Lego's Long Tail: Niche Markets and the Swarm Strategy

Big companies create markets for ancillary products and services they can not profitably serve themselves. The scale and margins just arent there in sufficient quantity to generate the kind of returns that keep sell side analysts or private equity investors interested.

But as long as patents, trademarks and copyrights arent violated and quality is not diminished, enhancing the commitment to brand.

The advent of 3D printing and other technological advances has made niche manufacturing a more attractive proposition both for the niche maker and, perhaps more importantly, for the global corporation looking to build customer loyalty. The data are conclusive on this: repeat customers are more profitable. They require less marketing expense and tend to move up the value chain for products or services they like, purchasing more expensive options over time.

Swarms of 'pilot-fish' producers who surround the core products with enhancements free up corporate capital for more scalable strategic investments but still provide inducements that may be more affordable and enticing to marginal customers.

The niche players get to address a market already created at great expense by someone else but can focus their efforts in ways that make the opportunity both profitable and organizationally worthwhile for entities of their size.

The distribution of risk, investment capital required and return are attractive for all involved. It may represent as pure an example of capitalist mutual benefit available in a global economy. JL

Chris Anderson reports from his book "The Makers," in Reuters:

Lego, as a family-oriented company, has some rules about guns.

With few exceptions, it doesn’t make twentieth-century weapons. You can go farther back into history and have Lego swords and Lego catapults, but not Lego M-16 automatic rifles or rocket-propelled grenade launchers from today. Or you can go forward into fantasy and have Lego laser blasters and plasma cannons, but you can’t have World War II machine guns and bazookas. That’s a perfectly fine policy for Lego, but the consequence is that it tends to lose its customers around the age of ten,
when they go through their war phase. That included Will Chapman’s sons. In 2006 his youngest one wanted to replicate a World War II battle in Lego and was disappointed that he couldn’t do it with the Lego figures he already had.

That would have been the end of the story, but Chapman is a Maker. In his Redmond, Washington, basement he has a small CNC mill and he knows how to use 3-D CAD software. So he started designing some Lego-sized modern guns. And because he could, he actually fabricated them.

To do so, he first sent the files to his desktop CNC machine, a Taig 2018 mill that costs less than $1,000, to grind the mold halves out of aircraft-grade aluminum blocks. Then he put the molds in his hand-pressed injection-molding machine, which uses regular propane like that for a backyard barbecue to melt plastic, and a lever like a water pump to force it into the mold. For the plastic he just used spare Lego blocks, to use the same ABS plastic as the real thing.

After some experimentation and revisions, he had some pretty good- looking prototypes, including an M1 infantry rifle and a sniper rifle. His son was impressed, and so he made a few more and started sharing them with other “adult fans of Lego.” They started clamoring for more, and so he launched a website to sell them.

Today, his company, BrickArms, goes where the Danish toy giant fears to tread: hardcore weaponry, from Lego-scale AK-47s to frag grenades that look like they came straight out of Halo 3. The parts are more complex than the average Lego component, but they’re manufactured to an equal quality and sold online to thousands of Lego fans, both kids and adults, who want to create cooler scenes than the standard kits allow.

Lego operates on an industrial scale, with a team of designers working in a highly secure campus in Billund, Denmark. Engineers model prototypes and have them fabricated in dedicated machine shops. Then, once they meet approval, they’re manufactured in large injection-molding plants. Parts are created for kits, and those kits have to be play-tested, priced for mass retail, and shipped and inventoried months in advance of their sale at Target or Wal-Mart. The only parts that make it out of this process are those that will sell in the millions.

Chapman works at a different scale. He continues to design the weapons in CAD software and prototype with his desktop fabrication tools. Once they look good, he sends the file to a local toolmaker to reproduce the mold out of stainless steel, and then to a U.S.-based injection-molding company to make batches of a few thousand.

Why not have the parts made in China? He could, he says, but the result would be “molds that take much longer to produce, with slow communication times and plastic that is subpar” (read: cheap). Furthermore, he says, “if your molds are in China, who knows what happens to them when you’re not using them? They could be run in secret to produce parts sold in secondary markets that you would not even know existed.” Chapman’s three sons package the parts, which he sells direct. Today, BrickArms also has resellers in the UK, Australia, Sweden, Canada, and Germany. The business grew so big that in 2008 he left his seventeen-year career as a software engineer; he now comfortably supports his family of five solely on Lego weapons sales. “I bring in more revenue on a slow BrickArms day than I ever did working as a software engineer.”

How does Lego feel about this? Pretty good, actually. BrickArms and the many small companies like it, such as BrickForge and Brick-stix, that make everything from custom Lego-sized characters to stickers that allow you to customize official Lego minifigs, represent a complementary ecosystem around the Danish giant.

They solve two problems for Lego: First, they make products that wouldn’t sell in large enough quantities for full Lego production, but nevertheless are wanted by Lego’s most discriminating customers. This is the Long Tail of Lego, and such niche demand is as real in plastic building toys as it is in music and movies. The entrepreneurs orbiting around the Lego mother ship collectively fill in the gaps in the market, allowing Lego to continue focusing on the blockbusters its scale requires.

Second, by offering products that are particularly prized by older children, companies such as BrickArms keep them in the Lego world a few years longer, from around eight or ten to perhaps twelve. This increases the chance that they will graduate from casual play to true Lego obsession, maybe even maintaining that into adulthood (don’t laugh— Lego’s “Architecture” series of famous building kits is sold in bookstores and museum shops for around $100 each). If so, they may become the buyers of Lego’s most elaborate kits, including a Star Wars Death Star and Star Destroyer, which both have more than three thousand pieces and cost $400.

So Lego by and large turns a blind eye to this swarm of Lego fan-created businesses around it, as long as they don’t violate Lego’s trademarks and include cautions about keeping pointy or easy-to-swallow toys away from young children. Indeed, Lego has even issued informal guidance on using the best plastics that are non-toxic and including holes in parts that could be a choking hazard, to allow for air passage.

What BrickArms and its kin represent are examples of Maker business targeting niche markets, which are often underserved by traditional mass manufacturing.

One of the triumphs of the twentieth-century manufacturing model was that it was optimized for scale. But this was also, at least from a twenty-first-century perspective, a liability. Henry Ford’s powerful mass-production methods of standardized interchangeable parts, assembly lines, and routinized jobs created unbeatable economics and brought high-quality goods to the common consumer. But they were also tyrannical — “any color you want as long as it’s black” — and inflexible. The price differences between small-batch and big-batch products were so great that most buyers could have either affordable products or wide choice, but not both — cheap, mass-produced products beat variety every time.

Meanwhile, the long tooling cycles of mass production meant that products had to be designed years in advance of sale, and the cost of innovation rose as the consequences of failed experimentation at mass scale rose (witness the Edsel, a radical car that set back innovation at Ford for decades). Today the same is true: the local furniture maker can compete with IKEA only by serving the rich. All those Billy bookcases out there (and I’ve got my share) are the marketplace saying that they don’t care enough about differentiated shelving to pay more for it.

A more pernicious cost of the triumph of mass production was the decline of small-scale manufacturing. Just as in retail, where the local specialty retailer was driven out by Wal-Mart, in manufacturing, scores of car companies were overwhelmed by Detroit’s Big Five (or subsumed into them) in the first half of the twentieth century. So too in textiles, ceramics, metalware, sporting equipment, and count-less other industries. All succumbed to the lure of labor arbitrage abroad, while wage pressure made union relations increasingly toxic at home.

To be sure, many of these smaller manufacturers lost on their merits: their products were no better than imported goods and their costs uncompetitive. But others failed because they lost their distribution channels to the few consumers who still wanted their specialized goods (or just wanted to buy American). The grinding race to the bottom of price competition at the big-box retailers made it increasingly hard to find niche goods.

Fast-forward a half century, and two things have changed. First, thanks to desktop fabrication and easy access to manufacturing capacity, anyone with an idea can start a business making real things. And second, thanks to the Web, they can sell those things globally.

The barriers against entry to entrepreneurship in physical goods are dropping like a stone.

“Markets of ten thousand” defines the successful niche strategy for products and services delivered online. That number is large enough to build a business on, but small enough to remain focused and avoid huge competition. It is the missing space in the mass-production industry, the dark matter in the marketplace — the Long Tail of stuff. It is also the opportunity for smaller, nimbler companies that have emerged from the very markets they serve, enabled by the new tools of democratized manufacturing to route around the old retail and production barriers.

Even better, some of those companies that start with niche markets may graduate to huge ones.