I have been doing a lot of work on the future of the digital economy for various multinationals these last months. Part of the work is to map the key driving forces that are shaping the future of the markets.
It’s not about checking the latest technologies hype because it’s essentially irrelevant and doesn’t really produce solid foresight. Remember five years ago when everyone was focused on the emergence of the internet of things? After everyone tried to connect its fridge or spread Bluetooth objects in retail spaces, what happened? Nothing much.
It’s also not so much about just checking where the internet is at the moment (in which case you should read the always remarkable Mary MEEKER’s report). But that again is very tech-oriented, and while Alibaba and a few others are discussed, it’s also eminently US-oriented. And this is a problem on so many levels.
That being said, if you’re in the business of seeing where the digital markets are going to shape the next five years, this is in 42 bullet points what I think you should consider as key events and drivers:
Before we start, a few extra warnings:
- I’m going to split this into three parts, dealing with the US digital economy, China, and then Europe. There are many overlaps and you could criticize this choice. In my experience, it’s still the most efficient way to present all this.
- I want to make abundantly clear that I’m everything but an expert on Africa and India. So that’s a huge bias right there (but I’ll come back to these countries in the conclusions).
- The text is formatted to be referenced (“What do you mean by saying X at 19.?”) not to be read like a novel (sorry about that).
Here we go…
US Digital Economy « RED 1 »
- I call US internet RED 1: it has been the first large-scale internet, GAFAs are still dominants for now (see China) and it’s a “red ocean” under a large amount of Republicans’ influence.
- The US has been responsible for the global hold-up on digital after a first partially failed attempt during the dot-com bubble.
- Digital can be many things, for the US it’s been leveraging B2C social network effects to build unprecedented reach and market caps.
- The 2008 crash accelerated the US digital economy by fueling an unprecedented amount of investments in tech as a “shelter” strategy. This is not over: investors have tasted this for more than 10 years and won’t let go (building recurring revenues is pretty much mandatory in this game).
- Social networks have been built by giving a largely free pass on business ethics and plain decency for digital entrepreneurs (Section 230). Strangely enough no one outside of the US bat an eyelash for now. This is slowly changing (see Europe).
- US investors and GAFAs insist on talking about “tech” while it’s not about tech, they have switched from deep tech (Stanford, MIT) to convenience as a service (Uber delivering pizzas and sharing vacation pics on Instagram).
- The GAFAs are 10-20 years old and are incumbents at a plateau. Everyone has been looking for the next wave since Uber (see discussions on where’s the next iPhone?).
- Markets are still very bullish on tech mainly because money is dirt cheap and investors are abundant. The possibility of a global recession in 2020 is pushing even more investments in case they are the least profitable ones before 2030.
- Ad monetization (as a business model invented in the 60s) is the core business (in B2C Apple is the rare exception).
- To get market access and aim for leadership, the rule is still that scale matters more than value. Most are dreaming of being Amazon 2.0, running at loss for years while investing for scale. Many investors judge Tesla unreasonable for not completely getting there and trying to turn a profit.
- Uber’s crappy IPO is nonetheless sending a signal: enough investors start to worry about being in a Ponzi scheme. I’d say they’re right.
- Being at a plateau, GAFAs will radicalize more and more (called it here). Remember that they didn’t have a red line for a decade or more, they don’t have a culture of restraint (Facebook trying to “print” its own crypto-money is going to put every government on high alert — they can’t see it and won’t care).
- Current surprise still: after years of having a free pass GAFAs might get scrutinized and slow down with anti-trust / competition inquiries (just as Microsoft was).
- Apple is the lone wolf now pushing forward privacy as a service and probably holding a long-term market view (called it too)
- Microsoft will not be worried: Democrats are concerned with citizen privacy (and can’t attack B2B for fear of being called ‘socialists’) and Republicans just want to stop facts to be broadcasted in media (ironically they don’t get the “article 230” discussion and consider Facebook, Twitter and Google as accountable media because they use them as their own media).
- In any case, no new model is emerging from “RED1” anymore. Horizontal integration by de facto monopolistic platforms is the norm, nothing really interesting to do is left except really hard things (healthcare, education). Banking is probably the last low-hanging fruit (Apple and Goldman Sachs have moved in — being very conservative– who’s next?).
- The US sees innovation as successive jumps lead by the free spirit of investors and entrepreneurs while the government subsidizes science that no one else would invest into. The optimistic consensus is that it’s going somewhere positive for everyone (maybe not the planet anymore, oh well).
China Digital Economy « RED 2 »
- This RED is obvious, and 2 is for the second entrant. By rank in terms of GDP, “digital China” has surpassed “digital US” around 2014 (as corollary analysts that discover in 2019 China as an innovation nation are to be avoided).
- China subsidizes big bets in digital because it’s not a market economy and can afford it. If the market doesn’t seem to be big enough for now (electric vehicle or AI), it’s not a problem.
- Big bets are easy because problems in China are BIG. From energy to healthcare, most markets have had to leapfrog from “nothing much” to “modern society” and in some cases like payment “state of the art”.
- Pollution has been for the last five years problem number 1: expect results on clean energy faster than any eco-friendly nation in Europe will achieve (prediction: China will export clean tech to Europe within 3-5 years).
- Moving fast and breaking social things is still OK for now. Allowing foreign companies to dominate anything in mainland China, is not anymore.
- Moving fast on social surveillance x energy x mobility is key for the next years (AI is at the intersection of all that).
- Speaking of energy and mobility, don’t allow yourself to have an opinion on China if you don’t have a basic understanding of the dynamic —or lack thereof— between Tier I to IV cities. This is key for most of the markets and digital change happening now.
- When unrest will appear (surveillance) the game is always the same: the central government will blame regional governments, scale back a little, and will have achieved its goals. Foreign companies will be blamed whenever possible too (being in AI business in China can be sexy on paper, it’s certainly very dangerous).
- China doesn’t let investors jump on all trends for too long anymore. Excess investments are now cooled off by the government (EVs startups). They learned the Ofo lesson.
- China is still the first battery producer worldwide (5x the US capabilities) and they’ve planned the death of gas vehicles (within 2yrs no gas cars for ride-hailing in Shenzhen).
- EVs are a strategic goal to disrupt the EU / US car manufacturing market and claim and render irrelevant a large part of the Western economy.
- As such EVs are not seen as products. It’s an extensive value chain (surveillance, 5G, automated manufacturing, green energy, etc). Perfect industry storm: they understand what “mobility” means.
- China will be a global leader in patents before 2025, turn around its views on IP, and suddenly / aggressively enforce the international rights of laws on patents. Many companies dealing with tech transfer in China right now will be caught in the fire.
- This is not yet visible, but Trump has pushed — has, not is– China to close further down their great firewall. Expect a Chinese mobile OS within 2021.
- The birth of « RED 2 » as a second web fully self-sufficient (arguably faster and more powerful in so many ways) and insulated from the rest of the world, was June 2019 (Trump, Huawei). Things will move slow front-stage, not back-stage. Dramatic announcements will be made before 2022 even if Trump is not reelected.
- Part of the digital isolationist strategy will involve onboarding Africa in RED 2 (and maybe India?).
- China sees innovation as a long road going up to give the country its deserved #1 rank in the world. It can only be driven by the central government, leaving some freedom on bumps along the way. The optimistic consensus is that people will follow along quietly.
Europe Digital Economy « BLUE 0 »
- Meanwhile in EU nothing much past GDPR and maybe taxing the GAFAs appropriately in a few years. That being said GDPR is a strategic first move that has value (measured by how much push back or ridicule it induced in the US).
- EU is not a digital economy, it’s for now essentially a subsidiary of RED 1. All EU countries competing together to be the biggest European startup hub demonstrates that they don’t get it yet. Italy or France are not going to dominate by themselves, not even Germany.
- Still, the EU should be a powerhouse and the #2 economy on the planet. Getting there will mean disengaging to some extent from RED1 and build “BLUE 0”. (BLUE for EU and “0” as in “we’re not yet there by any stretch”.)
- The tax push back on GAFAs after a decade of gross abuse (Ireland not helping) is interesting but slow (target is 2021 for now). Also, most EU investors remain rather clueless on what happened after 2007 with digital network effects and why you don’t have unicorn-grade #startups if they’re not cross-EU from day 1 (check how many transnational incubators exist in 2019).
- The irony is that the EU population is slightly above the US. On paper, we should have built stronger digital network effects? Nationalist envies are not helping, will a common federal ground be rebuilt with 3-5 years?
- Many opportunities ahead still in clean energy (Northern EU countries) and on digital society also with Estonia. But why Germany or France would follow the lead of the #39 GDP on the planet? Germany and France are victims of their very own innovator’s dilemma problem.
- Still, there’s hope EU could be the champion of digital democracy and tech decency and become a haven for the rich middle class wanting private life protection, this is our future. It obviously opposes both RED 1 and RED 2 as a key differentiator.
- EU sees innovation as an obvious outcome of good science and good education, and that the long-term future is about building peace and social progress. The optimistic consensus is that the rest of the world thinks the same (spoiler alert? they don’t).
Final wrap-up on the future of digital economy
(A) US played the GAFA game while renouncing decency and somehow democracy. This is going to bite them back and push them in Chinese global surveillance paradigm if they intend to compete on AI (which they will).
(B) China’s long game was to pretend to still be the factory of US and EU, while building its supremacy. It will now unfold sooner then expected (thanks to Trump). They could be ready to cut most ties in tech and digital rapidly. Maybe too soon, and this could be an opportunity for EU (thanks Trump!). In any case, EU has a card to play if not too caught up in internal bickering.
(C) Europe is a Shrödinger’s cat. We’ll see if there’s a digital economy capable of growth, scale, and (why not) supremacy because would-be nationalists and Brexit are opening the box as we speak…
(D) Africa and India are a black box. We should worry more about that. Africa will fall in RED 2 because they don’t have a choice. Don’t know India enough to have a perspective. Japan will fall in RED 1.
(C) Russia finally, which has a smaller GDP than Texas, can only exert influence by getting more and more aggressive, siding as much as possible with China, but unwilling to fall in RED 2. It’s very unclear how this 144m people market will evolve from now on and that’s one of the most volatile force in the market (while not being in the digital market directly). In any case, expect concerns on security, data breaches and influence hacking to be central in whatever happens next.