[MUSIC] So again, let's continue our discussion of how our two worlds, the virtual world and the real world, interact with each other. Now, of course the virtual world provides great things. We can buy almost anything we want at any time we want on various websites, and through various apps, and so on. And yet government statistics tell us in the United States at least, and this is fairly similar in other parts of the world, that 92 to 94% of everything that's bought is still bought offline in real world stores. Whether we're talking about a pair of pants, a pair of shoes and certainly whether or not we're talking about groceries. In fact, groceries are a very, very interesting case and I would encourage you to follow this as we go along through our course. You might have noticed that Amazon now is getting into the grocery business with Amazon Fresh. And this will be a really interesting one to follow, because currently, I think only about 1% of groceries in the United States are actually sold online. And you probably enjoyed seeing Pete discuss the customer issues, but Pete also is somewhat of an Internet expert himself, my colleague Pete Fader. And I'm going to steal this little joke from Pete. Pete always likes to say that the fraction of groceries sold online in 2013 is roughly what it was in 1713. So, roughly 0% with rounding. And why is that? Well, there are significant frictions. First of all there may be the issue of delivery time. That's a barrier to getting things online. Of course our friends at www.diapers.com can get us diapers by 6:00 p.m in the United States as long as we order them by 9:00 a.m in the same day, but, even that may be too long for some of us. The second thing that prevents us from buying everything online is we may face some uncertainty about the fit, the feel, the texture, the quality, the color of the products we want to buy. Do you really want to buy your bananas online? How do you know what they're going to taste like? Would I really want to buy the shirt online without knowing how it fits and feels? Well, it turns out there are ways to overcome some of these barriers and I'll talk about this as we through. But then there's a second barrier, uncertainty about one of these might arrive when it comes to your door. And then the third thing that's typically voiced by consumers is a problem with the virtual world is the cost of returning things even if there are free two way shipping and so on. So, I think it's very, very important for us to keep in mind at this juncture but even though the internet is a great liberator and brings us all kinds of things most of what still gets transacted is getting transacted in the offline world. And so those two worlds are going to continue to coexist like this for some time to come. So let me again share with you a very, very interesting piece of academic research. It was done by some of my colleagues up in Toronto. The Canadians, once in a while do some very, very good things. So let me share one of the good things that the Canadians actually do. I'm part of the commonwealth, so I feel like I can say that. So what they looked at is they looked at sales at amazon.com in various zip codes around the United States, and whether or not those sales would be influenced were a physical store to come into the neighborhood. So let's imagine you're living in Philadelphia, zip code PA 19104. And right now there's no bookstore anywhere in sight. All of a sudden, a bookstore opens up across the street from your apartment. How would this affect the sales at amazon.com, if at all? Well if you're out there thinking that sales at Amazon might go down because some customers might now be encouraged to walk across the street and buy books you'd be absolutely right. When a virtual world store opens up in a zip code, sorry, a physical world store opens up in a zip code, virtual world sales do go down. But they don't go down for every product. They only go down for the popular products because if you wanted to buy Harry Potter and the Sorcerer's Stone you can probably bet that that book is going to be in stock at the local bookstore and so you might be able to run across the street and buy it. And indeed, that's what the researchers found. When a real world store opens up in a zip code Amazon's sales fall, but only for products that are popular. Now if you wanted to buy another book probably better than the Harry Potter book but less popular, there's a book called 101 Years of All Black Trivia. In fact, I suggest that you at least take a look at that book. But if you wanted to buy that you'd be unwise to go into the physical store, because the physical store would be unlikely to carry a book that's going to be so low in terms of popularity. And so this leads us to a very, very interesting concept and I'm going to elaborate on in a subsequent session. It's called the Long Tail, the Long Tail. And it's a very, very interesting idea about how products and services that are sold over the Internet change, or the mix of products and services sold over the internet changes, when we offer customers more and more variety. [MUSIC]
