Menu for growth – Just say “Digital” !

I read somewhere; Thomas Siebel of Mckinsey & Co. stated “The threat is existential. For boards, if this (digital transformation) isn’t on your agenda, then you’ve got the wrong agenda. If your CEO isn’t talking about how to ensure the survival of the enterprise amid digital disruption, well, maybe you’ve got the wrong person in the job. This may sound extreme, but it’s not.” I was taken aback with the might of this statement, setting me thinking about the agenda.?Why is there so much talk around Digital in the last five years ?

In the next few pages, I will try and outline my understanding of this evolution and together with you I will learn it a bit more.

In an effort to outline the progress of an organization towards its Digital journey I tried to outline the various phases it has to go through before it becomes part of an ecosystem. The percentages are not important to consider; however, we must note that the last three boxes are integral to contribution to the digital economy.

Economy is all about productive efficiency and the total output of the nation, be it the enterprise or the government. A measure of a good economy is how robust its total output is , in short Gross domestic product (GDP) ?and ?GDP is a summation of consumption , investment, government spending and net-exports. A significant portion of the GDP is contributed by a digital economy and it is estimated to be providing about 10% of the global GDP. And a significant carrier of the digital economy is Internet and technologies that use Internet as the backbone. If our total global GDP is 100 trillion dollars about 10 trillion dollars are contributed by the digital initiatives that are done by enterprises and governments, huge by any account , isn’t it ?

In today’s, world there are about 5.7b people that have access to Internet. Internet being the main carrier for a digital economy , there is massive spending on internet infrastructure to boost the economy as a whole.

Just as a reference

·????????Digital trade contributes to about 10% to the world GDP

·????????Internet has helped increase wages in some developed nations by 4%

·????????Internet has helped create 2 million jobs globally

·????????Mobile data and voice contributes $4T to the global GDP

?What are the elements of a strong digital economy ?

·????????Digital infrastructure?(fixed and mobile broadband, fiber-optic cables, etc.) is the backbone of the digital economy.

·????????Digital financial services and digital identification?allow individuals to conduct ?transactions.

·????????Digital innovation needs a supportive ecosystem of government regulations

·????????Digital platforms ?drive economic activity.

·????????Digital literacy and skills?create a knowledge workforce.

?What is the role that the platforms are playing in our economy ?

?There are so many apps (platforms) that we use today and some of them are big firms however you want to visualize it. Uber is 5% of the global taxi market or Airbnb is around 20% of the vacation-rental market globally. Economists lovingly call it “platform economics”, ?data and the ability to create value through data become factors of production including algorithms and ability to use/re-use data to produce value.

?Just like a normal economy , where the market is defined by perfect competition, even in the digital world there are large platforms that compete with each other promoting a supply and demand efficiency. There are many American and Chinese platforms which are examples to this fact, you know most of them and I don’t need to mention them.

?Now let us go back to the stages of digitization (the box drawing above) where I am pre-supposing all enterprises will gradually but eventually be pushed towards a “digital ecosystem”. It is not a question of whether that will happen but when that will become a mandate. As can be witnessed , we have an ultra large database of “Aadhar data” comprising of citizenship details, governments are pushing enterprises to share their business transactions on a digital platform (GSTN), enterprises mandate their suppliers to share their supply information(logistics), sellers proactively share their catalog of products(marketplace) and the tax man(tax websites) does not come to the door anymore. I am sure various enterprises, governments and citizens are at various stages of digital evolution and that will continue for the next 5 years.

?Which then brings me back to the point; why would governments including G20 and world trade organization talk so loudly about “digital” ? What value do they see in those long and various discourses on digitizing of processes and “platformonomics” ?

?There are 2 key levers on which the success of digital ecosystems relies on, which our world leaders can clearly see and want to harness it:?

·?????????The ?value derived from the sum of the participating actors on a super-app (i.e. customers, manufacturers, suppliers, distributors) is much larger than the one of the individual actor. The value generated by the participating actors on any app/platform referenced above is “N^2” (N squared or N raised to the power of 2). In short if I were to explain in simple terms , assume you are a platform (viz. ultra-microscopic version of Amazon) and the cost of acquiring customers on your platform is about $10. You manage to attract 10 such customers and the total cost of acquiring them is now $100 (10x10). However, the value generated is “N^2” (N squared) i.e. 10^2(10 raised to the power of 2) or equal to 100. ?Therefore, the point of inflection is 10 customers at a fixed cost of $10 per customer. Now let’s add the 11th customer to this list. The total cost is now $110 (11x10) while the value generated is 11^2 (11 raised to the power of 2) which is 121. Evidently, 121 is greater than 110 and therefore there is a positive value add. This is a simple example, but this does drive the behavior of a large community of startup platformers. Therefore, the higher the number of actors that you can get on your platform , greater is the value generated. This is true for all platforms be it private enterprises or government.?The simple example above does not take into account the importance and value of underlying data associated with all these actors. If you add that dimension , you may very well imagine the infinite possibilities. Therefore, all CEOs and government agencies have digital as top of their agenda.

·?????????The focus on bringing together several industries and adding an extra customer-facing layer that connects all in an integrated experience that goes far beyond the needs that each industry could address alone

?How much of these platforms add to the GDP ?

As discussed above digital platforms contribute around 10% to the global GDP. But if you notice a GDP is calculated as per the price paid for the output generated. Some popular economist caution us on a light note, not to marry our housemaid or baby sitter because they will drop off the economy moment you stop their wages post marriage. But to refer to this analogy, there are a lot of platforms that are extremely useful to all of us however, we do not pay a penny towards them. Google maps, Emails or personal WhatsApp or Telegram, lots of music apps, health meters and many more that you can think of. They have a lot of players, but they do not add to the GDP as their services are all at zero cost.?But if you take a classical economic view, anything that has a marginal utility , makes it efficient and is paid for is counted for in the total output of a nation. But not in case of billions of google search users or emailers or even unpaid WhatsApp. While you may argue that the advertisement revenues generated through those apps are counted for , it is a miniscule element of what the “intrinsic” value that could get generated in an economy. Digital economy could shoot up to 25-30 trillion dollars in the next 5 years and that is why many governments, WTO, G20 and other agencies have started to fan the debate. I took a dump of all the GDP indicators starting Q1 2018 till Q1 2022. I looked at all the normal indicators like manufacturing, transportation growth etc and found all of them correlated to the GDP trends. Since my intent was to evaluate how much digital activities are getting added to the GDP, I looked at some other indicators which cannot be directly related to GDP , however is a fairly good measure of digital transformation of a society. These two were measures of how much Internet bandwidth (speed) has increased y-o-y and how many more devices have been added to the Internet. These two ideally should tell me the heightened digital activity in the nation's output. This will also tell me how much of these activities are getting added to the GDP whether they are paid or unpaid activities. I attach 2 charts which show the highest or lowest ICT growth over last 2 years and their corresponding per-capita GDP change (in %).

Clearly with growth in speed or additional devices, the GDP has not really been affected except India , where we may argue that the startup ecosystems did add value. But other growing or developed economies do not show such indications

Similarly , if you notice the slowest growth ICT countries, the GDP does not reflect any de-growth or a visible pattern that we can attribute to ICT.

Therefore, based on this inference I believe that a large pot of digital transactions are not finding their way into the GDP tills.

How much of our personal data is being used to generate value in the economy ?

I would argue a lot of our data is being used to generate a lot of value. Personal data, preferences and the way we interact with Internet gives a lot of insights to the manufacturers. If a Tesla chip tells the manufacturer how we drive the car, our preferences and help them build a better/costlier machine , we should argue a lot of it comes to Tesla free, without spending a dime on collecting user reviews. I would therefore state , if I am user of their vehicle should I not be rewarded for this hard work ? When you look at various governments coming up with privacy laws, restricting data residency beyond their own borders, ?I assume it is for the purpose of being the owner and value extractor of their own citizen’s data.

Should resident data on our apps be taxed to app providers in the country of use ?

It is next to impossible to pin a value against any app since there is no monetary transaction conducted between the app platform and the user of the app. In this case I am mentioning the free apps. If we were to put an “intrinsic” value to these apps they may run into billions of dollars.?I asked around my colleagues and realized some would pay nothing for the free to use platforms that they have?been using for a long time to some who were ready to pay up to $5 per month. Therefore, there is a value for the usage of emails, messenger apps, health apps, music apps, the camera app on our phones, wikipedia app and many more that have gone on to replace the postman’s service, actual Canon camera, the courier services and the big fat encyclopedia. There was no consensus reached on the taxation bit since some of them were finance and for them business tax is not applicable without a corresponding revenue. Some of them felt that the apps are made in another country and the user are spread all over the world, therefore, it is next to impossible to tax a non-resident business. Whatever, this may be there is an on-going debate going on around the taxability and the day is not too far when we may hear of an “x% data-residence tax”.

Summary :

1.??????GDP will be viewed quite differently in a few years to come.

2.??????Data will be pooled and shared across enterprises + governments + customers by year 2027

3.??????There is a high probability of each data resource ( citizens on a government super-app) be paid “data-dividend” by 2030