The digital economy – what is at stake for you?

Updated analysis

The effects of the digital economy are all around us.

It started with the collapse of the traditional music recording industry a decade ago and has continued ever since, creating havoc among many traditional sectors and industries such as newspaper and book publishing, entertainment, telecommunications, financial services, retail and electricity energy. Companies such as Kodak, Nokia, John Fairfax, Blackberry, Motorola, Borders and Harvey Norman have all been in the press in relation to these developments – and always for the wrong reasons. Many others have entered the danger zone, including even giants like Microsoft.

Others seem to have been less affected by it, but if one digs deeper another serious trend is occurring.

Giants such as Google, Apple, Facebook and Amazon are now among the largest organisations in the world in relation to market capitalisation. They have been able to grow on the back of many of the companies that are part of the sectors mentioned above. In other words, they have been eating their lunch, by doing more with less.

So, while the traditional companies are still around in these sectors, and generally still doing reasonably well, their overall share of the market has shrunk. Typically, in market developments like this ongoing mergers and acquisitions take place – companies survive by taking over others without growing the overall market or their overall market share.

The book and telecoms industries are good examples of this. Telecom companies are seeing negative revenue growth and newspapers are not just shrinking their physical newspapers; they are also shrinking their overall market value. The telecommunications scene is particularly interesting – here we see one of the fastest growing industry sectors in the world, while the traditional hardware and services companies involved are experiencing great problems in maintaining their profitability.

The reality of the digital economy is that a comparison of the traditional and digital business models will show that, in general, the digital models are able to produce similar consumer products – sometimes even similar physical products, as in the case of retail – but at prices that are 20%-50%, and sometimes even 80%, cheaper. And in industries like telecoms, publishing and entertainment these alternative digital services can be delivered at no cost whatsoever to the consumers. By using the new digital tools the successful companies can grow their customer base faster, with fewer of the traditional workforce people; these will also be the companies where the more interesting and higher value new jobs are emerging, with significant demand already for those workers with digital skills.

What the shareholders in the traditional sectors often fail to understand is that the game is no longer directed at building up big revenues upon which to build future business models. Instead the focus is now on building large customer penetration numbers, on which to start building these new business models. Senior management often understands this but is reluctant to start the transformation process – or they are not supported in the process by their shareholders, who want to protect the traditional revenues for as long as possible – of course, only to fail in the end.

In this rapidly changing economic environment we see that those who are struggling are creating an increasing gap between themselves and the market leaders. Already in books, newspapers and retail we see that the national walls that protect local organisations within traditional models are crumbling. In other words, it is no longer an issue of local market share. It is now about international market share, and the abovementioned gap needs to be measured, or at least to be seen in an international context.

As this gap continues to widen the laggards will find it increasingly difficult to compete with their national and international market leaders. While in traditional markets followers could often secure a comfortable position behind the market leader, in the digital economy this is not the case. Because of the rapid widening of the gap followers might simply not be able to catch up, and they may fail completely.

Australia is in a very vulnerable position. Because we are part of the Anglo-Saxon market we compete directly with companies in the USA, Canada and the United Kingdom, as well as many others (Europeans) who have long been established in the Anglo-Saxon market as well as in their home market.

Apart from mining and agriculture products Australia does not have a well-established international trading culture, and in recent times the high dollar has made us significantly less competitive. Over the last few years our national productivity increase has been dismal.

Yet, despite the obvious need to move with the times, many Australian organisations are still grappling with the digital economy and questioning the impact it will have on them – or, even worse, are ignorant about it. In many cases their own consumers are well ahead of them.

The public sector is also seriously affected by this, and may even have greater difficulties with the transition. They should learn from the problems in other sectors, especially book and newspaper publishing.

Healthcare and education are classic examples here. The healthcare system is facing a financial disaster. The growth in cost is totally unsustainable yet this highly fragmented sector is ill-prepared to face these changes, and within years the government will have to declare that they simply cannot fund these growing costs. It looks as though the healthcare sector will have to face disaster before it will seriously reform itself.

Education is facing a similar path. Higher education students are increasingly skipping classes; instead they are studying at home, using their computers to connect to whatever they want, around the world. Students – all now belonging to the digital age – are driving these changes (not the education system). These students tap into MOOCs (massive open online courses) or interesting lectures from leading universities from around the world, provided by Skype. They use innovative collaborative education tools on their tablets provided by apps from Apple and Google. In developing economies ‘self-education’ is by far the largest growth area; significant innovations in the future could well come from those countries.

So the push for digital transformation is slow, with many businesses arguing over the high cost of ICT to their organisations, or the high cost of the NBN to the nation or the lack of skills in for example data analytics.  They obviously fail to understand the negative impact that a lack of underlying infrastructure will have on their future. There is no option but to increase digital productivity, yet these words ‘digital productivity’ are seldom uttered in many of the Australian boardrooms and executive suites. Over the last five years there have been more American companies championing the Australian national digital economy initiatives than there have been Australian companies. The Australian organisations simply keep their heads down in order not to be caught in the political debate, apparently not realising that this is all about their own economic future.

As has become very clear with the high profile company failures mentioned above, it is two minutes to midnight for many Australian companies. If they want to compete nationally or internationally they will have to start looking very seriously towards digital productivity. And they should ask themselves whether they can afford not to have the ICT tools – cloud computing, data centres, M2M, the NBN – that are needed to make that transition.

And in the case of for example, our lifestyle is at risk if we don’t embrace e-health. Over a 20 year period, we have had the fastest growing economy amongst the developed economies, in order to maintain the lifestyle we have grown to use too, both on an individual and on a social and economic level, we have no other choice than to utilise the digital tools that are increasingly becoming available to us. Our economic growth has created a two-speed economy. The sectors other than mining and agriculture however, have fallen behind in innovation and the use of technology and an urgent review of business models and transformation models is essential for us to maintain an innovative and competitive economy that can continue to support the lifestyle most people have become use too. Australia’s productivity has slipped dramatically on the world scale and unless we address this issue we, eventually will have to pay the economic price for that.

Paul Budde

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