Category Archives: Digital using economy

Asia and the Internet of Things

The Chinese Internet economy has grown to staggering proportions, but it is still hard to see from within Europe. Yes, our phones, tablets and computers are stuffed full with Chinese (and other Asian countries’) components, but the services we use still seem to be dominated by Silicon Valley. In the US, although consumers now enjoy the option of buying from Alibaba, it remains to be seen whether the company will be able to make a dent in the sales of Walmart and Amazon.

My guess is that Chinese companies will need to await a paradigm change to get a real foothold. The Internet of Things is, I suspect, that opportunity.

At the recommendation of a friend, Ray, I have recently started listening to the excellent Exponent podcast about the technology industry. I’ve be working through the back catalogue and was listening this week to the programme about Xiaomi. This young Beijing-based, smartphone company has attracted a lot attention for the rapidity with which it has amassed a devoted following, somewhat akin to Apple.

XiaomiThe presenters, Ben and James, discussed at length Xiaomi’s business model which starts with beautiful devices (like Apple) but sold at rock-bottom prices, meaning that services will be vital to achieving real revenue (like Google). And that service layer could well constitute a smartphone-based unification of connected consumer devices.  Although Xiaomi today only makes phones, the presenters thoughtfully speculate that Xiaomi is well placed to extend its brand rapidly into connected consumer electronics, as millions of young Chinese fans move out from their parents’ houses to set up their own homes. By contrast, Apple only knows computers, and Google doesn’t have a compelling device strategy, so Xiaomi also has the potential to conquer new markets with what it learns in China. More on the original Stratechery blog.

Not all of the evidence is yet on the table, but we in Europe need to plan for Asia being a far greater force in the technology world. And the Internet of Things is a more than big enough change to open the door for new giants. Of course best of all would be to create an innovation climate that permits European players to scale up rapidly in a truly single market.

(The Xiaomi podcast then goes on to discuss patents, including the powerful observation that in tech / ‘winner-takes-all’ markets there is already often enough incentive to innovate fast, and patents don’t play a societally useful additional role. Definitely worth a listen!)

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A ‘Digital’ narrative for ‘structural reforms’

Gutenberg’s printing press took over a century before its true impact began to be felt. At a hearing yesterday organised by the Industry Committee of the European Parliament, my message was that, despite upheaval in the entertainment and news industries, the true contours of the ‘Digital Economy’ are still to emerge. And, as we think about future policy my advice to policy makers was: “think less about digital, and more about the economy”.

The Internet of Things will be a real game-change, as it takes ‘communication’ beyond the realm of humans into a vast array of items and sensors. That said, we can speculate about its impact, but we’ll probably be wrong.

A more immediate example of the scale of transformation technology enables can be seen in the “sharing economy”, and that is where I focused my contribution. There are many definitions of the sharing economy, but for me it means the aggregation (through technology) of micro-supplies to deliver a service seen as comparable to those provided by the firm-centric, industrial model.

This covers pure sharing services, but also includes commercial couchsurfing (AirBnB) and ride sharing (Uber), and characterises the shifts underway in Germany in the name of Energiewende. All are changing the competitive landscape for sectors that may never have imagined they would be affected by ‘digital’ and creating new choices for consumers.

The conclusion from such an analysis is that while sharing economy services are affected by the traditional elements of digital policy, such as privacy, net neutrality and copyright, the key breaks on potential European champions lie in other parts of our regulatory framework. This can mean sectoral rules (e.g. of taxis), but also more general regulation of small businesses and freelance workers.

There is no silver bullet for unleashing growth, but there is a political opportunity for Brussels policy makers. ‘Structural reforms’, which have hitherto been perceived by citizens as painful austerity, can genuinely be presented as preparing the continent for the digital era.

If Europe is play host to the next generation of global internet champions, we need policy to let out start ups grow quickly in whatever sector they choose to disrupt. You can find signs of this, for example, in the way Portugal has opened up its tourism industry. But the structural reforms agenda does not just apply to ‘programme member states’ alone, and the ongoing reluctance of other member states to open markets (such as the unenthusiastic implementation of the Services Directive) is now the real digital agenda.

The “Digital President’s” ultimate challenge

All being well, a new Commission President will take office this year, having proclaimed ‘Digital’ to be her/his top priority.  But what should a Digital President do?  Sort out our fragmented telecoms market?  Perhaps.  Foster entrepreneurial start-ups?  Definitely.  But the real challenge is driving technology-based productivity gains in the rest of the economy: manufacturing, services and the public sector.

Competition can do most of the work in the private sector, which is why completing the single market remains so vital.  But the public sector is the largest part of the economy, generally a monopolist provider, and historically a victim of “Baumol’s disease”.  (The American economist, William Baumol, argued in the 1960s that it was impossible to achieve significant productivity gains by the state because it naturally focused on labour intensive services.)

Public spending % of GDP: maroon > 55%, red 50–55%, orange 45–50%, yellow 40–45%, green 35–40%, blue 30–35% “Depense-publique-sur-PIB” by Marc Baronnet – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons.

Baumol’s disease has been born out over the last 50 years, but in their recent book entitled The Fourth Revolution, The Global Race to Reinvent the State, John Micklethwait and Adrian Woolridge suggest that the picture could now change.  After charting the history of the western state, the authors argue that it is living up to Plato’s two great concerns: that voters would always favour short-term benefits, and that politicians would pander to this by offering entitlements to paid for by the next (unborn) generation. But they see two contemporary phenomena that will precipitate change.

The first is an emerging Asian model of technocratic government – the book focuses mostly on China, but identifies Singapore as the intellectual origins.  The key features of the model are long term planning and ruthless meritocracy.

Second is technology.  In Education, Moocs create radical new economies of scale for teaching, while giving all students a chance to learn from the best teachers.  The advent of wearable technology places prevention firmly alongside cure in health planning.  Big data helps focus law enforcement towards emerging trouble spots.  Meanwhile, open public data changes the level of accountability of every public service, and private sector developments could reduce demand for some public goods, such as ride-sharing needing less roads.  Ultimately, there is a need to reset our ambitions for the state, and to turn to technology, and the networked society, to find alternative means to the end.

Moreover, the two forces combine.  China has far fewer public sector traditions than the west; has studied the good and the bad of our systems; and can impose best practices quickly.  Given how important the state has been in fostering western economic success, a modern, effective Chinese public sector will become an inescapable global benchmark. The EU neither runs the most costly and labour-intensive parts of the public sector, nor even has competence over them.

The authors are dismissive of the EU, but a Commission that used the relenting economic crisis to drive an EU-wide debate about public sector reform would render a huge service to European citizens.  Fostering the reinvention of the public sector is the real challenge of the ‘Digital President’.

The Single Market for trust

ImageLate in the 20th century the early adopter in me wanted an LCD TV. Prices on the (Belgian) high street were astronomical, but I found an offer 25% (€500!) cheaper on a French website.  Could I trust the seller?  It didn’t take much search effort to discover lots of customers frustrated with late deliveries, but it told me the company existed, and the savings were just too significant to overlook.  My TV arrived just under a month later, and my calculated act of cross-border trust was rewarded.

The Internet is a boon for small businesses because consumers have been willing to trust the online environment.  Where has the trust come from? Not from regulation I would suggest, but a system of organised ‘word of mouth’.

It began with eBay (and no doubt before them).  After each transaction, sellers and buyers ‘rate’ each other, and subsequent transactors were comforted dealing with someone with a large, positive record.

The beauty of the system is that it leverages technology and, thus, ‘scales’.  Moreover, it works cross-border by default – ratings use the universal language of numbers, and machine translation is more than sufficient to give you a flavour of qualitative comments.

The systems’ main shortcoming was gaming (paid-for ratings), not least because most users originally used pseudonyms.  But here social networks are beginning to show their real value. Posting and liking make such networks fun, but they put a premium on real names, and Facebook has quietly emerged as an (the) identity verifier for the web.

Traditional rating systems were good enough for buying goods, but are the 2.0 systems with real names sufficient if you are thinking of opening your home or car to a stranger?  That’s the question posed by the sharing / collaborative / Peer-2-Peer economy.  And it is really a question about regulation itself – put bluntly, do new business models need licenses and inspectors if they can be regulated by ‘data’?  Regulators don’t scale easily, but they won’t need to if I can get trustworthy information from peers about my room for the night, or about the person and car taking me there?

The P2P economy is giving us a new taste of how broadly disruptive the Internet is really going to be, and that inevitably includes to government as well.  My belief is that the adaptation of government service provision to the Internet could prove to be every bit as decisive for competitiveness as measures to improve private sector productivity.

Looking for public sector superstars

I’ve been reading the Second Machine Age by Erik Brynjolfsson and Andrew McAfee, two leading economists studying the digital economy. The book builds on their previous work about the future of growth and employment in a world of exponentially growing computing power, but one of the many new points that emerged for me from the book was about ‘superstars’.

In essence the Internet makes it possible for superstars to project their talent more broadly than ever before and, in so doing, accrue rewards at the relative expense of others. Whether at the corporate or the individual level, this explains the weak performance of US median wages and growing levels of inequality. The authors rightly fret over the social consequences, and redistribution features frequently in their policy recommendations.

But the perspective is inverted when you consider public services, such as teaching and healthcare. Classroom and hospital superstars can suddenly improve the lives of a far larger part of the population, whether directly or at least by the sharing of their materials and techniques.

Some of these superstars will no doubt be content simply knowing that are more amply fulfilling their public mission.  But others may feel they deserve relative recognition, and I doubt few parents or patients would disagree! Meanwhile, many long serving, but less effective, public workers will be watching from the sidelines. Such distinctions sit uncomfortably with many traditions of public service.

The point is that the Internet’s impact is not limited to the communications technology sector. It will be felt throughout the economy, including the relatively large public sector that we – as Europeans – choose as part of our social model. The public sector needs to lead in embracing the disruptive influence of the Internet, but will it take a political superstar to create the climate for that?

Regulating a revolution

ID-100207059The 3D printing (additive) manufacturing revolution has been heralded by many, and including The Economist and by McKinsey. Today, a new group called Netopia held their inaugural event in Brussels to launch a report that addresses possible policy issues.

The report is a rather depressing read (see below), but the local ‘maker’ / entrepreneur invited to demonstrate 3D printing did capture the real excitement. Above all I was taken by the reference to the ‘maker culture’. Thinking about ‘culture’ helps us understand how profound the transformation is. The same cultural shift is present in open source software, may also be reflected in the emerging sharing economy, and is something that the traditional elites are still struggling to keep pace with.

So the authors’ must be right to question whether present institutional organisation is fir-for-purpose,but this is not a new idea — see for example the Lisbon Council’s Plan I(nnovation). The core idea is that vertically siloed institutions will struggle to provide a coherent response to a horizontal technology change such as 3D printing, or the Internet.

The organisers’ real agenda appeared to be promoting regulation. For example, gun control needs redoubling in light of the first 3D-printed gun, and issues such as liability and ‘copying’ need addressing (the latter is not surprising when you look at the group’s backers). The author of the legal section, Christina Wainikka, who claims rather ominously to focus ‘on using the law to strategic advantage’ calls for levies on 3D printers, like those applied to blank CDs today.

For me, the real challenge for policy makers will not be the substance, but finding a way to apply rules in the context of the broader culturalchange. 3D printing is not only technology for companies, which are used to regulation, but also belongs to prosumers. We’ve seen before that the extension of commercial prohibitions to citizens is not politically straight forward, and if we think of ‘makers’ as budding entrepreneurs, then we should be cautious of red tape anyway.