Despite all that you might have heard about Silicon Roundabout, digital entrepreneurs can’t and don’t operate in their own bubble. Importantly, they are able to help the CEOs of large companies push into top gear. They are out there, working on solving the problems that those running FTSE 100 businesses, medium-sized enterprises and multinational organisations are facing. These large companies have scale, distribution, reach, audience and often an established brand and reputation. They can be seen as the highways, while the entrepreneurs and digital industrialists are the drivers of the cars that can transport us into a high-growth, digital economy. The cars need the highway to get anywhere. Best of all, the large companies can establish a tollbooth to exact a fee for the assets the start-ups are sharing.
It’s at this stage that many people start talking about disruption. But this is not an article about disruptive technology. That time is past. Technology today is an enabler, what’s really disruptive are the economics surrounding it.
1971
The year the microprocessor changed the technological world
Venezuelan economist Carlotta Perez in Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages reviews the last 300 years and finds that there have been five 60-to-70 year periods starting with a big bang of disruptive technology, which then settles into society over the period.
We are, according to Perez, going into the second half of a very long first phase, stemming from the arrival of the microprocessor, which changed the technological world in 1971.
What this means is that today growth is less about the emergence of new technology sectors deriving from the microprocessor and more about how our existing industries deploy those technologies. Where once the focus was on IBM or Hewlett Packard, now it’s on how advertising has been transformed by search or music by digital delivery.
Overall, we are working towards a “new common sense” of how the world will work by the end of the cycle. Large corporates will migrate to dominant positions or fade into insignificance over the next 20 years, based on whether and how they adopt those new technologies.
Economic forces are in the ascendancy, guided by the network-orientation at the core of the development of this new common sense. Examples include the fact that more than one billion people are connected through Facebook; the way LinkedIn has revolutionised the recruitment industry; and how Monitise, the London-based mobile banking firm, services 1,000 financial institutions, having created a business model that incentivises all parties in the mobile money transaction to use the service.
The way Apple shook up the music industry is another example. It saw the music transaction as one of multiple stakeholders, including Apple, the listener, the artist and the mobile carrier, and took the lead on developing the economics for that ecosystem. And Google, too, has done it, changing advertising by organising its business model around advertisers, consumers and our data.
The winners in this new environment will be those companies able to use digital business models to create what I believe has to be the new industrial model, ecosystem economics.
But this structural change, which comes along every 60 to 70 years due to technology, touches more than just business and the individual. It forces government and the bodies that regulate money supply to rethink their assumptions. Deciding on monetary policy without knowing the context of where we are in Perez’s technology cycle is akin to diagnosing a patient without taking their temperature or doing a blood test. You simply don’t have all the data to understand what will follow next.
We have a two-sided debate today about how to create a high-growth economy. Monetarist thinkers point out that demand is created when the economy grows, and thus recommend low tax, reduced government spending and resizing government to get the economy growing. Keynesians claim that government stimulus must drive demand to allow the economy to spring back.
The latter approach is based on the idea that while a family can get its finances back on track by spending less than it earns, it’s impossible for everyone to do so at the same time. When the baker skips a haircut, the barber can’t afford to buy his bread.
What both hypotheses neglect to consider, however, is how technology creates prosperity. Technology, as we enter the second half of the Perez cycle, creates a new common sense. If this technology is embraced it expands the size of the pie, meaning it drives growth. But that is a big if.
The online-only economy remains just a fraction of the total economy. Like the proverbial iceberg, online is the tenth of the ice mass that appears above the water. The rest of the existing,
60-70 yearsCycle of change due to technology breakthroughs
traditional, offline industries are the nine-tenths that are submerged for the moment.
Traditional businesses in non-sexy industries such as transportation, chemicals, oil and gas, construction, and pharmaceuticals are being remade by leveraging software, adopting cloud technology, and engaging with the digital start-ups. In 2013, David with his slingshot doesn’t enter the arena to assassinate Goliath. The two have to share the dance.
Corporate leaders who believe they can choose the moment at which to engage with a digital strategy face a rude awakening. If digital is a 2014 issue for you, you will find that somewhere a David has more power in this asymmetrical game than you give him credit for. As a venture capitalist, there seems to be an unspoken rule: invest and sell to US tech firms. If European and UK corporate leaders don’t engage with the digital universe, the future is clear. US tech firms will continue to steamroll through other industries, as they have with books (Amazon), music (Apple) and advertising (Google).
These days money doesn’t reside with governments, neither, generally, does it lie with the banks who are largely pre-occupied sorting out historical messes. It is with large corporates on balance sheets. These cash mountains should be moved to get these companies safely to a leadership position in the new world, where this new common sense is apparent to all of society, and not just the early adopters or the digital industrialists.
In this context, it is crazy to continue to argue with companies, whether based in the US or the UK, about how much tax they pay into the UK Treasury. Yes, we should be asking for an appropriate contribution to the nation’s health and wealth, but that contribution should lie in using their cash to partner with, invest in or buy digital start-ups built by local entrepreneurs; or to back new fund managers. It should not be just about sending it to the Treasury.
Alfred Pigou, author of The Economics of Welfare, argues that the individual is the best judge of their own welfare. I would add that others don’t spend your money the way you would.
I often look in vain for evidence that government spends our tax money wisely, in the thrifty, focused, careful manner in which we would manage our own household or personal finances. Furthermore, the public sector often seems to be a numbers-free zone, with little or no management accounts available to us to interrogate the performance.
I often look in vain for evidence that government spends our tax money wisely, in the thrifty, focused, careful manner in which we would manage our own household or personal finances. Furthermore, the public sector often seems to be a numbers-free zone, with little or no management accounts available to us to interrogate the performance.
The world no longer operates in the top-down, collective exchange mode that was set up after the Second World War, and which governments largely still operate in. Digital technologies and the network-orientation enable peer-to-peer activity, making networks and exchange more horizontal than vertical. Digital enablers abound; corporate management teams just need to get out of their corner offices to meet them. David and Goliath can figure out the tune they need to dance to and learn how to dance to it, which will bring prosperity to society without paying tolls to the government. Government increasingly is an out of date intermediary, losing its legitimacy fast.
Today, economics trumps politics. The goal is to create high-growth businesses with network effects throughout society. These will not leave people behind, but create new roles, new services and a new common sense.
By way of example, I recently met with the CEO of a £200m company in London. He showed me the technology platform that enables the firm to broadcast locally and nationally at the same time. It has become a powerful tool in the transformation of this business since he took over and has created a dominant position for the firm. I asked him where the firm got the technology. The CEO smiled and said: “We had a 22-year-old guy from Leeds hanging out in the operations team who kept banging on about this, so we told him to go and build it.”
The future is around the corner, but not necessarily the corner you think it is. Your key to the digital future may be a digital David from outside your firm, or that 22-year-old down the hall. What is clear is that society is changing, and the winners are those who lean forward and embrace the change.
Julie Meyer is the CEO of Ariadne Capital, managing partner of the ACE Fund and founder of Entrepreneur Country
- See more at: http://economia.icaew.com/business/march2013/in-a-digital-age-the-network-is-king#sthash.H0h6UIiT.dpuf
