Productivity gains and the digital economy

While the hotly debated issues of ‘cost benefit analyses’ in relation to the NBN have died down the obvious issue remains and that is why we need an NBN.

From the early 00s onwards BuddeComm has highlighted the social and economic benefits, and most people intuitively agree with this. But obviously economists are tend to probe more deeply. Unlike policymakers, they are not asked for a vision; they simply look at the cold, hard facts. It is interesting to talk to economists and many will simply say ‘don’t ask me for a vision – that is not our job’.

Of course, with hindsight it is always much easier to see if ‘vision’ does indeed become translated into real economic benefits and once these benefits are delivered the economists start warming up to what such a vision is actually delivering. They would have questioned those who suggested national energy networks and road systems in the same they question broadband infrastructure.

However, without having such hard facts and sticking to economic conservatism, we have seen what happened to those who denied the ‘soft’ benefits of the digital economy, or who simply missed the boat in ignorance. There are plenty of examples of the problems that the digital economy has created in the music industry, the newspaper industry, the book industry, retail and also individual companies such as Intel, Harvey Norman, Microsoft, Nokia, Motorola, RIM, to name just a few.

This shows what economists call ‘creative destruction’ – a massive reduction of costs and the removal of artificial monopolies and industry barriers – the process of disintermediation.

However the overall economic gains are not those savings, but the changes that are brought about that stimulate innovation, the creation of new companies and even completely new sectors. The apps industry didn’t exist five years ago and now employs an estimated 1 million+ people.

Most of the benefit derived from the digital economy is new business generated from totally new business models. An increase in the digital economy income, however, also leads to a decline in the revenue generated by the old models of the incumbents, as they are no longer able to charge premium prices based on their old business models.

The new, disruptive businesses that evolve from the ‘creative destruction’ sometimes only turn over 10%-20% of similar businesses operating under the old models. It is the customers who profit from this. They pocket the savings and can spend them elsewhere. This in turn leads to new opportunities where the customers are willing to spend more – smartphones, tablets, games apps and broadband are examples of new growth areas.

These changes in the economy are putting more power into the hands of the consumer and it is up to businesses to follow the customer to where they want to spend their ‘saved’ money. This is different from the old models where businesses, especially old models with monopolistic, oligopolistic tendencies, forced customers to operate within the confines of the business models made available to them by these companies.

Key to the digital economy is its digital infrastructure, and, similar to other major infrastructure developments in the past (electricity, telephony, roads, gas, etc), these infrastructure developments have economic multiplier effects. The social and economic benefits that can be derived from this can be shared over many sectors.

So, with the digital economy progressing, and, regardless of whether those affected like it or not, leading to ‘creative destruction’, it is essential that new economic activities are created that will lead to new economic growth. Creative destruction is forcing companies and sectors to change and that leads to innovation which will create these new revenue streams.

Also not all is lost for the victims of ‘creative destruction’ their are some early indications that once that creative destruction has happened companies who are able to transform themselves can start building up again based on new business models.

In order to make this happen countries should offer their organisations the best possible infrastructure on which to innovate and develop new economic activities that enable them to tap into the new revenue streams where customers will spend the money that they have saved elsewhere. This is also critical for any economy as it will create new jobs.

The other problem is that the digital economy is global – good examples are the music (iTunes) and book (Amazon) industries. So these changes can also affect the national economies.

 Major social and economic benefits are set to arrive when sectors such as healthcare, education and energy change over to the digital economy – again, a large volume of costs will be taken out of these economies.

One can take one of two stands on these issues. One is to try and protect vested industries for as long as possible, and we see strong lobbying from these sectors – and in countries where such lobbies have political power we even see governments slowing down digital economy developments.

However, a far more forward-looking approach is to embrace the new digital economy and provide the national infrastructure and the national policies that will allow national companies to use the digital economy, to enjoy the productivity gains that it delivers, and to look for innovation, new business opportunities and new products and move towards new economic activities where the customers are going to spend their ‘saved’ money.

Paul Budde

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