To get a sense of our true taste, unfiltered by the economics of scarcity, look at Rhapsody, a subscription-based streaming music service (owned by RealNetworks) that currently offers more than 735,000 tracks.
Chart Rhapsody's monthly statistics and you get a "power law" demand curve that looks much like any record store's, with huge appeal for the top tracks, tailing off quickly for less popular ones. But a really interesting thing happens once you dig below the top 40,000 tracks, which is about the amount of the fluid inventory (the albums carried that will eventually be sold) of the average real-world record store. Here, the Wal-Marts of the world go to zero - either they don't carry any more CDs, or the few potential local takers for such fringy fare never find it or never even enter the store.
The Rhapsody demand, however, keeps going. Not only is every one of Rhapsody's top 100,000 tracks streamed at least once each month, the same is true for its top 200,000, top 300,000, and top 400,000. As fast as Rhapsody adds tracks to its library, those songs find an audience, even if it's just a few people a month, somewhere in the country.
This is the Long Tail.
This is something that mass retailers are going to have to face. There's still a lot of pleasure to be gained in just browsing at a store - and you'll often find things that you wouldn't have noticed ootherwise that way (I spotted a bunch of history books at Borders yesterday that I'll want to get, for instance). On the other hand, search is pretty darn good at Amazon - and I've found things of interest that way as well - things that I would be unlikely to ever notice at a real store.
There's plenty of room for the big retailers in the mass market end of the business. What's opening up are the niche spaces that hardly anyone bothered servicing before. Your particular taste in music (or books, etc) might be rare enough that Borders would never bother to stock it - but the online retailer who has no actual inventory (beyond bits) can easily do so. As book publishing moves towards on demand binding, you'll see the same kind of disintermediation hit book sales that's been slamming music for the last few years.
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