The digital tsunami 1.0
(Part one of three blogs based on the thesis that digital disruption is happening everywhere at breakneck speed, fueled by mobile computing, smart ideas and loose monetary policy).
Future Shock: What the Famous Thinkers Said
In 1970 in Future Shock Alvin Toffler wrote:
Technological innovation consists of three stages, linked together into a self-reinforcing cycle. First, there is the creative, feasible idea. Second, its practical application. Third, its diffusion through society.
Today we’re witnessing a technology-led disruption cycle that is universal in its effects. Diffusion is upon us.
In 1980 in The Third Wave, Toffler said:
The First Wave – the agricultural revolution – took thousands of years. The Second Wave – the rise of industrial civilisation – took three hundred years. Today history is more accelerative, and the Third Wave will complete itself in a few decades. (content abbreviated)
How prescient Toffler’s words were. Welcome to the Third Wave.
In recent decades Harvard has produced thought leadership on successes, failures and disruptions. In 1997 Professor Clayton Christensen coined the phrase “disruptive innovation”, describing how innovation would devour whole industries.
Last June, in “The Disruption Machine” Harvard Professor Jill Lepore wrote that disruption is a theory of change founded to some extent on anxiety – with a legion of consultants, conferences, seminars and even a university degree dedicated to disruption. Everyone has an opinion and emotive terms are increasingly being used, like “dizzying speed”, “exponential complexity”, “mind-numbing technology advances” and even “devastating innovation.”
So, on that note, here is my opinion based on 30-something years of practical experience investing in and financing growth companies – replete with emotive words to add to the drama!
Today’s Stage
The Internet has made the world more borderless. And it seems to be moving faster and faster, 24/7 – disrupting the human circadian rhythm.
The patterns we’ve learned over decades about competition, growth and risk are becoming less reliable as guidelines for the future. Non-linear, exponential growth is now possible.
“Digital” is not a theoretical construct – it’s the tool that can change both your customers’ lives and your business. It’s so pervasive you must integrate it into your business or someone else will integrate your business into theirs while you’re thinking about it.
Cliched as it sounds, like death and taxes, disruption is now a fact of life that we need to embrace.
It’s in that context that two guys in a garage can steal your customers with something shinier, newer and cheaper. And those two guys probably don’t want to work for you – in fact, they may even be better funded than you.
Life cycles are getting shorter. Even disrupters are now being disrupted. Disruption is constant yet inherently unpredictable.
Against that backdrop every nation, every company and every person needs a disruption strategy.
Are You Ready?
Governments have a unique ability to shape the impact of technological change. But governance structures in most societies can’t deal with Internet-speed change. Just look at the different Government responses around the world to Uber and Airbnb.
At a corporate level, nothing is off-limits. Practice and thinking need to be recalibrated. Whole industries are being turned on their heads – but classic governance models struggle to respond. For many it’s already too late, but they don’t realise it.
At a personal level, you have to consider what this means for your kids. According to the U.S. Department of Labor, 65% of jobs haven’t been invented yet. So we need to help our kids by not arming them with educations that lead nowhere.
The Digital Tsunami is not tomorrow, it’s not next month, and it’s certainly not next year: it’s now. The destructive force is beyond anything we have experienced before and it is probably accelerating.
Evolution of the Digital Tsunami
I’ve observed two distinct phases to the Digital Tsunami: let’s call them 1.0 and 2.0. The initial dotcom boom in the late 20th century was a mere ripple. It was a precursor to the main event – a testing ground, and a great destroyer of capital.
Tsunami 1.0 took place in the first decade of the 21st century, let’s say from 2000 through 2010. A wave of change made new fortunes and decimated old ones. Even the Great Recession couldn’t stop it.
Now we’re in the eye of Digital Tsunami 2.0, which has many parts to it, each with a catchy name: omni-channel commerce, the Sharing Economy and the Internet of Things. Tsunami 2.0 is fuelled by smart devices, by the Cloud, by social media, and increasingly by Big Data. And, of course, by the printing presses of the central banks in the USA, Japan and Europe which are churning out trillions of bank notes as we sleep.
Industries Disrupted in 1.0
Digital Tsunami 1.0 saw many industries disrupted: from travel to newspaper advertising to TV, large profit streams and numbers of jobs were affected.
Online travel was an early mover. OTAs have been disintermediating the high street travel agent for over a decade. Today online travel is maturing quickly with around half of global flight transactions booked online. Expedia and Priceline dominate the international stage and we are now in an M&A consolidation cycle.
The music industry was disrupted very quickly and missed the boat. Witness the initial rise of iTunes and now the rise of Spotify. The record labels are still trying to fight, but the fight looks hard. Even iTunes is fighting for relevance against the onslaught of streaming, hence its purchase of Beats
While all of this was happening we also witnessed the rise of Internet retailers and marketplaces like Alibaba, Amazon and eBay. Many books have been written about these three. Their story will play out for many years.
High Street retailers and department stores at first reeled from the rise of specialty eCommerce retailers with odd names like Net-a-porter, Asos and Wiggle. Niche online retailers rose everywhere during Tsunami 1.0, and the B2C online marketplace became fragmented.
Then something funny happened. Bricks and mortar began their omni-channel fight-back, offering offline, online or a combination of whatever their customers want. Not to be beaten, online retailers like Amazon and Warby Parker are experimenting with showrooms to deliver “multi-sensory consumer experiences” to their customers
To add to the uncertainty the shopping mall, that infallible 20th century real estate play, now seems somewhat at risk. Some commentators believe 15% of US malls will fail in the next decade.
Meanwhile even banking is now seeing a small wave of potential disruption through peer-to-peer lending. Lending Club in the USA and SocietyOne in Australia are but two examples of a fast growing trend which might – might – have some impact on the world of banking that we all grew up in.
There are many disruptions not covered in this blog but it would be remiss to not discuss the poster child for disruption, the newspaper industry. An oft-quoted example is the Australian newspaper group that once controlled highly lucrative classifieds such as cars, jobs and real estate. Today it has a market capitalisation of around $2.5 billion whereas the e-businesses that now control those very same classifieds have a combined market cap of $16bn. As they say, ‘nuff said’.
Some Hard Numbers on Traditional Media
You might think that if e-tailers are starting to open physical showrooms there might still be some hope for above-the-line media. Of course there is, but let’s look at some hard numbers to illustrate the level of disruption.
My colleague Senthil Sukumar and I have crunched 15 years of data to illustrate how above-the-line media has been disrupted by the Internet. Our analysis, all in today’s USD, starts in 2000, when Internet advertising was in its infancy. It makes great reading:
In 2000, per capita Internet advertising in the USA was $21. It’s now $161 and in 15 years has grown from 4% to 28% of all advertising spend.
During that time the UK went from a $3 per capita spend to $182 today, and online spending now sits at ~50%.
In China, it has risen from zero to $14 per capita, representing 37% of total ad spend.
Hong Kong sits at $48 per capita and 13% of spend, while Singapore sits at $45, or 12% of spend.
In Australia, it has risen from $3 to $167 per capita and now represents 40% of all ad spend. New Zealand has risen to $105 per capita, and sits at 28%.
The outlier, and the real opportunity, is Southeast Asia where today Internet advertising is only $3 per capita and sits at a mere 7% of total advertising dollars.
So in the developed world Internet advertising sits at ~$100-200 per capita and 30-50% of all spend. But in Southeast Asia the journey has barely started and digital spending is now growing rapidly off the lowest of bases. Intuitively there must be considerable downside in traditional Asian media when the tipping point arrives.
To contextualise all of this, Google’s 2014 revenues were US$66bn. If Google was a country it would now rank it somewhere between Vietnam and Luxembourg, with GDP per employee 10x higher than GDP per capita in the wealthiest country in the planet.
What’s Next?
Digital Tsunami 2.0 has arrived. The mobile economy, the sharing economy and the Internet of things have been unleashed, they’re moving fast, and they’re highly disruptive.
I could go on for pages, but I’m sure you get it. The Internet juggernaut of price discovery, growth and disruption is going to roll on for decades. We are all simply going to have to roll with it.
More in my next blog: The Digital Tsunami 2.0.