable selling individual Technic pieces at reasonable prices AND keep them in stock).

I'm not talking about competition to LEGO here - I'm talking about missed revenue. LEGO is a business like any other - it's ultimate goal is to make a profit, let's not kid ourselves. That said, if LEGO isn't investigating The Long Tail, they're missing out on what the book argues to be about 33% or more of potential overall profits (if I understand the math correctly).

Jim

Matthias Paul Scholz said...

Jim said: "I hate going into the LEGO store and not being able to buy beams and L-brackets and other Technic pieces that I need just ONE MORE to finish something... ever been there?"More than a million times. Actually, I was surprised at the beginning of my adult LEGO activities (ahahaha, how weird that sounds! ;) ) that I couldn't do that.

I'd love to also. That's a completely valid and understandable wish by any LEGO® builder.
But is it a wish of TLG?
I'm not so sure that TLG would also benefit from that. Would the sales of new models suffer and to what extent?
Don't forget that TLG is financing all the creative work and research with the (comparatively expensive) model sets (my guess).

I'd really love to hear the view of someone in TLG's economical department...

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