Saturday, January 30, 2016

BusinessDay 2016 Economic Survey: Share market flat all year, economic outlook bleak

 

 

The Reserve Bank board will confront a bleak economic outlook when it meets for the first time this year on Tuesday.

In 2016 the forecasting panel for BusinessDay's Scope economic survey is expecting below-trend economic growth, a further collapse in mining investment, next-to-no lift in other investment and a lacklustre year on the sharemarket.

It believes Australia's unemployment rate will stall rather than improve, wage growth will barely match inflation, US economic growth will remain weak, Chinese growth will weaken and the price of iron ore will stay low while Australia's terms of trade weaken.

In other words, it is forecasting a year pretty much like the one we've just had. Except that this time the Reserve Bank won't cut rates.

The panel concedes there's a small chance of an cut (its average forecast is for a December cash rate of 1.9 per cent) but not enough of a chance to force the Bank to cut by a standard increment, from 2 to 1.75 per cent.

It'll be a muddling-through kind of year, with little to drive growth. Housing investment, which did the job last year, jumping 10 per cent, will this year climb just 4.1 per cent. Home prices, which last year soared 11.5 per cent in Sydney and 11.2 per cent in Melbourne, will this year climb just 2 and 2.8 per cent.

The good news is that none of the panel expects home prices to collapse. The most pessimistic forecast comes from Stephen Koukoulas of Market Economics, who expects slides of 6 and 7 per cent; the most optimistic comes from Renee Fry-McKibbin at the Australian National University who expects gains of 10 and 9 per cent.

Made up of 26 leading economists from financial markets, academia, consultancy and industry, the BusinessDay panel's forecasts have over time proven to be more accurate than those of any of its members.

Of necessity they assume away unexpected events, as do the forecasts of the Treasury and the Reserve Bank. But as with the official forecasts, it would be fair to say the risks are weighted to the downside.

"For iron ore in particular, a sharper slowdown in global steel output (especially in China) could potentially drive iron ore prices closer to US$30 per tonne – roughly the breakeven prices for major Australian miners – compared with our current forecast of US$42 per tonne," writes the National Australia Bank's Alan Oster.

This year's survey is unusual in hosting something of a write-in protest. Five of the panel said they didn't believe China's official economic growth figure. They produced forecasts for what China would say the figure was, but thought the actual figure would be much less.

"Actual GDP is likely to be lower, but not reported," was how Nicki Hutley of Urbis Consulting put it.

The panel expects reported Chinese growth to remain near the 7 per cent target at 6.4 per cent, but it doesn't expect it to necessarily support Australian exports...

"China's economy is, at best, transitioning away from relying on commodity-intensive manufacturing and heavy industry to drive its growth, and at worst could experience a prolonged depression of these industries," writes the ANZ's Warren Hogan. "So the outlook for commodity markets remains weak, with stability in prices and continued growth in volumes looking increasingly like an optimistic view."

On balance the panel expects the iron ore price to end the year near where it started at US$40 a tonne, but the range of forecasts is wide, from US$33 to US$58 a tonne. Even if the price does hold up, the panel expects other export prices to fall, pushing Australia's terms of trade down another 4.7 per cent.

Mining investment will collapse a further 20 per cent as existing projects wind up, and the much anticipated boom in non-mining business investment will be postponed for another year. The panel expects non-mining investment to climb by 1.2 per cent, nowhere near enough to take up the slack.

And housing won't either. The authorities have been successful in their attempts to cool the boom in investor borrowing.

All up, the panel expects economic growth of just 2.5 per cent this year, much less than the 3 per cent expected by the Reserve Bank and also less than the 2.75 per cent the treasury believes is Australia's long-run potential.

As a result unemployment will stay roughly steady at 5.9 per cent, and wage growth will remain barely noticeable at 2.4 per cent, just a touch above the underlying inflation rate of 2.3 per cent.

Household spending will continue to grow at about the rate it has been, 2.6 per cent, perhaps funded by a further fall in the household saving. While a long way short of the 4 and 5 per cent growth rate in household spending achieved in the mining booms, its an improvement on the anemic growth of less than 2 per cent experienced during much of 2012.

Nominal GDP – the measure that matters for budget revenue – will also hold up in the view of the panel, growing by 3.4 per cent, up from this year's 2.2 per cent. But again the range of forecasts is wide, from just 1.5 per cent (Steve Keen) to 5.2 (Paul Bloxham of HSBC).

The panel broadly accepts the government's budget deficit forecasts, agreeing with it about 2015-16 and expecting a $3.6 billion bigger deficit in 2016-17. But forecasts for the second year range from a deficit of $17 billion to $60 billion indicating considerable uncertainty about how much the government will be able to tighten the budget in an election year.

Mardi Dungey of the University of Tasmania believes there might be an economic limit to how much tightening the economy can bear brought on by the tax white paper.

"There will be an effective tightening for consumers due to announcement effects and anticipation of an increase in tax collection via either a broadened or increased goods and services tax collection," she writes.

The panel expects the share market to grow hardly at all, the ASX 200 doing little more than recovering its January losses in the first half of the year and then closing up a mere one half of one per cent at 5325.

Weighing on the market will be a weak Australian economy and an equally weak American economy. The panel expects US growth of just 2.5 per cent throughout 2016. The most optimistic forecasts are 3 per cent (Nicki Hutley and Su-Lin Ong). The most pessimistic is 1 per cent (Steve Keen).

Higher US interest rates would mean a much-needed lower Australian dollar, but the weak US forecasts suggest it might not happen quickly. The forecasts for the Australian dollar centre around 69 US cents, roughly where it is now.

The government's 10-year bond rate should remain low at 3.14 per cent. Without a sustained lift in global interest rates, long-term rates will remain low.

The original version of this story wrongly attributed the lowest forecast for nominal GDP growth to Dr Guay Lim of the Melbourne Institute. The forecast was Steve Keen's. Dr Lim and her team at forecast nominal GDP growth of 3.8 per cent.

In The Age and Sydney Morning Herald

 

 

BusinessDay Economic Survey: Stephen Anthony shines in a year of gloom

Asked what would happen to the price of iron ore this time last year, our panel said "nothing much". It would remain roughly steady around US$72 a tonne.

Instead it collapsed, plummeting to US$41.

In fact, 2015 was the year our panel got spectacularly and unusually wrong.

Was the Reserve Bank going to cut interest rates? Not at all, said most of our 25-person panel. Instead, starting just days after the forecasts were published, the Reserve Bank cut its cash rate twice in a matter of months. By May it was 2 per cent. Only one of the panelists predicted it. He was Stephen Anthony, now with Industry Super.

Dr Anthony also came the closest to picking the fresh collapse in the price of iron ore. He wasn't very close, he predicted an iron ore price of US$55 rather than US$41. But he was closer than any of the rest. All the others went for an iron ore price of US$60 or even more. Some tipped a rise to US$80.

Until mid-last year the director of forecasting at his Canberra consultancy Macroeconomics, Anthony is a former treasury economic modeller who feeds scenarios to computer models that give him consistent economic and budget forecasts.

The scenario he chose was the one outlined in Ross Garnaut's book Dog Days: turmoil in China and much weaker demand for Australia's big exports.

"If you forecast the right story, if you back the right horse, you'll do well pretty much across the board," he says. "It's when you have the wrong sense of where we are at as a macroeconomy. That's when you a have problem."

His sense is that much weaker demand for Australia's exports will mean weaker incomes, weaker budget revenue and much weaker mining investment. He doesn't think it's over, and he doesn't rule out a recession.

"Mining investment was 5 per cent of GDP. It's going to fall to around 1 per cent. That means the economy is transitioning to something else, but we are not yet sure what it is," he says.

One of Anthony's forecasts was too gloomy. He expected an unemployment rate of 7 per cent. Instead it fell to 5.8 per cent. Anthony thinks employment is switching away from high wage jobs to lower wage jobs, something he didn't expect.

In The Age and Sydney Morning Herald

 

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Wednesday, January 20, 2016

China gets it wrong

A write-in protest is unusual in an economic survey.

I am in the middle of compiling the annual BusinessDay survey, to be published at the end of the month.

This year, five of those surveyed complained about one of the questions.

They were asked to forecast China's economic growth.

Instead, they forecast what China would say the growth rate was, and said they wouldn't believe it. "I, as well as many others, suspect the official figures are significantly inflated," wrote one. "I have forecast 6.5 per cent, but the actual figure will be more like minus 1," wrote another.

That they are openly mocking the pronouncements of Australia's biggest customer says a lot about where China finds itself.

Its target growth rate is 7 per cent. Its official growth rate, released on Tuesday, is almost exactly the same, 6.9 per cent, suggesting either that China's leaders are incredibly good at meeting targets, or that their frightened underlings are good at leaning on the figures to make it look as if they are.

The first is unlikely, given the leadership's spectacular failure to get what it wants out of its own share market, the world's biggest. The Shanghai composite index plummeted 15 per cent at the start of the year, despite frantic efforts to prop it up.

What's happening to the share index isn't that important, except as an insight into a bigger game being played out on a larger canvas.

"Countries are like people," says Patrick Chovanec, chief strategist at Silvercrest Asset Management in New York. "People do what works until it stops working, and then they keep doing it, because it used to work."

China latched on to something that worked. Appallingly underdeveloped with embarrassingly low local purchasing power, it turned that weakness into a strength. Like Japan, South Korea and Singapore before it, used its low wages to tap into the rest of the world's purchasing power. As as it sold more and more cheap goods it invested the proceeds in more and more factories and housing. It was bringing hundreds of millions of workers in from the country to cities.

As the number of its factories and housing units grew, its need for the rest of the world to buy even more of what it made grew; which it did, enabling China build even more factories and more accommodation, mostly with Australian iron ore.

Until China grew to the point where it dwarfed the economies it sold things to...

On one measure it is now the world's biggest economy, on another the world's second-biggest. With the rest of the world unable to keep buying increasing amounts of what it produced it needed to try something different. It needed to let the growth rate slow and allow the spending of ordinary Chinese drive the economy.

It paid lip-service to the idea, but mostly it kept doing what it used to do.

If building more factories and accommodation had boosted growth before, surely it would do it again, its logic went. And it worked during the global financial crisis, sort-of. Its economy kept growing while the rest of the world's stumbled.

But the rest of the world never really recovered, and China kept building increasingly useless factories and increasingly empty housing.

"Intellectually, China's leaders know what they have to do," Chovanec says. They need to shift resources away from construction towards households. It's been Communist Party policy since 2013.

"The problem is the moment they succeed they will knock the stuffing out of the investment boom. That's why they flinch. They pull back and try to shore up the existing model."

Chovanec was until recently a professor of economics at Tsinghua University in Beijing. No longer living in China, he is free to describe what he saw.

"Whether it's in the property market, in shadow banking, in the stockmarket, in bad debts or in uneconomic state-owned enterprises, they want a correction without having a correction," he says.

"And the longer that goes on, the deeper the hole they dig, the more traumatic and the scary the correction becomes, and the more they flinch away from it."

China's industrial production slowed last year. Yet borrowing jumped a further 5 per cent as banks pumped more and more money into less and less economic factories, housing schemes and loss-making businesses.

"The message it sends is: hey, if you invest in real estate it doesn't matter whether anybody occupies the building, we will ensure you will make a profit because we need it for GDP," says Chovanec.

"It's storing up problems for later, but it is also sucking the oxygen out of the parts of the economy that need to grow."

As Chinese cotton on and attempt to get their money out of the country, China's president, Xi Jinping, is becoming increasingly authoritarian.

Outside of the country he is being openly mocked. Australian economist Saul Eslake described the share market collapse as a "Wizard of Oz" moment. "Far from the Wizard being as omniscient as Dorothy and all the munchkins believed, he is just an old man behind a green screen," he said.

In the short-run doing what used to work is helping Australia. It's allowing us to sell a few more years of iron ore. In the long run it is making what's coming worse.

In The Age and Sydney Morning Herald

 

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Friday, January 15, 2016

Stephen Anthony. Australia 'has few tools left' to fight recession

A further downturn in China would leave Australia exposed, without sufficient tools to avoid a recession, one of Australia's leading forecasters says.

Stephen Anthony is a former BusinessDay forecaster of the year. In 2015 he took up a role as the chief economist for Industry Super Australia after having run his own economic consultancy and worked on forecasting in both the Treasury and Department of Finance. On Saturday, January 30, when the next set of BusinessDay forecasts are published, he will once again be awarded the title, this time for having most accurately predicted 2015.

"I think the risk of a recession is higher than most people would price it," he told Fairfax Media. "Most people are talking about a less than 30 per cent chance this year. I think it is higher."

Dr Anthony said the government had far less "wriggle room" to avoid a recession than it had before the onset of the global financial crisis in 2008.

In January 2008 the Reserve Bank's cash rate was 6.75 per cent, giving it plenty of room to cut interest rates. In January this year the cash rate is just 2 per cent.

In January 2008 gross government debt totalled just $55 billion. It's now $415 billion, or 25 per cent of GDP, giving the government less room to borrow more without alarming rating agencies.

Australia is going into 2016 with an expected budget deficit of $35.1 billion. In 2008 it had an expected surplus of $19.7 billion.

"The real question is how severe is China's downturn going to be," Dr Anthony said. "Are we going to see Chinese growth fall to 6 per cent, to 5 per cent, or to 4 per cent? A Chinese economy growing at 4 per cent is probably very bad news for Australia because it will cut the volume of our exports as well as the prices."

To date real estate investment had been propping up Australia's economy, but it had been deliberately slowed as the authorities had tightened conditions on investor loans...

Forecaster Nicki Hutley, of Urbis Consulting, said the probability of a China-linked crisis in the next 12 months was "pretty low, about a one in 10 chance".

"Some people might say that's not low," she added. "But the point is it's nowhere near the central case."

If Australia needed to respond to a downturn it would be unable to rely too much on the Reserve Bank.

"Not only does the Reserve Bank only have two percentage points left, but the experience of Europe and the United States suggests that those last few percentage points won't do much," she said.

"Investors don't respond in the same way to dropping rates from 2 per cent to zero as they do from 7 to 5 per cent."

The government had plenty of room to expand the budget.

"Australia has a very low debt-to-GDP ratio. Even the Prime Minister and Treasurer have significantly changed their language on this. Subject to the need for a path to recovery in the budget, they shouldn't feel uncomfortable about spending to stave off a recession."

"In fact a massive recession would itself damage the budget, so they would be better off making use of the budget to stop it."

Economist Saul Eslake said the government had far less budget firepower than it did in 2008 but that if necessary it should abandon its commitment to maintain a AAA credit rating.

"If needed, we should do what we did in 2008 - go early, go hard and go households," he said.

"The best option is too much rather than too little. If you do too much you can wind it back later. If you do too little it won't work, and you will have undermined the credibility of any attempts to do more."

The 8 per cent collapse in the Chinese share market in the first days of the year was important not because it meant China's economy was in trouble but because it showed China's leadership was no longer in control.

"It was almost a Wizard of Oz moment. Far from the Wizard being as omniscient as Dorothy and all the munchkins believed, he was just an old man behind a green screen."

Dr Anthony said the best thing Australia's government could do to was to focus on its core business of creating a stable environment. 

"It should remove the ephemera, the noise; crazy stuff like beating up on unions or creating disputes over television programs. It should remove impediments and instil confidence."

In The Age and Sydney Morning Herald

 

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Tuesday, January 12, 2016

The bonds that fell to earth. Bowie's part in the global financial crisis

Did David Bowie spark the global financial crisis?

It was a question seriously asked after Lehman Brothers collapsed in 2008.

A decade earlier in 1997 he pioneered what came to be called Bowie Bonds. The first was essentially a long-term loan to him in return for the future revenue from the 287 tracks he released before 1990.

He and his financial engineer collected $55 million. The bond holders collected the rights to the income from singles such as Space Oddity, Heroes, Changes and Ashes to Ashes. After 10 years Bowie had to return the $55 million (plus interest) and the bond holders had to return to rights to income from his tracks.

Securitisation, as it was called, had been around for a while, but Bowie showed it could be used for almost anything. By the late 2000s it was being used on an industrial scale to bundle the future income from bad US home loans with the future income from good ones and offload it to unsuspecting investors.

In the new movie The Big Short opening in Australia on Thursday Brad Pitt and Ryan Gosling outline what happened.

Bowie got the better end of his deal.

His bonds were given a AAA credit rating. Prudential Insurance bought the lot. Yet by 2004 they were downgraded to just above junk status. The growth of the internet and body blows to the traditional method of distribution meant his catalogue performed far worse than thought.

He knew it was going to happen.

An early internet service provider (he set up BowieNet at about the time Malcolm Turnbull helped set up Ozemail) he foresaw the arrival of digital downloads and streaming services years before they took off...

Here he is talking to the New York Times in 2002:

"I don't even know why I would want to be on a label in a few years, because I don't think it's going to work by labels and by distribution systems in the same way. The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it. I see absolutely no point in pretending that it's not going to happen."

"Music itself is going to become like running water or electricity," he said. "You'd better be prepared for doing a lot of touring because that's really the only unique situation that's going to be left. It's terribly exciting. But on the other hand it doesn't matter if you think it's exciting or not; it's what's going to happen."

Bowie didn't spark the financial crisis. He was ahead of his time in applying to music the techniques that sparked the crisis.

As always, he spawned imitators. To this day a Los Angeles firm called Royalty Advance gives artists a quick cash advance on their royalties. But those artists are unlikely to ever do anything like as well out of securitising the future as Bowie.

A man of his time, and beyond his time, he was a one-off.

In The Age and Sydney Morning Herald

 

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Monday, January 11, 2016

Trans-Pacific Partnership will barely benefit Australia, says World Bank report

 

Australia stands to gain almost nothing from the mega trade deal sealed with 11 other nations including United States, Japan, and Singapore, the first comprehensive economic analysis finds.

Prepared by staff from the World Bank, the study says the so-called Trans-Pacific Partnership would boost Australia's economy by just 0.7 per cent by the year 2030.

The annual boost to growth would be less than one half of one 10th of 1 per cent.

Other members of the TPP stand to benefit much more, according to the analysis. Vietnam's economy would be 10 per cent bigger by 2030, Malaysia's 8 per cent bigger, New Zealand's 3 per cent bigger, and Singapore's 3 per cent bigger...

Australia and the United States benefit the least from the Trans-Pacific Partnership. The study says it would boost the US economy by only 0.4 per cent by 2030.

Non-members would suffer as members directed trade to other members. The biggest loser would be Thailand, whose exports are set to fall 2 per cent while Vietnam's grow 30 per cent.

The study explains that highly developed nations such as Australia are either relatively reliant on things other than trade for economic growth or are already fairly free of trade restrictions.

Since sealing the deal in October the Australian government has been reluctant to commission an economic analysis of its effects, turning down an offer from the Productivity Commission.

Prime Minister Malcolm Turnbull described the deal as a "gigantic foundation stone", saying it would deliver "more jobs, absolutely".

It opens up trade between members but makes trade more difficult with non-members through a process known as "cumulative rules of origin" where members lose privileges if they source inputs from countries outside the TPP.

The Productivity Commission has been strongly critical of the provisions saying that they turn so-called free trade agreements into "preferential" agreements.

The Partnership also requires members to sign up to tough intellectual property provisions and to submit to investor-state dispute settlement procedures administered by outside tribunals.

World Trade Online says the negotiating parties are planning to sign the agreement in New Zealand on February 4. It says Chile has confirmed the date and some trade ministers have already made arrangements to travel to Auckland, but it says New Zealand has yet to issue formal invitations.

The deal will not come into place until it has been ratified by at least 6 of the 12 signatories representing 85 per cent of their combined gross domestic product. 

President Obama is expected to use Tuesday's State of the Union address to push for US ratification.

Australia has to table the agreement in Parliament for 20 joint sitting days and consider a report from the joint standing committee on treaties before it can ratify the agreement.

Labor has yet to announce its position. It has said previously that it opposes investor-state dispute settlement procedures but has agreed to them in the Korea and China free trade agreements.

A spokeswoman for Trade Minister Andrew Robb said the agreement would deliver enormous benefits by driving integration in the fast-growing Asia-Pacific, and establishing one set of trading rules across 12 countries.

"The World Bank report demonstrates that all 12 member countries – representing around 40 per cent of global GDP – will experience economic growth and increased exports," she said.

In The Age and Sydney Morning Herald

 

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Sunday, January 10, 2016

Relax, Spotify won't stop the music

Remember how the internet was going to kill music?

Seriously. And before that home taping, the arrival of the radio, and the invention of the record player.

Each was going to cut the return for making music. As a result, we would be surrounded by less of it. Seriously. At home I have a copy of a 1990s CD entitled "Don't stop the Music". The Australian record industry sent it around to warn that Australian music would vanish if the government allowed the unregulated import of CDs, which it did. The record player was going to cut sales of sheet music, putting composers out of business. Radio was going to cut sales of records, putting recording artists out of business. Home taping was going to cut multiple sales of records, meaning that artists would no longer find it worth their while to record. And the internet was going to cut payments to artists altogether.

Now there's streaming radio. It charges two prices: nothing (backed up by advertising), and very little. It pays the recording companies just 0.7 US cents per play. The artists and composers get a fraction of it.

Yet all these years on we are still surrounded by music. It follows us throughout a day from our bedside to our commutes to our earphones at work to our drive home to settling into bed.

And an astonishing amount of it is new. A decade after the arrival of file sharing, US economist Joel Waldfogel charted what had happened in a paper called Bye, Bye, Miss American Pie? The Supply of New Recorded Music since Napster.

There is no doubt that recording companies are making less money since file sharing, he says. But that doesn't necessarily mean they are making less music, or even less good music...

Assembling data on the quality of songs from the "all-time best" lists compiled each year by Rolling Stone and other magazines he finds that the albums regarded as good tend to be recent, and increasingly so as the internet age wears on.

The good new ones aren't even by old artists. He says around half of the good new albums are by artists who only started recording since file sharing. It has neither killed new music, nor frightened people away from beginning to make music.

But it is killing albums. The biggest revolution wrought by the internet wasn't illegal downloading (it's diminishing rather than growing), it was the ability to buy tracks one at a time.

Most albums are filled with fillers. After the standout tracks (the ones the producers put an effort into) the rest are close to junk, the kind of tracks that wouldn't be bought unless they were bundled onto albums.

While it has always been possible to buy individual tracks in the form of singles, they used to be inconvenient to play. Who wanted to change a CD every few minutes? Now that it's easy to play hours of single tracks without interruption, there's no longer much reason to buy albums.

A decade ago albums (physical and digital) outsold singles four to one. Now singles outsell albums four to one.

We are no longer buying what we don't want, and increasingly, we are no longer buying at all. Pandora, Spotify and similar services allow us to pay just to listen. So they've become the next big threat. At the annual general meeting of the American Economic Association last week Waldfogel previewed a new paper he has written examining whether they boost or harm sales.

It's quite clear they boost the sales of particular tracks. When Pandora tried playing some tracks in some regions and not others the sales of the tracks increased in the locations where they were played. It's what happens with radio and it's why artists are keen to get airplay. But that doesn't mean that Pandora itself boosts sales. Without Pandora and Spotify, would music sales in general be higher?

His answer is yes, but not by much, and it's not the end of the story. Every 137 streamed tracks appear to cut legitimate sales by one track (and to cut illegitimate downloads by much more).

That lost sale is a cost to the record company. It misses out on the 82 US cents it would have got from a retailer such as iTunes. In return it gets 0.7 US cents per play. Multiplied by 137 that gives it 95.9 cents in return for losing 82 US cents, putting it slightly ahead.

So please don't feel guilty listening to music at work. It isn't going to stop.

In The Age and Sydney Morning Herald
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Wednesday, January 06, 2016

Blockbusters. The net is the force that is making us all alike

It's getting hard to see movies other than Star Wars.

 Playing on a record 941 Australian screens, The Force Awakens is squeezing other films out. Want to see a different film? You'd better be quick. Since December, other films have been on screens for mere days, replaced by others on for mere days, as The Force and The Force in 3D monopolise real estate and obliterate potential competition.

Fortunately, many filmgoers I know don't seem to want to watch other films. Some have seen The Force Awakens repeatedly. Others who aren't that interested feel they have to see it in order to find out what everyone else is talking about.

It isn't what we were told would happen.

Ten years ago, in an award-winning book titled The Long Tail: Why the Future of Business is Selling Less of More, the editor of Wired magazine Chris Anderson argued that blockbusters were on the way out. In their place would be "a market of multitudes". There would still be big sellers, of course, but beyond them would be an ever-growing tail of niche products that would do surprisingly well, "shattering the mainstream into a zillion different cultural shards".

Anderson used the example of a long-forgotten British book, Touching the Void, by mountain climber Joe Simpson. It sold poorly, until a decade later a fellow mountaineer, Jon Krakauer​, released another book, Into Thin Air, which became a sensation, causing Touching the Void to start selling with renewed vigour. It became a movie and a paperback and eventually outsold the Krakauer book two to one.

It happened because of the internet and online bookseller Amazon recommendations. Amazon's software told people who bought the Krakauer book that they might also like Simpson's story, and ecstatic reader feedback pushed the software to keep recommending it until it rose from the dead.

It could do it because bookstores no longer had physical limits...

"Scarcity requires hits," Anderson wrote. "If there are only a few slots on the shelves or the airwaves, it's only sensible to fill them with the titles that will sell best."

But with bookstores and record stores and movie stores suddenly limitless, and with search engines suddenly clever, the real money was to be made in the "long tail" of smaller sellers, which, when added together, would outsell the blockbusters.

Anderson's data seemed to show the tail growing. Record stores would have once sold only a few thousand units. Apple told him every one of the 1 million tracks in its iTunes store had sold at least once. Netflix told him that almost all of its massive collection of movies had been seen at least once. The tail seemed limitless.

Except it didn't work out that way. According to more recent data pulled together by Harvard Business School professor Anita Elberse, the long tail is weakening while blockbusters grow stronger.

She says of the 8 million digital music tracks sold in 2011, an astonishing 7.5 million were barely heard at all, selling fewer than 100 copies. An astounding 32 per cent sold only one copy.

"Yes, that's right: of all the tracks that sold at least one copy, about a third sold exactly one copy," Elberse writes.

It's the opposite of what Anderson predicted. Two years earlier, 27 per cent of tracks sold just one copy. Two years before that, 24 per cent sold one copy. The more digital sales have grown, the less important the tail has become.

Meanwhile, the head is swelling. When Anderson wrote his book, million-selling tracks accounted for 7 per cent of total sales. By 2011, they accounted for 15 per cent.

Google's Eric Schmidt, who endorsed Anderson's book at the time, now says things are moving in the other direction. "I would like to tell you that the internet has created such a level playing field that the long tail is absolutely the place to be, that there's so much differentiation," he told McKinsey Quarterly. "Unfortunately, that is not the case," he said.

"In fact, it is probable that the internet will lead to larger blockbusters and more concentration of brands. When you get everybody together, they still like to have one superstar."

Google ought to know. Few of us ever look past the first few search results. We want what others have found. In the 1950s, when the radio rule was that "no tune ought to be repeated within 24 hours", Todd Storz and Bill Stewart of radio station KOWH in Omaha, Nebraska, broke ranks by repeatedly playing the most popular tunes, to the exclusion of lesser-known songs.

The idea came from a restaurant across the road, where they noticed that when the staff were cleaning up they programmed the jukebox to play exactly the same songs their customers had been listening to all day. The top 40 has been with us ever since.

We want what others want. In 2006, three researchers from Columbia University set up a fake market in which 14,300 internet users were asked to rate 48 previously unknown songs. Those who were told how others rated the songs were far more likely to agree with their peers.

Australians flocked to December's Taylor Swift concerts partly because she is a good performer and also because others were going, too. It became an event, a communal experience, like the Olympics, a grand final, or the final episode of The Voice.Even Netflix, the ultimate long-tail company with a near unending catalogue, felt the need to create House of Cards.

The internet has made it easier for us to find things in the long tail, and diminished our need to do so. Why have separate pop stars for different countries when one or two will do for the entire world?

For a while, it looked as if the internet would free us to be different. Instead, for good or bad, it is binding us together.

In The Age and Sydney Morning Herald
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