How to Succeed in the Second Digital Era
Blockbuster. Borders. The U.S. Postal Service. These once-dominant entities, and many more, have all been victims of disruptive tech.
Although it’s too early to sound the death knell for taxis, it’s also too late to say that ridesharing companies like Uber and Lyft are a flash in the pan. The disruptive change they represent is becoming part of our psyches—how we think about the world around us is framed by digital data’s seemingly endless potential to upend. Businesses and industries that have so far avoided disruption’s cleaver might think that the worst is in the past. It isn’t.
We are entering a Second Digital Era with profound implications for the future of disruption. The first digital era began when analog devices were replaced by their superior digital equivalents—think portable tape players becoming CD players—but this next period will be significantly more dramatic. The second digital era will be driven by the broader digitization of our physical space. In the second digital era, we not only digitize more of the objects around us, but also systematically digitize the information the objects gather. It is this digitization of data that fully opens the floodgates of disruption.
Our second digital era isn’t only impacting the rate of disruption; it’s changing what disruption looks like. In other words, disruption in the digital era has a few common factors—factors that legacy businesses and industries can identify and use to improve their chances of surviving and thriving in the digital age. These factors include:
Scale: Scaling businesses has always been a key element of growth. But, with the introduction of the next digital era, the process of scaling businesses changes significantly by a number of measures—including cost. In an analog world, consumers face real costs when choosing to find and travel to a new store or engage a new service provider. But in a digital marketplace, both search costs and switching costs are lower, meaning consumers can more readily find and switch to new businesses without major disturbance. Lower switching costs enable businesses to scale (and fail) quickly.
Digital has also changed the magnitude of growth expected of a business when it scales up. In an analog setting, selling the first 50,000 units might be the threshold that suggests the marketplace is viable. The scaling of Internet businesses today is gauged on a completely different tier. Today, we might say that anyone can get their app downloaded one million times; it’s the next ten million that matter. There are 1.2 billion worldwide members of the nearly 2,000-year-old Roman Catholic Church. Today, there are over 1.5 billion monthly active users of 11-year-old Facebook. That is the scale of digital.
Network Effects: Network effects have always been a powerful force in technology, and they help explain how the value of devices like telephones or fax machines increases (and decreases) over time. For example, the value of the first fax machine was close to zero without a second fax machine from which to send and receive documents. Positive network effects are almost always a defining attribute of disruptive businesses in the second digital era because they are a defining attribute of digital networks. Today, platforms like Instagram, Pinterest and Snapchat all benefit from positive network effects.
Compressing Diffusion Cycles: One of the properties of the second digital era is the ability to quickly evaluate the potential of a market. Historically, companies could innovate slowly around core businesses to create and capture value, but that is no longer the case. Upstarts are creating value around existing business from all sides. Digital compresses diffusion cycles, and that, in turn, compresses adoption cycles – meaning startups are able to create entire businesses and industries nearly instantaneously. In the second digital era, we are moving from a world of incremental innovation to one wherein value is created and organized quickly.
A Shift to Services: Over the last 50 years, we’ve been spending more on services rather than goods. In the 1960s, about 45 percent of total spending was on services. Today, that figure has increased to 66 percent, and the actual figure is likely higher when you add in devices that rely on accompanying services to demonstrate their value to end users. The products and devices launched in today’s digital environment increasingly look more like services. For instance, one buys a smartphone (hardware), which is able to accomplish certain functions. But the value of the hardware is really delivered through the services (apps), which are regularly updated.
Multi-Sided Platforms: Uber, Square, Craigslist, and even services like Tinder or WeChat are all examples of successful multi-sided platforms – marketplaces that allow participants to have direct interaction with each other. The scaling and network effects of digital environments create an atmosphere well suited for multi-sided platforms, or what economists call two-sided marketplaces. These marketplaces have two distinct groups, each of which benefits from interaction with the other side. Examples include temporary staffing agencies (workers and employers), search engines (advertisers and users), credit card networks (merchants and cardholders) and even shopping malls (shoppers and merchants).
Legacy businesses and industries are fortunate that we can identify what success looks like in the new digital era. But that doesn’t mean it’s any easier for these entrenched enterprises to restructure themselves to fit the new business models. Even the largest, most successful enterprises must continue to innovate in a digital economy. If not, they’ll join the ranks of Blockbusters, Borders and, perhaps, taxi companies.