Digital – what is different about it?

Digital – what is different about it?
by Sudeep Kanjilal on 09-18-2016 at 4:00 pm

 A very basic question, surely, but something that has been surprisingly difficult for many to answer coherently! There is no universally acceptable description or definition out there. Many use digital and mobile interchangeably, some more technology-minded define Digital by use of APIs (and differentiate it from ecommerce with an app-vs-browser distinction), and some define Digital based on operating system/runtime – digital is iOS and Android based ecosystem.

In my humble opinion, to get a proper definition, one needs a proper perspective. So, allow me to ‘zoom out’ and talk not in terms of decades, but millennia!
There have been, roughly speaking, 4 main revolutions that has driven human civilization forward from the stone-age to the current age:

  • Agriculture Revolution – lasted about 6 millennium. Powered primarily by human power, massive increases in calories-yield-per-acre (as compared to hunting), resulting in settlement and specialization of labor (productivity improvement).
  • Metallurgy Revolution – lasted about 3.5 millennium. Powered primarily by animal power and far better tools, significant increases in productivity, resulting in large empires
  • Industrial Revolution – lasted about 3.5 centuries. Powered by engines, another significant jump in productivity, resulting in global-spanning empires
  • Information Revolution – currently underway for the past 50 years.

The current Information Revolution, predicted to last at least another 100 years, has already proved immeasurably consequential for human civilization. It has established and powered an integrated global economy, reversed the power structure from strong unitary states (empires) to giving voice to billions of citizens, impacted and changed culture, turbo-charged innovations and enabled massive increase in human knowledge – 90% of all scientists that ever lived are alive today!
Digital is simply the next phase in this ongoing information revolution.

Its all about Information Asymmetry
So how does digital fit into the overall narrative of Information Revolution? How do we recognize it? What is the impact of this current ‘phase’? And how do we measure it?

Digital impacts our world, and especially culture and productivity, by correcting a very basic market failure – information asymmetry. Information asymmetry is a known case of failure in market economy, referring to situation where one of the party in a transaction has less information, and hence power, than the other party. As a result, the party with less information pays a penalty in terms of price, and as a result, market-clearing price is distorted.

At its core, Digitization generates data – the lifeblood of information revolution – but in a unique twist, spreads the data evenly.

Advances in computing accompanying (and driving) digitization spreads computing power evenly. This is, of course, a central trend across the entire information revolution cycle – advanced in underlying computing architecture and ecosystem from mainframe to client service to web ecosystem to distributed cloud-based on-demand handheld computing means computing power, resources and data is increasingly getting generated and consumed at the edge.

Advances in run-times – GUI to browser to api to bots – also empower the ‘edge of the network’. Trends in UI (man machine interaction) capabilities – from ‘text based command-line’ to ‘point-and-click GUI’ to ‘fat-client browsers’ to ‘multi-touch glass interface’ enabling a much deeper interaction to the coming ‘Augmented Reality’ based interface are all part of the overall digitization trend – of reducing information asymmetry.

This has profound implication on market efficiency, something that will play out over decades. Given that the world economy is about $80 trillion, a 10% improvement in price setting/market efficiency can release $8T each year into the economy – to drive further investments and growth.

We have already seen impact of this virtuous cycle in the past 2 decades – and as the new digital technologies permeates thru every sector of the economy over the next couple of decades, this cycle will kick in again.

New Business Models
Further, digital also fundamentally flips business models. For past several centuries (the industrial revolution), the core driver of productivity, profitability and business models was ‘economies of scale’. Basically, as firms gain scale, their cost-per-unit drops and thereby, gain a runaway effect of increasing scale thru reducing cost.

If one thinks carefully thru, there is however an element of information asymmetry that favors the larger firms viz-a-viz consumers. Larger firms leverage their scale to not only reduce cost, but also gain privileged access to resources and market data/prices.

Digitization not only reduces information asymmetry, it also enables new business models based on demand-size economies of scale – thru network effect. By generated and transmitting valuable commerce-intent data across network, digital savvy firms can leverage the same to create network economics, driven by Metcalf law (v = n^2) or even Reed’s law (v = 2^n) and can tip the market.
For example, in 2007, when iPhone was first introduced, 5 firms accounted for 95% of global phone market profits. Apple was just a new entrant, with no telecom related IP, no telecom supply chain, no core telecom technology, no carrier relationship (distribution network) and no experience of running a complex analog electronics based consumer devices (it is much harder than digital electronics devices). Yet, by 2015, itunes based network effect enabled Apple to ‘tip’ the market and garner 95% of global smart phone profit. Meanwhile, only one out of the previous 5 market leaders even survived!