Wednesday, 18 November 2015

Datarisation and its transformative impact on industries

Banks and other established sectors are nervous of the transformative effect of the digital sector.  They should.  An interesting phenomenon explains the underlying cause, showing at a macro level its effects.

When an article, be it video, voice, code or text is transported over the internet that item has the economic value around it reduced, some to zero.   It affects anything that can be digitised and turned into data – products (music, books, software, media), services (phone calls, computing, ads), items (professional photography, designs), transactions (money, payment) -  and delivered over the internet, distressing the industries around them.  To the internet, they are all plain data, indistinguishable.  Content seems shorn of its makeup.  A different business model can then be applied and thus the rise of WeChat, Netflix, displacing the traditional voice providers (telcos), tv and bookstores.  It even affects sectors that can be ‘informationalised’ as with AirBnB ‘hotels’.  While categorised in the hospitality sector, AirBnB is really an information business - it owns no physical assets, its assets is information.  Truly, we’re in the information age.

Aereo (now defunct from legal challenges) seems to use this principle in its business model powerfully to stream tv over the internet, in the process reducing consumer cost.  Like Napster’s innovation bringing the peer-to-peer model (storing songs on consumers’ PC) to music and similarly neutered but re-birthed in different forms, the Aereo model may return.

In the process, there is also unbundling; there is a separation of content from delivery.  Datarisation affects distribution.  A radio station doesn’t need its transmission towers.  Banks don’t need their ATM networks and telcos of their telephone networks to deliver phone calls.  Such traditionally integrated industries re-structures as a result.  With their loss of control over distribution, they will also lose control over the ecosystem.  Once muscular in their relationship with partners they now need persuasive skills.

Further, its parts can be broken up.  Classified can now exist on its own from the rest of the newspaper.  Cable bundles in the cable tv industry unbundles.  Fixed line phones are optional at home.

The economics of the affected industries transform.

The high distribution cost is replaced with the cheaper internet, reducing input costs.  But highly profitable parts, like cable bundles are threatened.  Phone calls 20 years ago made up 99% of telcos’ revenue, now a fraction.

The value of datarisable products changes.  Voice conversations and messaging now has worth (when mined) even as phone call charges collapse.  Prices of movies and music are affected since discovery (search, recommendations by online providers, sharing on social networks) and distribution costs are lowered (internet) while reach is potentially higher (global internet).  Supply is also affected by the democratization of content.  YouTube, the popularity of user-generated videos and freebooting affect demand.  Similarly software can now be made through crowdsourcing which means they’re offered free.

Rules that apply to the digital economy are foisted upon them   So are the operating models and the culture of doing business online.  In many cases, it differs greatly from conventional business models.

“Unlike hotel and taxi companies that seek to constrain supply to keep prices high, Airbnb and Uber are creating structural assets that appreciate in value as they attract more and more new hosts/drivers (i.e. supply) and travellers (i.e. demand) to their platform, leading to the ultimate network effect.”

The middlemen industry, the mainstay of commerce is rapidly being dismantled as the internet facilitates a direct model.  It’s not going away but layers are reduced.

Competition increases since it’s now borderless but so too the opportunities.  One change is customer service.  Once mostly a lip service it’s now reframed as user experience and moved to the top of business strategy ala  Competitors are now literally a click away. 

The peer-to-peer model is particularly impactful.  It’s destroying the business of traditional phone calls.  A person making a call to another is a person-to-person process.  Since the internet allows this to be carried out directly via mobile apps (WeChat), it bypasses the traditional telephone exchanges.  And in its basic form, banking is about a party lending to another via his deposits which is used as a loan.  It mirrors a p2p transaction, thus startups using this to replace some functions of the banks such as (p2p) lending, currency exchange and payments.  In fact the entire sharing economy, started by Napster and based on p2p is a huge and emerging economic sector, not only in terms of revenue but in efficient use of assets and productivity. 

Besides disrupting the software industry, the open source model brings new management principles.  Lean management and agile derives from the open source process.  It also improves product development, provides a mechanism to track trends continuously and inputs customers’ wants in situ. 

Let’s now look at the effect of datarisation on three industries.

Napster advanced the digitalisation of music and in the process caused the price of music to go down.  Music shouldn’t be free but datarisation reduced the cost of distribution and increased reach.  Likewise the tv/movie industry is transforming right before our eyes but it’s still early days.  Datarisation says prices will continue to fall.

With traditional voice calls datarised and thus revenue disappearing, telcos are being transformed.  Very simply, the future telco is the ISP.  Somehow I don’t think the incumbents see it this way.  Instead of innovating in the new internet economy, they seem more interested to turn the internet back to the old telco model where they control the ecosystem!  Datarisation suggests that’s not going to happen.

Datarisation of software means it’s really a services business now in the form of cloud computing and open source software.  We are witnessing re-sizing of the current giants of the traditional industry.

Any product that can be datarised will see its industry affected.

©Thet Ngian Chen, (2012, 2013, 2014, 2015).  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Thet Ngian Chen and with appropriate and specific direction to the original content.

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