Welcome to the Digital Economy
Imagine you suddenly had to pay 10 cents per message you post on WhatsApp. It would stop the continuous flow of movies, memes, photos, video and voice calls, activity updates and group chats. Wouldn’t it? But how is WhatsApp making money? And why paid Facebook $19 billion in 2014 when they acquire it? At that moment, the revenue stream was close to zero. Currently, they have found some ways to make money. But again, 19 billion? Welcome to the digital economy.
Let me give you another example. Imagine you are at the bank office, a client comes in and asks you for a loan of 1 million. Sure, you say. You turn your chair, switch on your terminal, enter 1 million in the designated input field and voila, 1 million is created. You turn your chair. Here is your million, you have to pay it back in 10 years with an additional rent of 300.000, i.e. 2.500 a month. OK, says the client, no problem. Hereby you added 300.000 to your income. You now have a security of 1,3 million. You take this to a stockbroker and say: Listen, here’s 1,3 million. I want to buy stocks for it and pay you in 10 years, and we split the profit. Ok, says the stockbroker and buys 1,3 million worth of stocks. End of the story, everyone happy. Then your client misses his first monthly payment, then the second, the third and so on till he goes bankrupt. In the meanwhile, the purchased shares are worth 1,1 million. Ai. And if one person did this, no problem, but many financial institutions in the world are doing this. Welcome to the digital economy.
The real, the digital and the promise
The digital economy works slightly different than that good old-fashioned chap focussing on revenue, income, outcome, profit, CAPEX, OPEX and shareholder value. At least, now you know why your savings are worth shit. Banks used it to give loans to other people, but they don't need it anymore since they can create money with a few keystrokes. Since the 1990s, the financial industry created a new shielded hardly to understand universe only accessible by computers where money breeds like rabbits with once in a while a myxomatosis outbreak, vaporising a great part of the inhabitants. But again, what artificial is created, burnt down to the ground, can be artificially recreated. Where are the days of the gold standard and governments printing money? Those are gone, and it’s gone wild. So wild that at one point, someone wrote a paper and created decentralised digital money that would become scares. No money creation by vague institutions called banks, no politics, no favouritism, just an algorithm, launched once, not adjustable. Yep, Satoshi Nakamoto. He, she, or the group of people was fed up with the impenetrable financial jungle and, therefore, created a digital currency based on trust, decentralisation, and transparency, called Bitcoin. No bank, person, institution, government, or company needed. Just a network of servers that run a program. That’s it, basta, nada, dyna ni. Well, not exactly. Bitcoin, currently worth around $ 54.000, created a completely new industry, actually, a new world, a new Universum, called the cryptocurrency industry. Unfortunately, men’s seven deadly sins also spread like gangrene in this Universe, but we are only human, as said before. So, basically, the 100% digital cryptocurrency world is not that different from the “real” one. The major difference is that the “old” money, officially called fiat money, has a physical representation in the real world, known as cash. Yes, the coins and notes you can hold in your hands. And whether banks want it or not, fiat money is still controlled by governments, subjects to laws and legislations imposed by a nation. Cryptos, to use the popular naming, aren’t, at least not yet. It is subjected to mathematical rules and algorithms and a lot of energy, an enormous amount of energy. Cryptos are typical offsprings of the digital pantheon. So let’s do deep dive into this parallel universe and see if we can define some characteristics of the digital society, economy, or whatever you want to name it. Ecosystem maybe?
Let’s knock on an open door. The foundation of digital consists of three layers: hardware, software and the network. Really? Yep, really nothing more, nothing less. But, you would say we have these layers in place since the early 1970s. The first email was sent in 1971. However, the 1970s network started connecting computers in an office and slowly developed into a worldwide network (web) connecting digital devices worldwide. It took more than thirty years to grow mainstream. Remember the surfer in a previous blog, looking for the next wave to catch. The waves travel from far, so does innovation. The world wide web started slowly with dial-in connections and minimal bandwidth and paying per second for the connection. Totally different from today's super-fast network, connecting 24/7 27,1 billion devices on a world population of 7,8 billion. The network makes it possible that these 27,1 billion hardware devices can exchange software and data really fast. The device, the hardware connected to the network can be anything from PC’s, smartphones, smartwatches, smart speakers, camera's sensors and so on, but also servers broadcast masts, cables, wifi boosters and any antenna that can transmit data. Yep, also satellites. On these hardware devices, software is installed that sends data to software installed on other devices. When you cannot sleep tonight, close your eyes and try to imagine the number of zeros and ones flowing over the world through cables, radio waves. Try to count them instead of sheep for a change.
Files, files, files…
Now you understand the scale of the network, let’s have a look at the software. As said, the software is a file. Also, the content handle by the software, movies, audio streams, messages is a file. So once you have a file, you can copy it with the speed of light to 27,1 billion devices. Assuming those people owning the devices want to have it. Meaning that your market can be enormous if you have a business that can be translated into a software application. The digital network has no national borders and, therefore, no customs. It doesn’t stop in China. Of course, China does everything to control it, but the Chines internet is part of the worldwide web. But that is not all. A really important, and not many people talk about this, is that most of the world population can speak and understand English. Not so important anymore, because of the instant translation service we have these days, but really important in the early days of the internet. Remember the example of Jack the Ripper? We talked about him because at the moment of the murders, most Londoners could read. This boomed the circulation of newspapers but also boomed the circulation of print in general. Basically, by increasing literacy, the sales market increased. As a result, the amount of information released on the general public was enormous, like today with the internet. Here comes one of my minor points. We are talking about a technology revolution but, it is basically an information revolution. Let’s make a quick and dirty deterministic history swerve out of the chaos we live in on releasing information and social change. The printing press was invented in 1450 and increased the amount of information, ultimately leading to the reformation. Massive communication and literacy in the 1880s led to socialism and communism. The massive adoption of the internet since 2010 will leads to? Do I have a scientific study supporting this statement? No, of course not, but the first thing dictatorial regimes do when they come to power is starting to control information. You can read it in today's world news: China, Russia, Myanmar, India, Hungary, Poland, you name it, all very busy censoring information to control public opinion. It is brave to promote and allow free press because you never know which way the wind blows. I think or maybe hope that today's influx of information will trigger massive adoption of a sustainable lifestyle and a circular economy. Or as the Dalai Lama said:
I believe the twenty-first century can become the most important century of human history. I think a new reality is emerging. Whether this view is realistic or not, there is no harm in making an effort.
So to grow your business in the digital world, you don’t have to build trains, offices, mine metals, or cut woods. There are no national borders, customs, export licenses, import tariffs to ship your digital product from A to B. You just copy and distribute files. As long as the infrastructure is in place, there are no limitations to growth in the digital world. Once you hit, you hit hard, and unlimited economic growth, exponential growth is yours. The chance of exponential led to a gold rush last decade. World’s smartest minds were dedicated to seducing people to click links to install software to grow business. Hard cash and profit were not the most important indicators for success but the number of user subscriptions, active users, time on site, user engagement and the upward trend of these indicators. If you could realise an exponential growth of users, business and profit would follow. And due to the digital nature of the business, exponential growth was no problem as long you were capable of copying enough files. Social media is the perfect example of this model. Before Facebook, there were multiple national and local initiatives, there still are, but they are marginal. Once in a while, a new initiative gets traction and growths exponential: Instagram, Snapchat, Tiktok, and recently Clubhouse. Social media is one of the purest breed of the digital family. In the next blog, I will dive into platforms and the network effect. But before we finish a few words on AI.
There is much to do about AI. But if we really analyse AI to the bone, it doesn’t do anything more than comparing strings of zeros and ones. Very quickly but nevertheless, nothing more than comparing A with B and list the result. AI can compare things much faster than humans. Trains, planes, boats, and cars travel more quickly from A to B than a human, even Justin Bolt can run. One big disadvantage of AI is that it is trained with data from the past, so it is always a look in the rearview mirror. It can be a precious view because it can access and process so much data. So much more and quicker than a human can. But there are still many flaws, ifs, buts and ands so we have to be careful with it, really careful. Does pure unbiased data exist? Every historian would say: no. Personally, I wouldn’t call AI intelligent. These days it is mainly used in e-commerce to generate profiles of users to seduce them to the next purchase to create exponential growth of the business. But as every self-respecting e-commerce platform is doing it, the result will be zero. But don’t let me dive too deep into AI because otherwise, I would need to start a new series. But occasionally, we will touch on it in the next issues.
The innovation files
1. Innovation versus business optimisation: from Gyro Gearloose to Elon Musk
2. Serendipity: Icarus and the four horsemen of the apocalypse
3. The evolution of product revolution
4. Digital: Boolean Rhapsody
5. Welcome to the Digital Economy
6. Whiskey, platforms and the network effect
7. The waves of innovation