THE DIGITAL TSUNAMI 2.0

We are in the eye of Digital Tsunami 2.0. It is being enabled by a combination of factors – connected mobile devices, asset sharing, crowd sourcing, data and the Cloud. It is being fuelled by the cheap money currently being printed by the central banks of Japan, the US and the EU.

Scarcely a day goes by without commentators writing tomes on this subject. But few seem to contemplate the likely effects of the combination of everything more or less at once: smartphones + asset sharing + crowdsourcing + connected devices + Vodka Red Bull (monetary policy) = serious disruption!  Read on…

THE SMARTPHONE

We all know that since Steve Jobs famously said “this will change everything” in 2007, smartphones have become the fastest-selling devices in history. They outsell PCs four to one, 50% of all adults own one, and they have more computing power than NASA used to land on the moon. Two billion people have smartphones today and by 2020 that’ll double. 500 million will be sold in China this year. In India you can buy one for $40.

U.B.I.Q.U.I.T.O.U.S.

And oh, how the little devils have changed our lives. We check them upon waking.  We’re buried in them all day. Our kids prefer them over TVs and PCs. The desktop is no longer our main workplace. Our phones travel with us, recording our behaviour and our health. Being wired in is cheap and easy. We are addicted, and although we dream of unplugging…we daren’t.

Smartphone applications now connect people, share and aggregate knowledge, match supply and demand. If I want to find companionship in a bar, arrange a ride there in someone else’s car, book a restaurant or a room in someone else’s house – it’s all there at my fingertips. The differences between a service and a product, a car and a taxi, a tenant and a landlord – are getting pretty blurry.

The mobile ecosystem stimulates economic activity. It is also a major disruptor, catching big names like Nokia and Dell among others napping. It has decimated camera manufacturers and map makers. Messaging apps like WhatsApp, WeChat and Line are now much bigger than the global SMS market. And so on.

Meanwhile, smartphone unit sales passed the PC four years ago. Xiaomi is the world’s most valuable start-up. Apple is a smartphone company, with iPhones generating 68% of first quarter 2015 revenues. The App Store and Google Play have millions of apps for download. Apple sold more than $14 billion of downloads last year.

THE INTERNET OF THINGS

At first we accessed the Internet via desktop. Then via mobile devices. Now it connects everyday objects in our homes, workplaces and cities. This connectivity will deliver new levels of circumstantial awareness, automation and efficiency.

A diverse ecosystem of “things” is being developed. It’s going to be big and it’s going to be disruptive. Cisco tell us that within five years there’ll be 50 billion connected devices. They’ll consume more data than all the people currently using the web.

Professor Michael Porter recently wrote in the Harvard Business Review that connected products will transform competition in business. Once “dead” items are rapidly becoming part of complex, connected ecosystems driven by miniaturisation, software, sensors, chips and storage. More data will be produced, stored and analysed, driving improvements in product functionality, efficiency and performance. In this new world if your car engine breaks down it’ll talk to the manufacturer and fix itself or despatch help. Or in future, message a driverless car to pick you up.

Connected ecosystems will change the shape of business. Boundaries will be blurred or broken down. Value chains will be disrupted. Companies that make, service, support, store, deliver or market products will have to reinvent themselves.

Competitors will emerge from left field, dreaming up new ways of doing things. There will be massive data issues, which is why data scientists are a hot commodity. Professor Porter says companies will need to ask themselves the most existential of questions: “what business am I in?”

By 2020 half the planet will be connected to the web and more than one billion homes will have Wi-Fi. Sensor prices will halve. Data will be stored and accessed in the Cloud at an ever-decreasing cost. There’s money to be made from making the devices, writing the software that runs them and providing analytics to make sense of it all. One researcher, BI Intelligence, sees a five year 44% CAGR opportunity to build a US$600bn market. That’s 10x the size of Google today. So money is piling in, new products are being developed, venture capital investments are being made and there have been billions of dollars in M&A.

Businesses will be large users of smart devices to gain operational efficiencies.  Manufacturing, transport and logistics will dominate early use, initially using connected devices to manage or track assets remotely.

Consumers have warmed to connected TVs and robot vacuum cleaners. Home automation and energy efficiency are growing fast, led by companies like Nest and Control4. By 2020 there’ll be 100 million connected cars on the road offering not just mapping but music streaming and safety features. That’s mainstream.

Then there’s 3-D printing. Today’s 3-D printers aren’t up to the task; however, when 3-D printing has its Steve Jobs moment, manufacturing and related supply chains will be badly disrupted. If history helps us to predict the future, consider the Xerox 914, which the Smithsonian Magazine recently wrote about as a proxy for 3-D printing. The 914 was the world’s first easy-to-use photocopier and when it was launched in 1959, Americans made 20 million copies per annum. Within 7 years they made 14 billion. When companies like HP or Apple release a 914, it will happen.

We’ve briefly covered the smartphone and connected devices. Let’s move to the Sharing Economy.

THE SHARING ECONOMY

Uber and Airbnb use technology to share excess capacity. Since Uber was founded in 2009 its ride-sharing marketplace has turned transportation upside down. The company will report ~$10 billion in gross revenues this year and is valued at $40 billion. The successes of Uber, Airbnb and others aren’t fads: collaborative asset sharing is a proven way of doing business. Consumers are ready to take a risk on an unknown bedroom or car and driver to save money.

Researchers say that today’s $15 billion Sharing Economy will be a $300 billion business within a decade. This story will spread from taxis and vacation rentals to broader categories. With it comes a fear that as more consumers share their belongings, demand for new products will decline. Or that manufacturers will start to rent out what they make, direct to the consumer.

Sharing isn’t restricted to inanimate objects – it also applies to services. Just as platforms like Uber and Airbnb provide mechanisms for sharing resources, the connected crowd is a large invisible workforce that can get things done quickly and inexpensively. Crowdsourcing – the sourcing of at demand labour qualified for specific types of work – will grow because it’s flexible and it’s borderless. Low cost structures in developing countries are becoming accessible to everyone. Employment is being redefined as more flexible jobs are created requiring fewer full-time jobs.

Once again, the implications for conventional notions of supply, demand, capacity utilisation and pricing are profound and potentially deflationary.

All of the factors described above will require increased spending on IT infrastructure and storage.  We’ll be transmitting and processing large amounts of data from diverse locations, requiring speedy aggregation, processing and storage. Which leads us to the Cloud.

THE CLOUD

We all know the Cloud is a sharing of resources to achieve economies of scale, to save capital and scale faster. You no longer need to own and manage computing infrastructure because you can rent it and pay for the volume and level of service you need.

Almost everything we’ve talked about in this blog intersects with the Cloud at some point. Whether it’s the data being collected from your smartphone, connected devices talking to each other or designs for 3-D printing, the Cloud will be the centre of much activity.  Cloud computing is growing fast and some pundits believe it’ll be a $100bn business within five years. AWS apparently adds as much server capacity daily as its parent Amazon needed to run its entire business a decade ago. Wow.

CRAZYNOMICS

Let’s summarise where we’ve got to. In Digital Tsunami 2.0 we face great change; in part opportunity, and in part disruption. It is being enabled by a collusion of technological advances that are being felt almost concurrently.

But there’s one additional environmental factor that is stimulating much of this innovation, and it seems to be getting overlooked. I call it Crazynomics.

The terms digital disruption and monetary policy aren’t usually uttered in the same breath. Yet the activity described in this blog is being somewhat fuelled by the American, Japanese and European central banks printing trillions of bank notes, which they’ve been doing since the Financial Crisis. This has created a suspended financial reality in which appetites for risk have gone up as investors have chased elusive returns.

The volume of money invested in tech start-ups is closely correlated with both the NASDAQ and with interest rates. According to Mattermark, when interest rates go down, the NASDAQ Index goes up, and the number of early stage tech financings goes up. Conversely, when interest rates go up (as they inevitably will!), the opposite happens.

Tsunami 2.0 has been fueled by a zero interest rate environment. The weight of money going into equities has puffed up valuations, which some would say have reached levels not seen since 1929. When interest rates eventually move upward, that will have a negative impact on funds flows, valuations and start-ups. And at that time – whenever it occurs – financings, and therefore innovation, should suffer a cyclical slow down.

But until then, it’s a great environment for risk-takers, and it has surely seen the launch of new business models that otherwise wouldn’t have seen the light of day. Ironically it’s this free flow of capital and risk appetite that are accelerating the speed of disruption.

THE WRAP

So that’s my take on the current decade. Concurrent with so much opportunity will be disruption and no doubt some devastation. We don’t yet know the balance between value creation and destruction, therefore we need to ask ourselves an important question: “are we going to be a disruptor, or are we going to be a victim?

The final blog in this series asks how ready we are. Stand by.

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