The Economic Value of Digital Disruption: A Holistic Assessment for CXOs (Management for Professionals) 9811981477, 9789811981470

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Management for Professionals

Vijay Kumar

The Economic Value of Digital Disruption A Holistic Assessment for CXOs

Management for Professionals

The Springer series “Management for Professionals” comprises high-level business and management books for executives, MBA students, and practice-oriented business researchers. The topics cover all themes relevant to businesses and the business ecosystem. The authors are experienced business professionals and renowned professors who combine scientific backgrounds, best practices, and entrepreneurial vision to provide powerful insights into achieving business excellence. The Series is SCOPUS-indexed.

Vijay Kumar

The Economic Value of Digital Disruption A Holistic Assessment for CXOs

Vijay Kumar Azygos Consulting Bengaluru, India

ISSN 2192-8096 ISSN 2192-810X (electronic) Management for Professionals ISBN 978-981-19-8147-0 ISBN 978-981-19-8148-7 (eBook) https://doi.org/10.1007/978-981-19-8148-7 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

The analog world was different (it was idyllic, some would remember wistfully). In the days of landline phones, one had to wait for more than eight years to get a phone connection; half the world’s population had never made a telephone call. An outstation cheque would take a month to get cleared in India (its UPI is now the leading digital payment platform). We would happily go to a restaurant and enjoy a meal in the old world. Now, who wants to go out and eat? One in three Chinese is prepared to rent a flat without a kitchen because of the convenience of food delivery. Going to a movie was unbelievably romantic (with popcorn to boot). Now movies are digitally streamed (sans the popcorn). Cut to the digital world. We live in interesting times. A digitally tuned world drives our social lives and every facet of business. Although the world has gone digital, life remains essentially analog. The big five tech companies are worth more than $10 trillion. Only the US has a GDP greater than that. ATMs dispense actual cash, albeit with a highly digitized banking backend. Banks face an existential threat. Netflix serves up a mushy romance to make one sniffle, but the signals are digitized, making one sob even louder. Tapping your phone to call Uber is made possible by a series of 1s and 0s. Movies, books, pizzas, masseurs, and snake catchers can all be summoned with the touch of a screen. New competitors have humbled giant retail, automobile manufacturing, and media corporations. Welcome to the heady digital world! So, what does the book contain? The digital enablers serve the digital world on a platter. First came the Internet, and then came the Internet of Things. Our gateway to the digital world is through smartphones, and most humans can’t live without a smartphone. The underlying of the digital world is data, and the virtuous cycle of harnessing data leads to value creation. Artificial intelligence has evolved as a supplant to man in decision making in various spheres, from predicting attrition to increasing the accuracy of pathological diagnosis. An intro to the Generative AI, ChatGPT is included. It’s early days yet. The digitized financial world, Fintech, is getting a makeover. Traditional banks are set to disappear in a decade. Digital payments are the norm making the world a cashless and more inclusive society. Crypto, the digital currency, was originally conceived to replace the centralized financial system but has become a haven for speculators. Through AI, high-frequency trading has taken over 90% of global securities trading. v

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Preface

The future of work is a daunting landscape. It is a picturesque route dotted with technologies such as automation, artificial intelligence, and robotics that reshape our work. The specter of automation leading to joblessness has been haunting us for centuries, but in reality, automation is a net creator of jobs. And then there is the issue of the “Gig” economy, where everyone works without being “employed.” The pandemic-induced work from home has become mainstream. Digital platforms are the lynchpin of the digital economy. The network effects create “winner takes all,” resulting in oligopolies that we see today in the digital world. The platform economy is littered with successful commercial firms like Uber and Airbnb. Apart from creating lifestyle conveniences, platforms have also created millions of new jobs, alleviating the loss due to automation. The new 5G mobile communication system is frequently dubbed the century’s greatest invention. It has the potential to commoditize intelligence. 5G’s blistering speeds and low latency will rewrite the digital engagement rules. The implications of 5G on IoT, high-frequency trading, e-commerce, and health care will be profound. The impact on global trading will be stunning and disruptive. Financial Times has declared that the 5G technology is one of the most significant developments in human history. Online learning has become imperative after the pandemic. The efficacy of online learning is a matter of serious debate. There are more brickbats than bouquets, but the danger is that we may throw the baby with the bathwater. The effect of the digital divide on children has been savage. It is not just the loss of learning for the children; their idyllic childhood is dented. Online education has become lucrative, and scores of startups have raised billions of dollars. Blended learning seeks to be an optimal solution for all key stakeholders: students, teachers, parents, and educational institutions. The big five tech companies MAAMA (Meta, Apple, Amazon, Microsoft, Alphabet), made omnipotent by network effects, control our lives. The combined market value of FAAMA (the earlier avatar of MAAMA) accounts for more than 30% of the S&P 500. Digital advertising is controlled by two landlords—Google and Facebook. Apple is the most valuable company on this planet. The big five tech companies have one proponent, the user, who enjoys immense consumer surplusfree. Big tech is accused of devouring competition and being the cause of many social evils. Lawmakers worldwide are trying to rein them, but without much success. Finally, while the world is in a frenzy with digitization, only a few digital hotspots do the heavy lifting—Silicon Valley, China, and India. Silicon Valley is still the undisputed numero uno in innovation. China is a strong contender in AI and 5G, and its one-upmanship with America could decide the technology leader of this century. India’s digital backbone is unmatched. The non-pareil digital identity, Aadhaar, has made India a more inclusive society. The Unified Payments Interface (UPI) is the best in the world. India’s 100-strong unicorns are a tale of innovation and vibrant entrepreneurial culture.

Preface

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The world is digitizing at a furious speed, but there has been no holistic assessment of its outcome. This book is a study aimed at providing a comprehensive appraisal of the impact of digitization and should count as a pioneering effort. The task seemed daunting. My wife Rekha and daughter Malavika watched me banging on my laptop with trepidation, wondering aloud whether I would ever finish the book (it took more than two years to write the book), but shared my joy when it was completed. Writing a book on digital disruption is a double-edged sword; while one admittedly deals in cutting edge, the canvas is so large that one faces the risk of being pilloried for not covering specific aspects of the digital economy. And the frenetic pace of developments meant that you were running all the time to capture the latest digital deal. Bengaluru, India

Vijay Kumar

Praise for The Economic Value of Digital Disruption

“In a connected world, digitization is the primary source of competitive differentiation leading to higher shareholder wealth. To be successful, firms must be digitally savvy to outwit their competitors. Vijay’s book aims to provide insights into the digital transformation dynamics impacting our lives and businesses. Two streams run through the entire book. One is the value creation ability of digitization; two, the extent to which the digital backends enrich the analog human life. Vijay’s book is replete with episodical examples of a planet in digital transformation.” —Ashok Soota, Executive Chairman and Founder, Happiest Minds; Founder and CEO, Mindtree; Former President, Wipro InfoTech “Dr. Vijay Kumar is one of those rare authors with comprehensive experience in the industry as well as in academe. He has worked extensively in Asia, Europe, and North America. He combines his academic research acumen with industry knowledge in this timely book on The Economic Value of Digital Disruption. His lucid writing style along with references and illustrations make this an excellent book for both practitioners as well as for faculty and students in seminar classes in business, economics, and engineering. This book demonstrates the impact of digitization on the Triple Bottom Line of profit, people, and the planet. Enjoy and learn!” —Prashanth N. Bharadwaj, Ph.D., Dean, Director, School of International Management, Eberly College of Business, Indiana University, USA “The book ‘The Economic Value of Digital Disruption—A Holistic Assessment for CXOs’ by Vijay Kumar is a pioneering effort to capture the digital transformation phenomenon touching all facets of the economy. Unlike books written by academicians, Vijay Kumar uses his stint in Wipro Global R&D to cover technology aspects from a practical viewpoint. The narration is simple and easy to grasp without too much jargon creeping in. It has a good blend of concepts supported by real-world applications, highly recommended for CXOs from different departments and varied industry verticals.” —Dr. Sridhar Mitta, Founder and Managing Director, NextWealth Entrepreneurs, Former CTO, Wipro Limited ix

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Praise for The Economic Value of Digital Disruption

“Dr. Vijay Kumar has brought out another tome as a sequel to his initial book on innovation. Dr. Kumar blends the rare combination of his academic and industry expertise to weave a compelling story of disruptions across various sectors, all spawned by digital technologies. The book has plenty of useful references for both practitioners and students—a must-read for people who want to get started on the insides of tech innovation.” —R. P. Sundarraj, Ph.D., Professor, Program Director-EMBA, Department of Management Studies, IIT Madras “The world is digitizing at a frenzied speed, but there’s been no holistic stocktaking of its outcome. Vijay’s book is a study aimed at providing a comprehensive assessment of the impact of digitization and should count as a pioneering effort. In my opinion, the book is a broad canvas that is extensively referenced, and comprehensively illustrated.” —Dr. A. L. Rao, Former President and COO, Wipro Technologies “It will be an understatement if I say the concept note totally bowled me over on your book on Digital Disruption. It was so fascinating, almost like an Alvin Toffler novel. I just wanted to convey my heartfelt compliments and best wishes. Looking forward to reading your book.” —Dr. Ravishankar Deekshit, Former Dean and Vice-Principal, BMS College of Engineering

Contents

1 Digital Enablers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 The 1s and 0s of Our World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.1 Growth of the Middle-Class Spurring the Digital Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.2 The Digital Enablers—Internet, Smartphone, Data, AI . . . . . . . . . . . 11 1.2.1 Internet—Stitching the Digital Economy . . . . . . . . . . . . . . . . . . 11 1.2.2 Smartphones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.2.3 Data—The World’s Most Valuable Resource . . . . . . . . . . . . . . 35 1.2.4 Artificial Intelligence (AI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 2 Fintech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Fintech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Digital Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Digital Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Financial Inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Moving Toward a Cashless World . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Cryptocurrency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Digital Money Gains Legitimacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Central Banks Mull Issuing Digital Money . . . . . . . . . . . . . . . . . . . . . . . 2.7 China Fires the First Salvo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 The Ills of Digital Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 High-Frequency Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

111 111 124 139 154 161 171 191 197 202 208 216 228

3 Future of Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Changing Nature of Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 What Is Impacting the Nature of Work . . . . . . . . . . . . . . . . . . . 3.1.2 What Kind of Jobs Will Be in Demand in 2029? . . . . . . . . . . 3.2 The Specter of Automation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Automation Threatens Unskilled Jobs . . . . . . . . . . . . . . . . . . . . . 3.3 Robotization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Profiling Robots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Embracing Robots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

231 231 233 244 247 252 266 271 275 xi

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Contents

3.4 Future of the Office Is Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 Move Toward a Hybrid Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 A Vote for WFH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Gig Working . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 Gig Worker-Employee or Contractor? . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

285 301 311 316 322 328

4 Digital Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Digital Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Platform Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 Profiting from Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Network Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 How Network Effects Create Value-Metcalfe’s Law . . . . . . . 4.4 Sharing Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Airbnb—The Quintessential Platform Business . . . . . . . . . . . . . . . . . . . 4.5.1 ML Optimizes the Airbnb Platform Business Model . . . . . . 4.6 The Ride with Uber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.1 The Economics of Uber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.2 Bumpy Road Ahead for Uber . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

331 331 333 341 346 351 355 365 371 375 380 387 391

5 The Promise of 5G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 5G—A Game Changer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 5G Will Transform into a GPT . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 5G Will Be Impactful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Economic Impact of 5G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 The Ubiquity of 5G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 5G Will Go Where No Standard Has Gone Before . . . . . . . . 5.3 Harnessing 5G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 5G in Health Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 5G in Farming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 5G in Automotive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.4 Early Adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 The Fight for 5G Dominance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 The Global 5G Rollout Challenges . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

395 395 397 403 410 413 417 419 423 427 428 430 434 441 446

6 Online Learning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Online Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 The Business of EdTech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 Successful EdTechs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.3 The Compulsion of Studying from Home . . . . . . . . . . . . . . . . . 6.2 Efficacy of Online Learning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 What Didn’t Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 What Did Work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

449 449 452 460 469 479 479 497

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6.3 Digital Divide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 The Pandemic Deepens the Digital Divide . . . . . . . . . . . . . . . . 6.3.2 Homework Gap—The Unkindest Part of the Digital Divide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

507 512

7 The Might of MAAMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 The Daunting Presence of Big Tech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 Market Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.2 Duopoly in Digital Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.3 Google: The King of Search Advertising . . . . . . . . . . . . . . . . . 7.1.4 Amazon-Largest Onliner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Facebook-Mogul of Social Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.1 Ill Effects of Social Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 A Cohort of Other Social Media . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Apple—The Cook Knows the Recipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Microsoft-Roaring Back with Nadella . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Going After the Big Tech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.1 FAAMA’s Restrictive Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.2 Checks and Balances for the Big Tech . . . . . . . . . . . . . . . . . . . . 7.5.3 Global Initiatives to Rein in Big Tech . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

525 525 538 557 582 590 606 620 628 634 641 649 655 661 672 686

8 Digital Hotspots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Digital Hotspots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Silicon Valley Is Aging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.1 The Resurgence of Silicon Valley . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 The Awesome Might of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 The Technical Prowess of China . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.2 China Sets Standards in E-commerce . . . . . . . . . . . . . . . . . . . . . 8.3.3 The China-US Slugfest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.4 China’s Quest for Self-reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 Digitized India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.1 India’s 100-Strong Unicorns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.2 Aadhaar—The Non-pareil Digital Identity . . . . . . . . . . . . . . . . 8.4.3 UPI—The Best in the World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

689 689 695 705 712 722 735 745 752 760 769 782 787 794

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About the Author

Vijay Kumar is an IT corporate professional turned researcher and academician. A qualified Patent Analyst, he has had a successful 25-year corporate tenure of building and managing world-class technology companies in India. He was the Corporate Product Marketing Manager at Wipro before being the India Center Head of Tektronix Engineering, a subsidiary of Tektronix, USA. Vijay later became Chief Operating Officer of Raffles Software, Singapore, and Chief Executive Officer of Mindteck, a public listed software company promoted by a global investment bank. As Managing Director of Manystreams USA and Managing Director of Citec Finland, he led the formation and growth of these companies in India. He was the President of IP consulting at Bizworth, a boutique consulting company. During his tenure as the Dean of Management Studies at PES University, Bangalore, the MBA program became the most preferred choice of management study in Karnataka and catapulted PES MBA to being the #1 Business School in Karnataka and # 3 in South India for successive years (2020 and 2021, TOI Business Schools ranking). He is an IFRS Foundation FSA (Fundamentals of Sustainability Accounting) Credential holder and consults in the area of ESG. His co-authored book Global Innovation and Economic Value (2018) was published by Springer. Dr. Kumar is an Electronics Engineer with an MBA from Rensselaer Polytechnic Institute (RPI), USA, and has a Ph.D. from IIT Madras.

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1.1

The 1s and 0s of Our World

Before the digital age, there were epoch-making inventions at regular intervals. The printing press had been invented. The World Wide Web, electricity, the steam locomotive, and the telephone, all these innovations were a component of the exclusive all-purpose socioeconomic galvanizing force. These disruptive inventions were triggers for transformational morphing that redefined work processes and rewrote the rules of competitive differentiators as they spread across multiple industries. The far-reaching consequences of these innovations range from increased human and machine productivity to improved peoples’ living standards all over the world.1 Then came the digital age. Although the world has gone digital, life remains essentially analog. ATMs dispense actual cash, albeit with the support of a highly digitized banking backend. A Netflix romantic film serves up a mushy romance to make one sniffle, but the signals are digitized and delivered to enhance the viewers’ experience, making one sob even louder. Taking Uber to get around without owning a car is made possible by a series of 1s and 0s in the background. Life experiences, without exception, are all analog, but they are increasingly digitally enhanced. People worldwide have seen digital services internalized and transform their lives over the last two decades. Taxis, movies, books, pizzas, masseurs, and snake catchers can all be summoned with the touch of a screen. New competitors have humbled giant retail, automobile manufacturing, and media corporations. Digitization adds value and enhances analog human life.

1

IHS Markit, The 5G Economy: How 5G will contribute to the global economy, November 2019.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 V. Kumar, The Economic Value of Digital Disruption, Management for Professionals, https://doi.org/10.1007/978-981-19-8148-7_1

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A typical example is the profound transformation of the friendly neighborhood bank. The distinction between a traditional bank and a digital bank is stark. A conventional bank must make between $200 and $400 per customer per year to stay afloat, with a high marginal cost for every addition of a new account. The equivalent figure for a digital-only neobank (a bank with no physical presence) is $50–60 with zero marginal cost for every new account.2 Because of the convenience of delivery (mid-wifed by digitization), one-third of people in China, the largest market for digitally enabled food delivery, are willing to rent a flat without a kitchen.3 Social technologies will affect one-third of consumer spending, amounting to nearly $1 trillion in annual consumption in some categories in the United States and Europe.4 The surge in e-commerce will induce one-fourth of all malls in the United States to be closed by 2022. Four hundred forty-eight thousand jobs have been lost. We spend 80% of our time on three apps: Facebook, WhatsApp, and Chrome. Facebook has the most data on its customers compared to any other company, including Google, and yet Sergei Binn, co-founder of Google, warned that “we know where you are, where you’ve been, and we can more or less know what you’re thinking about.” The irony of digital times is that Uber, which does not own a single vehicle, is valued higher than GM and Ford. Airbnb does not own a single room yet has a higher market cap than Hilton. Facebook is the king of social media but does not generate any content; Alibaba is the world’s largest retailer but does not own any inventory. Digital transformation has quickly become the new economy’s currency. The intensity of digitization now determines the value of a business. That the internet is busy is an understatement (Fig. 1.1). Digital transformation is a work-in-progress that changes people’s lives—creating economic value. Digitization is the primary source of competitive differentiation in a connected world, increasing shareholder wealth. Businesses must be digitally savvy to outwit their rivals. The topic of digital disruption has been one of the most discussed topics, resulting in a wide range of work on the topic. While such diversity can be challenging, uncovering insights into the dynamics of digital transformation is enticing. What is the digital economy? It is an economy based on digital computing technologies (Chohan, 2020) (Fig. 1.2). The digital economy is radically different from the old economies of the twentieth century. The theories formulated during those times cannot capture the digital economy’s nebulous, global, concentrated, intangible, and data-driven characteristics in the twenty-first century (Chohan, 2020). However, we intuitively understand it as conducting business via markets powered

2

Neobanks are changing Britain’s banking landscape, The Economist, May 2, 2019. The foodoo economics of Meal Delivery, The Economist, Aug 1, 2019. 4 McKinsey64, Euromonitor; iConsumer in Source: Statista, Visual Capitalist, Times of India, Oct 6, 2020. 3

1.1 The 1s and 0s of Our World

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Fig. 1.1 A minute on the internet. Source Statista, Visual Capitalist, Times of India, Oct 6, 2020

by the internet and the World Wide Web. Digital markets have become concentrated due to a “winner-takes-all” dominance due to the high upfront development costs (barriers to entry) that, once overcome, create a sizable moat that only a few players can replicate. A large part of the digital giants’ strength stems from a set of network effects, which refers to the critical mass of users that, as it grows, improves the benefits accrued to all users. Network effects further exacerbate the nature of market concentration, as the network with the most users gains a tenable advantage over any ostensible competition. Data play a self-reinforcing role in this phenomenon, as data growth improves digital services and attracts more users and optimizing services (Chohan, 2020). The digital economy accounts for approximately 30% of the market value of the S&P 500, six times the trade balance of the US, and more than the economic output of the UK (Delices, 2010). Remarkably, almost all the digital economy’s value was generated after the advent of the internet twenty-five years ago. In the last 15 years, the digital economy has grown two and half times faster than the global gross domestic product and has doubled since 2000. The bulk of the value has been created in a few countries: the US (35%), China (13%), and Japan (8%). Another 25% was accounted for by the EU, Iceland, Liechtenstein, and Norway.5 The digital economy is an energy guzzler. Cloud computing is manna from heaven because of the explosion in data, though the cloud has increased the digital economy’s electricity consumption and carbon emissions.6 The new digital economy consumes 10% of the world’s electricity. On average, a server room in a data

5

Digital economy report “value creation and capture: implications for developing countries” (PDF). United Nations Conference on Trade and Development. New York. 2019. 6 Walsh, Bryan. “The Surprisingly Large Energy Footprint of the Digital Economy [UPDATE].” Time. ISSN 0040-781X. Retrieved 2018-06-08.

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Fig. 1.2 Digital economy universe. Source Bukht and Heeks (2017)

center consumes more power than is required for 180,000 homes. Mining Bitcoin consumes about 70.7 TWh of electricity per year, according to Digiconomist.7 Nearly seven million households can be powered by the same amount of energy in the United States (see Footnote 7). The digital economy’s impact on retail is telling. Major retailers such as eBay and Amazon have grown rapidly with minimal investment in physical space. At the same time, brick-and-mortar businesses have opened online routes to complement their traditional sales.8 The digital economy has leveled the playing field considerably. Small companies like Bebe stores, which have a negligible net worth, have competed with Goliaths like IBM and Microsoft (Hazzard, 2019). Two key factors driving the digital economy are platformization and monetization of digital data. The term “platform” is not novel. Platforms are a mechanism that facilitates interaction between interested parties. The concept of the digital market as a “multisided” market has evolved from the French Nobel laureate Jean Tirole’s concept of “two-sided” platforms. The multisided characteristic enables platforms to offer their content free to their customers on the one hand and advertisers on the other (or could be riders and drivers as in the case of Uber). In a market where several people interact on a platform (which is also perceived as an intermediary), each group’s decision impacts other people via a positive or

7

“Bitcoin Energy Consumption Index—Digiconomist.” Digiconomist. Retrieved 2018-06-08. “Department Stores Bring Down Retail Results.” The Business of Fashion. 2019-08-22. Retrieved 2019-09-18. 8

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negative externality (Miller, 2014). A positive payoff results for the advertiser displaying a banner on a specific page when users visit the page and click on the links. The revenue generated by digital platforms does not come from users but from advertisers.9 One side effect of the digital economy is the creation of oligopolistic giants. Numerous factors contribute to their pre-eminent market positions. The first concerns network effects (i.e., the platform’s value increases with every additional user). It occurs when the user’s perceived value of a product or service rises exponentially for every additional new user of that product or service increases. For instance, WhatsApp is a free platform that enables the communication between friends. WhatsApp’s utility is a function of how many friends are already users of WhatsApp. More begets more.10 The second characteristic is the platforms’ data extraction, control, and analysis capacity. Additional users imply more data coming onto the platform with network effects. More data bring in the ability to outwit competitors and take advantage of being a first-mover. Thirdly, as a platform gains traction and starts to offer various integrated services, the cost of switching to a different service provider increases. Among the world’s top eight companies by market value, seven are centered on platform-based business models, demonstrating the platform’s strength. The digital economy accelerates its evolution, fueled by its capability to gather and analyze vast amounts of data about virtually anything. Data in the digital economy are generated by individuals, social, and commercial organizations on different digital platforms. Data flow (proxied by global IP traffic) exploded from 100 GB per day in 1992 to 45,000 GB in 2017 (Fig. 1.3). By 2022, it would reach 150,700 GB per second, fueled by an increasing number of people connecting and the expansion of the Internet of Things (IoT).11 Remember, the digital economy is still in its infancy! The Internet of Things (IoT) itself will be a critical component of the digital world. IoT is an array of internet-connected devices and human beings. IoT finds deployment in health care, driverless cars, RFID tagging, utility management, logistics, etc. In a landmark event, the number of IoT-connected devices (8.6 billion) surpassed the number of people with mobile broadband subscriptions (5.7 billion) almost four years ago. The IoT connections will grow at 17% per year, surpassing 22 billion by 2024 (Ericsson, 2018). By 2025, IDC estimates that the average connected person will communicate nearly 4900 times with IoT devices daily or approximately once every 18 s (IDC, 2018).

9

Taxation and the Digital economy: a survey of theoretical models (PDF) (Report). France Stratégie. February 26, 2015 [Final report]. Retrieved 2020-04-20. 10 Reddy, Nirmala. “Council Post: How to Harness The Power Of Network Effects”. Forbes. Retrieved 2020-04-20. 11 Digital Economy Report, 2019, United Nations Conference On Trade And Development (UNCTAD), 2019.

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Fig. 1.3 Data driven economy. Source Digital economy report “value creation and capture: implications for developing countries” (PDF). United Nations Conference on Trade and Development. New York. 2019

The oligopolistic digital economy is essentially dominated by the big five (FAAMA12 —Amazon, Google, Facebook, Apple, and Microsoft). China has its goliaths—Alibaba, Tencent, and Baidu. The combined market capitalization of the top five platform companies exceeds $10 trillion.13 A handful of digital platforms dominate the global market giving rise to a seemingly monopolistic market system. Google controls 90% of internet searches. Facebook controls two-thirds of the social media, and it is the leading platform in 90 countries (see Footnote 5). Amazon has a 40% market share of global online retail activity; its cloud services, Amazon Web Services, have a similarly dominant position globally. In China, it is no different. WeChat has more than one billion active users. It monopolizes the mobile payment market with Alipay. Alibaba has a commanding 60% of China’s e-commerce market. With non-China digital companies shut out from the country, the degree of concentration of a few digital players in China is strangulating. As a result of these entwined and combined effects, dominant market positions have formed (OECD, 2014). FAAMA has moved in early and today enjoys the seemingly unassailable first-mover advantage (Ciriani & Lebourges, 2017). The rapid expansion of the digital economy has had some unintended consequences. For example, the advertising industry, which has largely shifted to digital, is dominated by a duopoly—Google and Facebook. Google and Facebook own 60% of the world’s digital ad real estate.14 As more marketing moves online, the digital giants’ conquest of adland appears to be unstoppable, and everyone is subject to the whims of the daunting pair. Several Asian digital products have recently become world leaders. TikTok, a Chinese music video app, has surpassed WeChat

12

With Meta coming into being, FAAMA has become MAAMA. Both are used interchangeably in the book. 13 See Footnote 11. 14 The advertising business is becoming less cyclical and more concentrated, The Economist, 27 June 2020.

1.1 The 1s and 0s of Our World

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Fig. 1.4 Asia takes the lead in app usage. Source Sensor Tower in A Chinese music video app is making WeChat sweat, The Economist, July 12, 2018

as the most downloaded iPhone app, barring games (Fig. 1.4). Of course, TikTok is currently facing turbulent headwinds and is caught in the conflict between the United States and China is another matter.15

1.1.1

Growth of the Middle-Class Spurring the Digital Economy

A critical factor in the growth of the digital economy is the rise of the middle class and its attendant affluence, even as the digital divide devastates the weaker section of the world. Something enormously significant on a global scale is unfolding almost imperceptibly. For the first time in 10,000 years since agriculture-based civilization began, most of humanity is no longer impoverished or at risk of poverty.16 With sufficient discretionary spending, one-half of the world’s population (3.8 billion people) living in their homes qualify as “middle class” or “rich” (Fig. 1.5). The per-capita income of the world has risen steadily from $3700 in 1960 to $10,600 in 2020.17

15

A Chinese music video app is making WeChat sweat, The Economist, July 12, 2018. A global tipping point: Half the world is now middle class or wealthier, Homi Kharas and Kristofer Hamel, Brookings Institution, September 27, 2018. 17 World Bank in A global tipping point: Half the world is now middle class or wealthier, Homi Kharas and Kristofer Hamel, Brookings Institution, September 27, 2018. 16

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Fig. 1.5 Middle-class driving the digital economy. Source A global tipping point: Half the world is now middle class or wealthier, Homi Kharas and Kristofer Hamel, Brookings Institution, September 27, 2018

The middle class has some discretionary income to spend on consumer durables such as motorcycles, refrigerators, and washing machines. They have holidays and have a sufficient safety net to weather any exigencies without becoming penurious. And they are ardent supporters of the digital economy. The story of the rapid rise of the global middle class is compelling. Today, approximately one person escapes severe deprivation every second; however, five people move into middle-class strata every second. The wealthy are also increasing in number but at a much slower rate (thirty individuals every minute) (see Footnote 16). Why is it significant that the middle class has reached a tipping point and that the middle class is the fastest-growing segment in the world? Because reasonably well-off people are the ones driving the global demand. Private household consumption accounts for one-half of the worldwide demand, while the other half is evenly accounted for by investment and government consumption. They are the driving force behind digital products. Ensure digital platforms benefit from network effects. Seize control of social media. Shop online. Watch movies at home that are delivered digitally. Rarely visit a bank. The predominance of the middle class in 2030: The middle class accounts for two-thirds of household consumption (see Footnote 16). The wealthy spend more per person, but their numbers are insufficient to propel the global economy. The impoverished and vulnerable are in large numbers but don’t have adequate disposable income. The middle class is the sweet spot for most rich countries; it is now true globally. The new middle class is overwhelmingly Asian; ninety percent of the next billion middle-class consumers are from Asia, scattered across China, India,

1.1 The 1s and 0s of Our World

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Fig. 1.6 The continued rise of middle-class. Source A global tipping point: Half the world is now middle class or wealthier, Homi Kharas and Kristofer Hamel, Brookings Institution, September 27, 2018

and South and Southeast Asia. Unsurprisingly, Asia is home to the world’s most prominent digital startups. It is also the fastest-growing segment, with a projected population of 5.3 billion by 2030 (see Footnote 16). Asia’s middle class is vitally relevant to the digital economy (Fig. 1.6). The digital world’s potential markets will grow exponentially. China and India’s middle-class markets are estimated to be worth $14.1 trillion and $12.3 trillion, respectively, in 2030, comparable to the American middle-class market size of $15.9 trillion. Significant investments are being made in digital technologies, not just for the sake of profit but for enhancing human experiences.18 US$1 invested in digital technology is estimated to have increased GDP by US$20 over the last 30 years, while the same amount invested in non-digital technology increased GDP by only US$3.19 Unsurprisingly, digital technologies will account for nearly a quarter of global GDP by 2025. Digital addiction starts in infancy and fuels the meteoric rise of the digital economy. Those under the age of 25 have no idea how to live without the internet. Individuals born after the mid-1990s are born with a digital spoon. And digital addiction begins in childhood, even before they are born! Kids are already producing vast amounts of data, beginning while still in their mothers’ womb when the baby’s first scan is uploaded to the internet. The kids’ tryst with the internet continues during their growing-up years when they constantly interact with gadgets and programs generating copious data. They will be available to third parties, and how they will be used is unknown.

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What Industry 4.0 Means for the Global Economy, Industry Wired, Dec 6, 2019. World Economic Forum in What Industry 4.0 Means for the Global Economy, Industry Wired, Dec 6, 2019.

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Fig. 1.7 Children’s internet infatuation. Source OECD in The Economic Value of the Advertisingsupported Internet Ecosystem, Interactive Advertising Bureau (IAB), June 2009

While parents may despise their children’s participation in the digital ecosystem, they are here to stay. According to one study, smartphone and internet addiction occur at 1.2% among three- to nine-year-olds with a high probability of addiction and 3.5% among teenagers.20 Some of these youngsters have no interest in offline activities such as outdoor sports and are on their phones for at least eight hours a day. South Korea has the maximum dysfunctional internet usage globally, both among children and adults.21 In the OECD, 90% of teenagers have a smartphone. They spend more than 18½ h per week online on average (Fig. 1.7). Only a tiny fraction of children do not use the internet. According to the American Academy of Paediatrics, video conferencing is acceptable for infants and toddlers (see Footnote 21). It believes that an hour of high-quality programming per day is sufficient for two- to five-year-olds. And some believe it is still far too conservative! Most studies indicate that technology enables children to maintain contact with old friends and make new ones (see Footnote 21). Despite the negative consequences of excessive digital devices, 84% of 15-year-olds across the OECD claim online social networks were beneficial. More than half feel dreadful if they don’t have access to them.

20

South Korean government survey in How children interact with digital media, The Economist, Jan 3, 2019. 21 How children interact with digital media, The Economist, Jan 3, 2019.

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What is concerning is that the middle class is increasingly using screens to maintain a social lead, with youngsters from affluent homes enrolling in exclusive lessons to learn skills such as “How to be a YouTuber” that impoverished parents cannot afford. The digital divide is brutal. The story is the same on the other side of the Atlantic about raising kids becoming a new battlefield in academic oneupmanship. Granted that conducting an online search or watching an educational video is not dissimilar to studying together. The issue is that children today may struggle to garner their parents’ attention because they, too, are constantly absorbed by their smartphones. Welcome to the digital world (see Footnote 21).

1.2

The Digital Enablers—Internet, Smartphone, Data, AI

This section will discuss the pillars on which the digital ecosystem is built: the internet, which provides the glue to the digital economy, smartphones, our gateway to the digital world, data, the elixir of the digital game, and artificial intelligence (AI), the magic bullet to unearth the insights of the digital landscape.

1.2.1

Internet—Stitching the Digital Economy

The first cornerstone of the digital economy is the internet which has ushered in a new social order over the last two decades. Over a million people who run oneperson businesses online rely on the internet—120,000 trade full time on eBay, another 500,000 trade part time, and an equal number earn a living from advertising revenue generated by blogs.22 Around 70 h per month is spent equally on the internet and in front of the television. Over 10% of non-food items are sold online. The cross-border flow of digital data, such as web searches, e-commerce transactions, video streaming, and IoT interactions, has increased 45 times since 2005 and is expected to continue growing at a rate much faster than the global economy over the next few decades.23 New devices and services have infiltrated every corner of life, sucking up an increasing amount of time (Fig. 1.8). Historically, small businesses have accounted for more firms engaged in transnational digital goods, services, and information. Nearly 86% of technology-based startups now conduct cross-border business, which was unthinkable before the internet, when large corporations dominated global trade. It is safe to conclude that most of the wealth generated by cross-border trade could (although slowly) trickle down to the 80% of the population that has not benefited as much as it should (see

22

The Economic Value of the Advertising-supported Internet Ecosystem, Interactive Advertising Bureau (IAB), June 2009. 23 Has the world reached peak trade? The Time, Oct 24, 2016, pg. 44.

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Fig. 1.8 Daily time spent on internet. Source GroupM in Worldwide quarterly mobile phone forecast, IDC, March 2012

Footnote 22).24 The internet creates wealth for individuals, businesses, and governments. The global e-commerce market is worth more than $8 trillion per year. Internet-related venture capital transactions now account for more than 20% of total transactions. In advanced economies, more than one-fifth of marriages are initiated online (Kumar & Sundarraj, 2018).25 The five most valuable internet companies, Facebook, Amazon, Apple, Microsoft, and Google, have a 44% stake in the Nasdaq gain.26 It appears as though there is no life without the internet. The internet, originally a network of computers and servers, has evolved into a way of life, influencing how we work, search, shop, connect, and meet people. Look at the telling facts. The internet’s total contribution to global GDP exceeds Canada’s or Spain’s GDP and grows faster than Brazil’s. Over four billion people are now on the internet; another 200 million are added every year. However, growth has slowed to less than 8% year over year (Pélissié du Rausas et al., 2011). In the G-20 economies, the internet economy exceeds $4.2 trillion: Only four countries have a GDP larger than this. Mobile users spend more than 80% of their time on just three apps: Facebook, WhatsApp, and Chrome27 ; the global value of web advertising exceeded $455

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Worldwide quarterly mobile phone forecast, IDC, March 2012. This chapter has drawn material from my co-authored book Kumar and Sundarraj (2018). 26 Nasdaq: http://www.nasdaq.com/symbol/ixic/stock-chart. 27 Time, June 20, 2016. 25

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Fig. 1.9 Internet is a large contributor to the economy. Source Pélissié du Rausas et al. (2011)

billion in 2021 and could reach a staggering $645 billion in 2024.28 Since 2010, digital banking has enabled a 30% reduction in physical transactions, and half of the customer lending occurs without the customer ever visiting a branch.29 The United Kingdom is the world’s most internet-savvy country.30 One lingering fear is that widespread mobile internet use will result in job losses, even though the reality appears to be quite different. While extensive internet use has reduced the need for intermediaries, it has also created more jobs (software engineers, online marketers, and delivery people) than it has eliminated (Kumar & Sundarraj, 2018). In developing countries, 3.2 new jobs are created for every job lost (Manyika et al., 2013). In France, for every job lost to the internet, 2.4 jobs were created (Pélissié du Rausas et al., 2011). The contribution of the internet to economic growth varies by country and is a function of internet penetration and usage. Sectorally, the internet is a significant contributor to the world’s economy. In an internet-centric country like the UK, the internet contributed 11% to the country’s growth over the last 15 years. The internet has irreversibly altered the global landscape, bringing about the “death of distance,” creating a flat world. The internet’s impact is far-reaching and transformative. The internet has a larger weight in the global economy than agriculture, utilities, and other well-entrenched industries (Fig. 1.9).

28

Statista in The Future of Innovation and Employment, Oxford Martin School and Citibank, Feb 2015. 29 The Future of Innovation and Employment, Oxford Martin School and Citibank, Feb 2015. 30 The Internet Economy in the G-20, Boston Consulting Group, March 2012F.

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Fig. 1.10 Who benefits the most from the internet? Source Pélissié du Rausas et al. (2011)

It may seem counterintuitive, but 75% of the economic value generated by the internet goes to brick-and-mortar firms (companies that would exist regardless of the internet). In comparison, only 25% is appropriated by pure internet players (companies that exist solely because of the internet, such as pure e-commerce players) (Fig. 1.10). The impact of the internet on small and medium-sized businesses (SMEs) is even more dramatic. SMEs generate two-thirds of all new jobs (OECD) (Bezerra et al., 2015). Internet-savvy SMEs outperformed their non-internet-centric counterparts in productivity, job creation, and export volume and grew twice as fast as their low-web-intensive counterparts (Pélissié du Rausas et al., 2011). In general, SMEs in developing economies are more web-savvy than their counterparts in the developed world. Closing the “mobile divide” between leaders and laggards could create 7 million jobs in several advanced economies (Bezerra et al., 2015). The results are even more compelling in the UK, where high-internet-intensity SMEs grew revenues six times faster than SMEs that did not use the internet (Kumar & Sundarraj, 2018). Over one billion people will join the connected world over the next four years, adding significant value to the value already created by the internet, at which point three-fifths of the world’s population will be netizens.31 Mobile subscribers will surpass those who have access to electricity or running water in their homes. Despite the value delivered by the internet, many people remain without access, indicating the internet’s untapped potential (Fig. 1.11). Apart from economic benefits, increased mobile internet penetration and usage result in societal benefits such as improved health care, education, and nutrition. Enhanced distribution of life-saving information via mobile networks has saved 1 million lives in sub-Saharan Africa by preventing HIV, malaria, and perinatal conditions. Food spoilage has been reduced by tracking food distributions and monitoring and optimizing food temperature and delivery routes using mobile

31

ITU in On and Offline, The Economist, Sept 24, 2016.

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Fig. 1.11 Untapped potential of the internet. Source On and Offline, The Economist, Sept 24, 2016

technologies. Reduced food wastage saves enough food from feeding 40 million people, or nearly 80% of Kenya’s population (Bock et al., 2015). By 2025, health care will see a 10–20% cost reduction in treating chronic diseases via remote health management (IoT). The savings are significant when treating chronic diseases globally would cost $15.5 trillion. Through remote patient management in just one application—supervision of chronic diseases such as heart disease and diabetes— mobile internet could save more than $2 trillion per year by 2025 (Broderick & Lindeman, 2013). Mobile internet use in education has a colossal societal impact. A conservative estimate is that education spending will reach $11 trillion by 2025; mobile internet would boost secondary graduation rates by 5–15% and productivity gains in higher education, corporate, and government training by 10–30%. Mobile computing can transform K-12 education by increasing productivity by 10–30%, resulting in an annual economic impact of up to $1 trillion.32 Mobile apps can increase productivity by 60–70% in public services (such as information requests, tax refunds, license applications, and vehicle registration renewals), resulting in up to $500 billion in annual value by 2025 (Manyika et al., 2013). The pandemic has made remote learning a near imperative.

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Socio economic impact of mhealth: An assessment report for the European Union, PWC, May 2013 http://www.gsma.com/connectedliving/wp-content/uploads/2013/06/Socio-economic_ impact-of-mHealth_EU_14062013V2.pdf.

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Retailers have embraced mobile commerce wholeheartedly. Subway, the restaurant chain, uses geotargeting technology to send notifications about special deals to the phones of Subcard owners when they are near a store (Kumar & Sundarraj, 2018). Groupe Casino in France uses near-field communication (NFC) labels on shelves for visually impaired buyers in downloading product information to their phones (Bock et al., 2015). By 2025, retail shopping will have shifted dramatically, with between 40 and 70% of retail transactions expected to be online, resulting in a potential annual impact of up to $400 billion. Mobile payments have reduced processing costs by 50–70% compared to cash/paper transactions and increased GDP by 3%, resulting in a $300 billion economic impact (Pélissié du Rausas et al., 2011). Worldwide e-commerce sales reached $4.3 trillion in 2020, accounting for nearly 15% of all retail sales, up from almost 9% in 2016.33 It is expected to reach $6.4 trillion by 2024. Online sales will increase by 50% to £100 billion by 2021.34 And to think that Napoleon once mocked Britain as a “nation of shopkeepers.” It has evolved into a country of online shoppers in the modern era. The British spend the most on online shopping in any country. While the average annual online purchase in the United States is $1773, the figure for the United Kingdom is $2535, making the UK one of the most developed e-commerce countries.35 However, this has had a devastating effect. As more people shop online, brickand-mortar stores are closing, and shop assistants will lose their jobs. By 2025, the retail industry could lose a third of its 3 million jobs (see Footnote 33). Retail employs 15.9 million people, or one in every nine Americans. There has been a steady decline in retail jobs, resulting in 30–50% surplus retail stores. At the same time, 4.8 million jobs could be jeopardized.36 Retail job losses are as severe as those in manufacturing. And this is a global trend. Japan’s retail sales decreased from $63 billion in 2000 to $44 billion in fifteen years. Automation has put an additional 192 million retail employees in jeopardy (see Footnote 36). The growth of e-commerce and the decline in retail employment are inextricably linked. About 70% of e-commerce sales consist of books, films, and music, nearly 70% of which will reach almost 80% by 2022. Approximately one-quarter of clothing and accessories are sold online (see Footnote 36). Worse yet, for every percentage point increase in e-commerce, brick-and-mortar retail margins decline by about half a point (see Footnote 36). Amid this uproar, Walmart, the venerable brick-and-mortar retailer, is fighting for supremacy. Walmart is ubiquitous, with approximately 90% of Americans not required to travel more than ten miles to shop at a Walmart store and with

33

EBay tries to push past its tag-sale roots, Bloomberg Businessweek, Oct 3–9, 2016. All that is solid melts into air, The Economist, Nov 19–25, 2016. 35 The Economist, Nov 19–25, 2016. 36 Sorry, we’re closed, Economist, May 13, 2017. 34

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about 80% of them shopping at Walmart in 2014. In 2012, Walmart shoppers outnumbered US presidential election voters by a two-to-one margin. The internet is posing a threat to this colossus (Kumar & Sundarraj, 2018). Walmart’s share of retail sales has been declining in recent years as Amazon, a relatively new upstart, has surpassed Walmart. Amazon alone offers 1.8 million items of women’s clothing in terms of selection, which dwarfs Walmart’s 120,000-item assortment.37 Like Barnes and Noble, Walmart may be the next company to be “Amazoned” by the internet’s sheer power. Walmart, on the other hand, is fighting back. With nearly 10% of Walmart purchases now made in-store via mobile devices, Walmart is effectively converting each of its 11,000 locations into its multichannel shopping island, complete with its product and price promotions. Amazon, the e-commerce behemoth, alone accounts for half of all online transactions in the United States and has a 5% retail market share, roughly half of Walmart, the retail sector’s largest company.38 Over $1.3 trillion in products were researched online and then purchased offline (ROPO) by G-20 buyers, representing 7.8% of consumer spending or $900 per wired consumer. As a result of ROPO, the internet economy has a more significant impact on global economic output than previously estimated. ROPO would add 2.7% to GDP across the G-20 if it were to be included while computing GDP (see Footnote 30). Without a doubt, the internet has improved the lives of millions of people. It has increased productivity, sparked innovation, and enabled people to connect and overcome language barriers.39 The internet’s multiplier effect on the economy and society is staggering. For every job created on the internet, other 1.5 jobs are created elsewhere in the US economy. Their wage bill is approximately $300 billion, or roughly 2% of the US GDP. Americans spend more than 70 h per month on the internet, spending more than $680 billion (Quelch, 2009). Nearly three-quarters of internet users in less developed countries do not communicate in English, but this has not stopped the internet from improving the lives of millions worldwide (Nottebohm et al., 2012). The maturity of the internet is strongly correlated with an increase in quality of life (Choi & Yi, 2009). Each ten-percentage-point increase in broadband penetration results in a 0.9–1.5% increase in per-capita GDP growth (Choi & Yi, 2009). No wonder many believe that the internet’s advent is as significant as the invention of electricity (Carr, 2009).

1.2.1.1 Consumer Surplus Generated by the Internet There does appear to be free lunch in the world. Internet users don’t pay for any services (but provide the crucial data to grease the digital engine). Email is complimentary. Google Maps is gratis. YouTube is free. Social networking is without charge. A measure of these services to the consumers is known as consumer surplus. Consumers benefit the most, as the internet generates a significant consumer

37

Thinking outside the box, The Economist, June 4, 2016. Amazon’s empire, The Economist, March 25–31, 2017. 39 Open for Business: the economic impact of Internet openness, report of Dalberg Global Development Advisors, March 2014. 38

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Fig. 1.12 The consumer is the biggest beneficiary of internet. Source Pélissié du Rausas et al. (2011)

surplus.40 Consumer surplus41 is substantial, with mobile users helping to tune $500–1500 per user in developed countries and to a lesser extent (by about 30%) in developing countries. Consumer surplus results from the widespread usage of smartphones to access the internet. Internet usage generates more than $28 per month in consumer surplus in some countries, totaling more than $64 billion in the United States and $135 billion in 30 aspiring countries (Nottebohm et al., 2012).42 With the widespread use of the internet, the economic value of this surplus could reach $4.8 trillion annually by 2025 (Fig. 1.12). Consumer surplus occurs due to consumers’ (mostly) unrestricted access to services such as email, browsing, search, online reservation, and cooperative modules such as Wikipedia, blogs, and social media networks. The extent of monetizing such consumer surplus in any country is determined by how developed internet usage is and ranges between e13 and e20 per month (Pélissié du Rausas et al., 2011) (Fig. 1.13). The UK generates the highest consumer surplus, demonstrating the most internet-savvy economy. How to quantify consumer surplus? The internet has resulted in an explosion of freely available information products, ranging from Instagram photographs, Google searches, and Facebook newsfeeds. What are they worth? Measuring

40

Internet matters: The Net’s sweeping impact on growth, jobs, and prosperity, McKinsey Global Institute, May 2011. 41 Consumer surplus—the perceived value that consumers themselves believe they receive, over and above what they pay for devices, apps, services, and access. 42 Internet Advertising Board, Assessing the consumer benefits of online advertising, July 2010.

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Fig. 1.13 Consumer surplus generated on the internet. Source McKinsey, Internet Advisory Board, Yankee group in Internet Advertising Board, Assessing the consumer benefits of online advertising, July 2010

the economic impact of the internet’s numerous changes to individuals’ lives is exceedingly tricky since so much of it is free.43 It is simpler to compute the losses Wikipedia has incurred to encyclopedia producers than quantify the benefits Wikipedia has generated for users, such as those who have discovered new treatment options for cancer (thus saving lives). Capturing social welfare is a wellknown challenge in economics. GDP is a monetary transaction-based metric, not a welfare metric. For example, if a person is prepared to pay $60 to the NY Times best-seller but buys the same book on the internet for $40, the difference, $20, is termed “consumer surplus” (see Footnote 43). The extent of internet usage included in GDP—for example, Google’s ad sales—significantly underestimates the contribution of the internet because the consumer surplus accruing to Google’s users is not considered. The tricky question is by how much (see Footnote 43). In 1999, the first attempt was to calculate consumer surplus by constructing a demand curve (Greenstein & McDevitt, 2009). Assume that a person pays $40 per month for internet access in 2000. By 2006, the widespread adoption of broadband had reduced the actual cost to $10. That subscriber enjoys a $30 annual consumer surplus, even as the lower price attracts additional subscribers. By 2006, broadband had produced $39 billion in revenue and a consumer surplus of anywhere between $5 and $7 billion per year. It will be significantly higher now. Out of this consumer surplus, $50 million was ascribed to Wikipedia based on its share of online viewing

43

Net benefits, The Economist, 9 March 2013.

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(see Footnote 43). These figures are almost certainly exaggerated. The emergence of services such as Instagram and Newsfeeds has significantly increased the value of internet access. As a result, the surplus will be more significant as well (see Footnote 43). Additionally, consumers may overlook the worth of complimentary internet services while determining how much to spend on internet access. According to one estimate of the value of free internet services, they produced $38 billion in consumer surplus in the US and $82 billion in Europe. Sixteen percent of total consumer surplus in the US and Europe was attributed to email, while search accounted for 15% and social networks accounted for 11%.44 Another indicator of consumer surplus is the time saved through the internet (Greenstein & McDevitt, 2009). Assuming that time is worth $30 per hour (the average wage in America in 2020), Google search, for example, generated $700 in consumer surplus per user per year (see Footnote 45). Hal Varian, Google’s chief economist, calculated that the average user would save 3.75 min per day. Erik Brynjolfsson and JooHee Cho of MIT developed a framework for quantifying the value of extremely cheap online applications based on the perception that while people do not pay for any internet service, they must still pay “attention” while using the internet. His “attention economy” model predicts an annual consumer surplus accrual of approximately $21 billion between 2003 and 2010 due to free internet sites.45 Another technique is to quantify the amount of time spent on the internet during leisure time. According to one study, Americans spent an average of 5.8 h per week on the internet between 2002 and 2011 (Brynjolfsson & Oh, 2012) (estimates for more recent years are not available). They proposed a framework for estimating the consumer surplus from the internet in their paper. This “time-use model” calculates the consumer surplus in dollars derived from both the time and spending shares. Between years ym and yn , the welfare gain from complimentary services on the internet was calculated using the generic equation (Brynjolfsson & Oh, 2012). Welfare gain =

yn ( ∑

EVtL − EVt−1 L

)

ym

Equivalent variation46 (EV) is one way to quantify welfare gain between the periods ym and yn . A model to investigate a framework for quantifying the value of highly low-cost online applications, based on the presumption even while people

44

McKinsey in “Economic Value of Google,” Presentation by Hal Varian, Chief Economist, Google. 45 “Economic Value of Google,” Presentation by Hal Varian, Chief Economist, Google. 46 For a rigorous analysis of the model, please refer to the journal paper Brynjolfsson and Oh (2012).

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may not spend any money, their period of “attention” must be quantified. As a result, consumer surplus value is compared using two distinct approaches: one centered on direct market expenses and another on the period spent consuming services rendered free of charge. Suppose we begin by assuming that internet at ym was not available in your neighborhood. The question is how much additional compensation is to be provided to a consumer to achieve the same welfare level as the internet. The conditional difference between expenditure functions can obtain equivalent variation with and without the internet. The study concludes that a differential value must be attached to the extent that consumers value the time spent on the internet (compared to other options available for spending time). This differential is valued at about $560 billion in 2011, or $2600 per user. If this surplus expansion had been included in GDP, it would have increased economic growth by nearly 0.4 percentage points since 2002 (Brynjolfsson & Oh, 2012). These are impressive figures but should be viewed with caution. Is the user likely to pay $2600 for internet access? Should not other free pastimes such as jogging in the park or, worse, spending quality time with your kids be equally valuable? Additionally, the internet detracts value in other ways: Productivity is lost due to constant Twitter checking, and human interactions are replaced by email. However, if we move forward to 2021, today’s estimated net consumer surplus would be significantly higher, as consumers spend considerably more time online (see Footnote 43).

1.2.1.2 Internet of Things (IoT)—The Disruptive Force While the internet initially connected computers (and later phones), the Internet of Things (IoT) is a web of interlinked devices referred to as “things” implanted with sensors and software designed for the interchange of data with other gadgets (including human beings fitted with health monitoring devices) via the internet (Rouse, 2019). The Internet of Things is unquestionably the next big computing concept. The Internet of Things (IoT) is an awkward moniker for a significant concept. It signifies that, despite all the changes brought about by the computer revolution, it is only getting started. The advent of IoT will extend the benefits—and drawbacks—of computerization to everything else, as it becomes embedded in various non-computer items, ranging from factories and toothbrushes to pacemakers and beehives.47 The magic of computers is that they imbue machines with the ability to calculate, process information, and make decisions previously reserved exclusively for biological brains. The IoT envisions a world in which this magic is pervasive. Numerous small chips will be woven into buildings, cities, clothing, and human bodies, all connected via the internet.

47

Drastic falls in cost are powering another computer revolution, The Economist, 12 Sept 2019.

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A closer examination reveals a steady stream of mundane benefits. Some will arise out of necessity. Microchipped garments could instruct washing machines on how to handle them. Intelligent traffic systems will reduce wait times at traffic lights and improve the distribution of automobiles within a city. Some of these will be the productivity gains that are the primary drivers of economic growth. For example, data from factory robots will enable algorithms to forecast when they will fail and schedule maintenance to prevent this from happening. Sensors implanted in farm animals will detect early signs of illness and micromanage their feeding. Collectively, those benefits will result in a more profound change. By gathering and processing vast amounts of data about itself, a computerized world’s inhabitants will be able to quantify and analyze a wide variety of previously intuitive and imprecise behaviors (see Footnote 47). The Internet of Things aspires to accomplish for information what electricity accomplished for energy. As befits such a grandiose ambition, the IoT’s proponents are fond of huge numbers. By 2021, total spending on it will reach $520 billion.48 Another study estimates that there will be a trillion such devices by 2035, implying that computerized, networked gadgets will outnumber the humans who control them by over a hundred to one.49 Another is even more optimistic about the future: It estimates that the IoT will have an annual economic impact of up to $11.1 trillion by 2025 (see Footnote 44). The rapidly declining costs have been the driving force behind IoT’s explosive growth. Today’s cost of computation is roughly a hundred millionth of what it was in the 1970s when the first commercial microprocessors became available. A megabyte of data storage costs approximately $9200 in 1956 ($85,000 at today’s prices). It is now only $0.00002 (see Footnote 47). Between 2004 and 2020, the average cost of the type of sensor used in the IoT decreased from $1.30 to $0.38 in 2020.50 While the internet connects the computers, IoT will tie all living beings into one tight embrace! Pampers has introduced a sensor that attaches to disposable diapers. It monitors sleep patterns and notifies parents via smartphone when their little darlings require diaper changing (see Footnote 47). “Within a few decades, computers will be integrated into almost every industrial product,” computer scientist Karl Steinbuch predicted in 1966. Over 50 years ago, a prediction had proven to be astonishingly accurate. Today, IoT is a wellestablished reality that can irreversibly alter every facet of society, economy, and environment (Fell, 2014). The Internet of Things is a platform that enables heterogeneous devices (including humans via wearable devices) to communicate and exchange data (Brown, 2016). IoT reaffirms our commitment to connecting the

48

Bain & Company in Net benefits, The Economist, 9 March 2013. Arm Holdings in Machines that shop for themselves promise to save time and money, The Wall Street Journal, April 7, 2021. 50 Goldman Sachs in Drastic falls in cost are powering another computer revolution, The Economist, 12 Sept 2019. 49

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physical world to computer-based systems, paving the way for cyber-physical systems (CPS). As a result, enhanced accuracy, increased efficiency, and economic value creation in the cyber world are achieved with less human intervention.51 General electric predicts that the Internet of Things will be the most disruptive force in the coming decades.52 Using IoT-enabled devices and industrialized robots would reduce the total cost of ownership for business operations by 30%.53 By 2022, the developed world’s life expectancy would have increased by half a year due to the widespread adoption of wireless remote health management technology (see Footnote 52). By 2025, connecting physical and digital devices via IoT can generate up to $11 trillion in economic value per year. A third of that amount is generated through manufacturing.54 Could the Internet of Things cause havoc? “The Internet of Things, like the Internet, has the potential to transform the world. Perhaps even more so,” MIT’s Kevin Ashton says, who coined the term “Internet of Things.” These intelligent and pervasive devices will become an integral part of everyday shoes, food packaging, and home appliances. Almost everything becomes remotely monitored. Convenience, sheer utility, and advancements in microtechnology will all contribute to the widespread adoption of IoT, which will benefit the economy enormously.55 SoftBank of Japan’s acquisition of ARM Holdings for an astounding $32 billion was predicated on the explosive growth of IoT devices. The rapid growth of IoT will usher in a world where there will be 40 times as many devices as people within the next few years.56 Estimates of the economic impact of IoT vary, but they all agree on one point: The value of IoT will be in the trillions of dollars range. The economic value of IoT on the global economy (the sum of increased sales and decreased costs generated or transferred across businesses between 2013 and 2022) (Bradley et al., 2013) is estimated to be in the range of $14.4 trillion by 2022, significantly higher than McKinsey’s estimate of $11 trillion. By 2020, IoT was expected to exceed 20–50 billion units but has fallen short of this target (see Footnote 56). Numerous imperatives drive the economic value [estimated at $14.4 trillion (see Footnote 56)] realized through IoT, achieved through increased revenues and cost savings (Fig. 1.14). By implementing improvements in business process execution and capital efficiency, IoT enables improved asset utilization by reducing Sales, General and Administrative (SG&A) and Cost of goods sold (COGS). The value

51

Internet of Things: Science Fiction or Business Fact? Harvard Business Review. November 2014. 52 The rise of superstars, The Economist, Sept 17, 2016. 53 Gartner Predicts Big Change for Digital Business: Will You Be Ready? Gartner Symposium, ITExpo, 2014. 54 Machines learning, The Economist, Dec 3–9, 2016. 55 Six Technologies with Potential Impacts on US Interests out to 2025, National Intelligence Council, April 2008. 56 Internet of Things—a 40 trillion market http://www.slideshare.net/fullscreen/ValaAfshar/Int ernet-of-thingsslideshare/1.

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Fig. 1.14 How does IoT create value? Source Internet of Things—a 40 trillion market http://www. slideshare.net/fullscreen/ValaAfshar/Internet-of-thingsslideshare/1

created as a result is estimated to be around $2.5 trillion. Additionally, increasing employee productivity via labor efficiencies will result in $2.5 trillion in savings. Further, IoT contributes to waste reduction and process efficiency improvements in supply chain and logistics management, with a combined value of $3 trillion. The most significant impact of IoT is likely to enhance customer experience via network effect, which will account for more than a quarter of the total value created by IoT. Finally, the IoT’s influence on innovation, increased R&D ROI, decreased time to market, and the creation of supplementary revenue generation through new business models and prospects can generate $3.0 trillion in economic value. McKinsey’s estimates of the value that IoT is likely to generate are less sanguine but still significant, predicting an economic value of between $3.9 and $11.1 trillion annually by 2022.57 The chart illustrates the sectoral distribution of this value creation (Fig. 1.15). The maximum impact is seen in health care. Significant impact is likely to manage chronic diseases such as diabetes and cardiovascular disease. By remotely monitoring a patient’s vital statistics via implanted or attached sensors, proactive treatments can be initiated if values exceed predefined thresholds, avoiding costly hospitalization costs. With chronic disease treatment accounting for 60% of healthcare spending, remote monitoring has the potential to reduce costs by 10–20%, resulting in annual savings of up to $2.5 trillion by 2025. The additional value will be realized through improved monitoring of in-hospital patient care, with potential gains of 30–60 min per nurse per day in hospitals. By deploying IoT solutions, the negative impact of counterfeit drugs, a significant source of healthcare scourge, is mitigated. By embedding sensors in bottles and packages, counterfeiting on select medications can be reduced by 80–100%. The

57

The Internet of Things: Mapping the value beyond hype, McKinsey Global Institute, June 2015.

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Fig. 1.15 Sectoral economic impact of IOT. Source Manyika et al. (2013)

estimated annual value of counterfeit drugs is $75 billion, growing at more than 20% (Manyika et al., 2013). IoT’s deployment is diverse. From tracking product movement through a factory to monitoring water content in a farm; from capturing vehicular emissions to monitoring water flows through utility pipelines. The Internet of Things enables optimal asset management and opens new vistas developing new business models. Doctors, for example, can continuously collect information from their patients via wireless IoT sensors, thereby increasing the efficiency of chronic disease management and treatment. As opposed to periodic testing, continuous monitoring can result in up to a 20% reduction in treatment costs, equating to billions of dollars in treating congestive heart failure alone (Bauer et al., 2014). Schindler, the world’s largest elevator manufacturer, has cut elevator wait times by predicting elevator demand trends and allocating elevators optimally through IoT devices (Porter & Heppelmann, 2014). With human beings now included in the IoT ecosystem, the next wave of dramatic growth on the internet will occur due to the convergence of people, data, processes, and things, dubbed the “Internet of Everything.” The business opportunity presented by IoT is unmatched, particularly in terms of connecting the disconnected. Currently, 99.4% of physical objects that will eventually be connected to the Internet of Things remain unconnected. Such untethered objects mean that only 10% of the world’s 1.5 trillion connected devices are connected, highlighting the enormous potential for the IoT to grow.58 The Internet of Things will grow due to untapped applications such as smart homes, smart grids,

58

The Internet of Everything (IoE) Value at Stake in the IoE Economy, Aamer Azeemi, December 2013, CISCO.

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remote patient monitoring, intelligent factories, connected commercial vehicles, and education. Numerous enablers will contribute to the growth of IoT. Among them are increased processing power, exponential growth in cloud services, an explosion in mobile devices, exponential growth in big data, the availability of inexpensive microsensors, and quadratic growth in business. Additionally, a steady increase in processing power and a steep decline in bandwidth costs enable greater value extraction from IoT. Second, the advent of IPv6 eliminates IP address limitations. Third, the trend toward miniaturization in electronics is unabated. A solar-powered computer the size of a grain (1 × 1 × 1 mm) is possible, equipped with memory, a pressure sensor, a thin-film battery, an antenna, and a radio. Real-time signals such as temperature, pressure, and movement can be unearthed and communicated using cameras with a resolution of 250 × 250 pixels and sensors the size of a speck of dust (50 × 50 µm). Neither the computer nor the sensors will be visible to the naked eye in a few years. The requirement to gather intelligence more quickly and from various external sources in real time will increase the value of IoT to business entities and government agencies (see Footnote 56). The Internet of Things significantly impacts health care (via remote health monitoring), particularly in managing chronic diseases. Human beings are now a part of the IoT ecosystem via sensors (wearable devices) that monitor their health. Close monitoring of people through IoT has increased longevity and a higher quality of life, generating economic value. Wearable devices have exploded in popularity in recent years and now account for most IoT deployments. They will account for 73% of the $30.2 billion market by 2022, representing a more than threefold increase.59 Automobiles will also see significant deployment of IoT devices. Since 2007, every car manufactured in the United States has included a chip in each tire that measures and transmits real-time tire pressure data to the vehicle’s central computer. Electronics now account for 40% of the cost of a car, prompting a comment from an industry expert that “every car will be an iPad on four wheels.” IoT will be a jumble of numerous, unfamiliar, and widely dispersed objects. Millions of IoT devices will generate data about new devices and processes from remote locations unseen and beyond control. The ability of IoT to sense, collect, transmit, analyze, and disseminate data on a massive scale will provide humanity with the knowledge and insight it requires in the coming years, not just for survival but to flourish (Evans, 2011). Manufacturing is an area where IoT will have a significant impact. Apart from 2.5 to 5% productivity gains, IoT can significantly reduce manufacturing costs, particularly process manufacturing. The combination of low-cost sensors and high demand for process optimization in manufacturing enables an 80–100% adoption rate of IoT,

59

The Internet of things is revolutionising our lives, but standards are a must, Guardian, 31 March 2015.

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resulting in $2.3 trillion in economic value annually by 2025. By 2025, the deployment of IoT in civic services such as traffic management, waste management, and water supply could add another $300 billion. Other areas of IoT that can result in significant cost savings include crime management, precious material extraction, farming, retail, and vehicular accident control (Manyika et al., 2013). One oft-quoted example of IoT in homes is the ability of machines which can shop for themselves. As cars and refrigerators become smart, the next step in the evolution is for these devices to order goods and services without the intervention of their owners. It is not inconceivable to think a truck will pay parking charges. Or a refrigerator automatically orders if it senses that food inventory levels have gone below a preset level. The eventual goal of IoT is for smart devices to become so smart that they can act independently without the intervention of human beings.60 The above is not taken out of a sci-fi movie, and it’s already happening. When bristles wear out, smart toothbrushes can order replacements. Air filters can detect when to reorder. Nevertheless, these examples are few and far out today. It’s only a matter of time before it becomes mainstream and for the intelligent devices to talk to each other with no help from people. By 2035, the world will have more than one trillion connected devices (see Footnote 49). Machine-to-machine connections would form 50% of globally connected devices by 2023.61 Automated machines will be a boon to fleet logistics, says Daimler Trucks. The company has experimented with digital wallets that allow truck drivers to automate payments at selected gas stations and tolls. This system reduces fraud by linking a truck wallet to a unique truck identifier, preventing drivers from using a fuel card for personal use. A self-driving truck might be able to process an invoice when goods are delivered, generate a tax return, and decide on the logistics of its next journey (see Footnote 60). “That remains the vision-that the machine can administer itself.”62

1.2.2

Smartphones

The ubiquitous phone: According to a recent survey, people would rather leave the house without wallets than smartphones.63 The economic impact of mobile internet varies considerably, but McKinsey estimates that it will be between $3.7 trillion

60

Machines that shop for themselves promise to save time and money, The Wall Street Journal, April 7, 2021. 61 Cisco in Machines that shop for themselves promise to save time and money, The Wall Street Journal, April 7, 2021. 62 Daimler Trucks AG in Machines that shop for themselves promise to save time and money, The Wall Street Journal, April 7, 2021. 63 “Consumer priorities: Choice of taking wallet or smartphone to work in 2012,” Statista, www.sta tista.com/statistics/241149/consumer-choice-of-taking-wallet-or-smartphone-to-work-in-2012/.

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and $10.8 trillion globally by 2025 (Pélissié du Rausas et al., 2011). Improved service delivery, increased productivity, and the addition of 2–3 billion new users, primarily from developing economies, is the primary value generators for this economic value. Once considered a luxury item, internet-enabled mobile devices have become ubiquitous. Cell phones now outnumber people on the planet. In the United States, mobile devices account for more than 50% of web browsing and social media interaction. A surge in the processing power of handheld devices, combined with a precipitous decline in the price of smartphones, has resulted in their rapid adoption and widespread use. The impact on people’s lives has been dramatic. Mobile internet affects consumer behavior, creates opportunities for entrepreneurs, creates new products, and stimulates economic growth (Kumar & Sundarraj, 2018). Over half of the world’s population is already online, primarily via mobile phones. Nearly 40% of the global workforce, or 1 billion knowledge workers, earn their living online. Mobile internet can have a $1.7 trillion impact on internet-related GDP and a $25 trillion impact on employment costs associated with knowledge workers, which account for 70% of global employment costs (see Footnote 22). The 5G phones, alongside disruptive innovations such as the steam engine and the printing press, are often bracketed together. The 5G phones can download a full-length HD movie in less than a second, generate $3.5 trillion in economic output, and create 22 million jobs globally by 2035.64 By 2025, mobile devices will account for nearly all internet usage. While the app ecosystem has expanded exponentially, the increased use of mobile internet has resulted in a slew of new services. Six years ago, the value of mobile commerce exceeded $1 trillion, growing at a 56% compound annual growth rate. When combined with the 500 million mobile banking users, mobile commerce represents a massive market opportunity for players in the mobile money ecosystem.65 With the rapid adoption of smartphones, tablets, “wearables,” and the Internet of Things, mobile has had a significant and growing economic impact on the global economy. Mobile contributes between 2 and 4% to global GDP (11% in South Korea) and has grown at 10–20% annually 100. Globally, the mobile internet ecosystem generated nearly $3.3 trillion in revenue (Fig. 1.16) and directly supported the creation of 11 million jobs, equating to an increase of $1.2 trillion in the United States, Germany, South Korea, Brazil, China, and India. The ecosystem’s apps, content, and services layers are the primary drivers of revenue growth, fueled by the rapid growth of mobile shopping and advertising (Bock et al., 2015). The meteoric rise in mobile internet use has resulted in spectacular benefits for consumers. Over 2 billion people now own smartphones with internet access. A megabyte of data has decreased from $8 in 2006 to a few cents today, while download speeds have increased 12,000 times. The proliferation of smartphones has

64

The Greatest Generation is around the corner, Bloomberg Businessweek, pg. 41, Feb 20–Mar 5, 2017. 65 Businesswire, June 29, 2011-http://www.businesswire.com/news/home/20110629006369/en/ Yankee-Group-Sees-Global-Mobile-Transactions-Exceeding.

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Fig. 1.16 Mobile internet generated $3.3 trillion revenue. Source Bezerra et al. (2015)

compelled Amazon to add as much capacity to its cloud services daily as it would have required ten years ago to operate the entire global infrastructure (Kumar & Sundarraj, 2018). Last year, 80% of adults worldwide owned a smartphone and used it for more than two hours per day. As with earlier revolutionary inventions such as the clock, the book, and the integrated circuit engine, the smartphone has irreversibly altered global life and upended established business models.66 Mobile services can positively affect economic growth as technology advances by upgrading customers’ voice phones to high-value 4G/5G services. Each additional ten mobile phones per 100 people increase up to 0.6% in per-capita GDP growth; the effect is more significant in developing countries, estimated to be 0.8– 1.2% (Waverman et al., 2005). The World Bank estimates that a 10% increase in broadband subscribers results in a 1% increase in GDP (Qiang et al., 2009). Mobile applications can significantly boost an organization’s internal efficiency by increasing the productivity of sales representatives, frontline workers, and knowledge workers. At Boeing and BMW, assembly workers are equipped with virtual reality glasses that display online instructions and manuals explaining how components fit together (Dillow, 2009). The mobile internet increases interaction workers’ efficiency by reducing the time required to process email requests, mine for information, and collaborate with colleagues; the potential economic impact could be as high as $1.7 trillion per year by 2025 (Manyika et al., 2013). Jeffrey Sachs, a renowned economist, lauded mobile as the ultimate tool for alleviating poverty. Mobile technology has been the primary driver of economic growth and has profoundly transformed wired users’ lives. Payment apps are becoming more prevalent and, in some cases, completely replacing cash registers. Kenya has a significantly more mobile bank accounts than Kansas. However, the

66

The truly personal computer, Economist Feb 28, 2015.

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country is experiencing a critical physician shortage (7000 doctors for 40 million people). Mobile users can access a one-stop medical shop online, where they can diagnose illnesses based on observable symptoms and get directions to the nearest clinic or hospital. Additionally, they can have their treatments monitored (Bock et al., 2015). It is almost self-evident that widespread mobile phone use benefits the economy. Mobile telephony affects the supply side of the economy via operations carried out by mobile operators, network service providers, suppliers of commercial and support services, and a network of sales channels. Smartphones have reshaped the computer industry. Apple’s iPhone has catapulted the company to the world’s most valuable company, with revenues now exceeding the entire PC industry combined. The smartphone industry is the most lucrative, attracting the most venture capital and the brightest minds. Phones are incredibly customizable via apps; the App Cry Translator claims to interpret your infant’s mood; RunPee suggests the optimal time to use the restroom during a film and fills you in on the scene you missed. Uber, a well-known company, is now worth $92 billion due to its success in converting the mobile phone into a remote control for taxis. Tinder, the dating platform, is less than three years old but is already used by over 30 million people who swipe a billion times daily and receive 13 million matches (see Footnote 66).

1.2.2.1 Smartphone Multipliers While the internet serves as the foundation for the digital economy, the smartphone serves as the portal for accessing internet content. The smartphone has grown in popularity and appears to be indispensable. The smartphone’ multiplier market’ has exploded into a trillion-dollar economy quickly.67 To say smartphone sales are big business is stating the obvious. However, even that market may soon become insignificant compared to the revenues generated by accessories and services dependent on smartphone ownership—the so-called smartphone multiplier (Fig. 1.17). The smartphone sales may be dwarfed by the sales of multipliers such as addon memory and protective gorilla glass. The smartphone generated US$459 billion in revenue alone in 2020 (see Footnote 67).68 Along with the multipliers, the combined revenue exceeded US$900 billion (see Footnote 68). The smartphone multiplier alone is expected to tot-up sales of over half a trillion dollars in 2023 (see Footnote 67). Next to mobile ads, the mobile apps were a significant multiplier with $118 in 2020 (Cheney & Thompson, 2018) (see Footnote 67). It is no surprise that Google Play and Apple’s App Store were top app stores in 2020 and will continue to remain for the foreseeable future.69 They take away 75% of the total app revenue.

67

Deloitte Insights, Technology, Media, and Telecommunications Predictions 2020. Deloitte Global estimates based on various sources including 4A’s, “Zenith advertising expenditure forecasts,” September 2019; App Annie, The state of mobile 2019, 2019; International Federation of the Phonographic Industry, IFPI global music report 2019, April 2, 2019. 69 TMT Predictions in Elad Natanson, “The ‘Other’ Android app stores—a new frontier for app discovery,” Forbes, September 3, 2019. 68

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Fig. 1.17 Smartphone multipliers. Source Deloitte Global estimates based on various sources including 4A’s, “Zenith advertising expenditure forecasts,” September 2019; App Annie, The state of mobile 2019, 2019; International Federation of the Phonographic Industry, IFPI global music report 2019, April 2, 2019; Deloitte Insights, Technology, Media, and Telecommunications Predictions 2020

The remainder is shared by many smaller app stores, including Xiaomi, Samsung, and Huawei. China alone boasts of three hundred Android app stores (Natanson, 2019). The smartphone is accelerating the mobile game business in conjunction with app stores. Gaming is the most profitable application type of smartphone software, which brought in $79 billion in 2021. In addition, console games, boxed games, tablet games, and browser video games brought in another $97 billion in revenue.70 Mobile and tablet games sales could exceed $100 billion by 2022; 80% of this revenue is expected from smartphone users (Wijman, 2019). Part of the explosive growth is due to faster microprocessors and videographic processors, which have considerably enhanced the gameplay. Today’s fastest smartphones support 120 frames per second gaming with a screen refresh rate of 120 Hz, allowing slick computer graphics ideal for fast-paced games. Mobile game streaming may become even more compelling due to 5G’s low latency.71 While the animated icons on the smartphone continue to blossom, they have added a new dimension by adding value to companies and industries.72

70

Sam Cheney and Eric Thompson, “The 2017–2022 app economy forecast.” Hatch, “Hatch and Samsung extend 5G cloud gaming partnership to Europe,” September 3, 2019. 72 State of the App Economy Sixth Edition, ACT/The App Association, 2020. 71

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Fig. 1.18 The app economy. Source State of the App Economy Sixth Edition, ACT/The App Association, 2020

The smartphone is our gateway to the world. The tight coupling of mobile and cloud computing has been transformative for the world’s 3.4 billion people and small businesses.73 The human ingenuity of 10,000 years—from historical manuscripts to weather reports, pictures of outer space, and the tickling cat tantrums all accessible by the ubiquitous smartphone. Smartphones have been highly utilitarian. They can alert people with diabetes if their glucose levels cross the threshold level, help farmers spray pesticides through a drone, provide predictions on crop yield, or entertain users with an intellectually challenging game. Smartphone apps entertain us and provide unparalleled value.74 Users downloaded 175 billion apps last year, primarily from Google Play and Apple Store.75 The downloaded apps blend casual applications and enterprise apps, which help to enhance productivity, optimize output, and sustain customer relations. More than two-thirds of businesses deploy enterprise apps for in-house internal communication training, helping employees focus on a shared vision.76 Looking into the future, third-party enterprise app demand will surpass firms’ internal ability to develop five to one.77 The profile of the app economy presents a picture of humming activity (Fig. 1.18).

73

“App Annie Forecasts Growth of Global App Economy.” PR Wire, 27 June 2017, prwire.com. au/pr/72693/app-annie-forecasts-growth-of-global-app-economy. 74 State of the APP Economy, Roya Stephens and Adarsh Mahesh, The App Association. 75 “Global App Downloads Surpassed 175 Billion in 2017.” App Annie, 31 Jan. 2018, www.app annie.com/en/insights/market-data/global-app-downloads-2017/. 76 “Driving Competitive Advantage with Enterprise Mobile Apps.” Adobe, 2016, https://off ers.adobe.com/content/dam/offer-manager/en/na/marketing/Experience%20Manager%20PDF’s/ 2016/Adobe-Report_Driving_competitive_advantage_enterprise_apps.pdf. 77 “Gartner Says Demand for Enterprise Mobile Apps Will Outstrip Available Development Capacity Five to One.” Gartner, 16 June 2015, www.gartner.com/newsroom/id/3076817.

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Fig. 1.19 Mobile ads overtake TV ad revenues in 2020. Source Zenith, Advertising expenditure forecasts September 2019

Sectors such as agriculture, health care, and manufacturing sectors increasingly adopt app-enabled IoT into their systems by supporting mobile connectivity to cloud data. Exponential growth is predicated on 28.4 billion interconnected sensors integrated into worldwide devices and equipment (Afshar, 2017). The data collected are mined through machine learning to provide information on industrial production, predict farm yields, and improve patient recovery. BCG’s conservative estimate of spending of $276 billion on app-facilitated IoT in 2020 may have been conservative. It is likely to experience exceptionally swift growth after a prolonged straight-line growth over the next ten years.78 By introducing new efficiencies into our daily lives, the app economy has benefited consumers, businesses, industries, and the workforce (see Footnote 72). Despite the smartphone’s small screen, mobile advertising, the multiplier’s primary source of revenue, has thrived (Fig. 1.19). While the screen on the phone is small, it is nearly ubiquitous, heavily used, and intimately personal. Smartphone advertising will account for approximately US$176 billion of all mobile advertising (smartphone and tablet) in 2021, an increase of 18% year over year.79 Mobile advertising, which has already surpassed television advertising as the world’s most popular form of advertising, will continue to grow rapidly.80 More than half will be accounted for by mobile advertising (52% of total advertising revenue) by 2022 (see Footnote 80). Mobile advertising will also continue to

78

“Winning in IoT: It’s All About the Business Processes.” Boston Consulting Group, 5 Jan. 2017, www.bcg.com/publications/2017/hardware-software-energy-environment-winning-iniot-all-about-winningprocesses.aspx. 79 See Footnote 67. 80 Zenith, Advertising expenditure forecasts September 2019, September 2019.

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proliferate over the next few years, aided by new mobile advertising formats. Noteworthy is that the growth of online advertising is led by online video and social media—genres that have benefited significantly from sustained advancements in smartphone technology (Murphy, 2019). The seamless commerce capability of the smartphone is appealing to advertisers. A user can identify, see, buy, and evaluate a product with a few taps. When the data of credit cards are prestored and combined with secure authentication, transactions can happen almost instantly. This facility is offered in various products, including the well-known Kylie Jenner’s makeup (Williams, 2018). Additionally, newer features such as augmented reality filters may enable people to experiment before purchasing. The integrated feature of the smartphone makes it a convenient multipurpose tool. It is in sharp contrast to conventional media such as TV and print, requiring a switch to a connected screen to search for a product. The visual search may also help mobile advertising revenue (a.k.a. “reverse image search”).81 Smartphones use images rather than text for visual searches. Smartphones with exceptional photographing capabilities are ideally suited for visual searches; as the smartphone camera improves, visual search is expected to become popular (Rayner, 2019; Heisler, 2019). Visual search is already widely used in China, although it is still in its early stages in the rest of the world. In China, twenty-five percent of searches begin with an image. Alibaba’s visual search engine, Taobao, has a repository of 3 billion images of over 10 million products (O’Brien, 2018). Additionally, smartphones will dominate another ad format: app-installed advertisements, which will generate over US$60 billion in revenue by 2020 (Harris, 2018). Advertisements for additional applications are integrated with apps to encourage users to download other applications. Since smartphones are the most frequently used devices, they are the most likely candidate to deliver app-installed advertisements to users. It is no surprise that mobile advertising has accounted for almost all the growth in online advertising in the last ten years. Revenue from mobile advertising will zoom to $251 billion in 2021, accounting for more than 70% of the total. Desktop online advertising would still be a force to reckon with by bringing in a steady revenue of $102 billion per year (Fig. 1.20). Smartphones are the most favored device for making payments. Payments made through smartphones are the most popular way of paying for purchases in China; consumers used their phones to buy goods worth a staggering $41 trillion in 2018. Today payment gateways in China have become a norm, rapidly transforming China into a cashless country (Klein, 2019). One of the most significant technological developments is near-field communication (NFC) technology. NFC-based mobile payments authenticate each transaction using a one-time token; if the token is captured, it cannot be utilized for another transaction (see Footnote 69). This

81

Google, “Find related images with reverse image search,” accessed October 1, 2019.

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Fig. 1.20 Mobile is propelling online ad spend. Source Zenith, Advertising expenditure forecasts September 2019

integrated feature will be extensively deployed to speed up the processing of personal payments while also reducing fraud.82 It is unthinkable for the teeming billions today to live without a smartphone—or the inseparable apps, accessories, and supplementary devices that are a part of our daily living (see Footnote 67). The bottom line is that while smartphone device sales might be tapering off, multiple revenue streams advertising (content, hardware, and services) which feed off the phone show robust growth. Over $500 billion in 2020, these ancillary revenues will surpass smartphone sales in the next five years. The moral of the story is that a bigger opportunity lies outside the smartphone in the vast markets spawned by the phone (see Footnote 67).

1.2.3

Data—The World’s Most Valuable Resource

The most cliched phrase of this decade has to be: “The world’s most valuable resource is no longer oil, but data” (in the 1990s, it was the phrase “user friendly”). Antitrust legislators will intervene whenever a new commodity gives rise to a swiftly expanding industry to curb its flow. Oil, controlled by a few countries, took that exalted position a hundred years ago and was seen as a threat till the 70s. Similar apprehensions are expressed about data, the digital economy’s lynchpin.

82

European Central Bank, “Fifth report on card fraud,” September 26, 2018.

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The data economy has created an oligopoly (FAAMA—Facebook, Apple, Amazon, Microsoft, and Google) which seems unstoppable. FAAMA, which feeds on data, is the most valuable listed entity. In 2020, FAAMA made $160 billion in net profit on a turnover of $900. Amazon is the king of online retail, accounting for half the money spent in America. Two landlords, Google and Facebook, are responsible for almost all the growth in the US.83 Data in the digital economy are being generated at a frenetic pace. Two and a half quintillion bytes of data are produced daily; in other words, 90% of the data on earth were created in just the last two years (see IBM, 2017). Despite the frenzied pace, the data-driven economy is still in its infancy. In 2022, the global IP traffic will generate 150,700 GB per second and will continue to hurtle with a steeper trajectory.84 The data traffic profile shows a skewed profile: the Asia–Pacific and the US account for 70% of all digital traffic. Video data make up 90% of digital data, while private consumption accounts for 80% of the total, with the balance, accounted for by businesses and governments (figure) (see Footnote 84). Around 98% of all international data transmissions are via fiber optic submarine cables. Large technology companies are pouring in investments in these undersea cables (Bischof et al., 2018). Content providers now own or lease half of the undersea bandwidth (including FAAMA).85 The bulk of data centers (80%) are located in prosperous economies; the US alone houses 40% of the world’s data centers (see Footnote 11). More than businesses, it’s the consumers who generate most of the data in the world (Fig. 1.21). The by-product of data is the artificial intelligence-driven world order. Unlike the earlier oil-driven bipolar structure (OPEC and the rest of the world), the complex world order will emerge, especially given the data rate.86 AI will be responsible for $13 trillion by 2030 in economic activity and will determine the new powerhouses in the digital economy similar to oil in the previous century.87 China and the US will undoubtedly be leaders in the new economy. Data will fuel the rapidly evolving digital economy. A few years ago, the Economist predicted with uncanny precision that data replaced oil as the most treasured asset: “Whether you are running, watching TV, or simply sitting in traffic, virtually every activity generates a digital trace—more raw material for the

83

The world’s most valuable resource is no longer oil, but data, The Economist, 6 May 2017. Digital Economy Report, 2019, United Nations Conference On Trade And Development (UNCTAD), 2019, CISCO. 85 See New York Times, 10 March 2019, How the Internet travels across oceans. 86 Which Countries Are Leading the Data Economy? Bhaskar Chakravorti, Ajay Bhalla and Ravi Shankar Chaturvedi, January 24, 2019, Harvard Business Review. 87 mckinsey.com/featured-insights/artificial-intelligence/notes-from-the-ai-frontier-modeling-theimpact-of-ai-on-the-world-economy#part1. 84

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Fig. 1.21 Consumers generate more data than businesses. Source Digital Economy Report, 2019, United Nations Conference On Trade And Development (UNCTAD), 2019

data distilleries.” Algorithms extracting a wealth of information will be transformational and create “data blocks.” The new term in vogue will be “GDP—Gross Data Product,” a proxy for nations’ economic might.88 Data-centric life is so ingrained in us; it is unimaginable to live without Google’s search or Netflix or Amazon’s enticing Prime delivery, or endlessly checking for “like” for your post on Facebook. The oligopolistic tech companies are unfazed when antitrust proceedings are launched. Consumers are not complaining—they get all the services free of charge (they pay by providing data about themselves). The old yardsticks of anticompetitive behavior, such as dominant market share and predatory pricing (free services on the internet), are no longer valid in the digital economy. A consumer surplus is generated by the internet economy, which keeps the consumers happy. Concerns are different. The control of data by internet companies gives them enormous market swaying power. Traditional approaches to competition, developed during the oil era, appear outmoded in the “data economy.” What has altered the situation? Smartphones and the internet have increased data availability, pervasiveness, and value. Regardless of what you are doing, be it jogging, waiting for the traffic lights to change, or simply strolling in a mall, the digital economy will generate digital trace—the nectar for the data refineries. The

88

hbr.org/2019/01/which-countries-are-leading-the-data-economy. Which Countries Are Leading the Data Economy? by Bhaskar Chakravorti, Ajay Bhalla and Ravi Shankar Chaturvedi, January 24, 2019.

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next-generation internet, IoT, will generate data at an even more furious pace; IoTdriven autonomous cars will generate 100 GB per second when fully operational (see Footnote 83). The internet is very busy (Fig. 1.22). While raw data (just like crude oil) are practically useless, they create magic when refined by techniques such as machine learning. Algorithms can forecast stock price movement with uncanny precision, predict when a plane needs maintenance, perform precise actuarial calculations, and provide an accurate prognosis of any disease. Gene mapping can foretell when a person is likely to die. It is no wonder that old behemoths such as GE and Siemens claim to be data companies. This deluge of data corrects the competitive landscape indelibly. Technology behemoths ride on network effects: The more subscribers join, say Netflix, the Fig. 1.22 How much data is generated every minute? Source https://www.domo. com/learn/data-never-sleeps5?aid=ogsm072517_1&sf1 00871281=1

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more enticing others to join. Network effects have other positive payoffs for tech companies. There are additional network effects associated with data. By amassing more data, businesses can improve their portfolio of offerings, bring in more users, generate more data, etc. This virtuous cycle of data transformation is at the heart of data economics. Tesla, which aggregates data from its self-driving cars, harnessed the data to boost sales dramatically; it is now worth more than GM, a company with more than a century of lineage. Thus, vast data banks can provide a competitive edge to companies and act as protective moats (see Footnote 83). The data economy has given rise to a surveillance economy. Google pries on what people are looking for, and Amazon keeps tabs on people’s purchases; Facebook watches the social behavior. With a “God’s eye view,” big tech firms purvey activities even beyond their boundaries. They own app stores and operating systems and rent out computing power through their cloud offering. Because technology companies can predict market behavior, they build products proactively or acquire startups before it becomes threatening. Data provide big tech companies the power to stifle competition. Data can stifle competition by establishing entry barriers and early-warning systems (see Footnote 83). Facebook’s acquisition of WhatsApp for $22 billion falls under this category. That data have become the new oil is supposed to be the root cause of the hegemony of FAAMA. If that is one side of the story, there are several instances where data have provided positive economic value to society. Consider a few anecdotal examples. A telling example is a study conducted by Harvard Medical School. Diagnostic results of human pathologists and machine learning detecting breast cancer revealed insightful learnings. While pathologists were 96% accurate, the machine learning system delivered 92% accuracy. So, what’s the commotion about AI systems being more accurate? Harvard then blended the pathologists’ diagnoses with those of machine learning scans. The accuracy jumped to 99.5%, or five errors out of a thousand, eliminating 56,000 breast scan errors in the US alone. Machine learning systems need vast amounts of data to better human beings.89 Gene therapy is another example of data being a life-saver. Cancer patients are routinely put through gene sequencing for the oncologists to prescribe the mode of treatment. Gene therapy has been made possible by the genetic sequencing of hundreds of patients’ data. The secret of these life-saving advances owes it to exabytes upon exabytes of data.

89

Harvard Medical School in Forbes: Data Is the New Oil—And That’s A Good Thing, Kiran Bhageshpur, Forbes Technology council, Nov 15, 2019.

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To hold out the sanctity of Moore’s law, the microchip has to be shrunk to a few microns (less than 10 µm). Chip geometry has to shrink at an aggressive rate. As geometries become smaller, the amount of data generated during the processor design process increases exponentially.90 This data, design library, and simulation results become the manufacturer’s core intellectual property, providing him with a critical differentiator in this high-risk industry. Autonomous vehicles (AVs) ingest and process massive amounts of data. The benefits are well-known: safer roads, economic growth, and reduced rush-hour congestion. However, perhaps the most significant benefit is reducing greenhouse gases (GHG) produced by automobiles. Transportation currently contributes nearly 30% of GHG emissions in the US; the payoffs of data processing are significant. Autonomous vehicles can reduce GHG emissions by 40–60%.91 The direct impact of digital data on humanity depends on how data is monetized. Oil contributes to pollution, but it also aided in the emancipation of many of the world’s population from abject poverty. When we manage data’s dark side, the advancements in data fuels will be worthwhile (see Footnote 90). Is data akin to sunshine? The question exemplifies the numerous facets of data. Initially, data were compared to oil, implying that data are the future’s fuel. Recently, the comparison has been made to sunlight, as they will soon be ubiquitous and permeate everything, just like solar rays. Another view is that data should be viewed as infrastructure, more akin to roads, bridges, and railways that require constant investment requiring new organizations to maintain and expand. The proliferation of comparisons reflects the flexibility of data economics. The first characteristic of data is they are “non-rivalrous.” Because they are noticeably copyable, many people can use the data concurrently without preventing others from using them (unlike a “rivalrous” resource like money). However, they are also “excludable”: Technologies such as encryption allow for the restriction of who has access to them. Depending on how the cryptographic slider is set, data can be private goods such as oil or public goods such as sunlight—or something in between, referred to as a “club good.” This results in not one but three more or less distinct data economies, each with its ideology. The comparison with oil has limitations since oil is a rivalrous resource. However, as with oil, data must be processed before it becomes useful. Data tagging is a big industry employing thousands of people as gig workers. Before it is used, data must be “scrubbed” and “tagged,” making them free of flaws and inaccuracies. For example, Scale AI, a Silicon Valley startup, has 30,000 taggers to screen footage of autonomous cars to make sure that its software properly categorizes objects like homes and people on the streets.92

90

Forbes: Data Is the New Oil—And That’s A Good Thing, Kiran Bhageshpur, Forbes Technology council, Nov 15, 2019. 91 Environmental Protection Agency in Forbes: Data Is the New Oil—And That’s A Good Thing, Kiran Bhageshpur, Forbes Technology council, Nov 15, 2019. 92 Are data more like oil or sunlight? The Economist, Feb 20, 2020.

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Before data can fuel AI systems, it is passed through algorithms that train them to identify different faces, drive autonomous vehicles, and predict when the locomotives require maintenance. By combining different datasets, statistical patterns develop. It is possible to predict jet engine wear and tear through these patterns, for example, by combing weather patterns and usage history. Personal data are very precious in online advertising, where clicks are traded based on an elaborate digital sketch of each viewer. Like refined oil (gasoline, for example), processed data have enormous market value and are traded globally. In 2020, it was worth $378 billion globally.93 Data brokers trafficking in personal data track hundreds of data points for each person who has been on the net. The rich haul of personal data is sold (sometimes unethically) to financial institutions, stockbrokers, and telecom utilities, garnering over $21 billion in annual revenue (see Footnote 93). The information gleaned from data mining is highly valued. Google-owned Kaggle website continuously runs competitions for scientists and students to develop optimal algorithms to predict a building’s electricity consumption or unearth “deepfake” videos. These competitions carry prize money of over $1 million (see Footnote 92). Facebook and Google monetize data not by selling data but by selling insights to advertisers who can precisely target their ads. As the comparison with oil throws up challenges, the comparison to sunlight or air has more appeal. The compelling reason is data should be viewed as an asset jointly owned by society and, therefore, must be used equitably. Would not it be preferable to maximize the use of data? After all, this is the optimal way to maximize social wealth. Many regulators in Europe have come to view data as infrastructure. The new General Data Protection Regulation (GDPR) of the European Union mandates portability, the ability for customers to switch to other providers, including rivals. Establishing a fair and equitable data economy, which keeps the interests of providers and consumers (who are the data fodder), will be challenging.94 If the consumers and businesses see the data economy as symbiotic and trust each other, better data sharing will occur, resulting in optimal services for all the participants (see Footnote 92).

1.2.3.1 You Are the Data While data have been compared to resources (most notably oil), it is critical to recognize that some of its characteristics are unique. The crucial distinction is that, unlike oil, data are an intangible asset and exhibits a vital characteristic. They are “non-rival,” which means there is no prohibition of concurrent use of the same data by different people (unlike cash). Thus data can be used repeatedly at the same time and duplicated without getting depleted. The non-rival nature of data, when combined with the network effects, provides significant economies of scale benefits. While governments worldwide are worried about data privacy and

93 94

Strategy& in Are data more like oil or sunlight? The Economist, Feb 20, 2020. SITRA, Finland in Are data more like oil or sunlight? The Economist, Feb 20, 2020.

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Fig. 1.23 Virtuous cycle of data monetization. Source Digital Economy Report, 2019, United Nations Conference On Trade And Development (UNCTAD), 2019

cyber-security, users of internet services continue to provide their data for various services evoking the tenet of a “data privacy paradox” (see Footnote 11). While the services on the net are free, the users pay for them by providing their data continuously and thereby becoming a product themselves.95 The virtuous cycle of data monetization: As raw data increase in volume, harnessing it to provide insightful information to aid decision-making can be challenging. Firms have a virtuous value chain that distills the data to extract useful information. The cycle starts with data collection and takes through various stages of distillation. While raw data have limited use, the value increases at higher levels of distillation. This is akin to the oil refining process, where different stages of purification yield different oil products such as tar, naphthalene, and finally, the most expensive product, gasoline. The highest value is realized when data are mined until it yields readily deployable information for business purposes (Fig. 1.23). Digital platforms generate value through their ability to gather, process, transfer, warehouse, investigate, and derive helpful information. Additionally, the data can improve the algorithms used for automated decision-making during the product, process, or service development process (Mayer-Schönberger & Cukier, 2013). As a result, data and platforms are two inseparable components of the virtuous refining cycle that drive value in the digital economy.

95

The Conversation, 19 April 2018, If it’s free online, you are the product; and Forbes, 5 March 2012.

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Four broad categories of data monetization transaction platforms can be identified: advertising, e-commerce, product, and cloud (Srnicek, 2017). Companies such as Google and Facebook are advertising platforms strongly dependent on advertising income. For example, more than 80% of Twitter and Google’s total revenue comes from digital advertising and close to 100% from Facebook and Snapchat.96 These platforms have a vested interest in extracting and storing personal information critical to relevant ads being beamed at online consumers. Privacy concerns are a by-product of the digital ad model. E-commerce platforms enable buyers and sellers to connect via online marketplaces with lower transaction costs. Amazon, Alibaba, and eBay are just a few examples. E-commerce platforms sometimes morph into a “sharing economy” model assets like a car (Uber) or house (Airbnb) are shared, resulting in optimal utilization of shared assets. Digital marketplaces charge a commission on every transaction occurring on the platform. Apple, for example, has been charging 30% on all app sales.97 Additionally, e-commerce platforms garner data continuously from sellers and buyers to improve their services (targeted ads, recommendations based on previous purchases, etc.). Though Uber and Airbnb have become household names, similar platforms cater to niche markets. Essentially they aim to convert a physical asset into a rentable one. The bike-sharing service company, Mobike, promotes the idea of encouraging users to rent bikes instead of buying them. At the high end, Rolls-jet Royce’s engine division is in the business of renting jet engines. Businesses find this appealing since there is no need for capital investment and pay through their P&Ls.98 Cloud platforms serve as the foundation for the global economy in the twenty-first century. They provide the necessary infrastructure, including software, hardware, and development tools on-demand “as a service” on a pay-as-you-use basis. Google Cloud Platform, Amazon Web Services (AWS), Alibaba cloud, and Microsoft Azure are all examples of cloud platforms. Additionally, there are specialized manufacturing platforms (Siemens’s MindSphere and GE’s Predix) and agriculture (John Deere’s MyJohnDeere and Monsanto’s FieldView). Cloud computing benefits small, medium, and large businesses by being flexible, cheaper, and more secure than in-house servers. It does provide a level-playing field to small startups. It can lower the barriers to developing countries’ access to large-scale and cutting-edge computing needs (Greengard, 2010; UNCTAD, 2013).

96

Data from 10-Q SEC filings for 2018Q3. Reuters, 25 November 2018, How much for that app? U.S. top court hears Apple antitrust dispute. 98 The Economist, 8 January 2009, Britain’s lonely high-flier. 97

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In the digital economy, you are the data. After all, there’s no free lunch. The seemingly “free” digital economy extracts its price. The freebies entice you to provide data about yourself, your habits, friends, and purchases. The data come back to you as targeted (pesky) ads. It’s a symbiotic relationship. Without you, the digital economy may not exist; life may not be worth living without the digital economy. The online economy is fueled by tangible human beings, not abstract “data.” Until they are processed into something more valuable, the Datastream of 1s and 0s is of little use. You are that something. Seven of the world’s ten most valuable companies are technology companies. Except for Apple, which profits from the sale of expensive gadgets, and Microsoft, which charges businesses for its software and services, all other firms are built on the premise of connecting data to individuals. Google and Facebook are interested in learning about their users’ interests, activities, friends, and family. Amazon maintains a comprehensive record of consumer behavior. Tencent and Alibaba serve as digital wallets for hundreds of millions of Chinese; both companies have a sufficient understanding of their customers to provide widely used credit scores.99 Wherever technology companies have set the standard, others have followed. India’s Prime Minister Narendra Modi cites Facebook as an inspiration. Consumer brands across all industries gather data on their customers to improve the design and advertising of their products and services. Governments have examined these firms and implemented their systems to collect citizens’ data. That is evident in the ever-expanding reach of Aadhaar, India’s 1.3 billion-strong identification system required for nearly every government service imaginable. People have begun to pay attention to the amount of data they disclose. Yet few have altered their online behavior, boycotted snooping technology companies, or exercised their scant digital rights. Data are used to determine how people access services in the information age. Uber ratings determine who gets a taxi, Airbnb reviews decide which type of property you can stay in, and dating app algorithms determine who gets a date. Businesses sell you products based on your location and payment history (see Footnote 99). Your online searches may affect the prices you pay for items. Discounts and no-deposit offers are available to those with a good Zhima credit score, which an Alibaba subsidiary administers. Those who are unemployed receive few offers. The fossils of previous actions shape economic and social outcomes. The first step toward ensuring the new information age’s fairness is recognizing that it is the data that are not valuable. It is you. Data flows have resulted in new infrastructure, new businesses, new monopolies, new politics, and, most importantly, new economics. Digital information is unlike any other resource in that it is extracted, refined, valued, purchased, and sold in various ways. It modifies market rules and necessitates new regulatory approaches. Numerous battles will rage over who should own and profit from data.

99

How to think about data in 2019, The Economist, 22 Dec 2018.

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Fig. 1.24 The digital universe. Source IDC, Bloomberg in Data is giving rise to a new economy, how is it shaping up? The Economist, May 6, 2017

There is a great deal to argue about. According to IDC, the “digital universe” (the amount of data created and copied each year) will reach 180 ZB (180 followed by 21 zeros) in 2025 (Fig. 1.24). It would take over 450 million years to transmit it all via a broadband internet connection. Amazon uses trucks pulling shipping containers loaded with storage devices holding 100 PB to expedite the transfer into its data centers (a mere 15 zeros). Businesses are rapidly constructing data refineries to process the humungous amount of data. Amazon, Alphabet, and Microsoft collectively spent nearly $32 billion on capital expenditures and capital leases, up 22% yearly.100 Additionally, the quality of data has become incredibly varied. They are no longer primarily repositories of digital data—databases of names and other welldefined personal information, such as gender, age, and income. The new economy is more concerned with analyzing rapid real-time flows of frequently unstructured data: the streams of photographs and videos generated by social media users, the realms of information generated by commuters on their way to work, and the flood of data generated by hundreds of sensors in a jet engine. All sorts of devices are becoming data sources, from subway trains and wind turbines to toilet seats and toasters. The world will be densely packed with connected sensors, leaving a digital trail wherever people travel, even if they are not connected to the internet. Oracle puts it, “data will be the ultimate externality: whatever we do, we will generate it.” Most importantly, the data’s value is increasing. Initially, Facebook and Google used the data they collected from users to improve advertising targeting. However, they have discovered in recent years that data can be transformed into various artificial intelligence (AI) or “cognitive” services, some of which will generate

100

Wall Street Journal in Data is giving rise to a new economy, how is it shaping up? The Economist, May 6, 2017.

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new revenue streams. These services include translation, visual recognition, and personality assessment through the sifting of someone’s writings—all of which can be sold to other businesses for inclusion in their products. While evidence of the data economy is ubiquitous, its shape is only becoming clear. The data juggernauts, an increasing number of risk-takers, and many other firms are vying for a piece of the pie. All seek to capitalize on a potent economic engine known as the data-network effect, which involves using data to attract more users, generating more data, which helps improve services and attracts additional users. The more users who leave comments, “like” posts, and otherwise interact with Facebook, the more information Facebook gathers about them, and the more targeted the ads in newsfeeds become. Similarly, the more people use Google, the more accurate its search results become. The big firms draw their supply from the most abundant reservoirs. These firms are constantly on the lookout for new sources of information. Facebook uses user data to train some of its algorithms, for example, when users upload and tag friends’ photographs. Google’s digital butler, dubbed “Assistant,” improves by performing tasks and answering questions. This explains why its computers can accurately recognize hundreds of millions of people. On the other hand, Uber is best known for its affordable taxi rides. However, the firm’s estimated $92 billion valuation is due partly to its ownership of the largest data pool on the supply (drivers) and demand (passengers) of personal transportation.101 Similarly, for most people, Tesla is synonymous with high-end electric vehicles. However, its most recent models collect mountains of data, enabling the company to optimize its self-driving algorithms and update the software. The company had amassed 1.3 billion miles of driving data orders, more than Alphabet’s self-driving-car subsidiary Waymo. Startups that are “data-driven” are the new economy’s explorers: They prospect for digital oil, extract it, and transform it into innovative new services ranging from analyzing X-rays and CAT scans to determining where to spray herbicide on a field. Nexar, an Israeli startup, has developed an ingenious method of utilizing drivers as data sources. Its app transforms their smartphones into dashcams that capture footage of their travels as they go about their daily lives. The firm’s objective is to provide a variety of services that assist drivers in avoiding accidents—and that they, or their insurers, will pay for. One example is alerts about potholes or when a car suddenly comes to a halt around a blind corner. If several vehicles unexpectedly hit the brakes at the exact location on the road, this indicates the presence of a pothole or another obstacle. As with the oil markets, larger data firms acquire smaller ones. However, another aspect of the data economy would strike dealers in black gold as strange. By value, oil is the most traded commodity on the planet. By contrast, data are rarely traded, at least not for monetary value. That is a far cry from the vision many

101

Data is giving rise to a new economy, how is it shaping up? The Economist, May 6, 2017.

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had when discussing data as a “new asset class.” As the term implies, the data economy will be characterized by thriving markets for bits and bytes. However, it is primarily a collection of independent silos as it currently stands. Despite their abundance, data flows are not commodities: Each stream of information is unique, whether in timeliness or completeness. This lack of “fungibility,” in economic parlance, makes it difficult for buyers to locate and price a specific set of data: The value of each sort is difficult to compare to the value of other data. Trade is a disincentive because each side will be concerned about getting the raw deal. Researchers have only recently begun developing pricing methodologies, which Gartner refers to as “infonomics.” The pricing issue is a significant reason why one firm may find it more convenient to acquire another, even if it is primarily interested in data. This was the case when IBM reportedly spent $2 billion on the Weather Company to gain access to mountains of weather data and the infrastructure necessary to collect it (see Footnote 101). Another ruse is barter agreements: Sections of the United Kingdom’s National Health Service and DeepMind, Alphabet’s artificial intelligence division, have agreed to exchange access to anonymous patient data for medical insights extracted from it. Additionally, because data are intangible, it can easily be used for purposes other than those originally agreed upon. Additionally, it contributes to the confusion surrounding who owns data (in the case of an autonomous car, it could be the carmaker, the supplier of the sensors, the passenger, and, in time, if self-driving cars become self-owning ones, the vehicle itself). Hal Varian, Google’s chief economist, asserts that data exhibit “decreasing returns to scale,” which means that each additional piece of data becomes slightly less valuable, and collecting more data eventually stops adding any value (see Footnote 101). He asserts that what is more critical is the quality of the algorithms that crunch the data and the talent hired to develop them. Google’s success is “determined by recipes, not by ingredients.” Data flows have given rise to a simulated mirrored world. An army of doppelgängers is raiding the world. Wind turbines, aircraft engines, and other heavy equipment were first digitized. Electronic ghosts of smaller and larger objects, ranging from traffic lights, toothbrushes, and complete stores and factories, are joining them in the virtual realm. Humans, too, have begun to develop these alter egos. An electronic avatar for each national football player in America is planned. A large part of the proliferation of data is that the world is being replicated.102 These “digital twins” are far more than carbon copies of the original. Whatever occurs in the real world is quickly reflected in the digital twin. This enables a peek into the future. Sports coaches will run simulations, for example, and forecast when an athlete is likely to sustain an injury and adjust training routines appropriately.

102

A deluge of data is giving rise to a new economy, The Economist, Feb 20, 2020.

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Fig. 1.25 Data generated worldwide. Source IDC, Seagate in A deluge of data is giving rise to a new economy, The Economist, Feb 20, 2020

The emergence of these parallel worlds will result in a distinct economy. This evolution will necessitate establishing new infrastructure, markets, businesses, institutions, and possibly even geopolitical groupings. Mirror worlds can be used to optimize virtually any aspect of life, from the acoustics of an auditorium to the performance of an entire shipping network. They enable new business models: why purchase heavy equipment when its wear and tear can be quantified and thus hired by the hour? One of the reasons for the explosion in data is the doppelgangers’ economy. If the amount of data generated globally is any indication, this new data economy is thriving. The first human genome (three gigabytes of data, nearly the size of a DVD) was sequenced 17 years ago; 23andMe, a genetic testing company, claimed more than 10 million customers in April. The latest autonomous vehicles generate up to 30 TB of data (or 6400 DVDs). Between 2020 and 2021, the world will generate approximately 90 ZB (19 trillion DVDs) of data (Figs. 1.25 and 1.26), more than all data produced since the invention of computers.103 One way to begin analyzing the data economy is to quantify it. Although a robust methodology has not yet been developed, the data economy is already substantial. Canada attempted to value its data (its stock plus related software and intellectual property in the field). The result was between $118 bn and $164 bn.104 If that figure is accurate, the value of all data in America, which has a GDP 12 times that of Canada, could be in the range of $1.4–2 trn, or nearly 5% of America’s stock of private physical capital (see Footnote 102). Mirror worlds are not merely mathematical representations of the real world. Additionally, they reinterpret the adage “knowledge is power.” Digital copies are increasingly taking on a life of their own and interfering with the physical world.

103 104

IDC in A deluge of data is giving rise to a new economy, The Economist, Feb 20, 2020. Statistics Canada, https://www.statcan.gc.ca/eng/start.

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Fig. 1.26 China galloping with data generation. Source IDC, Seagate in A deluge of data is giving rise to a new economy, The Economist, Feb 20, 2020

The digital mirror images can be used to optimize anything, from the acoustics of a headset to the performance of an entire national railway system. They will enable various artificial intelligence (AI) algorithms to recognize objects and faces, comprehend speech, and even discriminate between smells (see Footnote 102). Additionally, they allow new business models: why purchase heavy equipment when its wear and tear can be quantified and thus rented by the minute? Digital twins have created the mirror world’s greatest conundrum: The risk is that the wealth they generate will be distributed even more unequally than in their terrestrial counterparts. Facebook’s Metaverse hopes to exploit this virtual duplication. Data have given rise to an inequitable world. The data economy is still in its infancy. Its economics must still be figured out; its infrastructure and businesses must be fully developed, and geopolitical arrangements must be made. However, one final significant tension is between the wealth generated by the data economy and its distribution. Regardless of what one predicts, the data economy will increase global productivity. However, it is less clear who receives what and how. “We will move from an economy where the main challenge is to produce more and more efficiently to one where the distribution of the wealth produced becomes the biggest issue.”105 The data economy as it currently exists is already highly unequal. A small number of large platforms dominate it. FAAMA (Amazon, Apple, Alphabet, Microsoft, and Facebook) earned a whopping combined profit of $75 billion in the second quarter of 2021, outpacing the next five most valuable American technology companies over the previous 12 months.106 This corporate inequality is mainly due to

105

Santa Fe Institute in A deluge of data is giving rise to a new economy, The Economist, Feb 20, 2020. 106 Who will benefit most from the data economy? The Economist, 20 Feb 2020.

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network effects—economic forces that ensure that size breeds size. For example, a company that can amass a large amount of data can better use artificial intelligence and attract more users, providing additional data. Also, these firms can recruit the best data scientists and have the financial resources to acquire the best AI startups. Additionally, as the data economy grows, it is becoming clear that these dynamics will increasingly apply to non-tech companies and even entire countries. The race to become the dominant data platform is heating several industries. In terms of countries, the United States and China account for 90% of the market capitalization of the world’s 70 largest platforms (Fig. 1.27). African and Latin American economies risk devolving into mere raw data providers while being forced to pay for the digital intelligence generated.107 On the other hand, the public is increasingly concerned about what happens to its data. Eight in ten Americans, for example, now believe they have little or no control over the data collected about them by businesses. As the data economy grows, debates about data inequity become more heated. Nobody is currently concerned that revolutions and wars will be fought over data, but that is not a given. Fortunately, humanity has previously overcome a similar impasse. The Industrial Revolution of the 1850s resulted in significant production increases and social inequity. Societies took 100 years to adapt; some never did.108 Similarly, developing the necessary mechanisms and institutions in the data economy will take time. Data get hacked. Repeatedly. Data hacking and extracting ransom money is a thriving business. While most crimes rates remain relatively low in developed countries, cybercrime—a crime committed primarily or entirely through digital means—is rising. This includes internet fraud, identity theft, and ransomware attacks, such as the one Colonial experienced, in which victims’ files are encrypted until they pay a ransom. Once upon a time, such attacks were crude. Ransomware was distributed via spam emails and targeted the computers of everyday people. The amounts demanded were frequently small to entice people to pay. Nowadays, hackers target large corporations and demand large ransoms (Fig. 1.28). Malicious software is injected into specific computer systems. It steals data before encrypting it. The files are then encrypted, and a ransom is demanded to de-encrypt files or, increasingly, prevent them from being leaked.109 According to Chainalysis, a cyber-security firm, the amount paid in Bitcoin ransoms increased by 311% last year to around $350 million.110 Typically, victims are businesses, but governments and their departments, including the police, increasingly become casualties.

107

See Footnote 11. Bloomberg, CBInsights, Economist in Who will benefit most from the data economy? The Economist, 20 Feb 2020. 109 Ransomware attacks like the one that hit Colonial Pipeline are increasingly common, The Economist, 10 May 2021. 110 Chainalysis in The methods and menace of the new bank robbers, The Economist, 16 June 2021. 108

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Fig. 1.27 Selected global platforms, market cap, 2020. Source Bloomberg, CBInsights, Economist in Who will benefit most from the data economy? The Economist, 20 Feb 2020

With digital data comes vulnerability. Hacker squads go after money and data. If one trawls the dark web, it becomes clear that the new bank robbers frequent attempts to breach those walls. One criminal was discovered attempting to recruit insiders at America’s three largest banks, JPMorgan Chase, Bank of America, and Wells Fargo, by offering a weekly payment of “seven-to-eight figures” for

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Fig. 1.28 Ransomware. Source Coveware, Colonial Pipeline Company in Ransomware attacks like the one that hit Colonial Pipeline are increasingly common, The Economist, 10 May 2021

authorizing fraudulent wire transfers. Another was an auction of the details of 30 million accounts at Iran’s Bank Mellat.111 This type of activity is the work of a new breed of bank robbers. Forget about the hold-ups of the past. Today’s most sophisticated hackers are almost certainly backed by rogue states such as North Korea and, to a lesser extent, Iran, or tolerated by countries such as Russia and China. They benefit from unprecedented law enforcement resources and protection. They target data to conduct insider trading and attempt to empty accounts. As one of the first sectors to offer online transactions, banks have defended themselves against hackers since the internet’s inception. They invest more in cyber-security than any other type of business—$2691 per employee—and successfully foil most attempted thefts. Nonetheless, no industry has been subjected to more attacks than banks since 2016 (Fig. 1.29). Citigroup described hacking as the greatest threat to the financial system in the United States. JPMorgan Chase CEO Jamie Dimon has stated that they could devolve into an “act of war.” The sinking sensation is that “it is not a matter of ‘if,’ but of ‘when.’” As with other industries, online bank robberies typically begin with “phishing,” or tricking an employee into downloading a harmless-looking piece of software called a “Trojan,” which, once installed, creates a backdoor for other viruses to infect the company’s systems. The ruses can be pretty intricate. In 2019, hackers infiltrated Redbanc, an interbank network that connects Chile’s ATM system.

111

The methods and menace of the new bank robbers, The Economist, 16 June 2021.

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Fig. 1.29 US industries targeted in cyber attacks. Source Guidewire, S&P Global ratings in The methods and menace of the new bank robbers, The Economist, 16 June 2021

They staged a lengthy hiring process complete with rounds of video interviews to convince one victim to download and run a Trojan. Once the backdoor is installed, the hackers have a plethora of manoeuvers at their disposal. These have grown in complexity over time. The world’s largest cyber-heist occurred in 2016 when thieves transferred funds from a Federal Reserve Bank of New York account held by Bangladesh’s central bank to banks in the Philippines, Sri Lanka, and other parts of Asia. They stole $81 million (see Footnote 111). Ransomware attacks are rising, becoming more prevalent in other business sectors. However, banks are exposed in other ways as well. One example is “jackpotting,” malware tricks ATMs into spitting out large amounts of cash accessible to counterfeit cards even when no funds are present. The thieves then hire packs of money mules, usually from local mafias, to carry out multiple withdrawals simultaneously. In 2018, criminals stole $13.5 million from India’s Cosmos Bank by making 15,000 cash machine withdrawals in less than two hours (see Footnote 111). Often, robbers are after data rather than money. The most recent scheme involves stealing financial market data from banks to facilitate insider trading. According to a survey conducted by VMware, a cyber-security firm, 51% of 126 financial firms worldwide saw an increase in such attacks last year. Recently breached portfolio managers in the United States and the United Kingdom observed suspicious activity whenever they were about to trade. According to Advisen, a consultancy, banks have lost approximately $12 billion to cybercrime since 2000, with data breaches accounting for roughly three-quarters of the losses. According to studies, each hour of business interruption costs a bank

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$300,000; a typical data breach results in $6 million in losses.112 However, banks typically prohibit employees from discussing such attacks, and the reported figures significantly understate the problem. While many institutions are required to notify regulators and, in some cases, customers of serious hacks, rules change frequently and vary across jurisdictions, making disclosure haphazard. Additionally, first-order effects can obliterate initial losses. An incident puts 27% of customers at risk of having their accounts closed at a targeted firm and depresses companies’ share prices by 5–7%.113 Banks strive to develop more agile defenses and hire friendly “white-hat” hackers to probe their defenses. Financial firms spent an average of 0.48% of their revenue last year on cyber-security, up from 0.34% in 2019. The industry’s total revenue in 2020 equates to $23 billion in spending in the United States alone.114 Akamai, a security firm that serves eight of the world’s top ten banks, saw 736 million attacks on financial firms’ web-based applications last year, a two-thirds increase over the previous year (see Footnote 111). Without consistent regulation, the growth of fintech firms creates blind spots. And banks’ migration to the cloud, while ostensibly more secure, could backfire if it results in concentrated risk on a few platforms. Bank robbers of the new generation are as criminally entrepreneurial as ever.

1.2.3.2 Data on Cloud The term cloud is loosely used to refer to data centers accessible via the internet to many users.115 Cloud computing is based on resource sharing to achieve coherence and scale economies. Cloud computing proponents point out that it enables businesses to avoid or minimize upfront IT infrastructure costs. Additionally, cloud computing can get applications up and running faster with improved manageability and less maintenance. It enables IT teams to adjust resources more rapidly to meet fluctuating and unpredictable demand by enabling burst computing: high computing power during periods of peak demand. Several of the world’s largest cloud technology companies invest billions of dollars in cloud research and development. For example, Microsoft committed 90% of its $9.6 billion research and development budget to cloud development in 2011 and has continued to devote a sizable portion to cloud development.116 As a result, Microsoft is now the second-largest player in the cloud computing space.

112

Advisen in The methods and menace of the new bank robbers, The Economist, 16 June 2021. Cornerstone Advisors in The methods and menace of the new bank robbers, The Economist, 16 June 2021. 114 Deloitte in The methods and menace of the new bank robbers, The Economist, 16 June 2021. 115 “An Introduction to Dew Computing: Definition, Concept and Implications. IEEE Journals & Magazine”. 10.1109/ACCESS.2017.2775042. S2CID 3324933. 116 “Microsoft Says to Spend 90% of R&D on Cloud Strategy”. Archived from the original on 18 October 2013. Retrieved 22 April 2015. 113

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Cloud computing is made possible by faster internet connections, significantly reducing the latency between users and remote data centers. Costs associated with data storage have also decreased considerably. Cloud computing is transforming business models by reducing the need for in-house IT expertise, enabling greater scalability, and ensuring consistent application rollout and maintenance.117 Moving the computing power to the cloud brings several advantages. Previously, electricity was generated on-site but now is supplied via the grid, as is the case with computing power. Computing was once confined to mainframes and personal computers and is now migrating to the “cloud.” The cloud is a network of data centers that rely on the internet to provide services, from email and social media to data storage and analysis. Cloud computing’s meteoric rise is unstoppable and wreaking havoc on the technology industry. Customers have benefited similarly dramatically. Cloud computing is frequently significantly less expensive than legacy information technology systems. It substantially increases flexibility: businesses needing additional computing capacity no longer have to spend weeks installing new servers and software. Extra storage can be obtained in minutes. Applications are updated continuously. Emails, documents, and photographs can be accessed from any device. Additionally, cloud services are more secure, as providers understand how to protect their computing systems from hackers better than their customers do. Regular cloud users believe it is a gift from (digital) heaven.118 Not long ago, we would say all the human words ever uttered could be stored in approximately 5 exabytes of data. However, data are being generated faster than can be stored. To quote Eric Schmidt, “5 Exabytes of data were created between the dawn of civilization and 2003, but that amount of data is now created every two days, and the rate is increasing.” And not just within private infrastructures, over half of all data generated by organizations will be stored in the public cloud.119 The cloud’s true value extends well beyond IT and has the potential to revolutionize how industrial companies develop, deliver, sell, and service their products. Enterprises are increasingly refocused on software engineering, data and analytics, and process changes. However, many cloud migrations have not proven as profitable as anticipated. Businesses spend 23% more than the budget on cloud computing and estimate that 30% of their expenditures are wasted. The issue will only worsen as businesses anticipate cloud spending increasing by 47% every year.120

117

See Footnote 11. The sky’s limit, The Economist, 17 October 2015. 119 Gartner in Making the cloud pay: How industrial companies can accelerate impact from the cloud, McKinsey, October 2020. 120 Making the cloud pay: How industrial companies can accelerate impact from the cloud, McKinsey, October 2020. 118

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Cloud-enabled operations can generate over $1 trillion in shareholder value, half through revenue growth and half through margin expansion (see Footnote 120). It entails software engineering, process optimization, and business innovation. This is at the heart of “bending the curve” leading to profitable transformation. Volkswagen, the world’s largest automaker, generates value beyond information technology through a centralized cloud platform that connects 124 plants, 500 warehouses, and 1500 suppliers. This platform aggregates real-time data from all Volkswagen machines and systems, while advanced analytics tools monitor logistics and provide insight into shopfloor processes. Over 200 specialists have been trained for the company’s cloud innovation center. Volkswagen’s industrial cloud will be critical in achieving a 30% reduction in factory costs by 2025. It may also catalyze innovation within its thriving partner community (see Footnote 120). Cloud computing improves R&D, procurement, supply chain management, manufacturing, marketing and sales, aftermarket support, and business support processes. Increased efficiency can result in significant increases in margins and productivity. For example, in procurement, the cloud can assist businesses in cleaning up and integrating their data, facilitating the seamless and automated identification of opportunities (for instance, which suppliers to approach for cost concessions due to commodity fluctuations). Additionally, the cloud enables more rapid and scalable measurement of the impact of new procurement tools, such as those related to intelligence or electronic requests for information and quotes. These procurement enhancements can result in a 60% increase in procurement savings (see Footnote 44) (Fig. 1.30 courtesy: McKinsey).

Fig. 1.30 Economics of cloud computing. Source Making the cloud pay: how industrial companies can accelerate impact from the cloud, McKinsey, October 2020

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Fig. 1.31 The cloud pie. Source Making the cloud pay: How industrial companies can accelerate impact from the cloud, McKinsey, October 2020

Not only does the cloud improve margins, but it also enables growth (see Footnote 120). It facilitates access to cloud partners’ innovations, such as new artificial intelligence and machine learning engines. Second, because the cost of setting up a “sandbox” environment is nearly zero, the cloud enables experimentation with new products and features. Additionally, it connects the business to new products and services, such as sales tools, available through the partner ecosystem, significantly lowering the barriers to collaboration. There is an oligopoly in the cloud business. The big three (Amazon, Microsoft, Google) dominate the market. Amazon’s market share remained stable at around 33%, while Microsoft’s was 18%, and Google’s was 9%. Chinese cloud providers collectively account for more than 12% of the global market, led by Alibaba, Tencent, and Baidu. The top eight cloud service providers now account for 77% of the worldwide market (Fig. 1.31). Public IaaS and PaaS services account for most of the market and grow at a 34% quarterly rate.121 Every day, Amazon Web Services (AWS) added enough servers and other infrastructure to power Amazon. com a decade ago. This massive investment has maintained AWS as the market leader in the rapidly growing field of cloud computing. The cloud promised to revolutionize computing: It would be more affordable, keep software more current, and foster greater collaboration.122

121 122

Synergy Research group, July 30, 2020. Silver lining, The Economist, 30 August 2014.

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Corporate resistance to cloud computing gives way to an avalanche of corporate converts. Almost all startups are cloud-based. Google’s price reductions of between 30 and 85% on cloud services such as application processing and data storage aided the cause. The move, which was intended to bolster Google’s own cloud computing business, prompted a swift response from AWS, which reduced some prices by up to 65%. Microsoft, also determined to be a cloud giant, responded with its cuts. Since then, prices have fallen precipitously. For the next few years, hybrid cloud arrangements (involving running some software applications on a cloud service while maintaining others on a firm’s servers) will likely dominate. Industries such as health care and banking prefer to keep some dedicated hardware to comply with regulator-mandated data handling standards. However, AWS and its competitors are accumulating approvals from regulatory and industry bodies to demonstrate that they meet such standards. If they continue to reduce costs, their clouds appear to engulf several other businesses (see Footnote 122). However, Amazon’s pre-eminent position is under threat. Amazon and Microsoft are increasing their pressure on one another to provide corporate America with remote computing power, igniting a battle that is expected to dominate the technology world for the next decade. The previous decade saw a 246% increase in revenue from this business, dubbed cloud computing.123 As the dominant data storage provider to large multinational corporations, Amazon delivers some of the sharpest barbs. Amazon appears to be fearful of rivals, most notably crosstown competitor Microsoft. To entice customers, Microsoft has been telling them that, unlike Amazon, when they sign up for Microsoft’s Azure cloud computing service, they will not be placing sensitive customer or product data on servers operated by a potential competitor.124 Amazon is undisputedly the market leader in cloud computing, but its lead is dwindling. Amazon controlled 32% of the market, Microsoft controlled 19%, and Google controlled a meager 7% (see Footnote 124). Companies competing for this business have built massive data centers known as server farms worldwide, allowing customers to rent storage space and utilize some of the vendors’ massive computing horsepower for analysis (see Footnote 124). Customers are charged based on the amount of data stored and the features used. Some customers choose pay-as-you-go plans, while others opt for other pricing options. Cloud computing revenue is expected to reach $266 billion this year and more than double to $366 billion by 2023 (see Footnote 119). A sizable portion of these customers will undoubtedly migrate to Microsoft’s Azure, as they fit that profile: They run many Windows and prefer to be safe. The decision-makers in that camp heavily favor Azure (see Footnote 124). Amazon has attempted to dispel the perception that as it expands into new markets, such as logistics or health care, incumbents in those sectors that use AWS need to be

123

Gartner, in Amazon Has Long Ruled the Cloud. Now It Must Fend Off Rivals, The Wall Street Journal, Jan 4, 2020. 124 Amazon Has Long Ruled the Cloud. Now It Must Fend Off Rivals, The Wall Street Journal, Jan 4, 2020.

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concerned about their data being misused. Amazon has attempted to address these concerns directly in its AWS sales pitches. According to a representative for a healthcare company that was recently shopping for cloud services, Amazon cited streaming video company Netflix as an example of a business that was comfortable with its service despite Amazon’s online offering (see Footnote 124). Given Amazon’s competitive clout, retail companies were the first to be wary of using AWS. Walmart warned vendors against using Amazon’s platform two years ago. Unilever is crunching some of the most sensitive customer and third-party vendor data available through Microsoft’s Azure data analysis tools while partnering with Amazon in other areas (see Footnote 124). The global dominance of a single large technology company may result in the demise of a viable business model for competitors and other online services. A similar dynamic may exist for cloud platforms, with global providers reaping revenue and data benefits, while other businesses and countries become increasingly reliant (Rahman, 2018). For example, Amazon is also expanding its infrastructure business, offering logistics and retail as a service. Third-party sellers can now sell on the site in addition to utilizing Amazon’s warehouses and delivery system.125 This infrastructure advantage is almost certain to increase wealth and digital resources concentration. Cloud service providers frequently earn a high-profit margin on their services by virtue of owning the infrastructure. Amazon Web Services (AWS) is the clearest illustration: Between 2013 and 2018, its operating income increased from $0.7 billion to over $7 billion, accounting for a growing share of Amazon’s total operating income.126 Additionally, cloud computing companies are accused of siphoning data away from their providers. Alibaba made this clear in its offers to provide cloud computing services to Chinese convenience stores for “free” in exchange for access to data on offline economic transactions (Hao, 2018). These types of data can give an incalculably valuable competitive edge. For example, Amazon provides cloud computing services to Chile for local businesses, the government, and worldclass telescopes. It will receive rent and access to critical data that can be used to improve artificial intelligence and develop new services.127 These examples demonstrate how cloud computing appears poised to increase the value captured by global platforms. While recognizing the significant benefits clouds deliver to firms, there is now an increasing focus on the costs. Expenditure on public cloud services took away 10% of businesses’ IT budgets in 2021, a steep increase from 4% in 2017 (see Footnote 119) (Fig. 1.32). For startups, spending on cloud services is the number

125

The New York Times, 9 February 2018, Amazon to test a new delivery service for sellers. ZDNet, 31 January 2019, In 2018, AWS delivered most of Amazon’s operating income. 127 Reuters, 4 September 2018, Amazon eyes Chilean skies as it seeks to datamine the stars. 126

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Fig. 1.32 Public cloud as a % of total IT spending, $bn. Source Gartner in AI Set to Reshape Workplace as Physical Offices Open Up, The Wall Street Journal, March 31, 2021

one expenditure, consuming 80% of their revenue.128 The situation is analogous to when electricity was commercialized a hundred years ago and became a critical input for the industry; many firms appointed the Chief Electricity Officer! It has been a good time for cloud computing firms. Amazon (AWS), Google Cloud Platform (GCP), Microsoft Azure in the US, and Tencent and Alibaba in China are rapidly expanding. With a growth of 26%, the cloud computing business was $400 billion in 2021.129 But competition is getting more intense. Oracle reported higher revenue largely on account of increased cloud business. Initially, companies moved to cloud platforms because they provided scalability—the flexibility to increase storage as needed, but it was not the cost. Over the years, the costs have gone up, and the cloud bills have become highly itemized and complex, apart from being opaque. Web-based applications and platform services are the two biggest categories of cloud users indicating the high growth in segments like SaaS (Fig. 1.33). Companies have been considering building their private clouds to reduce costs. The transition from a public cloud to a private one can be difficult; the business also loses scalability (see Footnote 129). Microsoft, a great believer in a multicloud system, advises customers on the most optimal multicloud configuration, often at the cost of losing business to Google.

128

Andreessen Horowitz in The battle of the computing clouds is intensifying, The Economist, Dec 18, 2021. 129 The battle of the computing clouds is intensifying, The Economist, Dec 18, 2021.

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Fig. 1.33 Global public cloud spending. Source Gartner in Should data be crunched at the center or at the edge? The Economist, Feb 20, 2020

The three cloud providers make it difficult for the customers to leave their clouds. Once in, customers are stuck, almost for life. Portability exists only on paper. Customers are also looking at de-risking their cloud strategy and are willing to start new projects on another cloud service provider. The big three enjoy very high-profit margins, with AWS enjoying 60%, which is why more players enter the market and provide customers with a wider choice.

1.2.3.3 Cloud or Edge? Should data be processed at the center or the edge? Cloud services such as Amazon Web Services (AWS) represent a centralized model where all data are collected and crunched in a few locations, namely large data centers. On the other hand, pedestrians press a button to request a green light at one of the thousands of intersections activate software that utilizes “edge computing”: Data are processed in real time as close to the point of collection as possible. The distance between these two poles will define the data economy’s infrastructure. “Edge computing” is on the upswing. Consider the origin and journey of a typical bit and how both will evolve. The bit is frequently created today by a human clicking on a website or tapping on a smartphone. Tomorrow, it will be generated primarily by machines, collectively referred to as the “Internet of Things” (IoT): cranes, automobiles, washing machines, and eyeglasses, for example. And these devices will act on the world in which they are embedded, rather than simply being sensors.130

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Should data be crunched at the centre or at the edge? The Economist, Feb 20, 2020.

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Ericsson forecasts that the IoT will reach 25 billion devices by 2025, up from 11 billion in 2019.131 While this estimate may sound self-serving, it is likely the result of a significant shift in collecting data. Historically, most digital data remained on the device on which it was created. Numerous devices today are cable-tethered. They will gradually become wirelessly connected. The 5G, the next generation of mobile technology, is designed to support one million connections per square kilometer, equating to 60 million connections in Manhattan alone. According to Ericsson, mobile networks will transmit 160 EB of data per month globally by 2025, four times the current rate (see Footnote 131). Your typical bit is destination is also evolving. An increasing amount of data flows into AWS’s massive computing factories and those of its primary competitors, Microsoft Azure, Alibaba Cloud, and Google Cloud. These are frequently the only locations with sufficient computing power to train algorithms capable of detecting credit card fraud or predicting when a machine requires maintenance.132 The world’s largest cloud computing providers are making a valiant effort to centralize their operations further. AWS offers customers free or low-cost software that makes connecting and managing IoT devices simple. It offers no fewer than 14 methods for transferring data to its cloud, including several online services and offline methods such as lorries loaded with digital storage capable of transporting up to 100 PB (see Footnote 130). Nonetheless, centralization incurs costs. One example is businesses’ high fees to migrate data to other clouds. Additionally, consolidating data in large data centers may become more environmentally costly. Energy is consumed when data are transferred to a central location. And once they are there, the temptation to continue crunching them is strong. In 2012, the computing power required for cutting-edge artificial intelligence projects exploded. Before that, it closely followed Moore’s law, which states that chip processing power doubles approximately every two years; since then, demand has doubled every 3.4 months.133 Fortunately, a countermovement has already begun—toward the computing “edge,” or the location of data generation. Not only servers in large data centers are becoming more powerful, but also smaller local data centers and connected devices, allowing for closer analysis of data at the source. Additionally, software distributes computing power to the most effective, on or near IoT devices. Selfdriving cars, for example, require high-speed connections and cannot afford to be disconnected, which means computing must take place in nearby data centers or even in the car itself. And in some cases, data flows are too large to send to the cloud, as with Las Vegas’s traffic lights, which generate 60 TB of data per day (a tenth of the amount Facebook collects in a day) (see Footnote 130).

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Ericsson in Should data be crunched at the centre or at the edge? The Economist, Feb 20, 2020. Gartner in Should data be crunched at the centre or at the edge? The Economist, Feb 20, 2020. 133 OpenAI in Should data be crunched at the centre or at the edge? The Economist, Feb 20, 2020. 132

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How far will the pendulum retrace its steps? Large cloud providers will continue to be tempted to collect and crunch an excessive amount of data. While the edge is critical, it is necessary to aggregate your data to train the models at some point.134 However, industry observers anticipate that computing will be evenly distributed between the cloud and the edge.135 There is an imperative for edge computing. Health monitors self-driving cars need additional computing power at the network’s edge. Life-or-death computations can’t afford to wait for a response from far-off data centers. Millions of machines and objects are connecting to the internet for the first time, posing a challenge to an architecture built with people in mind over the last few decades. As a result, businesses deploy additional computing resources at the network’s edge, such as vehicles, elevators, and manufacturing machines. Specific applications and use cases necessitate the presence of real-time machine intelligence. You cannot afford to wait for the cloud to appear.136 Startups and established players such as Microsoft and GE are rushing to capitalize on the market for edge products and services, expected to reach $6.7 billion by 2022.137 By 2021, 40% of enterprises have implemented an edge computing strategy, up from about 1% in 2017 (see Footnote 132).138 Instead of sending data to a corporate cloud or data center, this new scheme processes and analyzes it on or near the device where it is generated. This enables devices to compute and analyze data in real time without relying on a corporate cloud. Additionally, the new architecture enables services such as personalized mobile app promotions that are powered by real-time analytics. The self-driving car exemplifies the importance of edge computing. It must make instantaneous life-or-death decisions. Data typically travel between 150 and 200 ms from the point of generation to the cloud provider and back (see Footnote 138). Some of these computations will be performed on-board the car rather than wait for data to travel to and from the cloud, or worse, risking a loss of cloud connectivity. By bringing servers or gateways closer to devices, that time could be reduced to 2–5 ms, significantly improving critical applications such as health care, connected cars, and smart cities (see Footnote 138). To be sure, businesses are pushing the cloud to the edge—figuratively speaking. Over the next few years, corporations are expected to increase spending on technology that powers data processing tools installed directly on factory floor machinery, cell phone towers, train track signals, or store checkout hardware—rather than in a data center.

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AWS in Should data be crunched at the centre or at the edge? The Economist, Feb 20, 2020. See Footnote 130. 136 Schindler in Smart Elevators, Self-Driving Cars Require More Computing Power at Network’s Edge, The Wall Street Journal, Jan 2, 2018. 137 MarketsandMarkets in Smart Elevators, Self-Driving Cars Require More Computing Power at Network’s Edge, The Wall Street Journal, Jan 2, 2018. 138 Smart Elevators, Self-Driving Cars Require More Computing Power at Network’s Edge, The Wall Street Journal, Jan 2, 2018. 135

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The goal of edge computing is to boost the performance of production and service applications by processing and applying data at the point of generation. Analysts say that the rapid growth of edge computing across industries is due to the massive amounts of data generated by digitized functions and processes, which are increasingly stored and processed in the cloud. By 2024, businesses worldwide are expected to invest $240.6 billion in edge computing, including hardware, software, and services, at a compound annual growth rate of more than 15%.139 Apart from big data, the race to deploy edge capabilities is accelerating with the growth of the Internet of Things, a network of connected machines and other devices used in manufacturing and retail sales, among other sectors. Typically powered by artificial intelligence, edge computing systems parse production data at the point of origin and make minor near-instantaneous adjustments, such as adjusting the electrical current load on welding robots, or the force applied by a machine press. Industrial behemoths like General Electric, Siemens, and Robert Bosch leverage edge computing technology to optimize productionline machines. Similarly, energy companies have leveraged edge technologies to improve analysis at oil and gas wells, while retailers have leveraged them to improve remote checkout services.140 Global spending on cloud services is expected to reach approximately $332 billion by the end of the year, up by 23% (see Footnote 132). The spending trend presents an opportunity for all the major cloud service providers. They have recently introduced edge computing tools: Cloud service providers can now address a broader range of use cases by extending their cloud platforms to distributed edge locations. As with the cloud, the edge enables organizations to automate operations, create rich customer experiences, and bring new products and services to market. Its edge strategy aims to increase both safety and efficiency (see Footnote 140). Alstom recently installed edge tools on trackside devices, such as railway grade crossings. The devices exchange real-time data to route trains via trackside signals while predicting and flagging track maintenance requirements without bouncing data back to a central server. Nearly half of corporate businesses are edging toward the bottom line by automating, reducing costs, and increasing efficiency. The other half are pursuing new revenue streams through cutting-edge technology. The second half of the year is the fastest growing (see Footnote 132). Most businesses use edge computing in areas where real-time response is required. A large amount of data is generated and cannot be transferred quickly, cheaply, or for semi-automated functions. The bottom line is that IoT applications will eventually need computations to happen on the fly at the edge.

139 140

IDC in Companies Extend Cloud to the Edge, The Wall Street Journal, May 3, 2021. Companies Extend Cloud to the Edge, The Wall Street Journal, May 3, 2021.

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Artificial Intelligence (AI)

AI is a hot buzzword in business and industry right now. AI technology is a critical enabler of much of today’s digital transformation, as companies position themselves to capitalize on the ever-growing amount of data generated and collected. So how did this change occur? To some extent, this is a result of the big data revolution itself. The abundance of data has prompted increased research into how it can be processed, analyzed, and acted upon. Because machines are far more suited to this work than humans are, the emphasis was on training machines to do it as “smartly” as possible. PwC estimates that AI will boost the UK economy, the most digitally savvy country, by up to 10.3% in 2030, making it one of the most significant commercial opportunities in today’s fast-changing economy.141 Over the period, the impact will be driven by productivity gains (1.9%), demandstimulating product enhancements, and new firm entry (8.4%).142 While the purpose of AI has evolved, it has always been to create machines capable of thinking like humans. After all, human beings have demonstrated an unmatched capacity to interpret the world around us and act on the information we gather. If we want to build machines that will assist us in accomplishing this more efficiently, it makes sense to use ourselves as a model! Thus, AI can be seen as simulating abstract, creative, deductive thought—particularly the capacity for learning—through computers’ digital, binary logic.143 AI research is already achieving breakthroughs in various fields. In quantum physics, it is used to model and predict the behavior of systems composed of billions of subatomic particles. In medicine, AI is deployed to diagnose patients using genomic data (see Footnote 143). In industry, it is employed in the financial sector for various purposes ranging from fraud detection to improving customer service forecasting future service needs. It is used in manufacturing to manage workforces and production processes and forecast faults in advance, enabling predictive maintenance. AI in the consumer world powers our daily lives—from smartphone assistants like Apple’s Siri and Google’s Assistant to self-driving and autonomous cars. Many predict that will outnumber manually operated vehicles within our lifetimes (see Footnote 143). On the potential of AI, there are incurable optimists such as Larry Page. Artificial intelligence would be the Google of the future. The ultimate search engine capable of comprehending everything on the internet. It would comprehend precisely what you desired and would provide you with the appropriate item. We are nowhere near accomplishing that at the moment. However, we can make incremental progress toward that goal, and that is essentially what we do. Larry Page

141

PwC in The economic impact of artificial intelligence on the UK economy, PWC, 2017. The economic impact of artificial intelligence on the UK economy, PWC, 2017. 143 Bernard Marr, Bernard Marr & Co. http://www.bernardmarr.com/default.asp?contentID=963. 142

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There are also pessimists. Genuine concerns have been expressed by scientists such as Stephen Hawking and eminent columnists that the development of intelligence that equals or exceeds our own but can operate at much faster speeds could have negative consequences for the future of humanity. The development of complete artificial intelligence may spell the end of humanity…It would take off on its own and constantly redesign itself. Humans, whose biological evolution is slowed, would be unable to compete and would be supplanted. Hawking, Stephen The upheavals [caused by artificial intelligence] can accelerate and become more frightening, if not cataclysmic. Consider how a medical robot programmed to eradicate cancer might conclude that the best way to eradicate the disease is to exterminate humans who are genetically predisposed to it. Nick Bilton, New York Times technology columnist

How will AI unfold? Even if robots do not eradicate humanity or transform us into living batteries, a less dramatic but still terrifying scenario is that labor automation (both mental and physical) will result in profound societal change—for the better or for, the worse. This understandable concern resulted in forming the Partnership in AI last year by a group of technology giants, including Google, IBM, Microsoft, Facebook, and Amazon. This group will conduct research and advocate for ethical AI implementations and establish guidelines for future robot and AI research and deployment (see Footnote 143). The AI ecosystem: “Artificial intelligence (AI)” refers to a collection of technologies that perform tasks typically associated with human intelligence (The Royal Society, 2017). Machine learning is the technology driving the most current and recent advancements in artificial intelligence. It is a technique that enables computer systems to perform specific tasks intelligently through data-driven learning. Several terms are related (Fig. 1.34). Fig. 1.34 AI and automation. Source The impact of AI on work, The Royal Society, British Academy, September 2018

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Digital technology encompasses all hardware and software that utilizes binary code to perform tasks, ranging from simple spreadsheets or calculators on personal computers to networked systems and advanced algorithms that enable computer systems to make data-driven decisions. In the broadest sense, automation refers to replacing humans with machines, robotics, or computer systems to perform a task. The term can be applied to the earliest mechanical devices, the Industrial Revolution, assembly line manufacturing, computing, and robotics. Automation is frequently used in policy debates about artificial intelligence to refer to the migration of human tasks to computers and robots, regardless of whether or not AI technologies are required to accomplish this.144 Artificial intelligence (AI) is a catch-all term for a collection of technologies that attempt to perform tasks usually associated with human intelligence. The term was coined by John McCarthy in 1955 and is defined as “the science and engineering of creating intelligent machines” (McCarthy, n.d.). Machine learning is a subfield of artificial intelligence that enables computers to carry out specific tasks intelligently. Machine learning capabilities have advanced significantly due to increased data availability, algorithms, and computing power. Many people now interact daily with machine learning-driven systems: image recognition systems, such as those used to tag photographs on social media; voice recognition systems, such as those used by virtual personal assistants; and recommender systems, such as those used online retailers. These systems learn from data rather than following preprogrammed rules to carry out complex processes.145 Today, machine learning enables computer systems to “intelligently” perform specific functions. However, these specific competencies do not correspond to individuals’ broad range of capabilities. While human-level intelligence—or “general AI”—receives considerable media attention, it is still some time away from being delivered, and when that’s going to happen is anybody’s guess. How intelligent is artificial intelligence? Should we not quantify an AI system’s intelligence the same way we do for humans? What is the IQ of an AI system? Computers have struggled with many of these tasks thus far, which is precisely the point. Chess was once regarded as the pinnacle of intelligence testing until computers defeated humans while demonstrating none of the other broad capabilities associated with intelligence. Since then, artificial intelligence has surpassed humans in Go, some forms of poker, and various video games. As a result, researchers are developing artificial intelligence IQ tests to evaluate more humanlike aspects of intelligence, such as concept learning and analogical reasoning. The creators of the tests hope their challenges will highlight gaps in current AI research and point the way toward machines that can finally think like humans.146

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The impact of AI on work, The Royal Society, British Academy, September 2018. The Royal Society, Machine learning report, 2017. 146 Matthew Hutson, IEEE Spectrum, 2 Feb 2021. https://spectrum.ieee.org/tech-talk/artificial-int elligence/machine-learning/how-do-you-test-the-iq-of-ai. 145

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Google has developed an artificial intelligence system with significantly more intelligence than Apple’s virtual assistant Siri. Google’s score outperforms Siri and Bing—despite having an IQ lower than a six-year-old. Researchers Feng Liu, Yong Shi, and Yin Liu conducted tests that determined Google’s AI IQ to be 47.2, just shy of the average IQ of a human 6-year-old, which they discovered to be 55.5. According to the study, the average 18-year-old has an IQ of 97. Siri’s IQ fell significantly below Microsoft Corp.’s Bing and Baidu, which scored 31.9 and 32.9. Thus far, the results indicate that while the artificial intelligence systems developed by Google, Baidu, and others have improved significantly over the last two years, they still fall short of the capabilities of a six-year-old child. While AI’s IQ is still dwarfed by the average human adult, Google, Microsoft, and others have seen their R&D pay off in the form of increasingly intelligent bots. In 2014, Google’s bots had an IQ score of just 26.5, while Microsoft’s bots had 13.5.147 The tech titans are investing heavily in AI research. According to published reports, DeepMind, a UK-based artificial intelligence company acquired by Google in 2014, has tripled its investment in top talent (see Footnote 147). The investments are expected to accelerate speech and image recognition advancements, enabling businesses to perform functions such as advertising automatically. According to a recent report by global accounting and consulting firm PwC, automation is expected to boost global GDP by 14% by 2030. Artificial intelligence systems have surpassed many of the tests devised by researchers. The current challenge is to develop benchmarks that will enable AI to be truly useful. Since the 1950s, researchers have tracked the progress of artificial intelligence by establishing benchmarks such as the ability to recognize images, construct sentences, and play games such as chess. These benchmarks have effectively determined whether AI can perform additional tasks and motivate researchers to develop more useful AI tools.148 In recent years, AI systems have surpassed many of the tests proposed by researchers, outperforming humans in various tasks. For researchers, the challenge now is to develop benchmarks that can capture the broader types of intelligence required to make AI truly useful measures that can reflect elusive abilities such as reasoning, creativity, and the capacity to learn. Not to mention areas such as emotional intelligence, which are notoriously difficult to quantify in humans. For example, an AI system can perform well enough that humans can often not discern whether a human or a machine created an image or a paragraph. Alternatively, an AI system would have no difficulty determining who won the Oscar for best actress last year. However, if you asked the AI why the actress won, it would be stumped. It would be devoid of the reasoning, contextualization, and emotional comprehension necessary to respond adequately.

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Google AI or Siri: Which Has the Highest IQ? Investopedia, Shoshanna Delventhal, June 25, 2019. 148 Why We Need New Benchmarks for AI, The Wall Street Journal, April 5, 2021.

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A look back at benchmarks demonstrates both how far AI has come and the difficulties it still faces. Alan Turing, an English computer scientist, established the first benchmark. Mr. Turing proposed in 1950, “I propose to consider the question, ‘Can machines think?’” To ascertain this, he described an experiment dubbed the Turing Test. A human judge evaluates a conversation between a human and a machine designed to generate human-like responses. If the judge cannot determine which conversationalist is human, the machine passes what Mr. Turing referred to as the Imitation Game. The goal of the earliest AI efforts was to pass the Turing Test. Not until the 1990s did researchers begin to shift the benchmarks away from matching human intelligence to outperforming it on specific tasks. Certain advancements were made, including an IBM computer program defeating chess champion Garry Kasparov in 1997, a feat hailed as a watershed moment in the development of artificial intelligence (see Footnote 148). However, advancements accelerated significantly in the recent ImageNet Challenge—a test to determine whether an algorithm could correctly detect and identify what was shown in photographs contained in a database of 14 million images. AlexNet, a type of artificial intelligence algorithm known as a neural network, achieved a 15.3% error rate, 10.8 percentage points lower than the previous best attempt. After most competitors reached less than 5% error rates in 2017, the contest’s organizers announced they would work on a new, more challenging version (see Footnote 148). In the last couple of years, systems capable of comprehending natural language and accurately deciphering digital images and video have surpassed a series of benchmarks. For example, in 2018, the GLUE benchmark was released, requiring AI systems to pass tests to determine whether sentences paraphrase one another and classify movie reviews as positive, negative, or neutral. Many of these tasks were completed in record time, prompting the researchers to upgrade it to SuperGLUE at the end of 2019. By January 2021, researchers working to develop systems capable of beating the SuperGLUE benchmark had already surpassed the capabilities of most humans (see Footnote 148). Researchers are calling for benchmarks to be structured to keep up with the pace of AI innovation. Amazon’s Alexa Prize, which challenges university students to build a chatbot that can naturally converse about a variety of topics for 20 min and earn a score of at least 4.0 out of 5.0 from a panel of human judges, is one of the company’s attempts to scale up a benchmark by extending its duration and test more abilities. The company recently announced the TaskBot Challenge, which it claims is the first conversational AI challenge to incorporate voice and images. The test will determine how well an AI can switch between voice and image to provide information to customers, beginning with cooking and home improvement tasks.149 The Alexa Prize has been held three times—the fourth iteration is currently underway—and no team has ever met the required time or score to win.

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Amazon in Why We Need New Benchmarks for AI, The Wall Street Journal, April 5, 2021.

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Another area in which researchers struggle to develop a set of benchmarks for creativity. We lack a good definition of intelligence and creativity, but the two are inextricably linked. Bias in AI systems is a crucial challenge to overcome. As today’s AI systems become more intelligent, they expose their flaws, necessitating modifying some benchmarks. For example, while facial recognition systems are impressively accurate, they frequently fail to recognize women with darker skin, partly because the AI systems are trained on datasets skewed toward images of white men. As a result, researchers are attempting to create balanced datasets after previous benchmarks that rarely considered racism or sexism in datasets, or the privacy of individuals included in them (see Footnote 148). Experts note that our assessment of human intelligence is evolving. Previously, the emphasis was solely on IQ tests, but we are now learning to value social and emotional intelligence. This changed reorientation could affect how we assess AI’s competence and intelligence (see Footnote 148). The theory is that AI neural networks are not conscious, but we could be on the brink of reaching Artificial Consciousness AI. The accomplishments of today’s artificial neural networks are astounding. AI systems today can write strikingly eloquent and comprehensible prose across a huge range of issues. In a fraction of a second neural network translates truly difficult, highly fluent passages. Highspeed speech is transcribed in split seconds. In the true style of immortal music composers, music is created. Mozart is reborn! Shakespeare in the making!150

1.2.4.1 Machine Learning Machine learning is a subfield of artificial intelligence that enables computers to learn automatically from examples, data, and experience. By enabling computers to perform specific tasks intelligently, machine learning systems can automate complex processes rather than following preprogrammed rules (Fig. 1.35). Machine learning has made significant strides in recent years, expanding its capabilities across various applications. Increased data availability enables machine learning systems to be trained on many examples while increasing computer processing power enables these systems to perform analytical tasks. Additionally, within the field, algorithmic advances have increased the power of machine learning.151 As a result of these advancements, systems that performed noticeably below human levels only a few years ago can now outperform humans at specific tasks. In health care, machine learning enables the development of systems that can assist physicians in providing more accurate or effective diagnoses for specific conditions. In transportation, it is advancing the development of autonomous vehicles and enhancing the efficiency of existing transportation networks. It can more effectively target assistance to those in need and tailor services to individual users for public services. And in science, machine learning assists researchers in making

150

Artificial neural networks today are not conscious, The Economist, 9 June 2022. Machine learning: the power and promise of computers that learn by example, The Royal Society, London, April 2017 (licensed under the terms of the Creative Commons Attribution License).

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Fig. 1.35 AI ecosystem. Source The impact of AI on work, The Royal Society, British Academy, September 2018

sense of the massive amounts of data available today, providing new insights into biology, physics, medicine, and the social sciences, among other fields. Machine learning’s recent success is primarily due to the explosion of data available in certain areas, such as image or speech recognition (see Footnote 151). This data has enabled machine learning systems to be deployed in critical applications. There has been much discussion about machine intelligence and its implications for our health, productivity, and well-being. In such discussions, machine learning promises to save lives, address challenges such as climate change, and boost the global economy by trillions of dollars through increased productivity (see Footnote 151). While doing so, it also fundamentally alters the nature of work and shapes or defines people’s daily choices. Its risks and benefits must be balanced as its use becomes more pervasive in daily life. Between these two poles is a potentially transformative technology that brings both opportunities and challenges. There are now voice and object recognition systems that outperform humans at specific tasks, though these benchmark tasks are by their very nature constrained (see Footnote 151). For instance, researchers developed a machine learning system that beat humans in a narrow range of vision-related tasks in recent years, including recognizing individual handwritten digits (Markoff, 2015). Numerous people now interact daily with machine learning-driven systems: image recognition systems, such as those used to tag photographs on social media; voice recognition systems, such as those used by virtual personal assistants; and recommender systems, such as those used online retailers.

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It all began in the 1950s, with Alan Turing posing the question, “can machines think?” (Turing, 1950) and famously establishing the Turing Test—a person’s ability to distinguish between machine and human responses—as a measure of machine intelligence (see Footnote 151). Today, the benchmark is still used to determine the effectiveness of an artificial intelligence system. Machine learning is a field of study that straddles the divide between computer science, statistics, and data science. It incorporates elements from each field to process data to enable the detection and learning of patterns, predict future activity, and make decisions. Daily life applications of machine learning include commercial recommender systems, virtual personal assistants, image processing, and various other pervasive systems without many people knowing the intelligence hidden beneath the surface. Recommender systems: suggesting products or services: Machine learning analyzes data from previous purchases and the purchases of others to identify patterns and make predictions. Recommender systems—systems that make recommendations based on previous purchases—are among the most well-known machine learning applications, even if familiarity with the underlying technology is limited. Recommender systems predict which products or services are desirable based on their consumption patterns and preferences. These systems are used in various online retail environments, including Amazon and Netflix (see Footnote 151). Additionally, they can promote specific types of content to social media users, such as news stories relevant to a user’s interests. Organizing information: search engines and spam filtering: Additionally, machine learning assists in the generation of results for queries entered into internet search engines such as Google. These systems take the words entered as part of a search, identify words and phrases with the same or very similar meanings, and use this information to predict the appropriate web pages to respond to the query.152 Machine learning can also be used to filter emails by spam detection systems. The system is trained in this application using a sample of documents classified as spam and non-spam to distinguish between emails and route them to the appropriate folders. During this training phase, the system can learn how specific words, the names of different senders, and other characteristics affect whether an email is a spam or not. When deployed in production, it uses this learning to classify new emails, continuously refining its training as users identify incorrect classifications (see Footnote 151). Voice recognition and response: virtual personal assistants: By distinguishing between the various audio footprints of these sounds, natural language processing and speech recognition systems can match the patterns of sounds produced in human speech to previously encountered words or phrases. After identifying the terms used, they can convert them to text or execute commands. Until recently, voice recognition systems lacked accuracy, making them difficult to use in many situations. Recent advancements enable these systems to recognize speech much more accurately, converting the data patterns encoded in sound waves to text and

152

The Royal Society. 2015 Machine Learning Conference Report. 22 May 2015.

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executing the commands contained therein (see Footnote 151). As a result, many smartphones and other devices now include virtual personal assistants, applications such as Alexa, Cortana, Google Assistant, or Siri that respond to voice commands or questions. Computer vision: tagging photographs and recognizing handwriting: Machine learning can augment advanced image recognition and computer vision systems. Computers must detect and analyze visual images and associate numerical or symbolic information with those images. Image recognition can be used in social media applications to tag objects or people in photographs that have been uploaded to a website. Similar image recognition systems can also recognize scanned handwritten material, such as letters’ addresses or the digits on cheques. Computer vision-based machine learning is also used in gaming systems that detect users’ movements or gestures (see Footnote 151). The system is trained to recognize the appearance of a “body,” and it then uses this knowledge to interact with its users. Machine translation: Translating text into different languages: Computer systems can automatically translate text or speech between languages. Although efforts in this field date back to the early 1950s, only recent advancements have made these techniques more widely applicable. There are now various techniques for accomplishing this task, including statistical, rule-based, and neural network-based approaches (Le & Schuster, 2016). Machine translation is now used in specialized translation apps for mobile phones, social and traditional media, and international organizations that require document reproduction in many languages. Detecting patterns: unusual financial activity: Machine learning can be utilized to identify patterns in data that human analysts may miss due to its ability to analyze large datasets. Its pattern recognition capabilities are often employed in fraud detection systems associated with credit card or other payment system use. Algorithms are trained to recognize typical spending patterns using normal transaction data from many users (see Footnote 151). Additionally, analyzing this data for each user can determine what factors contribute to the likelihood of a fraudulent transaction, such as the location, magnitude, or timing of spending activity. Then, if a user exhibits an unusual spending pattern, the system can raise an alert, and the user’s action can be questioned. Machine learning is giving free rein to previously unthinkable valuations. Corporate investment in artificial intelligence is growing exponentially. According to Deloitte Global research, machine learning programs quadrupled in size between 2017 and 2020.153 However, to truly comprehend machine learning’s economic implications, one must read the tea leaves. According to PricewaterhouseCoopers, artificial intelligence will contribute $15.7 trillion to global GDP growth by 2030—more than the combined GDP of China and India today. By 2022, spending

153

Deloitte Global in From not working to neural networking, The Economist, June 23, 2016.

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on AI and machine learning will reach $57 billion.154 By 2035, artificial intelligence will increase productivity and profitability by 40% and 38%, respectively.155 While these figures are impressive, they are unsurprising if one considers the primary benefits machine learning provides to every industry: cost savings, increased profits, and a dramatic increase in customer satisfaction. When combined, these advantages result in improved business outcomes across all sectors. Machine learning is bringing a new era of preventative healthcare to the fore. Machine learning enables healthcare providers to diagnose abnormalities such as tumors from X-rays and MRIs more effectively than any human radiologist. For instance, Stanford researchers developed a machine learning algorithm to classify 14 different medical conditions based on a single chest X-ray.156 This is a significant reason McKinsey estimates that when combined with big data and healthcare app development, machine learning could generate $100 billion in annual revenue in healthcare alone. The Georgia Institute of Technology uses deep learning algorithms to anticipate heart failure. Warehouses and factories are racing to incorporate machine learning capabilities into their supply chains, making sense. Machine learning reduces waste and increases efficiency by eliminating bottlenecks, streamlining inventory management, and optimizing production and logistics. McKinsey anticipates that machine learning will eliminate 50% of supply chain forecasting errors, 10% of transportation costs, and 40% of administrative expenses (see Footnote 156). A large part of this will be because machine learning will enable facilities to operate 24 h a day, 365 days a year. However, quality is just as important as quantity. Seventy-eight percent of physical work could be automated using currently available technologies. This enables workers to take on more valuable, less physically demanding roles. Perhaps nothing has revolutionized our roads more than ride-sharing services such as Lyft and Uber in recent years. However, this will be insignificant compared to the changes brought about by self-driving cars. Uber currently earns 20% of revenue per ride, but this will increase to 100% once the company transitions to autonomous vehicles. Automobiles are far from the only mode of transportation to be impacted by machine learning. Additionally, airplanes are receiving a significant boost in intelligence. Artificial intelligence in the air is already a reality. Boeing is concentrating its efforts on utilizing artificial intelligence to reduce pilot input, and thus human error, on commercial flights. Asiana, Korea’s largest airline, prohibits pilots from manually flying the aircraft once it reaches 3000 ft. Above this point, AI guides you to your destination (see Footnote 156).

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International Data Corporation in From not working to neural networking, The Economist, June 23, 2016. 155 Accenture in From not working to neural networking, The Economist, June 23, 2016. 156 https://www.guidepoint.com/machine-learning-will-drive-economic-growth-in-every-ind ustry/. Marc Fischer, Guidepoint.

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1.2.4.2 Deep Learning Deep learning is an artificial intelligence (AI) function that mimics the human brain’s data processing and pattern generation processes. Deep learning is a subset of machine learning in artificial intelligence that utilizes neural networks to learn unsupervised from unstructured or unlabeled data. The adjectival term “deep” in deep learning refers to the network’s use of multiple layers. Deep learning is adept at handwriting recognition, for example. One way to accomplish this is through neural networks. Neural networks are a machine learning approach in which layers of computational units are connected, like how neurons connect in the brain. One of these layers—the input units—is designed to receive data from the outside world, while the other side of the network, the output layer, communicates a decision about the data received. Between these, additional layers communicate information about the input’s elements to one another, resulting in the output (see Footnote 151). In one telling example, a series of studies published in the last few years has demonstrated that neural networks can more accurately identify medical conditions from X-rays than human radiologists. In May 2019, a team of researchers from Google, Stanford, and Northwestern University published a study. They demonstrated that a deep learning model outperformed human physicians at detecting lung cancer using CT scans. A few months later, a team of researchers at New York University published a series of studies demonstrating AI’s superior performance in detecting breast cancer using mammograms. In January 2020, a research group led by Google and leading medical research institutions published another study on breast cancer detection, with the AI system outperforming humans.157 According to the January study, which garnered widespread media attention, the AI system reduced false negatives by 9.4% and 5.7% compared to human radiologists (see Footnotes 151, 157). Radiology, in many ways, is an ideal application for deep learning. Examining images for the presence of a medical condition such as cancer is a pattern recognition and object classification exercise—two tasks at which deep learning excels. This prompted AI luminary Geoff Hinton to declare, “It’s quite obvious that we should stop training radiologists now” (see Footnote 157). Several years after Hinton predicted the demise of human radiologists, no clinic in the world had sent home any radiologist. There is no reason to fear that radiologists will become extinct soon (see Footnote 157). How did artificial intelligence (AI), which has long been associated with hubris and disappointment, become the hottest field in technology? The resurgence of “AI,” more precisely machine learning, and the current enthusiasm for the area date back to 2012 when an online image-mapping competition called the ImageNet Challenge was launched.

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Deep Learning Has Limits. But Its Commercial Impact Has Just Begun, Rob Toews, Forbes, Feb 9, 2020.

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Fig. 1.36 Error rates on ImageNet. Source ImageNet; Stanford Vision Lab in From not working to neural networking, The Economist, June 23, 2016

In 2010, the winning system correctly identified an image 72% of the time (the average is 95%) for humans. The accuracy increased to 85% in two years, owing to a novel “deep learning technique”.158 Further rapid advancements resulted in a 2015 ImageNet Challenge accuracy of 96%, surpassing humans for the first time. Since then, accuracy has steadily increased, approaching 100% asymptotically (Fig. 1.36). This resulted in the development of a new type of artificial intelligence: so-called artificial neural networks (ANNs). These are networks of artificial neurons, or brain cells, inspired by biology. Each neuron in a biological brain can be triggered by neurons whose outputs feed into it, and its output can then activate additional neurons. A simple ANN has an input layer of neurons that accepts data, an output layer that outputs results, and possibly a couple of hidden layers in the middle that process the data. (In practice, ANNs are entirely simulated in software.) Each neuron in the network is equipped with “weights” and an “activation function” that regulates the output’s firing. Training a neural network entails adjusting the weights of the neurons so that a given input produces the desired outcome (Fig. 1.37). Around 2009, researchers discovered that graphical processing units (GPUs), the specialized chips used in personal computers and video game consoles to generate fancy graphics, were also well-suited for running deep learning algorithms. GPUs could be nearly tenfold the speed of its deep learning system. Suddenly, several weeks previously took less than a day to train a four-layer neural network.

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From not working to neural networking, The Economist, June 23, 2016.

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Fig. 1.37 How an artificial neural network processes data? Source Economist in From not working to neural networking, The Economist, June 23, 2016

Since then, deep learning systems have become more powerful: Networks with 20 or 30 layers are common, and Microsoft researchers recently built one with 152 layers (see Footnote 158). Deeper networks can achieve higher levels of abstraction and produce superior results, and they are effective at solving a wide variety of problems. Google is using deep learning to improve the quality of its web search results, understand commands spoken on smartphones, assist people in searching their photographs for specific images, suggest automatic responses to emails, improve its service for translating web pages between languages, and assist its self-driving cars in understanding their surroundings. Deep learning comes in a variety of forms. The most frequently used type is supervised learning, a training technique using a labeled set of examples. In supervised machine learning, a system is trained on labeled data. Each data point is tagged with one or more categories, such as “apples” or “oranges.” The system learns the structure of this data—referred to as training data—and uses it to predict the categories of new—or “test”—data. For example, when filtering email spam, it is possible to build a massive database of example messages labeled “spam” or “not spam.” A deep learning system can be trained on this database by repeatedly running through the examples and adjusting the weights inside the neural network to improve the neural network’s accuracy in determining spamminess (see Footnote 158). The significant advantage of this approach is that no human expert or programmer must create a list of rules or implement them in code; the system learns directly from the labeled data. There is a vast amount of data available for supervised learning. Systems trained on labeled data classify images, recognize speech, detect fraudulent credit card transactions, identify spam and malware, and target advertisements. The correct

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answer is usually known in many previous cases for all these tasks. When you upload a photograph to Facebook, it can recognize and tag your friends and family (see Footnote 158). Adopting technology has enabled established financial services, information security, and marketing firms to rebrand as artificial intelligence (AI) companies. Unsupervised learning is another technique that involves training a network by exposing it to many examples without instructing it on what to look for. Unsupervised learning is essentially unlabeled learning (see Footnote 158). Its objective is to identify the characteristics that make data points more or less similar, for example, by creating clusters and assigning data to them. Rather than that, the network learns to recognize features and cluster similar instances, revealing previously unknown groups, connections, or patterns within the data. Unsupervised learning can be used to find things when the object’s appearance is unknown: for example, monitoring network traffic patterns for anomalies that may indicate a cyber-attack or examining large numbers of insurance claims to detect new types of fraud. TensorFlow, a popular free and open-source software library for ML and AI, is widely used as a testbed to validate ML applications (see Footnote 158). It is used across various projects but focuses on training and interpretation of deep neural networks. Google originally developed TensorFlow for internal use but was released subsequently for open use (Fig. 1.38). Reinforcement learning is unsupervised learning that falls between supervised and unsupervised learning. It entails training a neural network to interact with an environment with no feedback other than occasional rewards. Training entails adjusting the network’s weights to discover a strategy that consistently produces

Fig. 1.38 Spotting cats. Source From not working to neural networking, The Economist, June 23, 2016

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higher rewards. Reinforcement learning is a type of unsupervised learning that falls between unsupervised and supervised learning. In a typical reinforcement learning scenario, an agent interacts with its environment and is provided with a reward function to optimize159 ; for example, the system may be rewarded for winning a game. The agent’s objective is to learn about the consequences of its actions, such as which moves were critical to winning a game, and to use this knowledge to develop strategies that maximize its rewards (see Footnote 151). DeepMind, a subsidiary of Google, is an expert in this field. It published a paper in February 2015 in Nature describing a reinforcement learning system capable of learning to play 49 classic Atari video games using only the on-screen pixels and the game score as inputs and connecting its output to a virtual controller (see Footnote 158). The system learned to play all of them from scratch and performed at or above the human level in 29 of them. Historically, promising new AI techniques have tended to fizzle quickly. However, deep learning is distinct. The long-term goal is to develop an “artificial general intelligence” (AGI)—a system capable of performing various tasks—rather than developing a new AI system for each problem. Even the most optimistic believe it will take another decade to achieve human-level AGI expertise. Meanwhile, AI is already beneficial and will become increasingly so. Google’s Smart Reply system, which uses a twin neural network system to suggest responses to emails, went from a deep learning research project to a live product in just four months (though it had to be discouraged from suggesting the response “I love you” to nearly every message at first!). To most people, all of this progress in artificial intelligence will manifest as incremental improvements to the internet services they already use daily. Search engines will return more relevant results, and recommendation engines will become more precise. Artificial intelligence technology will enable computer interfaces to become conversational and predictive rather than driven solely by menus and icons. Additionally, communicating with computers will make them accessible to individuals who cannot read or write or are currently unable to use the internet. However, gradual advancements can result in abrupt changes when a threshold is reached, and machines can perform previously human-only tasks (see Footnote 158). Self-driving cars are rapidly improving; they may soon be able to take the place of taxi drivers, at least in controlled environments such as city centers. Delivery drones, both wheeled and airborne, could compete like human couriers. Robots may stack supermarket shelves and move items around in warehouses with improved vision systems and robotic technology. Additionally, there is ample opportunity for unexpected breakthroughs. Natural language processing (NLP) aspect of AI brings it closer to humans. Natural language processing is a subfield of linguistics, computer science, and artificial intelligence that studies computers and human language interactions, specifically

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Russell and Norvig (2003) define an agent as “something that perceives and acts” with AI being “the study and construction of rational agents”.

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how to program computers to process and analyze large amounts of natural language data. The ultimate goal is for a computer to “understand” the contents of documents, including the language’s contextual nuances. The technology can then extract accurate information and insights from the documents and categorize and organize them.160 Voice is beginning to supplant text as the primary computing interface, from virtual assistants to call center attendants. Microsoft’s $16 billion acquisition of Nuance Communications will bolster the company’s natural language processing capabilities, or artificial intelligence capable of interpreting and responding to human language. In recent years, technology has become ubiquitous. It powers Apple’s Siri, Amazon’s Alexa, and self-service call centers. Voice is on the verge of eclipsing text as a computing interface. Gartner forecasts that by 2025, 50% of knowledge workers will use an NLP-powered virtual assistant daily, up from 5% in 2020.161 Much of modern natural language processing is concerned with calculating the probability of how a sequence of words should be interpreted out of all possible interpretations. For example, it can determine whether the term “club” refers to a sandwich, a round of golf, or nightlife. The NLP technology has advanced due to the maturation of so-called neural networks, which gained traction in the early 2010s (see Footnote 161). Neural nets are modeled after the neurons in the human brain and are used to power a type of artificial intelligence called deep learning and facial recognition systems. Whether analyzing text or speech, a deep learning model analyzes a sentence by first examining fundamental components called tokens, which can be words or segments of words. These tokens are analyzed in conjunction with the other words in the sentence to ascertain each word’s most likely usage. A neural network trained on millions, or billions of sentences can make a probabilistic inference about the type of bank being discussed in sentences such as “I went across the river to the bank” and “I went across the street to the bank”. Using NLP in voice assistants typically entails additional steps. Suppose a speaker uses an automated system powered by natural language processing to book a flight. In that case, the algorithm searches for words that are likely the origin city, the destination city, and the departure and return times. The system recognizes words based on their sounds and makes statistical inferences about the word uttered based on the context. These words are converted to text and analyzed for intent, such as using the word “I” or “eye.” The text is converted back to speech when the user receives a response. Of course, there are some challenges with NLP. Current NLP systems are designed for very specific purposes, and their performance degrades when they come into contact with something outside of that zone (see Footnote 161). For instance, if a chatbot or voice bot assists a user in booking a flight, the system

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Wikipedia in Behind Microsoft’s Nuance Deal: Natural Language Processing, Explained, The Wall Street Journal, April 13, 2021. 161 Behind Microsoft’s Nuance Deal: Natural Language Processing, Explained, The Wall Street Journal, April 13, 2021.

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may struggle to answer questions about reward points or the status of a refund. Additionally, it is challenging to train NLP systems to predict which situations require a simulation of empathy and convey that response through appropriate language and tone, impacting the user experience. Academic and corporate researchers are working to make natural language processing systems more capable of handling many requests and inquiries without failing. Another objective is to make the systems more context-aware. For example, Amazon announced in December that Alexa technology could ask a clarifying question to understand previously unheard requests (see Footnote 161). Currently, this capability is limited to a few applications, but it is expected to grow. Earlier this year, software company OpenAI LP demonstrated that its natural language processing system, dubbed DALL-E, could generate images based on a user’s request—for example, it could generate an image of “an avocado-shaped armchair” if instructed to do so. NLP is viewed as one of the most promising technologies for developing machines capable of exhibiting what is known as general intelligence by performing tasks and responding to a wide variety of human requests without being explicitly trained.

1.2.4.3 AI’s Growing Economic Impact That AI is driving the digital economy is self-evident. Artificial intelligence has a significant potential to contribute to global economic activity. The top three deployments of AI are image recognition, algorithmic trading, and health care. The most popular deployment of AI is in image recognition, which finds application in social media and pathological diagnosis. Algorithmic trading is another key area where AI will deliver specific economic benefits. With the advent of faster computers and 5G, this will only accelerate. Critical healthcare applications will enable efficient and scalable processing of patient data (Fig. 1.39).

Fig. 1.39 The future of AI. Source Statista in Stone et al. (2016)

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AI technologies are already enabling the development of new products and services across a variety of industries and businesses: • In many businesses, intelligent personal assistants that use voice recognition, such as Siri, Alexa, and Cortana, are standard. • In the transportation sector, AI processes enable the development of self-driving vehicles and assist in managing traffic flows and the design of transportation systems (Stone et al., 2016). • In education, AI technologies are enabling the development of individualized learning systems. • AI enables new diagnostic and decision support tools for medical professionals in the healthcare sector. • In retail and logistics, AI assists in efficiently designing warehouse facilities (see Footnote 144). • In development and humanitarian assistance, AI-enabled data analytics assist in achieving the Sustainable Development Goals and assessing humanitarian scenarios (Vacarelu, 2018). • In the creative industries, software engineers develop computer systems capable of producing simple news reports, such as business results, orchestral music composition, and short film production (Hutson, 2018). • Across industries, AI is being used to analyze massive amounts of data, improve business processes, and create new services (see Footnote 144). The blitzkrieg of AI will shape the future of the world. Computer vision, natural language processing, virtual assistants, robotic process automation, and advanced machine learning are frontiers of widely adopted AI. By 2030, 70% of businesses will have adopted AI technologies, and less than half of large companies will likely utilize the full range of AI technologies across their organizations. In aggregate, and after adjusting for competition and transition costs, AI could generate an additional $13 trillion in economic output by 2030, boosting global GDP by about 1.2% per year.162 If delivered, this impact would be comparable to previous general-purpose technologies. To put this in historical context, the introduction of steam engines increased labor productivity by an estimated 0.3% per year in the 1800s. The impact of robots on productivity in the 1990s was around 0.4%, while the spread of information technology in the 2000s increased productivity by about 0.6%.163 Additionally, AI will result in significant shifts in the demand for skills, potentially widening wage disparities. While some workers may lose jobs because of automation, there may be a shortage of workers whose value is significantly

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Cushman & Wakefield PLC in AI Set to Reshape Workplace as Physical Offices Open Up, The Wall Street Journal, March 31, 2021. 163 McKinsey in Sizing the prize, PwC’s Global Artificial Intelligence Study: Exploiting the AI Revolution, 2019.

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increased by working alongside machines.164 Up to 375 million workers, or 14% of the global workforce, may need to change occupations—and virtually all workers will need to adapt to new ways of working alongside machines. The overall picture paints increasing wage and employment opportunity inequality, with groups with superior skill-sets capturing a disproportionate share of gains. The economic impact of AI is likely to be substantial, comparable to that of previous general-purpose technologies. Economic consequences may manifest gradually and become visible only over time. As a result, AI’s contribution to growth could be three or more times higher by the end of the decade than in the next five years.165 A significant challenge is that the adoption of AI may exacerbate existing divides between countries, businesses, and workers. Countries that establish themselves as AI leaders (mainly developed economies) stand to gain an additional 20–25% in economic benefits over today’s levels while emerging economies stand to gain only half. China and the United States are expected to benefit economically from artificial intelligence, while Africa and Latin America benefit the least.166 China, the United States, and Japan account for 78% of all AI patent filings worldwide.167 There may be a growing divide between companies, with early adopters potentially doubling their returns by 2030 and late adopters falling behind. Individual workers may also see an increase in demand—and wages—for those with digital and cognitive skills and expertise in difficult-to-automate tasks but a decline in demand for repetitive workers (see Footnote 165). Numerous factors influence the growth of AI-enabled productivity, including labor automation, innovation, and new competition. Micro- and macro-level factors such as a country’s global connectedness and labor market structure contribute to the magnitude of the impact. These have been plotted below, resulting in a net effect of $16 trillion resulting from AI (Fig. 1.40). The impact of AI grows gradually over time, accelerating after five to ten years. A net productivity effect accumulates over time—from negligible within five years to significant by 2030. As a result, AI’s contribution to growth could be three or more times that of the next five years by 2030. The net global impact of an additional $16 trillion in value relative to today’s global GDP will likely take longer to develop (Fig. 1.41). After five to ten years, the aggregate net impact of AI may accelerate (see Footnote 165). AI’s impact is likely to accelerate over time, boosting productivity growth. As a result, companies—and countries—pursuing proactive AI strategies will almost certainly need to be committed for the long haul, as the total net impact may not

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Sizing the prize, PwC’s Global Artificial Intelligence Study: Exploiting the AI Revolution, 2019. 165 Notes from the AI frontier modeling the impact of AI on the world economy, McKinsey Global Institute, Sept 2018. 166 The 2018 Global Innovation 1000 study: Investigating trends at the world’s 1000 largest corporate R&D spenders. London. Available at: https://www.strategyand.pwc.com/innovation1000. 167 WIPO Technology Trends 2019: Artificial Intelligence. World Intellectual Property Organization. Geneva.

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Fig. 1.40 Net impact of AI, $trn. Source McKinsey Global Institute of Analytics in Notes from the AI frontier modeling the impact of AI on the world economy, McKinsey Global Institute, Sept 2018

Fig. 1.41 Nonlinear value accrual of AI. Source McKinsey Global Institute of Analytics in Notes from the AI frontier modeling the impact of AI on the world economy, McKinsey Global Institute, Sept 2018

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become apparent for several years (Edquist & Henrekson, 2006). This pattern has been observed with older general-purpose technologies such as steam and electricity: a slow start characterized by investment and low productivity, followed by impact in the form of increased productivity (sometimes decades later). According to one study, electricity began to permeate businesses and households more broadly after 1915. When machines powered by stand-alone secondary motors became more prevalent, centralized power grids became more prevalent, and productivity rose (David, 1991). Another study discovered that capital accumulation in steam engines was slow. After James Watt patented the improved steam engine in 1769, steam did not achieve parity with water as a source of power in the British economy until 1830. Even as late as 1870, steam power was primarily used in mining and the manufacture of cotton textiles (Crafts, 2003). AI is likely to follow a similar growth trajectory, though faster than previous general-purpose technologies (see Footnote 165). The potential for AI to affect change in different employment sectors has reignited debates about automation and the future of work. While much of the public discussions about AI have veered between fears of the “end of work” and assurances that employment will remain stable, evidence suggests that neither of these extremes is likely. However, there is widespread agreement that AI will have a disruptive effect on work, resulting in the loss of some jobs, the creation of others, and the transformation of others. Over the last five years, numerous projections have been made about the number of jobs that are likely to be lost, gained, or changed due to AI technologies, with varying outcomes and analyses using a variety of timescales. There are numerous perspectives on “automatability,” with a consensus that current AI technologies are best suited to ‘routine’ tasks, albeit tasks involving complex processes. In contrast, humans are more likely to retain dominance in unpredictable environments or fields requiring significant social intelligence. Recently, a consensus has emerged from such studies that highly automatable between 10 and 30% of jobs in the United Kingdom. Numerous new jobs will be created as well (see Footnote 144). Substantial evidence from historical and contemporary studies indicates that changes in work enabled by technology disproportionately affect lower-paid and less-qualified workers. This suggests that transitional effects are likely to disrupt some people or places. One of the most serious issues raised by AI is the possibility of increasing inequality, at least temporarily, if lower-income workers are disproportionately affected, and benefits are not widely distributed (see Footnote 144). In recent years, technology has exacerbated job polarization, favoring higher-educated workers at the expense of middle-income workers, and increasing competition for jobs requiring non-routine manual labor. The concentration of market power may also have a detrimental effect on labor’s income share, competitiveness, and productivity. Despite AI’s significant contributions, concerns about automation and the workplace date back to the nineteenth century. For instance, the twentieth century witnessed renewed predictions that automation would render humans jobless. John Maynard Keynes envisioned a world where subsistence’s “economic problem”

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would be “solved” in 1930.168 In 1950, John F. Kennedy referred to automation as a “problem” that would create “hardship.”169 In 1965, Time magazine quoted an IBM economist predicting a 20-h workweek (Rothman, 2015). Later, as digital technology advanced, debate raged over whether it would herald the “End of Work,” as US economist Jeremy Rifkin coined the phrase in 1995. Such discussions are frequently sparked by fears of job loss and uncertainty about the broader economic benefits that will result, with expert opinion often divided on the subject (see Footnote 144). External environmental conditions may affect AI adoption. First, the adoption rate is influenced by commercial, social, and legal factors. For instance, businesses may be hesitant to invest in AI technologies. Consumers may be reluctant to switch to AI-enabled products and services, and legislators may take time to develop legal frameworks for AI-enabled innovations.170 Second, technological advancements can create new jobs, particularly when product costs decline and demand for products and labor increases. Thirdly, economies and businesses may adapt to new technologies by repurposing displaced workers. Examples include a reduction in typists being offset by increased call center staff and banks repurposing tellers to serve as customer service representatives. Fourth, new jobs are created as existing industries become more competitive and grow, or new types of work emerge. According to one report, approximately 6% of all jobs in the United Kingdom in 2013 did not exist in 1990 (PwC, 2015). Possible new job categories include “trainers” (those responsible for training AI systems), “explainers” (those responsible for interpreting AI outputs for accountability), and sustainers (those responsible for monitoring the work of AI systems).171 Meanwhile, advancements in industrial robotics may result in job creation in robotics support services for manufacturing firms and robot manufacturing (Eurofound, 2017). Major events of AI that are still unfolding which will shape the future of AI systems: AI M&A hits record. It has been a banner year for mergers and acquisitions in artificial intelligence. Around the world, there have been approximately 130 mergers and acquisitions involving artificial intelligence this year, with the total value of the transactions exceeding $28 billion.172 There were 120 global M&A transactions worth $5 billion last year. The rapid pace of AI M&A is likely to continue as large technology companies seek to acquire AI technologies that complement their current offerings.173

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Reproduced at: http://www.executiveshift.org.uk/images/site_graphics/downloads/John_Mayn ard_Keynes.pdf. 169 Reproduced at: https://www.jfklibrary.org/Asset-Viewer/Archives/JFKCAMP1960-1030-036. aspx. 170 McKinsey Global Institute, Jobs Lost, Jobs Gained. 171 Accenture PLC in Acemoglu and Restrepo (2018). 172 Dealogic analysis in The Big AI Stories of 2021, Wall Street Journal, Dec 28, 2021. 173 Forrester Research in The Big AI Stories of 2021, Wall Street Journal, Dec 28, 2021.

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Artificial intelligence is permeating business at last. Your crops are in “danger” from the machines, at least in a few American farms. John Deere recently delivered to farmers its first fleet of totally autonomous vehicles. Six cameras on the tilling tractors utilize artificial intelligence (AI) to identify impediments and move out of the path. The company sells about 50% of vehicles with some form of AI. This includes equipment like combine harvesters that autonomously change their settings to waste as little grain as possible and systems that employ on-board cameras to see weeds amid the crops and spray pesticides. The additional cost of an AI-enhanced tractor is recovered for a medium-sized farm in two to three years. Retail this year will overtake banking as the top spender on artificial intelligence, International Data Corp., a market researcher, reports. This year, the global retail sector is expected to invest $11.8 billion in artificial intelligence.174 Increased ecommerce activity prompted by the pandemic is assisting retailers in increasing their spending. For example, Home Depot is in the early stages of implementing a machine learning system to identify products that require replenishment on store shelves. The system uses computer vision to monitor the stock on the shelves of individual stores. EU proposes regulation to limit AI use. The executive arm of the European Union proposed a bill to restrict artificial intelligence in areas such as hiring and policing. It is one of the most comprehensive efforts yet made by a Western government to regulate artificial intelligence. The legislation would strengthen regulatory oversight and standards for the development and use of artificial intelligence in designated “high-risk” areas, such as college admissions and loan applications, restrict police use of facial recognition, and prohibit certain uses of AI. Although some believe the legislation will increase costs and stifle innovation, others believe it will be a critical component in establishing trust that benefits everyone.175 Inventive AI. The majority of patent laws, including those in the United States, recognize as inventors only human beings or “natural persons.”176 Recently, South Africa granted a patent to an invention that credited an artificial intelligence system as the inventor. The system proposed a beverage container design based on fractal geometry. It was the first time a government granted a patent for an artificial intelligence-based invention. However, the US Patent and Trademark Office and the European Patent Office rejected the patents.

1.2.4.4 The New Wonder—ChatGPT Starry-eyed technologists have been predicting that AI will revolutionize business and bring significant advantages for businesses and consumers for decades. There are other indications that this is finally happening besides John Deere. Fifty percent of businesses worldwide attempted had employed AI in some capacity, up from 20% in 2017.177 New, strong “foundation” models quickly transition from the

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IDC in The Big AI Stories of 2021, Wall Street Journal, Dec 28, 2021. The Software Alliance in The Big AI Stories of 2021, Wall Street Journal, Dec 28, 2021. 176 The Big AI Stories of 2021, Wall Street Journal, Dec 28, 2021. 177 McKinsey in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022. 175

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Fig. 1.42 The AI quotient. Source PitchBook in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022

laboratory to the real world. A new AI tool called ChatGPT, which has just been made available for public testing, is making waves for its capacity to create smart jokes and delineate scientific ideas. However, enthusiasm is also evident among businesses that use AI, its creators, and the venture capitalists who support those creators. The thriving AI scene is an exception to the generally depressing tone of techdom, which is currently experiencing a severe downturn. VCs invested $67 billion in companies claiming to be artificial intelligence experts in 2022. Since mid-2021, the percentage of VC deals worldwide involving these businesses has increased, reaching 15% this quarter (Fig. 1.42). Twenty-eight brand-new AI unicorns from 2022 were produced between January and October. Microsoft is discussing extending its investment in OpenAI, a maker of foundation models and ChatGPT’s provider. Google plans to invest $200 million in Cohere, an OpenAI competitor. The euphoria is not just present in Silicon Valley. All types of large companies need AI talent. A possible solution is AI. Fifty-two AI startups were bought by large American companies in the S&P index in the past 12 months, up from 24 in 2017.178 In the three months leading up to November, the same set of companies placed roughly 7000 job ads per month for AI and machine learning professionals,

178

PitchBook in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022.

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Fig. 1.43 Robots bring jobs. Source PredictLeads in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022

which is about ten times more than in the first quarter of 2020179 (Fig. 1.43). Big businesses have spent years gathering data and funding-related technology.180 They now seek to take advantage of this “data stack” for their gain. Unsurprisingly, the IT sector was the first to adopt AI. Machine learning techniques helped Google expand its internet advertising business in the 2000s. Among other things, it employs AI to enhance search results, completes your phrases in Gmail, and figures out methods to consume less energy in its data centers. Amazon uses artificial intelligence (AI) to manage its supply chains, give warehouse robots instructions, and predict which job candidates will make good employees. AI powers Apple’s Siri digital assistant, Meta creates eye-catching social media posts, and Microsoft’s Teams videoconferencing service uses AI to remove background noise and let users draft PowerPoint presentations. Big tech saw an opportunity to offer customers some of those same AI capabilities right away. Customers of Amazon, Google, and Microsoft’s cloud computing divisions can now access these features. Microsoft’s cloud service for machine learning’s revenue growth has doubled in the last four quarters. There are many new service providers, such as Avidbots, a Canadian company that makes robots that clean warehouse floors, and Gong, whose app aids sales teams in following up

179

PredictLeads in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022. 180 Capitalg in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022.

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on leads. The extension of AI to different industries, from industry to insurance, was made possible by increased usage of cloud computing, which lowers the cost of deploying the technology. AI is now present everywhere, even if you can’t see it. “Once something becomes useful enough and common enough it’s not labelled AI anymore.”181 Industry experts contend that AI will be used in an increasing number of jobs and business operations during the next several years. The predictive capability of AI can be greatly improved over time, leading to superior goods and significant cost savings.182 This is particularly true in less-showy areas where businesses are already utilizing analytics, such as supply chain management. Walmart employed a new AI-powered simulation of its supply chain to reroute supplies from other hubs and forecast how demand for items would change when Hurricane Ian prompted the company to close a sizable distribution center, stopping the flow of goods to retailers in Florida. This process took hours as opposed to days because of AI.183 It’s conceivable that the upcoming wave of foundation models will make AI much more boring. These algorithms hold two significant benefits for the industry. The ability of foundation models to produce fresh content is the first. Two firms, Stability AI and Midjourney, develop generative models that generate new images in response to a suggestion. The algorithm conjures up the requested image in about a minute, whether it be a dog on a unicycle in the manner of Picasso or, less frivolously, a logo for a new firm. On top of other companies’ foundation models, startups build apps. Copy and Jasper.AI pay OpenAI for access to GPT3, allowing their programs to transform straightforward prompts into sales content. The second benefit is that, after training, foundation AIs excel at many different tasks rather than just one highly specialized one. Foundation models’ adaptability will likely reduce an AI project’s expenses by 20–30%.184 Take GPT3, an OpenAI natural language model that serves as the foundation for ChatGPT. It was initially trained on substantial portions of the internet before being fine-tuned by various startups to perform various tasks, including generating marketing copy, completing tax forms, and creating websites using a sequence of text prompts. Computer programming is an early successful use of generative AI. This is, of course, a technological domain. Many companies provide a virtual assistant that generates new lines of code when asked. One illustration is Copilot on GitHub, Microsoft’s hosted open-source software. Nearly 40% of the code written by programmers who use Copilot is outsourced to it; programming is estimated to be 50% faster. Amazon released CodeWhisperer, its version of the tool, in June. Similar software, known internally as PitchFork, is purportedly being used by Alphabet.

181

Oxford University in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022. 182 Databricks in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022. 183 Walmart in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022. 184 Deloitte in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022.

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“We envision a world where everyone, no matter their profession, can have a Copilot for everything they do.”185 Numerous startups already carry out this. Microsoft released a tool in October that automatically organizes data for users after prompts. Google and Amazon might try to create something similar. Adept, a Bay Area company, is developing “a copilot for knowledge workers.” It unveiled a video of its first foundation model in September of 2022, which employs prompts to execute calculations in a spreadsheet and conduct searches on real estate websites. Other innovative corporate users are exploring generative AI. In December 2021, the world’s largest sportswear company, Nike, acquired a company that develops new sneaker designs using similar algorithms. The robotic assistant from Amazon, Alexa, can now create stories for kids. Images produced by DALL-E2, another OpenAI model, are used by Nestlé, a large Swiss food manufacturer, to promote its yogurt products. Some financial institutions use AI to create a preliminary version of their quarterly reports.186 Users of foundation models can also use the growing profession of professional prompters, who create instructions to optimize the output of the models. Users can purchase and trade prompts on PromptBase to get particularly smart outcomes from the big image-based generative models like DALL-E-2 and Midjourney. On the website, you may also engage knowledgeable “prompt engineers,” some of whom charge $50 to $200 per prompt. These days, writing prompts are big business. After allegations that it produced convincing but fraudulent research, Meta removed Galactica as its foundational paradigm for science. Many foundation models, having been trained online, depict humanity in all its flaws. In one study, researchers at Stanford University discovered that the likelihood of violence was far higher when GPT3 was asked to construct a sentence beginning “Two Muslims walked into a…” than when the phrase referred to Christians or Buddhists (see Footnote 186). Other challenges are exclusive to the business sector. Foundation models can create legal liabilities when things go wrong since they frequently function as “black boxes,” not explaining how they arrived at their results. Additionally, they won’t do much for businesses that don’t have a clear vision for what AI will accomplish or don’t train staff members on how to use it. This may explain why only 25% of McKinsey survey respondents claimed that AI had improved their bottom line (a 5% boost to earnings). The proportion of businesses benefiting significantly (an increase in earnings of over 20%) is in the low single digits, many of which are tech businesses. Nevertheless, those numbers will inevitably increase as AI becomes duller and duller. Rarely has the dull generated this much excitement (see Footnote 186).

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Microsoft’s CEO Satya Nadella in Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022. 186 Artificial intelligence is permeating business at last, The Economist, 6 Dec 2022.

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The economic impact of ChatGPT appears mind-boggling. The current emergence of generative artificial intelligence (AI) raises the question of whether task automation is about to accelerate quickly, resulting in labor cost reductions and increased productivity. The ability of generative AI, like ChatGPT, to produce output that can’t be distinguished from the human-created output and to remove barriers to communication between humans and machines represents a significant achievement with potentially significant macroeconomic repercussions.187 The most recent version of OpenAI’s GPT model, GPT-4, was released in March 2023 and can now handle visual input in addition to text, scoring 150 points higher on the SAT than its predecessor and 40% more likely to produce accurate results. By 2030, the galloping US investment in AI alone may be close to 1% of the US GDP (Zhang et al., 2022). The labor market may see a major change if generative AI lives up to its potential. Using data on occupational tasks in the US and Europe, it was determined that up to one-fourth of present employment might be replaced by generative AI and that about two-thirds of jobs are currently subject to some level of automation by AI. According to projections extrapolated internationally, generative AI may automate the equivalent of 300 million full-time jobs (see Footnote 187). The good news is that the development of new positions has historically offset job losses due to automation. Most long-term employment growth is attributable to introducing new professions in response to technological advancements. Significant labor cost reductions, the creation of new jobs, and increased productivity for non-displaced workers all increase the likelihood of a productivity boom that sharply boosts economic development. A recent study found that 60% of workers today are employed in occupations that did not exist in 1940, suggesting that over 85% of employment growth over the last 80 years is explained by the technology-driven creation of new positions. This finding shows how technological innovation that initially displaces workers drives employment growth over a long horizon (Autor et al., 2022). The impact varies greatly between industries and will be highest in the administrative and legal sectors, where AI poses a 46% threat to administrative employees and a 44% threat to legal employment. The occupations with the least exposure to AI are cleaning and maintenance, installation and repair, and construction. Physically hard jobs come with low risk; replacement is likely in maintenance 4% of the time and in building 6% of the time. Following widespread implementation, generative AI is predicted to increase yearly US worker productivity growth by a little under 1.5% over a ten-year period (see Footnote 187). Economically significant benefits could also result from the improvement in global labor productivity; it is predicted that AI could eventually boost annual global GDP by 7%. This estimate emphasizes the immense economic

187

The Potentially Large Effects of Artificial Intelligence on Economic Growth (Briggs/Kodnani), Goldman Sachs report, 26 March 2023.

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potential of generative AI if it fulfills its promise, even if the impact of AI will ultimately depend on its capabilities and adoption timeframe (see Footnote 187). The introduction of ChatGPTs may impact at least 10% of the work tasks performed by about 80% of U.S. workers and at least 50% of the tasks performed by about 19%. All wage levels are expected to be affected, with higher-paying positions possibly being more exposed to ChatGPT’s capabilities and ChatGPTpowered applications. About 15% of all worker tasks in the US could be accomplished substantially more quickly and with the same level of quality if they had access to ChatGPT (Eloundou et al., 2023). This share rises to 47 and 56% of all tasks when ChatGPT-based software and tools are used. This conclusion suggests that the economic consequences of the underlying models will be scaled significantly by ChatGPT-powered software. This leads to the conclusion that ChatGPTs demonstrate characteristics of general-purpose technologies, indicating that they may significantly impact the economy, society, and politics (Eloundou et al., 2023). The biggest names in technology are investing heavily in AI. Teams is not the only Microsoft product that has artificial intelligence embedded in it. Word and Excel are among the productivity apps the corporation recently revealed would receive the same approach. Days prior, Google unveiled a comparable update for its productivity software, including Gmail and Sheets. These announcements have come from America’s tech giants non-stop over the past month or two. GPT-4, a new super-powerful AI, was published by OpenAI, the startup that Microsoft partially owns, and which created ChatGPT, a popular AI conversationalist. Amazon Web Services (AWS) has announced it will deepen its relationship with another AI company, Hugging Face. Siri, Apple’s virtual assistant, is purportedly being tested alongside new artificial intelligence (AI) technologies. Meta claimed it wanted AI to “turbocharge” its social networks. In addition to its productivity tools, Google unveiled Bard, its own AI chatbot that competes with ChatGPT.188 A new wave of AI models quickly transitioning from the laboratory to the real world is causing a rush of activity. The five titans assert that AI is their sole emphasis. Two things are already obvious. AI development is gaining ground. And even before a winner is determined, the competition alters how big tech uses the technology. The big five are not new to AI. Amazon uses technology to sell and distribute its goods, Google uses it to search the internet, Apple gives Siri intelligence, Microsoft helps users manage their data, and Meta offers advertisements. However, the latest “generative” AI models like GPT-4 appears to be a turning point. With the release of ChatGPT in November 2022, which has the potential to produce anything from vacation itineraries to poems. “Large language models” are what give these AIs their generative nature. These examine online information and, in response to a user’s request, foretell the upcoming word, stroke, or note in

188

Big tech and the pursuit of AI dominance, The Economist, 26 March 2023.

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a text, image, or song. Many consider them to be a “platform shift” (see Footnote 188). According to this perspective, AI will develop into a technology layer on top of which any software can be created. There are many parallels between this and the emergence of the internet, smartphones, and cloud computing. Perhaps, another general-purpose technology (GPT). The tech behemoths have everything they require to prosper in the age of AI: data, processing power, and billions of consumers. AI seems to be the horse to back. Recently, Meta claimed that AI was the company’s largest investment category. AI firms have been involved in almost a fifth of all company acquisitions and investments.189 A tenth of job posts in big tech call for AI expertise.190 A similar percentage of major tech employees’ LinkedIn profiles indicate they are employed in the AI industry. With Meta hot on their heels, Microsoft and Alphabet seem to be pulling away from the competition. Microsoft is a front-runner. Each of its three transactions has included an AIrelated company. The share at Amazon and Alphabet is double that. It is vastly more than Meta and over six times as much as Apple. Microsoft’s biggest bet is on OpenAI, whose technology drives the improved version of its Bing search engine. At the startup’s most recent rumored valuation of $29 billion, the $11 billion that Microsoft reportedly invested would give the software giant a 38% interest in OpenAI (see Footnote 188). Apple is the AI buyer with the most unwavering focus. Its buy-out targets are almost all AI-related. They start with AI.Music that creates new songs, to Credit Kudos, which utilizes AI to determine a loan applicant’s creditworthiness. Although Apple’s purchases have often been modest, they are frequently rapidly incorporated into their products.191 Like investments, recruiting for AI in large tech is expanding (Fig. 1.44). Job listings from Google, Meta, and Microsoft are more likely to call on AI knowledge than three years ago. AI-related listings comprise 27% and 18% of Google and Meta job postings (see Footnote 188). LinkedIn data show that one in four Alphabet employees list their AI expertise, putting them slightly ahead of Microsoft and Meta. Despite recent layoffs in large tech, there is still a high demand for AI skills.192 Academia isn’t just sitting around doing nothing. More than any other company or academic institution between 2020 and 2022, employees of Alphabet published over 9000 articles on artificial intelligence, Microsoft did 8000, and Meta about 4000. Meta is an aggressive player in AI. Low-cost AI enables producers to produce content more affordably, including texts and videos that increase traffic to Meta’s social networks.

189

PitchBook in Big tech and the pursuit of AI dominance, The Economist, 26 March 2023. PredictLeads in Big tech and the pursuit of AI dominance, The Economist, 26 March 2023. 191 Bank of America in Big tech and the pursuit of AI dominance, The Economist, 26 March 2023. 192 Stanton Chase in Big tech and the pursuit of AI dominance, The Economist, 26 March 2023. 190

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Fig. 1.44 Job listings mentioning AI-related skills. Source LinkedIn, PredictLeads, Economist in Big tech and the pursuit of AI dominance, The Economist, 26 March 2023

So the AI craze is in full force among the biggest IT companies. And their AI bets are already beginning to pay off by improving their operations (Microsoft’s finance department now asks a generative AI chatbot to flag suspicious-looking bills for a human to inspect; the company uses AI to automate 70–80% of its 90 million annual invoice approvals); and by making their way into products at a rate that seems to be quicker than many earlier technological advancements (see Footnote 188). Barely four months after ChatGPT seized the world’s attention, Google and Microsoft unveiled the revamped versions of Bing, Bard, and their AI-assisted productivity tools. A tool provided by Alphabet and Meta creates advertising campaigns based on the goals of marketers, such as increasing sales or gaining more clients. Customers of Microsoft’s Azure cloud platform can now use OpenAI’s technologies. AWS customers get access to more than 30 large language models due to relationships with model-makers like Cohere and Anthropic. In the first year, Google is luring model-builders and other AI companies to the cloud with $250,000 in free processing power (see Footnote 188). The AI revolution is only getting started. The flip side of ChatGPT is ugly. According to a recent survey, the chatbot has already replaced employees in nearly half of US businesses using ChatGPT. This comes after OpenAI’s warning that the AI chatbot shouldn’t be relied on for “anything important”.193

193

ChatGPT replaces humans in half of US companies that use AI bot: Report, Ankit Sengupta, MoneyControl, February 28, 2023.

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It was discovered in a study of 1000 US companies that over half of the companies polled are already using the chatbot. Additionally, 50% of the US business leaders polled stated that ChatGPT has already replaced employees at their organizations.194 The study found that US businesses use ChatGPT for various purposes, including 52% for meeting summaries and other documents, 66% for writing code, 58% for copywriting and content creation, and 57% for customer assistance. The majority of corporate executives are generally pleased with the quality of ChatGPT’s services. Fifty-five percent rate ChatGPT’s work as “great,” while 34% describe it as “very good” (see Footnote 194). Conversely, in India, businesses like TCS, the largest IT services company in India have said that platforms for generative AI like ChatGPT will instead create a “AI co-worker“ and will not displace jobs. ChatGPT can help increase efficiency without altering business models for organizations, TCS averred (see Footnote 193). Notwithstanding the potential job losses, the race to monetize ChatGPT is truly on. Every so often, a new technology seizes the entire world’s attention. ChatGPT is the most recent example. One of the fastest consumer product debuts in history, the AI chatbot developed by OpenAI attracted 1 million users in just five days of its November 2023 debut. Microsoft hopes to infuse most of the software it sells with ChatGPT-like capabilities, which include producing text, photographs, and video that appear to have been created by humans. Microsoft has committed $10 billion to OpenAI to achieve this goal.195 It is still too early to determine how much of the initial hoopla is legitimate. Regardless of how much ChatGPT and its competitors’ “generative” AI algorithms alter commerce, they have already altered how the tech sector views innovation. The outcome of that race will determine who will rule the age of AI and how quickly it will arrive for computer users worldwide. Because they have the processing capacity and since this is a unique field where basic research results can be quickly implemented into products, almost all recent advances in massive AI worldwide have come from large corporations. Amazon and Meta produced two-thirds and four-fifths of the quantum of AI research at Stanford, the mecca of AI research. AI powers its Alexa voice assistant and Meta, which gained fame recently when one of its models defeated human players in the strategy board game “Diplomacy.” The Microsoft-affiliated OpenAI, Alphabet, and Microsoft produce many research papers in AI (Fig. 1.45). The race against AI has barely begun. The money going into generative AI businesses, which raised $2.7 billion in 110 deals last year, implies that venture capitalists are betting that big tech won’t be able to take all the wealth. Technology giants like Alphabet, Microsoft, and others will try to disprove these investors (see Footnote 195).

194

Fortune, Resumebuilder.com in ChatGPT replaces humans in half of US companies that use AI bot: Report, Ankit Sengupta, MoneyControl, February 28, 2023. 195 The race of the AI labs heats up, The Economist, 30 January 2023.

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Fig. 1.45 AI-related research papers. Source Epoch, State of the AI report, Zeta Alpha, Nathan Benaich, Economist

Chinese apps remove ChatGPT as global AI race heats up. Even as major Chinese tech companies race to create their equivalent, several well-known Chinese apps have blocked access to ChatGPT, the artificial intelligence chatbot that has taken the world by storm. ChatGPT is not officially available in China, but several apps on the Chinese social media platform WeChat had previously allowed access to the chatbot without using a VPN or foreign mobile number. Those doors now appear shut.196 There are further indications that China may be souring on ChatGPT, even if it’s unclear what caused these closures. State-run media cited the chatbot’s comments regarding Xinjiang as presumptive evidence of bias in a film stating that the chatbot may be used by US authorities to “spread disinformation and manipulate public opinion” (see Footnote 196). When asked about Xinjiang, ChatGPT describes the alleged human rights violations committed by the Chinese government against ethnic minorities, including mass detentions and forced labor. Beijing frequently refutes these claims, which assert that detention facilities were once “vocational education and training centers” but have since been shut down. Prior attempts by the Chinese government to impose restrictions on popular Western websites and applications like Google, Facebook, and Amazon prompted accusations of digital protectionism from some. Chinese IT businesses have developed into significant international players, several of which are now revving their engines with an eye toward AI due to the lack of foreign competition in the domestic market (see Footnote 196).

196

Chinese apps remove ChatGPT as global AI race heats up, CNN Business, February 23, 2023.

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It appears Microsoft has got a head start. Microsoft is placing itself at the vanguard of what some regard as the next wave of technical innovation as the breakthrough success of OpenAI’s ChatGPT sparks a tsunami of excitement about artificial intelligence. Microsoft’s and other corporations’ challenge is to make money from this unique and still-imperfect technology. The software company declared it would continue investing billions of dollars in OpenAI. The firm is in the spotlight because the public and IT industry leaders are fascinated by its chatbot, which can quickly write book reports, produce poetry, and respond to challenging inquiries.197 To hasten the technology uptake, Microsoft offered earlier this month to let any business apply to utilize it through its Azure cloud computing platform. CEO Satya Nadella declared, “The age of AI is here, and Microsoft is powering it.” Most exchanges with generative AI—so named because it can produce original creations based on regular language prompts—have been amusing. Since its release, ChatGPT has attracted millions of users. The image-generating DallE 2, another viral sensation from OpenAI, has swamped the internet with user-generated images. ChatGPT is a disruptive technology which still has some wrinkles that need to be ironed out. ChatGPT occasionally generates responses that seem made up, slow, and expensive to run. OpenAI has stated that ChatGPT is a flawed technology but that it will advance. “It’s a mistake to rely on it for anything important. It’s a preview of progress; we have much work to do on robustness and truthfulness.”198 Satya Nadella has hailed the technology as the upcoming disruptive development in the tech sector. He mentions incorporating OpenAI ideas into all of Microsoft’s products. The business has already incorporated OpenAI’s technology into Microsoft Designer and Bing search engine. Microsoft’s Azure cloud computing division may reap the most immediate benefits. As more businesses adopt generative AI, Microsoft can position Azure as the most effective tool for the task (see Footnote 197). With the advent of AI chatbots, the battle for internet search is on. Search engines have served as the main entrance to the internet for more than 25 years. Google quickly dethroned AltaVista, the first website to permit searches of the complete text of the web and has since taken control of the market in most of the world. With revenues of $283 billion and a market capitalization of $1.3 trillion in 2022, Google’s search engine, which remains the company’s core competency, has helped make its parent company, Alphabet, one of the most valuable businesses in the world. Not only is Google a well-known brand, but it is also a verb.199

197

ChatGPT Spotlights Microsoft’s Early Efforts to Monetize AI, The Wall Street Journal, Jan 29, 2023. 198 OpenAI in ChatGPT Spotlights Microsoft’s Early Efforts to Monetize AI, The Wall Street Journal, Jan 29, 2023. 199 The battle for internet search, The Economist, 9 February 2023.

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However, nothing lasts forever, especially with technology. Currently, tech companies are drooling over a development that could signal a similar shift and opportunity. Users can collect information through textual chats with chatbots powered by artificial intelligence (AI). ChatGPT, produced by the startup OpenAI, is the market leader. Over 100 million individuals were using ChatGPT by the end of January 2023, two months after its debut, making it the “fastest-growing consumer application in history.”200 Many products already use AI in a background capacity, but ChatGPT has brought it to the fore by enabling direct communication between users and AI. ChatGPT can summarize literature, explain complex concepts, compose essays in various genres, and respond to trivia questions. Additionally, it can synthesize information from the internet, displaying vacation destinations that meet particular requirements or recommending cuisines and itineraries. It can give specifics and an explanation if prompted. With ChatGPT, even legal and medical tests can be (barely) passed. In short, chatbots are better at doing many tasks that individuals currently perform via search engines. Similar to the 1990s, when search engines first debuted, a prize of immeasurable value—becoming the main portal to the internet—might be up for grabs once more (see Footnote 199). The market share for search ads is becoming a life-or-death struggle. Amazon has seen its share of the American search ad market increase from 3% in 2016 to 23%. Amazon’s e-emporium has become where many consumers begin browsing for things. Apple’s search ads business, which consists of searches for iPhone apps, now has 7% of that market.201 According to Google’s study, two-fifths of users between the ages of 18 and 24 choose Instagram or TikTok to Google Maps when looking for a nearby restaurant. Google’s share of the revenue from search advertising in America will decrease due to this upheaval from 67% in 2016 to 54% this year (Fig. 1.46).202 But none of these rivals ever threatened Google’s existence. The same cannot be said of search with chatbot assistance. Sundar Pichai issued a “code red” following the debut of ChatGPT (see Footnote 201). Microsoft poses the biggest threat to Google. The company already has the necessary infrastructure, including many computers, storage devices, and programs that constantly scan the internet for information. Microsoft estimates that its annual advertising income will increase by $2 billion for every percentage point of market share they increase in the internet search business.

200

UBS Bank in The battle for internet search, The Economist, 9 February 2023. Is Google’s 20-year dominance of search in peril? The Economist, 8 February 2023. 202 eMarketer in Is Google’s 20-year dominance of search in peril? The Economist, 8 February 2023. 201

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Fig. 1.46 US search advertising revenue, $bn. Source eMarketer in Is Google’s 20-year dominance of search in peril? The Economist, 8 February 2023

Incumbency is an advantage, though, for Google. It is the default search engine in Chrome, Alphabet’s browser, used by two out of every three internet users.203 It is also the default search on more than 95% of smartphones in America. Additionally, the company pays Apple $15 billion annually to set its search as the default on Apple products, including Safari, which makes up 19% of all installed browsers on desktops and mobile devices (see Footnote 201). One lingering question in Silicon Valley ChatGPT has posed about the future of artificial intelligence: Why couldn’t the biggest technology companies in the sector develop a cutting-edge service with a comparable level of impact, especially after amassing some of the biggest AI teams in the world? Exclusive new data reveal that the five top tech companies have an estimated army of 33,000 individuals working directly on AI research and development. Microsoft employs 7133 AI employees, while Google has 4970. Amazon has the largest pool, with 10,113 personnel.204 The statistics show how seriously the largest technological companies in the world have been treating their work on artificial intelligence, as well as how cautious and sluggish to develop services using the technology they had been until a little company, San Francisco-based OpenAI, urged them to act.205

203

StatCounter in Is Google’s 20-year dominance of search in peril? The Economist, 8 February 2023. 204 Glass.ai in Amazon, Google Scramble To Keep Pace With OpenAI Despite Huge AI Teams, Parmy Olson, Bloomberg, March 2023. 205 Amazon, Google Scramble To Keep Pace With OpenAI Despite Huge AI Teams, Parmy Olson, Bloomberg, March 2023.

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1.2.4.5 AI in All Its Splendor AI will be deployed in a variety of fascinating applications. Several of them will venture into previously uncharted territory. The pandemic has pushed AI into areas such as enhancing the security of office workers upon their return to work and enhancing drug development. Adaptive Learning: Consider how it all began in 2011 with the announcement of the first online course on artificial intelligence. About 160,000 people in 190 countries had signed up for it. The first machine learning program was also announced with 100,000 participants. Both courses were ten weeks in duration. Twenty-three thousand people completed the AI course, while 13,000 completed the machine learning course.206 This was a taste of what was to come. Now, AI is inextricably linked to human advancement. AI technology has enormous potential in the field of education. Massive Open Online Courses (MOOCs) have gained enormous popularity, resulting in online education platforms such as Udacity, Coursera, and edX. The explosion in the popularity of MOOCs has demonstrated the considerable potential for delivering education online in bite-size chunks. Udacity, Coursera, and edX emerged from AI laboratories, showing the AI community’s conviction that education systems require reform (see Footnote 206). These systems do not intend to replace teachers but function as mentors rather than lecturers.207 For years, “adaptive learning”— software that tailors courses to each student individually, presenting concepts in the order that makes the most sense to him and allowing him to work at his own pace—seemed to be on the horizon. However, new machine learning techniques may finally enable it to live up to its promise. Adaptive learning techniques currently work best in areas where many students must learn the same material and a large amount of data can be collected. AI has the potential to make education more “personalized, flexible, inclusive, and engaging.” Accelerating vaccine Rollout: The story of how AI aided in the rollout of Pfizer’s Covid-19 vaccine is fascinating. Pfizer developed dashboards to track the effect of Covid-19 on clinical trials in real time. Pfizer says it leveraged digital technologies and artificial intelligence to bring its Covid-19 vaccine to market less than a year. Pfizer experimented with new technologies and concentrated on the positive outcomes for patients, physicians, and employees (see Footnote 162). In December 2020, the vaccine developed by Pfizer and BioNTech SE was approved for emergency use in people aged 16 years and older in the United States. Pfizer currently enrolls approximately 46,000 people in Phase 3 clinical trials to assess the vaccine’s safety and efficacy. The company discussed the role of artificial intelligence in developing real-time predictive models of Covid-19 cases in specific counties: Pfizer prioritized innovation and remained digitally oriented in 2019, which aided in the company’s Covid-19 vaccine development (see Footnote

206 207

Re-educating Rita, The Economist, 23 June 2016. Pearson in Re-educating Rita, The Economist, 23 June 2016.

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162). The groundwork enabled Pfizer to be as prepared as possible when the pandemic struck. Pfizer developed dashboards to track the effect of Covid-19 on its clinical trials in real time during the pandemic. Before the pandemic, clinical staff members made personal visits to trial sites, which added time and expense. Several dashboards used artificial intelligence to mine massive amounts of data for insights. For example, to assist Pfizer’s clinical development team, the company developed real-time predictive models of Covid-19 case rates at the county level. The findings aided in the selection of clinical trial sites. Pfizer’s digital analytics team also developed a Covid-19 medical dashboard for researchers to manage massive amounts of data streaming from multiple external sources. Further, Pfizer submitted an entirely virtual drug application to the US Food and Drug Administration. Before the pandemic, an application required thousands of printed pages delivered in bulky binders. Pfizer valued innovation and quick responses to changing circumstances and was always first and foremost concerned with achieving the company’s goals.208 Looking back, we can see how the role of AI in the development of Pfizer (and other) vaccines paved the way for containing large-scale death and destruction (see Footnote 162). AI reshaping the workplace after offices open up: Employers considering reopening physical workplaces face several unique challenges, not the least of which is ensuring the safety of elevators; employers heartened by the rapid pace of Covid19 vaccinations (see Footnote 162). Numerous businesses address these and other back-to-work issues through artificial intelligence-powered software and platforms. Additionally, they are increasingly likely to adopt a hybrid model that balances inperson and remote work and a greater reliance on the role of smaller satellite offices.209 AI will assist buildings in improving traffic management and other postcoronavirus workplace issues. Among other benefits, smart software can assist in implementing advanced safety-monitoring tools, including contact tracing, health check-ins, contagion-risk alerts, and social-distancing notifications that flag overcrowded office floors or conference rooms. AI algorithms can be fine-tuned over time using a growing pool of data on employee arrivals and departures, providing insights to corporate executives, and building managers about optimizing work schedules and other on-site activities. As a result, the use of AI in business is rapidly becoming indispensable for day-to-day operations, and it is no longer just nice to have.210

208

How AI Played a Role in Pfizer’s Covid-19 Vaccine Rollout, The Wall Street Journal, April 1, 2021. 209 AI Set to Reshape Workplace as Physical Offices Open Up, The Wall Street Journal, March 31, 2021. 210 Gartner in AI Set to Reshape Workplace as Physical Offices Open Up, The Wall Street Journal, March 31, 2021.

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As the shift to remote work is well underway, many businesses are beginning to see a decline in productivity following an unexpected boost in the early months of the crisis. Corporate clients have indicated a desire to reintroduce people to physical workplaces with AI-assisted safety precautions while maintaining a permanent segment of remote workers to reduce contact further. Around 60% of global companies are developing a hybrid workplace model in which most employees work no more than three days per week. According to Gartner, more than 1.1 billion workers worked remotely last year, up from 350 million in 2019 (see Footnote 210). This increases the pressure on many employers to reintroduce workers to their desks. And many workers will likely welcome a change of scenery after a year of working from home. When people return to their offices following the pandemic’s end, they will be accompanied by AI-enabled safety precautions (see Footnote 209). AI aiding manufacturing: Artificial intelligence is being used by the German behemoth Bosch to analyze data in manufacturing processes. As a result, automotive parts become more reliable, and vehicle owners save money on maintenance. Leading industrial companies are leveraging artificial intelligence to analyze data from their manufacturing tracking systems in real time to identify the root causes of potential defects. Robert Bosch is one of the most recent companies to use artificial intelligence to analyze data from its manufacturing execution systems or monitoring and tracking systems. Bosch utilizes artificial intelligence to analyze data from manufacturing processes to determine the root cause of defective parts in a significant industrial application. Manufacturing execution systems collect hundreds of data points from each machine operating at a plant, such as electrical current sent to welding machines or force applied by a machine press. The data can determine why a production line is operating slower than usual. Siemens AG and General Electric Co. have already deployed similar systems. The Bosch system employs artificial intelligence to analyze large amounts of data collected from machines to assist engineers in quickly determining the root cause of defects. These defects could be like an electrical current fluctuation that resulted in an inferior weld or a poorly aligned part that resulted in improperly drilled holes. The new AI systems can instantly analyze this data and send it to a dashboard that alerts plant personnel when something is wrong and lists potential root causes of the failure, allowing staff to address the issue quickly. One of the significant advantages of these systems is real-time reporting. The German industrial conglomerate plans to implement the AI system in approximately 50 powertrain-focused plants this year and eventually in its 240 factories worldwide as part of a $600 million investment to digitize its powertrain plants. Bosch estimates that the system will save between $1.2 million and $2.4 million per year per plant, resulting in annual savings of up to half a billion dollars when fully deployed. The savings were calculated using various factors, including reducing defective parts and increased plant output.211

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Bosch Using AI to Find Root Cause of Defective Parts, The Wall Street Journal, April 29, 2021.

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AI building robust supply chains: Supply chains have taken a beating due to the coronavirus pandemic and other extreme events—and artificial intelligence has emerged as a critical tool for navigating daily business in this environment. According to executives, AI and its various subsets, such as machine learning, enable enterprises to forecast demand more accurately and optimize their supply chains. Supply chain and logistics providers are heavily reliant on data. Recent events, such as a shipping vessel accidentally blocking the Suez Canal this week, demonstrate how supply chain optimization and diversification have become critical. By incorporating redundancy into operations via multiple distribution facilities, AI can quickly determine how to reroute shipments and plan for extreme events. AI can assist in optimizing the location of these facilities and the intake and outbound flow at these facilities.212 To optimize supply routes, supply chain providers who are technologically savvy have unique insights into consumer purchasing trends and data from transportation networks and other parts of the supply chain. These businesses collect millions of data points from their operations. They then use machine learning algorithms to forecast demand or optimize a particular part of the supply chain. Others have discovered that investments in artificial intelligence have paid dividends during the pandemic. For example, Philips NV began experimenting with AI around 18–24 months ago (see Footnote 212). As the pandemic spread, the company doubled its ventilators and other medical equipment production. However, it had to reduce production in other areas concurrently as supply chains buckled under the strain of the pandemic. Operating in such a dynamic environment emphasizes the importance of forecasting models. This year, predictive AI models for forecasting demand have been critical (see Footnote 212). AI can predict and avoid sports injuries and bolster performance. The technology that drives facial recognition, computer vision, can change the sport by performing high-speed real-time analysis of athletes and fine-tuning training prescriptions. An AI-enabled stadium filled with very high-resolution video feeds coupled with camera-carrying drones can track each sportsman how high their high jumps, how their tendons flex during a game, or how swiftly they run, and can accurately predict athletes’ risk of injury in real-time before they occur.213 “There are athletes that are treating their body like a business, and they’ve started to leverage data and information to manage themselves better. We will see way more athletes playing far longer and playing at the highest level far longer as well.”214 AI on the “edge”: If you think of AI as futuristic and abstract, you need to change your perspective. We live through a watershed moment in the evolution of artificial intelligence, as more of it filters down from the clouds and into our smartphones and automobiles. AI moves from data centers to devices, speeding

212

Supply Chain Strains Sharpen Focus on AI, The Wall Street Journal, March 31, 2021. How AI Could Help Predict—and Avoid—Sports Injuries, Boost Performance, The Wall Street Journal, June 4, 2022. 214 Kitman Labs in How AI Is Taking Over Our Gadgets, The Wall Street Journal, June 26, 2021. 213

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up and personalizing everything from phones to tractors. These newly acquired abilities are not without their drawbacks. While it is true that AI that exists on the “edge”—where you and I are—is still far less potent than AI that exists in data centers, it has the potential to be far more meaningful in our daily lives.215 One significant example is that Apple’s Siri assistant will begin processing voice on iPhones this fall. Apple claims that by processing voice on the phone, Siri will respond more quickly. A simple request such as setting a timer is sent to the cloud as an audio recording, processed, and the results are sent back to the phone.216 Additionally, individuals may feel more secure knowing that their voice recordings are not sent to unidentified computers in distant locations. Edge AI has the potential to fulfill some of AI’s long-delayed promises, such as more responsive intelligent assistants, improved automotive safety systems, new types of robots, and even autonomous military machines (see Footnote 215). These so-called edge devices can be anything that contains a microchip and some memory. Still, they are typically the most advanced and sophisticated smartphones, automobiles, drones, home appliances, and industrial sensors and actuators. The difficulties inherent in making AI work at the edge are monumental, making it reliable enough to perform its function while justifying the added complexity and expense of integrating it into our devices. Existing artificial intelligence can be rigid, easily fooled, unreliable, and biased. When embedded in a device, it must be pretrained and updated regularly. It can be trained on the fly in the cloud to improve—consider how Alexa improves over time. Nonetheless, advancements in chip technology over the last few years have enabled significant advancements in how we experience AI, and commercial demand for this type of functionality is high (see Footnote 215). Nearly all edge AI systems have in common that they perform “inference”217 as pretrained AI. In general, machine learning artificial intelligence consists of four phases: • Data are captured or collected: For instance, millions of cat photographs. • Humans annotate the data: Yes, these are photographs of cats. • The labeled data are used to train the AI: This procedure selects models that resemble cats. • The resulting collection of code is then converted to an algorithm and implemented in software: A camera app dedicated to cat lovers! The final stage of the process—something akin to that cat-identification software—is called inference (see Footnote 119). For example, the software on many intelligent surveillance cameras performs inference. These systems can determine the number of patrons in the restaurant, whether any are engaging in undesirable

215

How AI Is Taking Over Our Gadgets, The Wall Street Journal, June 26, 2021. Pinterest’s Use of AI Drives Growth, The Wall Street Journal, May 22, 2021. 217 Arm Holdings in How AI Is Taking Over Our Gadgets, The Wall Street Journal, June 26, 2021. 216

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behavior, and whether the fries have been in the fryer for an extended period. It is all just mathematical functions that are so complicated that writing them would require an enormous amount of effort on humans, but which machine learning systems can create given enough data (see Footnote 215). Modern AI, primarily used to recognize patterns, may struggle to cope with inputs unrelated to the data on which it was trained. Operating in the real world only adds to the difficulty. The vast majority of artificial intelligence algorithms are still trained in the cloud. Additionally, they can be retrained using additional or more recent data, improving continuously. In the future, edge AI systems will begin to learn autonomously. They will become powerful enough to move beyond inference and begin collecting data and training their algorithms (see Footnote 215). AI fueling growth in social media: Pinterest is growing faster than most of its social media competitors—and it owes this growth to artificial intelligence. The site’s popularity stems from the fact that it enables you to discover new ideas by browsing images saved by people and brands you follow—and then suggests additional images that might be a good fit for you. The image search site allows users to organize their favorite photos and videos into collections called boards. Additionally, you receive ads relevant to your interests but labeled “promoted.” If a user expresses an interest in home improvement, the site will display pins and advertisements promoting tools and remodeling ideas (see Footnote 216). Without human intervention, determining what people like and finding appropriate images occurs. An advanced artificial intelligence manages it called a neural network, which performs millions of calculations extremely quickly to locate pins that catch your eye. Neural networks are responsible for “nearly 100%” of growth. It is similar to a massive machine learning engine powered by the people who pin content. The neural network formula drew nearly 480 million people to Pinterest searching for style advice, gardening ideas, and more in the first quarter. This is a 30% increase over the first quarter of last year, while advertising sales have doubled since 2018. In comparison, ad sales on YouTube and Facebook, frequently lumped together with Pinterest, are up 80% and 56%, respectively, in the United States.218 Pinterest is just one of the numerous organizations that have embraced this technology. For these groups, neural networks represent a significant advancement in analysis. Historically, computers were better at delving into “structured” data, such as numbers in a spreadsheet, than “unstructured” data, such as images, speech, and text. With neural networks, AI can more easily deal with unstructured data, enabling advancements in medical imaging, automated voice response, text generation, and various other applications. According to Forrester and International Data Corp., approximately a third of businesses that use AI in some form have implemented neural networks within 12–18 months. LinkedIn, which Microsoft owns, claims to match users and ads using neural networks to social media.

218

eMarketer in Pinterest’s Use of AI Drives Growth, The Wall Street Journal, May 22, 2021.

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Artificial neurons—a combination of processors and software algorithms designed to mimic how human neurons transmit and process information—are used to construct the systems. They consume large amounts of data, such as images, numbers, and text, and use it to learn about a particular object’s properties. The strength of neural networks is their ability to analyze data and apply learned lessons. A neural network will recognize patterns and identify objects through trial and error. For instance, neural networks will recognize patterns in the shape of a cat’s eyes and whiskers that differentiate it from a dog. This is a very accurate description of how humans learn. A neural network composed of multiple layers of neurons, referred to as a deep neural network, can make finer distinctions. For example, it may be asked to analyze a photograph of an animal beneath a bed and determine that it is a cat and the species of cat when only its face is visible. At Pinterest, neural networks analyze massive amounts of data about users, including their searches, the boards of people they follow, and the pins they click on and save. Simultaneously, the networks analyze user ad data, such as what content causes users to click on ads. The neural networks learn about the users’ preferences and can serve up increasingly relevant content. A single neural network optimized for Pinterest advertisements can make over 30 million predictions per second. Without neural networks, it would be impossible for a company like Pinterest to narrowly target ads, given the complexity and speed required to match the suitable ads with the right users instantly (see Footnote 216). AI addressing algorithmic bias: Algorithmic bias is a persistent criticism of AI. Several of its systems are criticized for being biased. Facebook took a significant step toward resolving this issue by publicly available a dataset intended to assist researchers in evaluating their computer vision and audio models for potential algorithmic bias. Casual Conversation is a dataset comprised of videos of approximately 3000 participants of various skin tones discussing their age and gender. According to Facebook, the dataset addresses two issues: ”the critical need within the AI community to [improve] the fairness of AI systems” and “the dearth of high-quality data sets designed to assist in measuring this fairness in AI”.219 According to Facebook, having individuals provide their ages and genders for content labeling, rather than having a third party or computer system estimate those values, results in a relatively unbiased dataset of people’s actual ages and genders. The Casual Conversations dataset includes labels for participants’ clear skin tones developed using the Fitzpatrick scale, a skin classification system, by trained annotators. Additionally, the annotators noted the ambient lighting conditions in the videos, which can aid in determining how AI systems treat skin tones in low-light conditions.

219

Facebook Dataset Addresses Algorithmic Bias, The Wall Street Journal, April 8, 2021.

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However, the dataset is only the first step. The company has granted outside developers access to the dataset to identify ways to improve it. For instance, all of the dataset’s videos were shot in the United States. Perhaps an outsider could enrich the dataset by including videos of people from countries other than the United States (see Footnote 219).

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Financial innovation, to be sure, has had a chequered history. Paul Volcker, a former chairman of the “Federal Reserve” in the United States who emerged unscathed from the 2007–08 financial crisis, once stated that none of the financial inventions over the last 25 years compares to the ATM. According to Paul Krugman, a Nobel laureate economist and polemicist, it is difficult to think of any significant financial breakthroughs that have benefited society in recent years. Another Nobel laureate, Joseph Stiglitz, argued that most innovation in the runup to the crisis “was not directed at enhancing the financial sector’s ability to perform its social functions.” The majority of these critics are on the lookout for market-based innovation. Other areas, such as retail payments, are undergoing tremendous innovation, potentially altering how people carry and spend money fundamentally.1 However, the rapid strides in customer-friendly innovation made by Fintechs in recent years and the fiery rate at which Fintech startups are funded have belied Fintech’s chequered start. “Fintech” is an overarching term that refers to “a new financial industry that applies technology to improve financial activities” (Schueffel, 2017). Disruptors are reshaping consumer expectations by offering frictionless, personalized experiences through “one-stop-shop” apps and platforms. While it is predicted that most banks will be irrelevant by 2030,2 paper currency, another critical component of the financial system, may also vanish soon, paving the way for a cashless society (see Footnote 2). Fintech refers to the technology and innovation aimed at competing with established financial methods to deliver financial services (Fig. 2.1).

1

Playing with fire, The Economist, Feb 25, 2012. Gartner in The state of Fintech Q2' 20 Report: Investment and Sector Trends to watch, CBInsights. 2

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 V. Kumar, The Economic Value of Digital Disruption, Management for Professionals, https://doi.org/10.1007/978-981-19-8148-7_2

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Fig. 2.1 The world of Fintech. Source The state of Fintech Q2' 20 Report: Investment and Sector Trends to watch, CBInsights

The nascent financial technology industry in cities such as London has increased in recent years, with financial and technology services employing 40% of the City of London’s workforce.3 Australia is another hotspot for fintech companies, with Sydney’s financial services sector accounting for 9% of national GDP and dwarfing both Hong Kong and Singapore’s financial services sectors.4 The digital revolution is remaking finance. The surge in Fintech has been gathering speed during the last decade. In 2012, for example, attempts were made by a Brazilian civilian to create an account in the bank. “It was like going to prison,” the Brazilian citizen explained. Before going through bulletproof doors, he was ordered to put his things in a locker. He faced a series of questions from an unfriendly manager after an hour of waiting. After five months, he was given a basic account that cost him a considerable cost a year and an introductory credit card with a four hundred percent APR. He was determined to set the system right. He founded “Nubank,” a digital lender, intending to erode Brazil’s crusty banking oligopoly the following year. By early 2020, the bank had a market capitalization of $10 billion. Then the pandemic struck—and business boomed. More and more individuals are banking and paying for products and services online now than ever before, thanks to Covid-19. This year alone, Nubank increased its account base by fifty percent, totaling 30 million accounts. With more than 120 million Brazilian users,

3

“What is Fintech and why does it matter to all entrepreneurs?”. Hot Topics. July 2014. “Subscribe | theaustralian”. www.theaustralian.com.au. Archived from the original on July 1, 2019.

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it teamed up with WhatsApp in June to facilitate payments over the chat app. Recently, they acquired a digital broker, “Easynvest,” and operations were established in Colombia. Opening banking to fintech will occur in Brazil in November when banks, insurers, and asset managers make their data available to fintech. All of this marked the initiation of the digital revolution: “it is only the first second of the first half of the game,” said the Nubank founder.5 Similar to how a digital rush caused by the epidemic has hastened the change of e-commerce and retail, finance was also undergoing an upheaval. This year has seen a dramatic shift away from physical to digital payments. According to The Economist’s poll of experts, the share of cashless transactions globally has increased to levels predicted to happen in the next two to five years. In April in the United States, mobile banking traffic surged by 85%, while new online banking accounts registered increased by 200% (see Footnote 5). A new age in Fintech is about to dawn.6 While some businesses will reap the rewards of the digital revolution, others will be left in the dust. Traditional banks hold only 72% (by market value) of the global banking and payments industry, a drop of 9% since the beginning of 2020, 96% a decade ago (Fig. 2.2). Fintech companies like PayPal and Ant Group account for 11% of the market; this year, their market value has increased nearly twofold to about $900 billion. Non-bank payment companies that are conventional, like Visa, which comprise the remaining 17% of the market, are also prospering. In sectors like entertainment and retail, digitization has made deep inroads. However, they appear to have a future in finance. Banks have a strong presence in various areas worldwide, albeit to varying degrees. Regulators are concerned about preventing them from extinction. The result will be a coexistence of new and old, with the precise characteristic of the hybrid system differing depending on where you are located. Payments are the most visible manifestation of the acceleration of digitization reflected in the rapid growth of the market cap of payment firms (Fig. 2.3). When it comes to physical money, people hoarded more of it due to the pandemic than they have in previous years, though the rate at which it is circulated has fallen, suggesting that people hoard the banknotes rather than spending. In contrast to this, payments through cards have continued to grow. A large portion of this is attributable to the exponential expansion of internet shopping, especially during the contagion. However, it also shows the unstoppable efforts of the retailers to reach customers through online platforms. This spring, Stripe, a payment processing company, worked with the centuries-old Paris farmers’ market to transition from physical checkouts to virtual checkout systems.7 Between March and mid-April of 2020, the volume of food orders processed by a payment company named Marqeta in collaboration with several American delivery companies went up threefold (see Footnote 5).

5

How the digital surge will reshape finance, The Economist, Oct 8, 2020. Capital Markets in How the digital surge will reshape finance, The Economist, Oct 8, 2020. 7 Stripe Payments https://stripe.com/en-in in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 6

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Fig. 2.2 Share of market capitalization. Source Bloomberg, CB Insights, CNBC, Finextra Research, Reuters, Economic Times of India, Wall Street Journal, The Economist, in How the digital surge will reshape finance, The Economist, Oct 8, 2020

Fig. 2.3 Growth spurts of payment firms. Source Bloomberg, press reports, The Economist in How the digital surge will reshape finance, The Economist, Oct 8, 2020

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Fig. 2.4 Share of cashless businesses, 2020, %. Source Square Inc., https://squareup.com/us/en in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021

While businesses have reopened, consumers continue to rely on plastic. In thirty-one nations, the government has assisted the card industry by raising the limits on contactless payments (the card firms want the limits to be raised further). The card networks Mastercard and Visa, which process 94% of transactions outside China, rose by more than forty percent in 2020 compared to 2019. A recent study found that Square, a company that enables small companies to accept credit cards, noticed an increase in its share of cashless customers from 5 to 23% in three months in the United States; it has stabilized at 14%. It has risen to 37% in the United Kingdom (Fig. 2.4). The change goes beyond the realm of cards. Numerous membership businesses, such as gyms, used shutdowns as an opportunity to make the switch from cash registers to direct transfers. Consumers use “peer-to-peer” (P2P) services to send money to family members or purchase online fitness classes. Venmo, a peer-topeer US payment service, reported an increase of fifty percent year over year in payment processing. Before the epidemic, mobile wallets, which allow payment after putting money into your phone, became more popular outside the Western world. They now have an advantage due to the virus. Approximately 1/3rd of street hawkers in Singapore, around 18,000, accept payments by scanning a QR code, representing more than 50% growth in two months. Several African countries have deemed digital wallets essential and prohibited transaction fees. In May alone, the value of cash stored in “M-PESA,” a highly used mobile money service in Kenya, grew by twenty percent.

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Digitization is also advancing at a breakneck pace in other spheres of finance. As many households accepted “furlough” payments and stimulus cheques, many of them turned to zero-fee e-brokers to trade stocks from the comfort of their sofas. Customer accounts opened in 2020 increased by 50% over the previous year at TD Ameritrade compared to their best year.8 In the meantime, insurance companies that formerly sold products through agents have mastered the art of doing so without them. For instance, 97% of the products offered by an online insurer, Manulife, are now available online.9 Banking, which serves as the foundation for retail finance, has not remained immutable. The number of connections to their mobile apps and digital sales has risen sharply for Western lenders. Showing Y-o-Y growth, Santander, a Spanish banking group with operations on three continents, reports that its digital channels increased by twenty percent in Europe, fifty percent in Mexico, and thirty percent in South America.10 Because the barrier to entry is lower in emerging economies, adoption is much quicker. More and more people have gained access to the financial system thanks to digital money in recent months. In April, Singapore’s largest bank, DBS, created forty thousand migrant accounts in a single weekend so that they could transfer money back home through a digital platform. With the aid of 60 million people, the Brazilian government is increasingly using mobile technology to connect with residents of Brazil’s Amazon region. KCB, Kenya’s largest bank, reports that since Covid-19 struck, the number of customers using this app has almost doubled. These people moved six times more in June 2020 (compared to Jan) from mobile wallets to bank accounts, totaling $329 million. It appears that these alterations in behavior will not be reversed anytime soon. Many consumers had never heard of the technology before the epidemic, but polls show they like it now. Nearly one-fifth of all individuals in the United States paid their bills digitally for the first time in April.11 Thirty thousand people over 60 have joined Nubank each month since February. Ninety-five percent of people will utilize digital banking to get their money post-pandemic.12 Also, banks are shutting branches quicker than they had anticipated, even as they attempt to decrease their physical presence. This year, Brazilian lenders shuttered one thousand five hundred branches, or 7% of the total. Two thousand five hundred branches are slated for

8

TD Ameritrade https://www.tdameritrade.com/home.page in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 9 Manulife Financial Corporation, Canadian https://www.manulife.com/ in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 10 Santander, https://www.santander.com/en/home in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 11 Forester in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 12 Bain Consulting in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021.

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closure throughout Europe. To provide “high-value” services like financial counseling, banks will refurbish those branches that are not closed, while banks will continue to run their everyday operations online.13 The whole new business model is being formed in the wake of the digital revolution, bringing in an increasing number of participants. The financial technology industry, e-commerce sites, taxi apps, banks, and telecommunications firms strive to become “platforms”—marketplaces where consumers may purchase various financial goods, whether they are created in-house or by third-party vendors. “Everybody is trying to become the home page.14 ” A Singapore-based ride-hailing app named Grab has grown to such an extent that it has become the most prevalent digital wallet in the country. It has alliances with sixty partners, including insurers, banking institutes, and many other financial firms that aspire to become a “one-stop platform” (see Footnote 5). According to investors, “embedded finance,” which integrates insurance, credit, and investment in non-financial apps, might become as indispensable as payment services are these days. The ride-hailing application and the largest search engine in Russia named Yandex are acquiring the digital bank of the country, the biggest digital bank in Russia. The largest bank in Russia, Sberbank, deleted the term “bank” from its name a week later, rebranding it as a technology firm tinkering with telemedicine and food delivery. Safaricom, a Kenyan telecommunications company and the primary owner of m-PESA, wants to transform the service into a “lifestyle brand” which offers insurance, loans, overdrafts, and capital management. This new model’s primary allure is money. Banks must diversify their business models in response to growing competition and low and declining interest rates (which depress the spreads). On the other hand, tech-based rivals are looking to improve the stickiness of their apps to boost sales of their main products or take a cut from the financial products they distribute for others. Network economics is transforming the financial sector, as traditional branch offices become outdated. Popular platforms draw exponentially more visitors, driven by the “winner-takesmost” dynamic accelerated by the epidemic.15 Firms want to employ algorithms to offer a slew of money-saving advice. Several benefits are obtained by combining and exploiting previously siloed data within various financial services. This increases the platforms’ stickiness and recommends even more products. “The more people share their daily lives with you, the more you can give them these additional benefits,” appears to be the adage.16

13

JPMorgan Chase in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 14 Omers Ventures, https://www.omersventures.com/ in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 15 UBS in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 16 Backbase https://www.backbase.com/ in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021.

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When it comes to other sectors, Big Tech has annihilated incumbents, but it has to satisfy itself by being on the fringe of the financial sector till now. In collaboration with Goldman Sachs, Apple has created a tool for payment and launched a credit card. Facebook’s attempts in the payment space have been mostly unsuccessful. Although steadily growing, amazon checkout is increasingly being used by American-based e-commerce businesses.17 Google has partnered with several banks; in India, its dominant payment app offers instant credit to small shoppers. On the other hand, Google is concerned about avoiding becoming a “grand unifying platform.” A more profitable market may be the reason. The banking sector, initially wary of cloud migration, is warming up. That will benefit Google, Alibaba, Microsoft as well as Amazon. Banking operations comprise two distinct segments: severely regulated “Core banking”—businesses with high capital requirements such as balance sheet management with sales of $3 trillion and return on equity of 5–6% globally. What does this imply to the traditional banks? A few fintech firms have the upper hand due to their sexier apps and more sophisticated risk analyses. On the other hand, these firms aren’t aiming to unseat existing lenders. On the other hand, payments, or product distribution, two refined business models, produce $2.5 trillion in sales but has a higher ROE of twenty percent. Fintechs are competing for the best pieces of the pie. They do, however, need banks to exist.18 Consider China as an example of how cohabitation could be possible. Ant and Tencent employ sophisticated algorithms to price and distribute the fast-growing part of the loans to individuals and small companies as part of their duopoly. However, the loans brokered by payment firms are kept on banks’ balance sheets. Banks continue to accept the arrangement because of their deep desire for access despite having to part with a large part of their profits to the payment companies. However, coexistence will take on a variety of forms. Certain lenders may be more suited to the new technology environment than others, itself a function of how tech-savvy the banks are today. There is a significant connection between the digital performance of the banks and the degree to which it was affected by the financial crisis of 2007–2009.19 Low-interest rates and bad loans have fallen heavily on the shoulders of European banks, which have spent the last decade cutting expenses instead of investing in transformation. Their apps are limited in functionality. In comparison, in a nation spared by the global financial crisis, the Commonwealth Bank of Australia has built an app praised for providing a tailored service similar to Netflix. It gives tax guidance

17

MoffettNathanson https://www.moffettnathanson.com/ in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 18 McKinsey in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 19 Bain Capital in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021.

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and informs customers when invoices are due. DBS has spent the last few months plugging “the last-mile” gaps to enable the online sale of complex products such as mortgages (see Footnote 5). Regulation will also determine how tech firms can wrest market share from banks. China has permitted them to live without restriction for a long time, even though it has lately reclaimed some of that liberty to safeguard banks. The United States, on the other hand, has shielded the majority of banks as well as credit card companies by being sluggish to develop a rapid payment infrastructure as well as making it difficult to acquire digital banking licenses. It has left it to the market to determine when and at what price data should be shared. Europe and many developing economies are at the center of the spectrum. These have tried to promote competitiveness by allowing an open flow of information. According to the World Bank, fifty-one nations, ranging from Malaysia to Mexico, will adopt some open banking soon (see Footnote 5). In the “open banking” system, thirdparty financial service providers can access consumer banking and financial data from non-bank financial institutions and banks through Application Programming Interfaces (APIs). An assessment of these initial conditions reveals why specific financial institutions are on digitalization and where they might eventually end up. The US is at stage zero. Customers get caught up in nefarious schemes related to the credit card funded by exorbitant fees on merchants. Tech companies must rely on antiquated financial infrastructure maintained by traditional banks that are well protected. However, banks will continue to administer the infrastructure, but noncore operations like payments will be accessible to new participants. In Europe, fintechs could initiate transfers, but they still transfer money between different bank accounts. In Sweden, they are responsible for originating three-fifths of all consumer loans. In the next stage, payments would bypass banks completely, as it happens between Africa’s mobile wallets, which do not go through the banks. However, the majority of other financial services would continue to use them. Stage three is dominated by “super-apps” such as Grab and Gojek in Southeast Asia, which began as an e-taxi service. Becoming financial supermarkets is the long-term goal of these organizations, which provide a wide variety of products made chiefly by others. China’s super-apps are the most sophisticated examples of this trend. There will be no stage four when non-banks dominate the creation and delivery of financial services if regulators insist on protecting banks. Nevertheless, dramatic changes cannot be ruled out and are quite probable in the foreseeable future. Activity in Fintech has reached a crescendo (see Footnote 5). The frenetic activity in Fintech is due to the investment boom as upstarts go mainstream. A combination of companies’ desire to expand into Fintech and investors’ search for returns bring about a deluge of deals and listings. An aura of hype frequently surrounds startups’ founders and venture capital backers: Everyone is a strong believer in their newest project. Despite this enthusiasm, fintech

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Fig. 2.5 Fintech companies, venture capital funding, $bn. Source CB Insights in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021

is experiencing something unique. It is receiving significantly more funding than usual. It attracted $34 billion in venture capital funding in the second quarter of 2021 alone20 (Fig. 2.5). In 2021, venture capitalists invested one in every five dollars in fintech. In the first quarter, 372 mergers and acquisitions were completed involving fintech firms, with 21 of those deals being worth $1 billion or more. Additionally, transactions are moving at a breakneck pace. $70bn in stakes in fintech new ventures have been sold by VCs this year, twofold as in 2020, which was an outstanding year21 (Fig. 2.6). Included in this were thirty-two IPOs (see Footnote 24). America’s largest bank, JPMorgan Chase, has announced the acquisition of OpenInvest, a provider of sustainable investment tools. As of now, JPMorgan Chase has acquired three fintech companies in six months. Two matching services which connect banks to savers, such as Raisin and Deposit Solutions in Germany, have merged. Several have gone public. Visa has paid $2.1 billion for the Swedish payments platform Tink. Wise, a money transfer company, was valued at nearly $12.2 billion following a London listing (see Footnote 24). Recent or upcoming multibillion-dollar initial public offerings include Robinhood (no-fee broker), Marqeta (debit card), and SoFi (online lender).

20

CB Insights in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. 21 PitchBook in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021.

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Fig. 2.6 Venture capital exists from Fintech companies. Source PitchBook in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021

This avalanche of activity reflects increasing investor desire for profits and the speeding up of the digital revolution in finance. It does, however, disclose something much more important. Financial technology companies are becoming more integrated with the existing financial system. Beyond its scale, the current investment boom possesses several novel characteristics. For one, it is increasingly concentrated on the largest firms.22 The beginning of 2021 saw a record number of funding rounds ever for private fintech startups valued at more than $100 million; the median round raised $10 million, nearly a quarter more than the last year (see Footnote 24). Shaky startups with business models that have faltered during the epidemic are no longer on the radar of investors. Additionally, the scene of action has shifted. The focus of fintech reporting used to be solely on US and Chinese companies five years ago. Europe is catching up today. Klarna, a Swedish “buy now, pay later” startup, was valued at $46 billion in a June funding round. The business is now the second most valuable private fintech company in the west. Revolut, a neo-based with headquarters in London, raised $800 million, valuing the firm at $33 billion (see Footnote 24). Latin American and Asian firms with Silicon Valley or Stanford-trained entrepreneurs are hot favorites with venture capitalists. It is estimated that Brazil’s biggest digital-only bank, Nubank, is worth $30 billion. The infatuation does not stop with payments. Developed countries’ savings have fueled “wealth-tech” businesses like online brokers and investment advisors in recent years. In the first three months of 2021, insurance-tech companies got $1.8

22

JPMorgan in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021.

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billion from 82 transactions worldwide. Except when it crosses into payments, disrupting lending has proved more challenging—partly because authorities have a stranglehold on this area of finance—as indicated by the growth of Klarna and its rivals. This increase suggests that the financing boom may be due to the massive rise of the fintech business due to the epidemic. The closing of bank offices and retail locations and the subsequent digitalization of trade and finance were both simply and swiftly embraced by both consumers and companies. Their new behaviors are more likely to remain. The big boom was also aided by elements unique to the fintech industry. Today’s top fintech companies appeared out of nowhere but were started in the early 2010s. Subsequently, the number of users has grown to the tens of millions, has become profitable, and has grown large enough to attract the attention of late-stage venture capital and private equity firms. Additionally, some institutional investors, including asset managers (BlackRock), sovereign wealth funds (Singapore’s GIC), and pension funds (Canada’s Pension Plan Investment Board), have made significant profits in recent years by acquiring shares in large technology companies. These firms are now attempting to gain an advantage by investing in promising startups before their initial public offering. The large cheques from these investors come just as fintech companies are gearing up to write the next chapter. For the most part, startups were created to “unbundle” finance: to carve out specific markets in which they could provide customers a better service than banks now do. Most successful companies have begun bundling, adding to their product portfolio, and transforming them into platforms. Acquisitions are a convenient shortcut; large firms can frequently acquire smaller firms for pennies on the dollar through equity swaps due to their high valuations. Stripe, West’s most valuable private fintech company, exemplifies the sector’s maturation. It was founded a decade ago to assist businesses in accepting online payments. It now has a market capitalization of $95 billion and provides services from tax compliance to fraud prevention (see Footnote 24). Part of the company’s growth has come from acquisitions; it has acquired three more firms since October. Banks see fintech as decreasing costs, improving digital products, and diversifying their business away from lending. Big credit card companies like Visa and MasterCard use a similar rationale against online payment innovations. Because of this, the distinction between fintech and conventional banking may become further blurred in the future.23 All of this extravagant spending and merging also entails risks. First, it’s been shown that the astronomical fees charged for fintech aren’t justified. Wise is valued at roughly 20 times its annual sales and 285 times its earnings (see Footnote 24). To acquire, Visa is paying 60 times Tink’s annual revenue. Additionally, this might lead to a lack of competition and innovation. Founders of new ventures

23

Google Pay in Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021.

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which have been acquired usually exit once they complete the “vesting” term— the minimum of time necessary before selling its shares. This period is usually one to three years. If a company’s culture has been conducive to its success, it may erode with the founders’ exit. Banks who have bought Fintech firms may have difficulties: cultures can clash following the sale, and customers frequently leave. Simple (bought by BBVA, a Spanish bank) is one of several neobanks that conventional banks have liquidated or sold. Nonetheless, one thing appears to be certain. Fintechs are rapidly approaching critical mass: their market capitalization has risen to $1.1 trillion, or 10% of the global banking and payments sector, from 4% in 2018.24 Even though prices may be strained today, and some businesses may go out of business, it appears likely that this share will continue to grow. The meteoric rise of Fintech activities has also become compute-intensive. Increasingly Quantum Computing is being deployed by Fintech firms to crack tough mathematical nuts. Finance has a long and fruitful association with computing. It was the first to take to mainframe computers to artificial intelligence (Fig. 2.7). For the better part of the previous decade, advanced algorithms completed more deals faster than people. Large banks are now considering quantum computing, another cutting-edge technology.25 Quantum computers will not consistently outperform their classical counterparts. However, bankers would be interested in a large portion of the mathematics they will excel in. One of quantum computers’ well-known strengths is numerous financial computations reducible to optimization problems. Quantum quants think their computers will boost profits by accelerating asset pricing, identifying higher-performing portfolios, and enhancing the accuracy of machine learning algorithms. Quantum computers can improve credit evaluation, increase arbitrage possibilities on a spot basis, and expedite so-called Monte Carlo models, frequently utilized in finance to create models of market behavior.26 Quantum computers accelerate the deployment of new financial algorithms; because of the magnitude of financial markets, even a tiny increase would be worth a lot of money. As a result, a lender such as Standard Chartered employs more PhDs in physics and mathematics than some large universities. Startups are also investigating possibilities. Quantum-enhanced algorithms can detect misappropriation more effectively at speeds up to a hundred times faster than conventional algorithms. Additionally, firms have experimented with portfolio optimization, a process in which analysts seek out the most profitable investment strategies. Not all possible applications are as glamorous. In regulatory stress tests, Monte Carlo simulations are frequently used. Numerous banks rely on Monte Carlo simulations to address CCAR [an American stress-test regulation],

24

Investment in fintech booms as upstarts go mainstream, The Economist, 15 July 2021. Wall Street’s latest shiny new thing: quantum computing, The Economist, 19 Dec 2020. 26 BBVA, a Spanish bank in Wall Street’s latest shiny new thing: quantum computing, The Economist, Dec 16, 2020. 25

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Fig. 2.7 Time-line of Fintech evolution. Source The Economist in Wall Street’s latest shiny new thing: quantum computing, The Economist, 19 Dec 2020

which consumes more than half the IT budget.27 When is the financial revolution likely to occur? According to industry experts, simple algorithms could be within 18 months, including credit score as a possible early implementation, while others believe it will take three to five years (see Footnote 25).

2.2

Digital Banking

The transition to online banking, or the delivery of banking services through the internet, is digital banking. Over 60% of consumers now prefer to conduct digital banking transactions via smartphones (Locke 2017). Over 47% of bankers believe digital banking can strengthen client relationships, 44% believe it can help them gain a competitive edge, and 32% believe it can help them acquire new customers. Only 16% mentioned the possibility of cost reductions (Ginovsky 2017). Slowly but steadily, digitization has disrupted banking. Digital services have altered the economy and people’s lives during the past two decades. Despite the buzz around Fintech, banking has generally dodged the turmoil of digitalization. In wealthy nations (and elsewhere globally), it is acceptable to queue at branches,

27

Wall Street’s latest shiny new thing: quantum computing, The Economist, Dec 16, 2020.

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communicate with your bank by postal mail, and deposit cheques imprinted with nineteenth-century corporate logos. While in other walks of life, a screen tap may call taxis, films, books, noodles, physicians, and even dog walkers. Nonetheless, technology is reshaping banking. Payment apps have become ingrained in the lives of over a billion people in Asia. Mobile banking has reached critical mass in the Western world—Tech titans are muscling in on the 49 percent of Americans who bank on their phones. In 2019, Apple partnered with Goldman Sachs to offer a credit card. Facebook is an online community proposing a payments service that would enable users to purchase tickets and pay bills.28 If a technological shift wipes out a blockbuster video, it is quite another if Bank of America is the victim. The consequences are significant, as Banks are not ordinary institution businesses. It is not simply that banks have amassed over $100 trillion in global assets. Banks are so vital to the economy that the economy implodes when they fail, as the 2008–09 crisis demonstrated. Banking is a late comer to the smartphone era due to regulatory barriers that have put off entrepreneurs. However, being late is preferable to never. Numerous new generation business models are gaining currency. Payment apps are usually packaged with chat, ride-hailing, and e-commerce services in China offered by Alibaba and Tencent. These networks are affiliated with banks but compete to control the customer relationship. Large banks maintain some power in the United States and Europe, and they are hurrying to provide digital products—JPMorgan Chase can create a deposit account in five minutes. However, dangers loom. Mobile-only “neobanks” that do not incur branch costs are chipping away at the customer bases of traditional banks. While payment businesses like PayPal work with Western banks, they are likely to get a more significant share of the earnings. Newcomers are seeking profitable segments such as foreign exchange and asset management. The rate of change will quicken. Younger generations are abandoning their parents’ banks; 15% of British 18- to 23-year-olds use a neobank. Amazon and Apple, for example, are excellent candidates to grow their finance activities. Each year, the top four American banks invest more than $25 billion in developing client apps and perfecting the art of data mining. Venture capital firms spent $37 billion on startup banking companies last year. The benefits of technological progress will almost certainly be substantial. As branches are closed, outdated mainframe systems are decommissioned, and with minimized bureaucracy, costs should fall. If the world’s publicly traded banks cut expenses by a third, each person on Earth would save $80 per year. The Netherlands had more bank branches per capita than the United States in 2000; it has now reduced by a third. The system will improve its critical function of capital allocation. Poor service will improve—it is easier to send money to a friend via a chat app than to request a cash transfer from your bank. Banks will be able to take risks that are currently unthinkable to underwriters due to the availability of richer

28

Tech’s raid on the banks, The Economist, May 2, 2019.

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data. Fraud should be more visible. Reduced costs and the democratizing effect of social media will improve access to finance for a more significant number of people. Additionally, more businesses with sound ideas should obtain loans more quickly, boosting growth. Change, on the other hand, implies dangers. Because the financial sector is so intertwined with the economy, innovation often results in turmoil. In 1950, the credit card revolutionized shopping, but it was also the catalyst for America’s consumer debt culture (see Footnote 28). Securitization greased capital markets in the 1980s but aggravated the subprime mortgage crisis. Additionally, who will succeed in today’s conflict is uncertain. The dirty little secret of banking is antiquated, inaccessible, and inefficient. The issue is that global growth has been slow, and productivity increases have been limited. A financial smartphone revolution is one of the most effective methods to boost and share the advantages of the economy (see Footnote 28). How have the banks fared till now amidst a gale of digitization? In reality, people hate banks. Frequently, their technology is outdated. Their customers are charged unreasonable costs. Their functions are vital, yet their coverage is inadequate. Rather than offering services to common customers, many of the biggest make most of their money through trading and fees. This may force important sectors of rich nations and whole communities in underdeveloped countries to be marginalized. Worse, their failings might cause catastrophic damage for which they only pay a fraction of the bill. Bob Hope once jested that “a bank is a place that will lend you money if you can prove that you don’t need it.” As a result, it seems reasonable to welcome the vigorous new competition weakening banks’ traditional position. As capital markets grow, linking assets to the liabilities that naturally finance them are simpler, lowering the risk of bank runs and collapses. A slew of new payment technologies is upending how people and companies go about their daily lives, providing previously unimaginable access to finance to millions of underserved customers. Instead of collateral, data can be used to secure loans, allowing individuals and businesses to borrow money based on their character rather than their assets. Finance is now accessible to a much larger number of people, hitherto untargeted. The costs are reduced. Additionally, data-backed, and better-informed firms should alleviate the insecurity in today’s credit provision model. However, this change brings with it a slew of new issues. Due to network effects, payment platforms would continue to consolidate into just one or two massive intermediaries. Established monetary policy methods may become outmoded if activity moves away from banks. The danger of losing control of the monetary system has stoked a fire among central bankers. Projects to speed up rapid payment systems have sprouted all around the world. Creating central bank digital currencies (CBDC), a digital replica of paper money, to compete with private digital payments is a priority for many central banks. In China, the nation with the most sophisticated payment businesses, over 100,000 individuals already utilize a digital yuan in test programs (see Footnote 29).

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However, there are hazards associated with establishing what amounts to a new monetary system. Many of its challenges are as confusing as previous financial stability and inclusion concerns. As individuals move funds to CBDCs (Central Bank Digital Currency), they will withdraw money from banks, endangering the system’s goal of encouraging lending without overt governmental interference in credit distribution. The central bank’s digital engagement in ordinary transactions would amplify the danger of such intervention and give an avenue for those seeking to spy on citizens. Additionally, the economy’s concentration on digital money, whether controlled by private firms or a central bank, would provide new avenues for malafide actors to disrupt the digital infrastructure. One option for central bankers is to forego the issuance of a digital currency. The issue with refraining from establishing CBDCs is that network effects transcend national and currency borders. Through its partners, Ant can reach 400 million customers outside China. Consider a decade from now, when individuals and businesses may receive and make payments in yuan rather than their local currency in the time it takes to create a QR code on the phone (see Footnote 29). CBDCs may appear to be needed for tiny nations to retain monetary autonomy. The more important question is what should be done by the world’s central bankers. If they do not establish their own digital money, they leave themselves exposed to two possibilities. First, they develop an unhealthy reliance on private businesses like Facebook. The other reason is that their currencies would be sidelined by countries that have created simple-to-use digital currencies, most notably China. Central bankers in charge of reserve currencies can avert the nightmare scenario of leaving global payment systems in the hands of Facebook or the Chinese government by issuing their digital currencies. If they proceed prudently, digital money may even become a force for good rather than just a means of avoiding disaster. When future generations reflect on this era, they will recall a period of rapid change in banking. The hope is that it will resurface in a more favorable state.29 Investors have placed their bets on how peoples’ banking habits will radically change, leading to “neobanks.” Square’s $29 billion acquisition of Afterpay sparked widespread discussion about the financial industry’s future (see Footnote 32). One popular buzzword that kept cropping up was neobanking. Square, PayPal, Robinhood, and Coinbase are frequently mentioned as neobanking players. Essentially, it refers to a digital wallet that stores cash or cryptocurrencies and may be linked to various kinds of trade or financial services. It is a playbook of sorts that has been primarily used in China thus far. Even though “neobanks” are neither new nor are banks, they are popular stocks. In anticipation of a banking upheaval on how individuals bank, investors have bought up the stocks of financial technology firms.

29

A brave new world for banks, The Economist, 6 May 2021.

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Fig. 2.8 Performance of banks and digital-wallet provider shares since start of 2020. Source FactSet, WSJ in ‘Neobanks’ May Not Be New, or Banks, but They Are Hot Stocks, Wall Street Journal, Aug 13, 2021

For the moment, though, fintech companies (Square, PayPal) seem to be doing better than their banking cousins (Capital One, JPMorgan Chase, etc.) (Fig. 2.8). Whether or not fintech companies ever become banks or offer consumers a standard checking account, many aims to be a one-stop shop for various bank-like and non-financial services-payments, trading, shopping, discounts, investments, savings, and lending. PayPal’s goal is to create a “super app.” Square has even acquired a music streaming service where customers are being attracted by players in neobanking in various ways. Numerous publicly traded companies began with credit or lending but have expanded their offerings to include investing, cryptocurrency, checking, and savings. Some initially grew their user bases exponentially, for example, through peer-to-peer payments. Checking accounts are not glamorous. They are occasionally viewed as commoditized, as customers frequently connect their accounts to other apps and generate value elsewhere. Having a direct deposit relationship with a consumer, on the other hand, can be a critical way to introduce additional services. PayPal experienced a significant increase in activity due to people depositing pandemic stimulus cheques into their digital wallets. Dave, an app that offers checking accounts and debit cards in collaboration with banks, is in the process of going public via a special-purpose acquisition company. Additionally, it assists users in finding “gig” jobs and plans to add savings, investing insurance, and other tools to its future roadmap. For the time being, today’s large banks may be somewhat protected from these upstarts, as their customers tend to be wealthier and more reliant on established payment systems such as rewards cards. However, the younger or less wealthy individual attracted to neobanking may eventually become a prime banking customer. A couple of large banks have responded to neobanks by eliminating

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overdraft fees. For example, Capital One and JPMorgan Chase apps continue to be highly downloaded.30 In Washington, potential threats to the neobank upstarts loom. Several Democrats and banking organizations have criticized efforts to expand the eligible firms permitted to offer banking services. Additionally, there is some debate over rules that allow smaller banks to earn higher fees on debit transactions, which is frequently a significant source of revenue for neobanks. Although the neobanking race is unlikely to be a one-horse race, there may be standouts in specific categories such as lending or investing. Additionally, some publicly traded banks, such as The Bancorp, collaborate with neobanks or digital wallets to provide regulated services such as deposit accounts. Some seasoned investors prefer a pick-and-shovel strategy. “Investors would rather buy fintech at a bank multiple than banking at a fintech multiple.”31 Neobanking may ultimately be an ephemeral concept. However, the impact on financial stocks is genuine.32 Banks extend loans by using deposits or other people’s money. However, clients expect the deposits returned in full when requested. Clients do not share bank loan losses or partake in the profits during good years. The banks entirely bear profits or losses. While this process increases bank instability, it also has a significant competitive edge in financial services since deposit collection and lending are balanced. Banks have expanded to provide clients with virtually all financial services to hedge their risks and improve profitability, from credit cards to mortgages to investment advice. All of these, however, are now at risk. Non-bank financial firms’ clout increases, diminishing the value of banks’ balance sheets used to support lending (Fig. 2.9). And tech behemoths are leveraging their platforms’ competitiveness to wrest control of banks’ primary business. It is as if the entire industry is encircled by a pincer grip that threatens to suffocate it one day. For the first few years following its launch as an escrow account to send cash to vendors after purchasers got their items, Alipay, the biggest payment platform, swiftly expanded to incorporate a mobile app. In 2011, QR codes for payments were launched by Alipay, which were very easy to generate. A shopkeeper merely had to display the code to collect payment. This mode of payment increased in popularity, accelerating Alipay’s growth. With more than a billion users, it processed $16 trillion in payments in 2019, nearly 25 times the amount handled by PayPal, the world’s largest online payment platform outside of China. Tencent, China’s largest messaging app, entered the fray in 2013 with a payment feature to WeChat. Together, they handle approximately 90% of all Chinese mobile transactions.

30

Sensor Tower in ‘Neobanks’ May Not Be New, or Banks, but They Are Hot Stocks, Wall Street Journal, Aug 13, 2021. 31 Colarion Partners in ‘Neobanks’ May Not Be New, or Banks, but They Are Hot Stocks, Wall Street Journal, Aug 13, 2021. 32 ‘Neobanks’ May Not Be New, or Banks, but They Are Hot Stocks, Wall Street Journal, Aug 13, 2021.

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Fig. 2.9 Diminishing share of banking assets. Source Financial Stability Board in How fintech will eat into banks’ business, The Economist, 6 May 2021

This is a significant setback for banks because they only make one-tenth of a percent of each transaction, less than what banks make from debit card transactions. Globally, exchange fees have decreased as a result of these companies. Instead, payment systems pose a threat by acting as a conduit for new users. Tenant, Grab, and Ant may use payment transaction data to assess borrowers’ creditworthiness. Only in 2014 did Ant begin lending to consumers. In six years since then, it has accounted for nearly one-tenth of China’s consumer finance market; however, policymakers are now seeking to reign it in. Banks have typically relied on a borrower’s credit history and present wealth to establish a borrower’s creditworthiness. Frequently, monitoring the borrowers individually is low as the loan is sanctioned against collateral like automobiles, land, homes, etc. Yet, “data can substitute as collateral.”33 Payment platforms have such a wealth of information about their users. Until recent crackdowns, China’s restrictions were so lax that there is an “inverse of the information asymmetry,” in which the information regarding the repayment of loans is available more with the lender than with the borrower. In five years, significant technology and financial technology firms lent four hundred fifty dollars per person in China, or about1/50th of the total credit. The technology industry is reengineering banking through its platforms. As banks recognized decades ago, loans and other financial products, such as asset management and insurance, have synergy. With the launch of Yu’e Bao in 2013, Ant joined the asset management market. It is a service that enables Alipay

33

Bank for International Settlements in How fintech will eat into banks’ business, The Economist, 6 May 2021.

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customers to earn a little return on their cash by putting it in a money-market fund. Yu’e Bao briefly became the world’s largest money-market fund in terms of size in 2019 but was forced to reduce by the central bank. Ant complemented this with other investment opportunities and entered the health, vehicle, and life insurance markets via joint ventures with other companies. This phenomenon has even migrated to the United States, where credit card sweeteners keep customers hooked, and the payment technology lags. The Covid-19 epidemic, which compelled buyers to buy online, heightened interest in payment networks. PayPal’s market capitalization has nearly doubled to more than $310 billion in the last year, making it the most valuable payment platform globally. Stripe, a commercial payments service, is now worth ninety-five billion dollars, making it the country’s most prominent privately owned technology firm. The success of Stripe as a platform of business indicates that retail banking and corporate banking may be under threat. The firm garnered appeal with small companies by making it easy to incorporate payments into their websites. Its services have grown to include payroll and cash management. These platforms cannot perform all of a bank’s functions because they lack a balance sheet to support lending. The advantage of a bank is that they have deposits to lend to, even if they are unsure who to lend them to. The advantage of technology firms is that they know who to lend to, even if they lack the capital. As a result, some platforms desire a balance sheet. Grab, preparing to go public at a valuation of approximately $40 billion, has obtained a banking license. If others follow this path, the largest bank could be Mercado Pago, Grab, or Ant rather than Santander Brasil, DBS, or HSBC. However, the majority of technology companies have chosen to forego banking licenses. Rather than that, they are skimming the top layer. The growth of technology companies and capital markets are mainly positive developments. “Core banking,” the highly regulated activity of banks that is capital intensive, generates approximately $3 trillion in annual revenue and earns a 5–6% return on equity (ROE). Distribution of products and payments, the business of technology companies, generates $2.5 trillion in revenue but has a return on equity of 20%. The power balance has shifted in favor of non-bank financial institutions. “The banking system is smaller, as a share of finance, than it was before.” Banking can be prohibitively expensive. Approximately 7 million households are unbanked in America, relying on cheque-cashing businesses, pawnshops, and payday lenders. Merchants are charged a fee ranging from 1 to 5% for all credit or debit card transactions. This implies that the typical cash-using family pays one hundred forty-nine dollars to the card user over a year, while every card user gets $1133 from cash users.34 Moreover, new payment methods are more user-friendly. In India, UPI has aided in lowering the cost of financial services for millions of people by connecting mobile phone numbers to bank accounts and biometric data. Over three years,

34

Federal Reserve Bank of Boston in How fintech will eat into banks’ business, The Economist, 6 May 2021.

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315 million previously unbanked Indians opened bank accounts depositing over 800 billion rupees ($12 billion), while 237 million debit cards were issued (see Footnote 35). The success of these competitors carries several benefits but also carries some risks. Banks and technology companies both benefit from economies of scale. Large banks spread the fixed costs of branches and marketing across many customers. Payment platforms spread costs across a large number of users. With the growth of the bank, the value proposition for customers to join grows in direct proportion to the size of the bank. A bank can offer lower-priced products due to its large customer base. Despite this, as the network expands, the value proposition for a payment platform rises exponentially. The regulators of China have taken a hard line against the country’s fintech behemoths. Ant’s problems started in November of last year when the company’s IPO was canceled. To appear and act more like a typical bank, the Ant and its rivals must remove some credit products, seek new business licenses, and raise extra capital. European regulators are also concerned. Bank balance sheets may finance a decreasing percentage of lending in the future, but they will continue to play an important role as the only institutions capable of receiving deposits. While this broadens the pool of potential participants, it also makes regulation more difficult for those in charge.35 Could all the technology disruption lead to a world without banks? Imagining a world without banks is difficult because they are so visible. Banks’ physical dominance reflects their importance. Most people interact with their banks for routine transactions such as grocery shopping. Banks are used by businesses to pay their employees, suppliers, and landlords. Banks are also available to assist with larger purchases, such as purchasing a home or obtaining a student loan. Institutions have given a hassle-free, secure location for money for almost as long as it has existed, whether in cowrie banknotes, gold, shells, or digital deposits. And for as long as deposit-taking institutions have existed, their managers have recognized that not all depositors will demand immediate repayment regularly. This eliminates the need to maintain cash on hand for each deposit; instead, they might put the money to good use by making loans. As a result, bankers earn interest while financing private investments. This was a wonder to traditional economics. Since the beginning of the twentieth century, the banking industry has changed significantly. The biggest banks used to be clustered in London; now, they’re concentrated in Beijing, New York, and Tokyo. Thanks to technological improvements, almost all payments are paid online rather than in cash or cheques. Banks are also significantly more prominent. In 2020, the combined assets of the world’s top 1000 banks exceeded $128 trillion, dwarfing the annual global gross product of $85 trillion (see Footnote 36). On the other hand, a world without banks is looming on the horizon. New technologies, financial markets, and even the government jeopardize their jobs. Central bankers feel that technology behemoths have developed speedier and more

35

How fintech will eat into banks’ business, The Economist, 6 May 2021.

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convenient payment methods to eliminate transactions from the banking system. They worry that digital payments may bring about the end of cash. Historically, banks have been in charge of monetary policy and financial regulation. They may be compelled to develop their own digital central bank money. Several sectors have been impacted due to technological advancements; it would appear to be another example of a staid, uncompetitive banking industry rendered obsolete by slick technology firms. However, money and banking are not comparable to taxis or newspapers. They serve as the link between the government and the economy. Now, a new architecture is gaining traction, implying a reckoning. It is possible to crystal-gaze a scenario in the future in which banks play a minor role, or even none at all, with central banks providing digital money and deposits, tech firms conducting financial transactions, and capital markets providing credit. The issue is whether such a world would be desirable. Banks are not without flaws. Numerous unbanked individuals are unable to afford them. They can be timeconsuming and costly. They frequently earn more money from trading and fees than from traditional banking. Negligent banks can generate boom-and-bust cycles that wreak havoc on the economy. Consequently, it is natural to assume that banks’ marginalization is another shackle broken by technological advancement. Nonetheless, there are specific challenges in a world without banks. Today’s central banks provide relatively little aid to economies. Bank deposits account for 90% of the broad money supply, backed by small central bank reserves and an implicit central bank guarantee (see Footnote 36). This enables central banks to instill confidence in the system while remaining detached from credit. Central bank digital money would be widely used, bringing them closer to the activity and inflating their balance sheets. This raises the stakes. Additionally, there are also more significant societal dangers to consider. Banking is fragmented in most nations, with three or four central banks and smaller institutions. However, network effects favor state-issued digital currencies and private payment systems, resulting in power concentration in one or two organizations. This might give governments and a few private sector executives access to a plethora of information on individuals. Additionally, it would make institutions significantly more exposed. A cyber-attack on the financial system of the United States of America that would temporarily shut down JPMorgan Chase would be upsetting. A similar attack that disables a Federal Reserve digital currency could have catastrophic consequences. Unlike cash, which cannot be traced, digital money leaves a digital trail. Because digital money can be coded, its usage can be programmed to be restricted. Food stamps might be targeted more accurately, and the efficacy of stimulus expenditure could be improved. However, it has some concerning implications: digital money could be programmed to prevent it from being used to cover the cost of abortions or the purchase of books from other countries. Also, there’s a chance the

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Fig. 2.10 Average no. of cashier transactions per bank branch per month in the US. Source Novantas in Banks that have no branches are making a surprising resurgence, The Economist, Nov 9, 2013

money may be used for social control. To many, a world without banks may seem like a dream. Nevertheless, it may very well turn out to be a nightmare.36 After the ATM revolutionized banking, the next step in the digital banking journey was for new banks to operate without physical presence. Neobanks (banks without branches) were founded nearly a decade ago. Banks without branches are experiencing an unexpected renaissance. Digital banks appear to be more sustainable as a result of technological advancements. Banks can now offer a broader range of services online due to smartphone and tablet proliferation. Instead of queuing at a branch or sitting in front of a computer, consumers may now check their accounts or pay bills on the bus using smartphones. They can electronically deposit cheques and make credit card payments using their phones. As a consequence, branch-based transactions continue to diminish (Fig. 2.10). Customers’ impressions of the security of online banking are also improving. According to polls, Americans aged 18–29 make most of their banking decisions based on their banks’ internet offers. For individuals in their sixties, proximity to branches is critical.37 Established banks are certainly being driven to increase their online presence as well. Low-interest rates destroy retail banking profitability in most industrialized nations by decreasing the spread between interest revenue received on loans and the meager rates offered to depositors. Reducing branch locations can save

36 37

A future with fewer banks, The Economist, 8 May 2021. Banks that have no branches are making a surprising resurgence, The Economist, Nov 9, 2013.

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considerable money since branches account for nearly half of the retail banking expenses (see Footnote 37). However, selling the most sophisticated and profitable financial products, such as mortgages, happens at the branches of new and incumbent banks. Additionally, persuading buyers to utilize numerous such products in person is often easier. Until online banks improve their ability to sell products, they are likely to remain fascinating experiments that appeal to the young and technologically knowledgeable. If they get it right, though, the danger to traditional banks will be significant (see Footnote 38). Banks risk losing their most lucrative clients while acquiring the most promiscuous in a pure online-only strategy.38 Neobanks are reshaping the banking landscape: Britain, which pioneered Neobanks, sees a positive shift in its banking landscape. “People were running their lives on mobile phones, living on social media and buying music on Spotify, but financial services hadn’t caught up.”39 Instead of rethinking their business models, it looked as if bankers were patching their computer systems and shuttering their branch offices. Neobanks were awaiting their birth. The United Kingdom has the greatest number of neobanks; more than a dozen licenses for neobanks have been issued since 2005. These new financial institutions account for one-third of all new revenue growth in the United Kingdom.40 All of them are raising large sums of money and seeing fast development in their respective client base sizes. Neobank accounts for 9 percent of British adults and 15 percent of those aged 18 to 23.41 ,42 The closure of branches is becoming more common in developed countries, and consumers are becoming more interested in digital financial products (see Footnote 42) (Fig. 2.11). A facilitating environment has been critical to the growth of the Neobanks in Britain. To comply, banks must grant direct access to the account’s information (with the account holder’s permission) to third parties. The main aim is to promote the growth of startups that provide account aggregation, various payment services, and the like. Since 2016, the Financial Conduct Authority in Britain has operated a “sandbox” for financial innovation. A sandbox separates the testing environment from the production environment. Sandboxes replicate the bare minimum functionality required to test programs or other code accurately. Each year, about 25 companies can sign consumers up for new products with complete transparency and an FCA assurance that they will not lose money if anything goes wrong (see

38

BCG Consulting in Neobanks are changing Britain’s banking landscape, The Economist, May 2, 2019. 39 Allied Irish Banks in Neobanks are changing Britain’s banking landscape, The Economist, May 2, 2019. 40 Accenture in Neobanks are changing Britain’s banking landscape, The Economist, May 2, 2019. 41 Finder.com in Neobanks are changing Britain’s banking landscape, The Economist, May 2, 2019. 42 Neobanks are changing Britain’s banking landscape, The Economist, May 2, 2019.

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Fig. 2.11 Diminishing bank branches. Source McKinsey (2018)

Footnote 42). However, companies are allowed to innovate within the spirit of the laws as long as they comply with all standard prudential precautions and checks for fraud, money laundering, and similar offenses. The approach has gained traction, with over a dozen regulators establishing sandboxes in the last couple of years. Applications for the sandbox have risen by three, far exceeding the number of seats available. This suggests that firms value the chance to show investors that their strategy works in a controlled setting. With no branches and cutting-edge cloud-based technologies, Neobanks can achieve substantial cost savings. Up to half of a high-street bank’s expenses are incurred by branches and their employees. The IT department will likely have to spend three-quarters of its IT budget running a legacy mainframe to “keep the lights on.”43 According to industry insiders, a conventional bank must earn between $200 and $400 per customer per year to break even. It is also observed that every new account adds a high marginal cost. Even including the cost of customer acquisition, development of the product, and several other costs, the overall figure for neobank is fifty to sixty dollars, while the marginal cost for the maintenance of each additional account is almost zero.

43

Temenos in The battle for the remittances market, The Economist, May 5, 2018.

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Scale economies are fueling the battle for global expansion. For a bank with a reputation for offering cheap foreign currency rates, the UK’s massive number of foreign-born residents is an attractive prospect. Another desired demographic is Australians, who have a strong desire to travel. Japan is a prime candidate for disruption. “Existing banks are prohibitively expensive, and the majority lack mobile or even desktop applications.” (see Footnote 42). Neobanks are primarily asset-light businesses, with traditional banks carrying the bulk of the risk on their balance sheets. The balance sheet light business model depends on selling more 3rd party products and less on deposit recycling needs frictionless service and data analysis. All neobanks spend a lot of money on data scientists and application developers, and they keep their systems up to date with regular upgrades and improvements. As the customers are verified and have complete customer data, third-party referrals are done using fingerprint or facial recognition (see Footnote 42). “What makes these new banks successful is that they are on the customer’s side of the table.”44 The global remittance market is going digital. Cross-border digital transfers aim to reduce cost disrupting remittance payments. The battle for the remittances market intensifies as banking operations become more digitized. Until the advent of Blockchain, the system of cross-border settlements remained essentially unchanged over the decades. Blockchain technology is virtually unexplored despite its great potential for enhancing payment systems already on the market. Global payment processor Swift believes blockchain is not yet ready to serve missioncritical global infrastructures.45 Singapore’s Central Bank has argued that one of the most compelling applications of blockchain technology facilitates crossborder settlements.46 In the eyes of many, blockchain will ultimately replace Swift’s present payment mechanism. Ant Financial has filed 49 patents relating to blockchain technology, more than any other company. Globally, one hundred financial institutions have committed to implementing blockchain technology.47 Western Union, the industry behemoth of the global remittance industry, is also testing it. Around ten million of the poor of the world rely on the remittance business, which has long been considered vulnerable to digital upheaval. Global remittance flows to developing nations hit $466 billion in 2017 as migration rose (Fig. 2.12), more than three times development funding. There was over $20 billion worth of international remittances flowing into Pakistan in 2017 alone, nearly equivalent to the country’s merchandise exports (India received the highest remittance of $100 billion in 2022). As of December, the central bank was promoting the usage of ewallets for cheaper remittances, although they are presently out of reach for most people because it is costly. Sending $200 has a cost of around 7.2%. However, the

44

Accenture in The battle for the remittances market, The Economist, May 5, 2018. Swift in The battle for the remittances market, The Economist, May 5, 2018. 46 Central Bank of Singapore in The battle for the remittances market, The Economist, May 5, 2018. 47 Ripple in The battle for the remittances market, The Economist, May 5, 2018. 45

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Fig. 2.12 Global remittances. Source UN, World Bank in The battle for the remittances market, The Economist, May 5, 2018

price may rise to 9.1% if the money goes to Sub-Saharan Africa and ignores the currency rate. Reducing such fees to 3% is one of the United Nations’ Sustainable Development Goals. There are a couple of reasons for the high cost. Exclusive agreements between money transfer companies and national post offices and derisking by banks to avoid breaking antimoney laundering and know-your-customer requirements are to blame for the high costs.48 Money transfer companies point out that they are also burdened with significant expenses. They must finance transfers in advance, leaving money lying in destination nations and facilitating timely payment. The total value of this worldwide float is estimated at 27 trillion dollars.49 Operators require physical attendance on either side. Except for Iran and North Korea, Western Union has more than 550,000 agents globally. On the other hand, this business is also transitioning to the digital world. Because of the rise of mobile money, fintechs have set their sights on Western Union’s market. The London-based TransferWise claims to give a “true” exchange rate, so its costs are one-eighth of those banks charge. It’s also worth noting that WorldRemit costs less than Western Union because its business model is “100% digital in nature,” which means that cash payments aren’t accepted. Through digital money transfers, the money is made by 23% to nearly $400 million.50 Mobile

48

World Bank in The battle for the remittances market, The Economist, May 5, 2018. Ripple in The battle for the remittances market, The Economist, May 5, 2018. 50 Western Union in The battle for the remittances market, The Economist, May 5, 2018. 49

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money services account for more than a third of all transfers.51 In the meantime, Western Union is repositioning itself as a digital corporation amidst hectic digital activity. As its critics rightly point out, finance is an infamously sticky industry. Customers are reluctant to forsake a money transfer mechanism that has served them well despite the hefty costs, similar to how few individuals shift their bank accounts.52

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Digital Payments

Millennials can expect to see physical money disappear in their lifetimes. Digital money is spreading. To describe the current condition of the payments industry, one in which everything has changed, would be underwhelming. The speed at which technology and finance have moved is mesmerizing. It was a sheer accident that the twenty-first century’s two most significant new payment systems came into this world. Kenya’s mobile payment system, M-PESA, started as a test project. It was seen that Kenyans were moving airtime between mobile phones as if it were money. This was then considered a possible method of managing microcredit repayments, thereby lowering costs. Payments may now be made using Alipay, a smartphone app already widely used in China and rapidly expanding internationally, which originated as a service developed for Taobao. Alibaba is a popular platform for small business holders for selling their products to customers directly. Most of the time, customers were hesitant to pay for goods before they received them. So, the buyers would send their orders to Alipay to hold the whole amount in escrow and release the money once the goods were received. This system morphed in 2008 into mobile “wallets” in which the money is kept. Due to its popularity in Kenya, M-PESA has grown into a general-purpose money transfer system. Thirty million or so account holders hand over money to one of nearly 150,000 agents, typically are corner stores that sell scratch cards for mobile phone top-ups. Withdrawal or transfer to another M-PESA account holder at another agency is possible with the money. Thanks to this, those living and working in urban areas can send money more securely, inexpensively, and quickly. Over time, more features and services have been introduced. M-PESA has become a worldwide phenomenon, with hundreds of clones springing up (see Footnote 53). Alipay, which dwarfs everyone else, has 658 million active users in 2021, almost as many other mobile money accounts combined globally. It aims to serve 2 billion customers worldwide by 2025. It is reported that the company is seeking an earlier round of funding that would value it at $150 billion (by comparison, Goldman Sachs is valued at approximately $100 billion).53 The volumes handled by

51

WorldRemit in The battle for the remittances market, The Economist, May 5, 2018. The battle for the remittances market, The Economist, May 5, 2018. 53 How mobile money is spreading, The Economist, May 4, 2018. 52

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its systems are mind-boggling. One of the busiest shopping days of the year, Singles’ Day (November 11th), saw Alipay handle $25 billion in transactions. 90% of those transactions occurred via mobile phones. Only WeChat Pay, a mobile payment service launched by Alipay’s Chinese competitor Tencent, the world’s largest social media company, comes even close to the scale of Alipay. In the mobile payment market of China, WeChat has halved the market share of Alipay, which stood at eighty percent. Most make use of both. Alipay, as well as MPESA, operate on models that are radically different. Though it is now available as an app, M-PESA was originally designed on a simple feature phone through a text-based menu system. Alipay is now only accessible as a smartphone app tied to an account of a bank, a reflection of China’s increasing adoption of internetenabled smartphones. Quick Response (QR) codes are used to make payments which have become ubiquitous in China. Some beggars accept them as well (see Footnote 53). Having access to M-PESA boosted consumption and helped 194,000 Kenyan families escape the cycle of poverty (one-fiftieth of the total).54 Ironically, China, the most digitally evolved nation, has the highest number of people who don’t have a bank account. However, unbanked people possess 82 percent of mobile phones, compared to two-thirds worldwide. In China, 40% of individuals utilize mobile payments, while 85% of online purchasers pay them digitally. (globally, more than half of online buyers pay cash on delivery). Rural regions account for 44% of the Chinese population, making connection difficult. Seventy-one percent of rural residents do not have access to the internet, compared to 33% in metropolitan areas.55 Even though mobile payment services are available in most developing nations, just 10% of individuals in sub-Saharan Africa have a mobile account. Because of this, retailers in Europe and the United States have begun accepting Alipay as payment for the residents of China and their tourists. Ant Financial has also made investments in Asian countries such as India, Malaysia, Singapore, Pakistan, Indonesia, the Philippines, and South Korea. The desire to quickly digitize payments has significant implications. Eliminating cash payments reduces costs, removes corruption-related leakages, discourages the informal economy, and broadens the tax base. The impoverished may similarly notice that mobile money is safer against criminals, saves them traveling hours and queue time, and allows them to access a broader range of financial services than traditional banking. The transition from cash to digital payments is not without difficulties, which impede the transition from “cash-in-cash-out” (CICO) systems to those that accept mobile money for everyday purchases. The objective is to grow the number of individual mobile accounts and, eventually, mobile payments. And a new study finds that CICO remains critical to current mobile money business models, accounting for roughly 60% of profits (see Footnote 53) (Fig. 2.13).

54 55

Findex in How mobile money is spreading, The Economist, May 4, 2018. Consultative Group to Assist the Poor, a partner of World Bank study.

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Fig. 2.13 Mobile money economics in emerging markets, % of baseline revenue. Source McKinsey mobile-banking practice in Ant Group and fintech come of age, The Economist, Oct 20, 2020

Fintech comes of age: Venetian trader Marco Polo presented a Chinese monetary miracle to Europeans around 1300. The emperor, he wrote, “causes the bark of trees, made into something like paper, to pass for money all over his country.” Nearly six centuries after paper money’s invention in China, the West followed suit. Recent Western visitors to China are enthralled by the idea of the full eradication of paper money in favor of pixels on mobile phone displays.56 Investors worldwide are fascinated by Ant Group’s remarkable climb to become China’s biggest fintech business. It signals a transformational shift in China’s and the world’s financial system. Ant, a Chinese e-commerce startup split off from Alibaba, has over 1 billion customers. Last year, its payments network connected 80 million businesses and handled $16 trillion in transactions (see Footnote 56).

56

Ant Group and fintech come of age, The Economist, Oct 20, 2020.

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In the grand scheme of things, payments are just an entrée. A user may borrow money, invest in 6000 financial products, and buy health insurance via one platform. Consider what would happen if banks, Wall Street brokers, Boston asset managers, and Connecticut insurers were all compressed into a single app. Other Chinese companies, most notably Tencent, the owner of the WeChat app, also have cutting-edge fintech divisions. China is not alone in this regard. The pandemic has accelerated activity in other areas. Along with global e-commerce and remote work growth, a surge in digital payments has increased 52 percent at Venmo, an American network, and 142% at Mercado Pago, a Latin American fintech. Parisian farmers’ markets, pizza joints, and Singaporean hawkers have all used new payment methods that eliminate the need for customers to physically hand over cash or credit cards. According to investors, a seismic change similar to rocked retail is sensed. Only 72% of the global banking and payments industry’s stock market value is currently held by traditional banks. This is down from 96% in 2010 (see Footnote 56). While the growth of digital finance is widespread, the business models that underpin it are not. Look for digital banks and e-commerce pioneers in Latin America, such as Nubank and MercadoLibre, which owns Mercado Pago. Grab and Gojek, two ride-hailing services in Southeast Asia, are evolving into “superapps” with financial capabilities. In Sweden, fintech firms now provide the majority of consumer loans. In America, credit card companies such as Visa (the world’s most valuable financial company), digital finance behemoths such as PayPal (the world’s sixth-largest financial company), and large banks coexist and compete. Apple and Alphabet are dipping their toes in, enticed by the financial industry’s $1.5 trillion global profit pool. There is much to celebrate. Fintech, at its best, enables significant efficiency gains. If the world’s publicly traded banks cut expenses by a third, each person on Earth would save $80 per year (see Footnote 56). Ant maintains razor-thin margins on payments and grants loans in minutes. TransferWise and Airwallex, for example, provide cheaper and faster currency exchange services. The days of being fleeced by airport moneychangers are over. Additionally, digitization has the potential to expand the reach of finance. Customers will be easier to reach, and data will improve loan underwriting accuracy. Square and Stripe are two companies that assist small businesses in connecting to the digital economy. In India and Africa, digital finance can liberate people from dubious moneylenders and decaying banks. Governments may bypass the conventional banking system and tax, collect deposits from, and pay citizens at the touch of a button by creating their digital currencies. Contrast that with the uproar over Uncle Sam’s stimulus cheques. However, the fintech conquest introduces two risks. The first reason is that it can destabilize the financial system. Fintech firms flock to the industry’s most profitable segments, frequently leaving traditional lenders with less profit and most of the risk. Almost 98 percent of loans originated by Ant in China end up on banks’ books, which pay Ant a fee (see Footnote 56). Ant is expected to eventually capture a tenth or more of the profits generated by Chinese banking. Lumbering lenders in

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the developed world are already being crushed by low-interest rates, out-of-date IT systems, and enormous compliance costs. If they become unstable, it could spell trouble, as banks continue to perform critical economic functions, such as holding people’s deposits and converting them into long-term loans for others. The second risk is that the government and fintech “platform” firms will seize additional power from individuals. The fintech model is built on network effects— the more people who use a platform, the more valuable it becomes, and the more likely others will be drawn to it. As a result, the industry is prone to monopolization. And as fintech continues to share more data with governments and platforms, the possibility of surveillance, manipulation, and cyber-attacks increases. Ant is a cog in the Communist Party’s control apparatus in China, which is one of the reasons it is unwelcome abroad (see Footnote 56). When Facebook, a company not known for its ethical behavior, announced a digital currency called Libra last year, it sparked a global backlash. As fintech grows, governments will take a holistic view of financial risk, including banks and fintech firms—Chinese regulators correctly shut down Ant’s booming loan securitization business, which echoes the subprime mortgage crisis. Governments will also lower entry barriers to encourage competition. Singapore and India have developed low-cost, open bank-to-bank payment systems that the United States could emulate. Europe’s banking system is adaptable, allowing customers to switch accounts easily. Finally, the rise of fintech will be linked to a renewed effort to safeguard citizens’ privacy against large corporations and the state. As long as fintech remains safe, open, and respectful of individual rights, a Chinese-led financial innovation will once again improve the world (see Footnote 56). The winds of change in digital payments are gathering speed. Current trends toward e-commerce, digital payments, and instant payments have accelerated significantly in the last six months. The epidemic and its aftereffects have accelerated certain tendencies that had already been in place in the payments business, such as supply chain and cross-border trade restructuring. When taken together, the challenge is speeding up a transformation that has typically taken a half-decade: consumer behavior, economic models, and operational payment models. Four payment areas are deemed critical for success in the face of accelerated change. • Like many other aspects of payments, the merchant-acquiring business was already undergoing significant transformation. Non-bank market entrants were gaining momentum in underrepresented sectors due to consolidation. Several fintech adversaries have targeted an area (such as the small-and-medium firms) that has traditionally proven tough for giant incumbents to service, and it is time to take a closer look. • Even while supply chain finance is widely acknowledged as an underutilized resource, it has been slow to catch on and solve structural issues, unlike other payment industries. An increased spotlight on working capital, regional redistribution of $4 trillion in cross-border supply chain expenditure and growing

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digital adoption at scale will make the value inherent in supply chain finance to become more appealing. • Many well-established payment service providers are pressured to adapt their business models to satisfy the rising demands for efficiency, scalability, modularity, and worldwide interoperability. • Many banks are hesitant to invest the hundreds of millions of dollars necessary to upgrade outdated payment systems; more focused players have ample opportunity to establish an insurmountable advantage.57 Global revenues increased by nearly 5% last year, bringing the total global payments to just under $2 trillion (see Footnote 57). In comparison to the overall revenue of banking, the payments are growing much faster in the last five years, increasing its share from thirty percent to almost forty percent. The popularity of consumer-to-business payments and electronic peer-to-peer has followed an increasing trend. The pandemic has heightened awareness of the importance of digital payments. In many regions, this has benefited debit cards, typically associated with lower-value transactions. In Asia, alternative payment methods such as instant transfers and mobile payments are popular, while credit cards have retained their hegemony in point-of-sale and e-commerce transactions. For consumers that contact averse, it’s a sensible cash substitute. Given the sharp decline in in-person purchases, it is logical that ATMs and transactions through cash would decline. The worry of risk of contracting Covid19 through ATMs and merchant unwillingness to take cash (sometimes in violation of regulatory rules) prompted customers to use electronic payment methods. India saw a 47% decline in ATM usage, while Britain saw a 46% decline, 4–5 times the annual decline in cash usage observed in recent years (see Footnote 57). Reduced reliance on cash benefits banks: cash handling costs exceed the revenue generated by cash-related transactions, while electronic payments generate incremental revenue. The move from “physical” to “virtual” banking has been accelerated by digitization. As a result of the epidemic, several banks are shutting down or not reopening their branches or ATMs. Since June, Australia’s top four banks have shuttered two thousand fifteen hundred ATMs and one hundred and seventy-five bank branches.58 Due to the rising importance of payment speed, consumers and companies in the United Kingdom are increasingly opting to settle their bills online. For example, the average daily value of transactions handled by the Faster Payments service climbed by over one-tenth in March 2020. Banks have enhanced mobile banking applications in India by merging bill payment, e-commerce connections, and the country’s real-time payment system, the Unified Payments Interface (UPI),

57

The 2020 McKinsey Global Payments Report, McKinsey. “Thousands of ATMs in Australia removed, branches closed due to coronavirus,” ATM Marketplace, August 17, 2020, atmmarketplace.com.

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allowing users to have three digital alternatives in a single user interface. UPI expenditure surged by 70% in the first seven months of 2020 (see Footnote 57). All this does not mean that cash is going away. “It works quite well.”59 Even in Norway, where digital payments are more prevalent than anywhere else, cash still accounts for 17% of all transactions. However, digital payments will become more accessible and prevalent. Additionally, tension exists between competition and the implied concentration resulting from network effects. Rich countries now have a plethora of options. Sit in a taxi in Singapore. You will notice that the window is obscured by stickers advertising various modes of payment—credit cards, debit cards, stored-value cards, and a variety of smartphone apps. However, the courageous mobile money pioneers frequently morph into near-monopolies in frontier markets. M-PESA controls 80% of the Kenyan market. Bangladesh’s central bank has licensed 27 services, with bKash claiming a 60% market share. However, their 176,000 agent network is challenging to match. Easypaisa and its chief competitor, JazzCash, have a combined market share of approximately 85% in Pakistan (see Footnote 51). Fierce competition guarantees that disadvantaged customers gain from expanding mobile money in most nations for the time being. However, competition is severe partly due to network effects, indicating that the winner gets everything. And as money transfer advances closer to the objective of free, frictionless, real-time payments, the extra services provided by the provider will be the key differentiator.60 It all started with the queen of Fintech, Ant. While Fintech is exploding in popularity, there is no doubt that the Ant group stands apart. Over a billion customers and 80 million merchants use Alipay, China’s most extensive digital payment network, to hit 118 trillion Yuan in total payment volume (TPV) transactions by June 2020.61 The Wall Street Journal reported in March 2019 that Ant’s flagship Tianhong Yue Bao money-market fund was the world’s largest, with over 588 million users of Ant’s mobile payment network Alipay contributing, accounting for more than a third of China’s population.62 Ant Group began as a payment service on Alibaba’s e-commerce platform. Using Ant, China became a global leader in digital transactions, opening up credit to small businesses and individuals alike and changing how people handle their money. It has grown into a colossus in its own right. The number of active users has crossed one billion in recent years. It processed 110 trillion yuan ($16 trillion) in payments last year, roughly 25 times the amount handled by PayPal, the world’s biggest online payment provider based outside of China (Fig. 2.14). An initial public offering (abandoned) would have demonstrated Ant’s expansion. According to expectations, it was to raise more than $30 billion, edging out Saudi Aramco to

59

McKinsey in How mobile money is spreading, The Economist, May 5, 2018. How mobile money is spreading, The Economist, May 5, 2018. 61 Hong Kong Exchange News in How mobile money is spreading, The Economist, May 5, 2018. 62 “More Than a Third of China Is Now Invested in One Giant Mutual Fund”. wsj.com. 28 March 2019. 60

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Fig. 2.14 The dominance of Alipay. Source iResearch, Analysys, PayPal, Ant Group in What Ant Group’s IPO says about the future of finance, The Economist, Oct 10, 2020

become the world’s largest initial public offering—a sign of the world’s transformation from a period in which oil was the most precious resource to one in which data is the most valuable resource. Ant would have commanded a market value of more than $300 billion if it had traded at a future price-to-earnings multiple of 40, equivalent to any global payment firm. This would have been more than any other bank in the world.63 What is more significant than Ant’s size is what it represents. No other Chinese financial organization with a global footprint matters as much. Because the government owns them, China’s banks are enormous yet ineffectual. Foreign financiers regard Ant with awe, envy, and anxiety. Ant is the world’s most integrated fintech platform: imagine a mobile app that combines Apple Pay for offline payments, PayPal for online payments, Venmo for transfers, Mastercard for credit cards, JPMorgan Chase for consumer financing, and iShares for investing, along with an insurance brokerage bundled in for good measure. Ant has an advantage over its rivals in other fintech sectors due to plenty of customer data and weak restrictions regulating its usage in China. Over 3000 factors are included in Alibaba’s credit-risk models (see Footnote 63). Its automated algorithms decide whether to offer loans in 3 min, which may sound improbable, but Alibaba has shown the capacity to handle 544,000 orders per second. For most part, Ant represents the immense promise of digital money.

63

What Ant Group’s IPO says about the future of finance, The Economist, Oct 10, 2020.

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Fig. 2.15 Alipay active users, bn. Source iResearch, Analysys, PayPal, Ant Group in What Ant Group’s IPO says about the future of finance, The Economist, Oct 10, 2020

Ant is a company that is referred to as a techfin leader to convey its priorities better64 (Fig. 2.15). To distinguish itself from a financial institution, it has demanded brokerages hire tech analysts to cover it. Of course, it helps to know that tech equities are now priced at a premium to bank stocks. Despite this, there is little question that Ant is a financial platform in the traditional sense. The simplest way to comprehend its business model is to examine the four segments of its revenue. The first is payments—how the company began and continues to operate. Ant was born as a solution to a problem in 2004. A retailer needed to show a QR code printout to take payment, a remarkable leap for a nation formerly dependent on cash. Alibaba became a popular destination for consumers and businesses alike, but it needed a reliable payment method. In 2011, the use of QR codes for payments accelerated the company’s development into the offline sector with the debut of an Alipay mobile app. Alipay was set up as an escrow account to transfer cash to vendors once purchasers got their items (see Footnote 63). Alipay’s growing acceptance outside China, where Alipay and its competitor WeChat Pay process ninety percent of mobile transactions, portends a shift in financial power (chart65 ). In 2019, digital transactions in China exceeded 201 trillion yuan, a significant increase from less than 1 trillion yuan in 2010. Adding a payment option to WeChat, China’s most popular messaging app has allowed Tencent to chip into Alipay’s market share. Both firms make as little as 0.1 percent on each transaction, a pittance compared to banks’ fees for debit card swipes and other transactions. That’s still a massive chunk, given the sheer volume of transactions involved. Last year, Ant’s payments division generated roughly 52 billion yuan revenue. However, growth has slowed from 55 to 36% in a year. Ant’s future success in payment gateways is contingent upon its ability to attract, understand, and ultimately monitor users (see Footnote 63).

64

Economist in What Ant Group’s IPO says about the future of finance, The Economist, Oct 10, 2020. 65 Company reports, Press reports, Economist in What Ant Group’s IPO says about the future of finance, The Economist, Oct 10, 2020.

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The primary beneficiary of this data is Ant’s lending arm, the company’s second division (which Ant, never one to shy away from jargon, calls CreditTech). Ant entered the consumer lending market in 2014 when it launched Huabei, a revolving unsecured credit line for purchases—basically a virtual credit card. Alipay users can use Huabei to delay or break up payments by a month. Because credit cards had never taken off in China, Huabei was quickly absorbed. This resulted in the creation of Jiebei, an Alipay feature, which enables users to borrow bigger sums. Ant also provides loans, with a particular emphasis on small businesses. Annualized interest rates range between 7 and 14%, lower than the rates offered by small-loan companies (see Footnote 63). Rabbits Go Home, a small convenience store, borrowed 10,000 yuan from Ant four years ago, as did many other Ant clients. Ant gained visibility into her cash flow by repaying the initial loan and converting customers to Alipay, and her credit score went up. The store now has a 100,000 yuan credit line from Ant, allowing it to stock ahead of the busy holiday season. Ant has amassed 1.7 trillion yuan in outstanding consumer loans in less than half a decade, or about 15% of China’s consumer lending market. Its loans to small businesses total around 400 billion yuan or about 5% of the market for micro-enterprise loans. Ant’s most significant innovation is the way it finances credit from a financial standpoint. It initially made the loans, bundled them, and sold them as securities to other financial institutions. However, regulators feared a repeat of the securitization boom that preceded the 2007–09 financial crisis. They mandated that issuers of securities maintain capital on a par with banks—a requirement that eroded Ant’s margins. As a result, Ant devised a novel strategy. It now identifies and assesses borrowers but refers them to banks for loan origination. Ant charges a fee for “technology service.” It is seamless for borrowers. Their credit requests are approved or denied with a few taps on their smartphones. Ant eventually ends up with a cash-heavy, asset-light lending model. Approximately 98% of loans are held as assets by other companies. Credit has grown to be Ant’s most prominent business segment, accounting for 39% of the company’s revenue in the first half of this year (Fig. 2.16) (see Footnote 63). Fig. 2.16 Ant group revenue by type, Yuan bn. Source Ant Group in What Ant Group’s IPO says about the future of finance, The Economist, Oct 10, 2020

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It is Ant’s platform strength that allows the firm to expand into its third as well as the fourth segments of the business: management of assets as well as insurance. In 2013, Ant launched Yu’ebao, which translates as “leftover wealth,” a platform that allows users to manage assets. Investing in a money-market fund would allow Alipay businesses or buyers with surplus cash to make a little return on their investment. Consumers were drawn to the platform primarily to store cash because of the excellent rates (now approximately 1.7%) on Yu’ebao than those offered on bank current accounts. Yu’ebao, by 2017, had formed the world’s biggest money-market fund in terms of assets under management. Ant has extended its capabilities to become one of China’s most formidable investment distribution platforms in recent years. It has introduced life, car, and medical insurance in partnership with global insurance firms, earning fees as a distribution platform. More than 6000 products, including stock and bond funds, are sold on Ant by 170 firms. These companies handle nearly 4.1 trillion yuan in assets via mobile applications. In the same way, it does with its loan business, Ant evaluates new customers and steers them to the appropriate products. After that, it charges a service fee. The assets under the control of Invesco Great Wall Fund Management’s two money-market funds climbed to 114 billion yuan in June, up from 665 million yuan at the starting of 2018 when the funds started trading on Ant (see Footnote 63). Insurance and management of assets now account for more than a quarter of total revenue. By the numbers alone, Ant appeared unstoppable until the Chinese government applied the brakes and slowed its growth (see Footnote 56). ________ Disclaimer: Since the article on Ant Group was published, China has compelled the financial technology firm to undergo a significant restructure, transforming it into a bank. Ant Group’s $37 billion initial public offering was halted in November by regulators due to concerns about the company’s finance model. China’s latest move is part of a broader crackdown on the country’s rapidly growing tech platforms. Ant is now subject to stricter regulatory oversight and minimum capital requirements due to the overhaul directed by the People’s Bank of China. Ant Group is China’s largest payment service provider, with over 730 million monthly users of its digital payments platform Alipay. China’s central bank stated that Ant would discontinue the “improper” connection between Alipay and its credit card and consumer loan services. Its vast consumer data collection was widely regarded as one of its primary competitive advantages. Ant has also agreed to establish a personal credit reporting company to bolster data protection and prevent abuse.66 ________ While the rest of the world is going gaga over Fintech, America has been slow. Even though Wall Street and Silicon Valley are located in the United States, the country has long appeared to be stuck in the dark ages regarding digital payments.

66

British Broadcasting Corporation, 13 April 2021, https://www.bbc.com/news/business-567 28038.

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Card purchases required hand signatures until 2018; Chip-and-pin has been in Europe for 15 years. Mastercard and Visa have a snug duopoly on credit cards, working together with banks to issue cards with enormous profit margins and little competition. Asia has accelerated its development with widespread, dirt-cheap, fast payment services and a new wave of innovative financial companies that have achieved scale. Banks carry a heavy legacy baggage of dated and pricey financial digital plumbing: as online shopping becomes a more significant piece of daily spending, far too few people with fewer means have inexpensive access to financial tools. The good news is that America’s picture is improving. Consumers have been more than willing to try out new digital payment options since the outbreak of the 2019 epidemic. In the last quarter, PayPal’s transaction volume increased 36% year over year, with 36 million people using the Square digital Cash App, which rose to 50% in 2020 (see Footnote 68). PayPal’s market capitalization has surpassed that of Bank of America, the second-largest lender in the country, to $275 billion. With these two businesses plus Stripe and Adyen (based in the Netherlands) in the picture, investors are placing their bets that this quartet would be capable of taking on America’s staid financial establishment. However, a word of caution, though. American customers have failed to see significant charge reductions despite the development of new enterprises. Square charges 2.6 percent on average transactions, while Stripe charges close to 3% (see Footnote 68). Fintech companies in China are charging less than 0.5 percent of their revenue. Because of a fierce pricing battle, fees have stayed low. One of the significant issues in the United States is overlapping payment pipelines instead of competition; when it comes to connecting businesses, banks, and customers, fintechs are usually compelled to use the country’s credit card infrastructure. Card issuers continue to charge a hefty 2% monthly service fee. It can take days for funds to travel. This reflects Visa and Mastercard’s strength and entrenched position. More than eighty-six percent of all card payments are processed by these two card giants’ extensive networks that link almost all retail establishments. Antitrust action against credit card firms is a possible answer. The antitrust enforcers in the United States are snarling. The justice department is looking into whether Visa hinders retailers from switching to less pricey alternatives.67 However, being optimistic could be wrong. Courts that determine the majority of antitrust lawsuits in the United States are notoriously slow to rule and forgive. In 2017, a significant antitrust case brought against American Express was dismissed. Rather than that, establishing a “real-time” interbank payment system that allows for almost instantaneous and inexpensive transfers will be critical to improving payment competitiveness in the United States. This has already occurred in large

67

The Wall Street Journal in Fintech comes to America at last, The Economist, 27 March 2021.

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swathes of Europe and Asia. Fintechs and Banks can then build new products, services, and standards, on top of this foundation once it is established. Netherlands and Singapore, for example, allow digital wallets to accept payments with only a few clicks, taps, or QR code scans.68 . Fed Now, America’s effort at immediate payments, is set to start in 2023 and is supported by the Federal Reserve. The big banks and credit card corporations are keen to delay the implementation of a system that might upend the status quo. The epidemic has shown how far internet transactions have progressed. It also illustrates that the government can respond fast and efficiently when needed. Digital payments that are affordable and quick should be emphasized in the United States (see Footnote 68). To be fair, digital payments in America are picking up speed. Stripe, an online payment company, was founded just over a decade ago to assist other technology startups in accepting online payments. It has since outgrown every one of them. Stripe was valued at $95 billion in March 2021—three times its value 11 months prior and enough to make it America’s largest unlisted company. Stripe is not the only company capitalizing on the check-out business as America’s payments revolution finally takes hold. Consider PayPal, a digital payments company founded in 1999 valued at $275 billion, more than Citigroup or Wells Fargo (see Footnote 71). Additionally, it is more valuable than Ant, which has fallen out of favor with Chinese regulators who canceled its initial public offering. The digital revolution lures credit card juggernauts and technology titans, such as Visa and Google, to online payments. The pandemic has piqued interest in digital payment companies. PayPal’s stock price has increased by 186% in the last year, while Square, an American rival, has more than quadrupled in value, and Adyen, based in Amsterdam, has nearly tripled in value (Fig. 2.17). The industry of digital payments is similar to a transportation system. To authorize travel, “acquirers” connect the shop’s app or website to the infrastructure and verify details, such as a buyer’s identity or availability of funds. The money is transferred along the customer’s preferred “rail”: credit card, bank-tobank, or mobile-wallet systems, all operated by independent firms. Then there are the refreshment trolleys—companies such as buy-now-pay-later businesses that promise to make the journey more pleasant. Everyone takes a cut along the way. Part of the digital firms’ ascension is due to their scale. PayPal combines a digital wallet used by 350 million consumers with a payment gateway used by 30 million merchants (see Footnote 71). This results in significant network effects, which the firm has sought to amplify through tie-ups with other firms. By 2025, the company anticipates doubling its user base. Square, which targets independent merchants and consumers underserved by traditional banks, follows a similar business model.

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Fintech comes to America at last, The Economist, 27 March 2021.

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Fig. 2.17 Share prices, Jan 1, 2020=100, in $. Source Refinitiv Datastream in America used to be behind on digital payments. Not anymore, The Economist, 25 March 2021

Adyen and Stripe, on the other hand, are pure online acquirers with no consumer brand. Their market capitalization has been soaring (Fig. 2.18). Their technological prowess enables businesses to establish online payment platforms easily. (Stripe has long served smaller businesses, while Adyen serves larger ones, but the two are merging.) Due to the difficulty of verifying a customer’s identity and integrity, notably, when cross-border transactions are involved, approximately 10–15% of online transactions are typically declined. However, digital firms can reduce rejection rates by 4–5 percentage points (see Footnote 71). They charge a reasonable fee in exchange: Stripe typically takes 2.7–2.9% of each transaction in the United States and 1.9% in Europe. Now that their costs can be spread across hundreds of billions of dollars in transfers, the fee they earn on each additional payment is nearly entirely profit, which they can reinvest. Three trends are assisting digital businesses in their expansion. The first is the exponential growth of e-commerce, which the pandemic has accelerated. The second trend is the shift from cash toward digital payments, which accelerated by three to five years because of the pandemic. A final factor is the growth of the online payment market share. Globally, over half of all digital transactions are still acquired by banks’ captive, sluggish arms.69 Because the majority lack global ambitions and e-commerce expertise, market share will inevitably migrate to the online giants. These trends also benefit Visa and Mastercard, the world’s two largest card networks. Despite this, they operate only one rail type, whereas

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MoffettNathanson in America used to be behind on digital payments. Not anymore, The Economist, 25 March 2021.

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Fig. 2.18 Payment companies market capitalization, $bn. Source Bloomberg in America used to be behind on digital payments. Not anymore, The Economist, 25 March 2021

the four payment champions are primarily agnostic about how money is transported. And established card companies are under fire from antitrust regulators who believe they make it more difficult for merchants to process transactions using less expensive alternatives. The fintech quartet may face a more significant threat from giants in adjacent sectors. Large technology companies are beefing up their payment apps. Large retailers such as Walmart and Target develop their acquirers and wallets to reward loyal customers. To offset the threat of competition, digital payment companies are expanding their product offerings. PayPal has launched a “buy-now-pay-later” service and cryptocurrency and credit card trading. In February, it aspires to be a financial services “super-app” and has told investors that it expects to double its revenue to $50 billion by 2025 (see Footnote 71). Square’s peer-to-peer service for payment, in Cash App, has evolved into a digital bank that enables users to purchase bitcoin, trade stocks, receive paycheques, and use a debit card. It now has 36 million users, up from 7 million in late 2017, and accounts for 45% of Square’s gross profit. Stripe has begun offering merchants working capital and accounts in collaboration with banks. It may have taken some time for digital payments to impact America and the Western world significantly. However, it is better to be late than never.70

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America used to be behind on digital payments. Not anymore, The Economist, 25 March 2021.

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Visa and Mastercard join the digital payments party. The industry’s most contentious battles frequently occur in the shadows. This latest conflict in which card networks, technology companies, and governments struggle to control the virtual conduits’ digital money flows is not uncommon. Card networks, Governments, and SWIFT, the critical international interbank messaging services for payments, have all made recent moves that show how the battle lines are shifting. As the digital economy has evolved, many governments have improved their infrastructure to facilitate quick clearing and online transaction settlement. Fiftyfive nations have established “real-time bank-to-bank payment systems from Canada to Singapore.” However, credit card companies perceive a threat. As a result, Visa and Mastercard, which account for 90 percent of worldwide card payments (outside of China), have devised a deft response: they have entered the fray (see Footnote 71). Mastercard announced a global partnership with ACI Worldwide, a software provider for real-time payment systems. With card use expanding by double digits in recent years, the surge in digital payments could provide many benefits. Swift, which has been criticized for its poor speed and high price, is upping its game. It unveiled a strategy to use cloud technology to “facilitate instant, seamless, and secure payments.” To draw an analogy, it would mean switching from the cumbersome and expensive method of delivering a package abroad to the ease of email. Plastic is becoming less prevalent: Mastercard rebranded itself this week as a “global multi-rail payments technology company.” On the other hand, the card networks want to hedge and are riding on more than one horse just in case.71

2.3.1

Financial Inclusion

A critical objective of Fintech is to increase financial inclusion. To be considered financially included, a person must have access to financial services and an equal chance to benefit (Nanda & Kaur, 2016). Financial inclusion efforts are typically directed toward the unbanked or underbanked and target sustainable financial services to the deprived (World Bank, 2013). Financial inclusion has been related to more robust and long-term economic growth; therefore, it’s become a top objective for many governments throughout the globe (Dixit & Ghosh, 2013). Around 1.7 billion adults were estimated to be without a bank account in 2018.72 Among the unbanked, sizable segments are women and poor rural residents; often, members of vulnerable or disadvantaged groups experience prejudice if they cannot access financial services. Financial inclusion is critical for poverty reduction and a prosperous society (see Footnote 81).

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Mastercard and Visa seek to get the most out of the digital-payments boom, The Economist, 3 Oct 2020. 72 “Overview”. World Bank.

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Around the world, a paucity of money is cited as the critical reason by twothirds of individuals not having a bank account, meaning that financial services are still too expensive or not targeted to low-income consumers. Lack of trust in financial service providers, unavailability of documentation, and distance to the nearest bank are further barriers to establishing an account.73 For countries where at least 80% of the population has accounts, the next step is to transition from account access to account usage (Kenya, China, Thailand, India). Reforms, private sector innovation, and a drive to create low-cost accounts, including digital and mobile payments, are all factors in these nations’ endeavors to become a digitally inclusive society. The following nations have made the most incredible headway in promoting financial inclusion: • Universal digital ID policies like Aadhaar/JDY accounts cover over 1.2 billion people (90% of the population). • Leveraged payments from the government were implemented at scale. (For example, 35% of adults receiving government payments in low-income countries opened a bank account for this purpose). • Facilitated the growth of mobile financial services. (Ownership of mobile money accounts, for example, went up from 12 to 21% in sub-Saharan Africa) (see Footnote 81). It must be said that financial inclusion is making strides. Almost a quarter of the global population is still unbanked. However, mobile phones are assisting in changing that. Amid an Ebola virus outbreak, Sierra Leone’s difficulties were exacerbated in 2014 by a strike by emergency response workers. They were taking risks with their lives but were frequently paid irregularly. Because of this, the government shifted to paying digitally through cell phones. Instead of waiting a month for payment, they got their pay once a week. The new system was cheaper due to lower costs and reduced fraud. The strikes came to an end, and lives were saved.74 Sierra Leone was well positioned to bring about this change in two respects: mobile phone coverage covered nearly 95% of the nation, and 91% of emergency workers had cell phones.75 Despite this, there were several impediments along the way. Only 15% of workers were using mobile money. Fears of infection with the Ebola virus were sparked by biometric identification, such as fingerprints (a problem solved by facial recognition technology). But eventually, they succeeded.76

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UFA2020 Overview: Universal Financial Access by 2020, The World Bank, Oct 1, 2018. Financial inclusion is making great strides, The Economist, May 4, 2018. 75 Better than Cash Alliance in Global Finance, March 3, 2022. 76 Better than Cash Alliance, an UN initiative comprising of companies, organizations, and governments in Global Finance, March 3, 2022. 74

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By lowering the number of individuals without access to financial services, the episode shows how technology can help combat “financial exclusion.” Because of the expansion of internet services and mobile phones, hundreds of millions of individuals have been drawn into the formal financial system almost by chance instead of design. Consider Bangladesh’s bKash, one of the most extensive mobile money services globally. It began in 2011 and now has 30 million registered users. Previously, people stored their money beneath their mattresses; they now keep it on their phones.77 The service “has become the collective mattress for all the common people of Bangladesh. Now the money is digital, and they are in the banking system regulated by the central bank”.78 When the number of financially excluded people decreases quickly, these initiatives are timely and expected to impact significantly. People who reside distant from bank offices or ATMs may now obtain financial services because of the growing popularity of mobile phones and the internet in general. Seventy-eight percent of the world’s unbanked adults who receive cash wages own a phone.79 Additionally, the “unbanked” are viewed as a growing commercial market. Companies ranging from Ant Financial to PayPal promote financial inclusion. PayPal’s mission statement is “to democratize financial services.” Financial exclusion is a particularly acute problem in the developing world. Even though financial exclusion is widespread in Pakistan, the country’s future looks bright. Seven percent of adults have bank accounts, 24% are serviced informally, and 7 percent utilize other formal financial services. However, the country’s population is large (210 million people), with the majority being under 30. The country’s strengths are a robust regulatory framework, a large number of mobile phone users (146 million), and a dynamic ecosystem of non-profit organizations and local and international enterprises. Pakistan is on the verge of establishing “the world’s first fully connected and inclusive economy.”80 The global state of financial inclusion is remarkable. While the problem remains enormous, progress has been remarkable. China and India have reduced their unbanked population to 20%, two of the most populous countries globally. From 51% in 2011 to 62% in 2014, the proportion of people with either a bank account or a mobile money account rose to 69% last year.81 Between 2015 and 2018, 515 million people opened bank accounts.82

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bKash, of Bangladesh in Global Finance, March 3, 2022. bKash in Global Finance, March 3, 2022. 79 Findex in Global Finance, March 3, 2022. 80 Gates Foundation in Global Finance, March 3, 2022. 81 World Bank in Global Finance, March 3, 2022. 82 Global Finance, March 3, 2022, https://www.gfmag.com/global-data/economic-data/worldsmost-unbanked-countries. 78

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Notional account access is not synonymous with “inclusion.” Over a quarter of all accounts are dormant, meaning no deposits or withdrawals have been made in the past year (see Footnote 79). India’s numbers might be deceiving, as is often the case. The aggressive financial inclusion strategy launched in 2014, which promised every Indian access to a basic bank account, resulted in about 240 million new accounts in the next two years. Apart from the relentless advancement of the mobile phone, optimism stems from advancements in two areas. One of them is developing low-cost biometric technology that will allow even the most illiterate people without identification papers to create a digital identity that a bank can use. The 12-digit universal identification number Aadhaar is used by 99 percent of adults in India. By incorporating additional identification methods, a digital system allows for far more robust security than one that relies only on paper documents to function. Second, cloud computing enables the automation of many financial transactions and the analysis of unimaginable amounts of data by artificial intelligence (AI). Ant Financial, justifiably, brags about their 3-1-0 standard: it takes Ant Financial three seconds to make a credit decision and one second to transmit the money. There is no human involvement in the process at all. Additionally, automation decreases the cost of financing, making it more cost-effective to deal with tiny sums of cash. The impoverished are no longer seen as a threat to banks but as a commercial opportunity at the base of the economic pyramid. Even though many unbanked people have no credit history, new forms of data and highly sophisticated methods may make them financially empowered (see Footnote 74). Increasing financial inclusion through mobile payments is possible and is a business opportunity. The rapid expansion of mobile financial services opens up new business prospects. The mobile-friendly microcredit has made a significant contribution to the advancement of financial inclusion for the poor. By extending credit to individuals, the poor would establish micro-businesses and livelihood. Digital money has the potential to improve things in two ways: by making it cheaper and quicker to grant, distribute, and repay loans, as well as to offer other financial services, including insurance and savings; and by gathering data on persons with little or no previous experience in the formal financial sector should extend access to financial services.83 Safaricom (Kenya’s largest mobile network operator) launched “M-Shwari,” which is a bank account requiring no paperwork offered by “Commercial Bank of Africa” (CBA) via M-PESA (a mobile phone-based money transfer service). CBA carries the risk but may establish the account using PESA’s already done know-your-customer cheques and the M-PESA payment history to assess creditworthiness. CBA’s client base has grown to 22 million from 50,000 in 2010 and has been extensively copied throughout Africa and beyond.

83

Mobile financial services are cornering the market, The Economist, May 4, 2018.

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Interest-bearing mobile money accounts are also available from M-Shwari and a handful of its rivals. Indeed, the number of financial services accessible to impoverished individuals with a mobile money account is rapidly increasing. It appears as though “a golden age of fintech” has arrived.84 Take life insurance as an example. MTN, a Ghanaian mobile network provider, provides Mi-Life, a life insurance product connected with mobile money accounts. For approximately $0.23 per month, users receive coverage of approximately $100. This is gaining traction throughout the developing world. Crop and livestock insurance are becoming more accessible via mobile devices. Farmers may buy “index insurance” for their crops from a variety of firms, including Acre Africa in east Africa and Econet in Zimbabwe; if, for example, a rainfall index falls below a specific level, it pays out instantly to a mobile phone account without the need to make a claim. As a result of the advent of digital money, lending and repayment should be more reasonable and practicable for persons with or without a formal credit history. M-Kopa’s solar-panel technology has provided energy to thousands of houses in Kenya, Tanzania, and Uganda. Purchasers make a small deposit and then make payments every day from their mobile money account until they own the panel after a year. If they fall behind on a payment, the panel is automatically barred, but if they need money for an unplanned expense, they can forego a day’s energy in exchange for extra cash in hand. In February, M-Kopa established a collaboration with MasterCard to spread throughout Africa to use MasterCard’s QR technology. START Once more, an Excellent East African Travel Ideas “Easypaisa” currently provides a comparable service in Pakistan (see Footnote 83). Alternative data is widely used in China (which, unlike “alternative facts,” this data has a foundation in reality). In 2015, the government permitted eight organizations to create consumer credit ratings. The most advanced payment system is Alipay’s. With a strong Zhima (Sesame) credit score, one does not have to pay a deposit for vehicle rentals, bike-sharing services, or hotel reservations. As well as to see a doctor without queuing. It reportedly allowed passengers to bypass security lines at Beijing airport at one point. In their online dating profiles, Lonelyhearts brag about their credit ratings. However, lower-score users should avoid Zhima-rated products. The database contains information on over 6 million people who have fallen behind on court fines, which has aided courts in catching up with over 1.2 million defaulters whose credit scores have plummeted (Xinhua, 2018). Zhima appears to facilitate financial inclusion.85 Approximately 380 million Chinese residents’ credit histories were maintained on file by China’s People’s Bank of China as early as 2015. To put this in perspective, this is less than a third of Chinese adults compared to 90% of Americans having credit histories. Zhima’s system is open and transparent. The five parameters to calculate credit scores are personal information, capacity to pay, social network stability, credit history, and

84

Accion in Mobile financial services are cornering the market, The Economist, May 4, 2018. Ant Financial in Mobile financial services are cornering the market, The Economist, May 4, 2018.

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“behavior.” This final one is not entirely clear. Zhima clarified that while someone who spends ten hours a day playing video games may be considered high risk, one who frequently purchases nappies would be considered more responsible. According to Ant, credit scores are a component of an “ecosystem” of online services that mutually support one another. Tencent operates its online fund, connected to WeChat, with 300 billion yuan in assets under management as of January 2022 (see Footnote 83). Since 2013, it has also offered loans and had a fund where Alipay customers could earn interest on unspent funds. The fund, dubbed Yu’e Bao (or “leftover treasure”), offers substantially higher interest rates than bank savings. By 2021, it had surpassed all other investment funds globally, possessing 325 million accounts, or over a quarter of China’s population, handling 1.58 trillion yuan ($243 billion) in assets. It had cornered one-quarter of the market (see Footnote 83). Servicing previously un-bankable populations is profitable, a lesson taught by the Chinese behemoths to the world. More financial inclusion is indeed a business opportunity (see Footnote 83). Because of increased financial inclusion, who wins and who loses? Despite some risks, financial inclusion is likely to benefit consumers. Banking is only a tool to help achieve individual goals, like purchasing a home or paying for your child’s education.86 Furthermore, banks risk becoming invisible in a digital world-mere “dumb pipes” managed and designed by others. They seem improbable in the new financial environment to be major winners. The established financial institutions would almost certainly be wiped out by a wave of internet-based disintermediation with entrenched practices. Their primary competitors, on the other hand, are not Fintech. Today’s Fintech is primarily reformers rather than revolutionaries. Open application programming interfaces (APIs) can offer their services on banks’ platforms. Thus, if they are winners, it will only be because they have reined in their ambitions.87 “Mobile network operators” (MNOs) provide the infrastructure upon which the financial system is increasingly built. For the most part, MNOs don’t care about anything other than making money as passive conduits. And that money that comes in—basically, money transfer transaction fees would be threatened as competitors offer free transfers in the hope of profiting from ancillary services. Digital “platforms”—the giants that govern the internet and the applications and websites where most people spend most of their online time—are what banks, fintechs, and MNOs dread the most. Google may be expected to be king in a world where data is king, but the company insists it has “no aspiration to be a bank.” WhatsApp and Facebook’s Messenger payment feature supports payments in several countries. It tried utilizing data to establish credit scores, but consumers abandoned the project because they found it unsettling. Amazon already has a sizable business lending platform for small businesses. When first reported in March,

86 87

DBS in Mobile financial services are cornering the market, The Economist, May 4, 2018. Who gains and who loses from more financial inclusion, The Economist, May 4, 2018.

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an Amazon-JPMorgan Chase bank account deal sent chills through the banking industry. Amazon is drooling at having access to more and more information (see Footnote 87). Due to China’s sheer scale, Chinese enterprises have an early edge. In addition, the domestic market is safeguarded for them. Since Master and Visa Card are largely excluded from China, UnionPay has grown to be the world’s most prominent bank card firm by concentrating nearly entirely on the Chinese market. Alibaba, Tencent, and UnionPay are all expanding internationally. Their ambitions focus primarily on Asia’s near-abroad and the Chinese diaspora and tourists. They do, however, have huge plans, significant finances, and what seems to be a viable business strategy to back them up. With four exceptions: market concentration, privacy, security, and inequality, consumers are likely to be the largest beneficiaries overall. Future worry will include concentration. There’s a concern that if platforms provide free transfer services, they’ll push out smaller payment providers that can’t compete with the monopoly rents demanded by the winners. However, customers will reap the benefits of lower prices due to competition in the coming years. Already, digital security is a significant concern. M-service Shwari’s in Kenya has recently been disrupted due to “technical issues.” Even the Swift system became vulnerable to cybercrime in 2016 when more than $100 million was stolen from Bangladesh’s central bank. However, digital payment is often safer for low-income customers than cash which forms the bulk of mobile money users.88 Even more problematic, though, is the issue of privacy. People will be concerned about losing control when it becomes increasingly evident that they surrender their data for better access to financial services. Most people are affected by this issue in China. The government has attempted to construct a “social credit” rating system based on good citizenship that reads like something out of a dystopian novel. However, the most significant impediment to financial inclusion may be persistent disparities. Despite these advancements, the gap between male and female account holders has remained stable at nine percentage points over the six years (see Footnote 89). Similarly, a significant disparity between wealthy and impoverished households persists. Seventy-four percent of adults in the wealthiest 60% have a bank account; only 61% of the poorest 40% have one.89 There are many reasons why 1.9 billion individuals do not have bank accounts, including the high cost, distance, and a family member already has an account, a lack of paperwork, mistrust in the financial system, and religious considerations. Two-thirds of those polled mentioned a lack of cash as the primary reason for not having a bank account (see Footnote 89).

88

Better Than Cash Alliance in Who gains and who loses from more financial inclusion, The Economist, May 4, 2018. 89 Findex in Who gains and who loses from more financial inclusion, The Economist, May 4, 2018.

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To be sure, financial inclusion is also a challenge in the developed world. Using data and technology, industrialized nations may achieve greater financial inclusion. Financial exclusion is surprisingly prevalent in the developed world, with 12 million people in the United Kingdom “lacking access to basic financial services.”90 Nearly two million adult British residents are estimated to lack a bank account; a whopping 40% of people in their prime earning years have less than £100 in cash saved, while 31% show indications of financial stress.91 Many prosperous countries have largely uninvolved populations in the mainstream financial system, and the UK is no exception. According to estimates, 109 million Americans are nonprime (not immediately creditworthy), and another 53 million are “credit invisible,” lacking sufficient financial history to receive a credit score.92 One-fourth of Americans (44%) say they’d have to sell something or borrow $400 to cover an unforeseen bill.93 As in the developing world, technology can help in three ways: simplifying identification checks, lowering expenses, and opening up new methods to evaluate a customer’s creditworthiness. For example, Auxmoney, the German online credit marketplace, permits loan applications to be filed remotely with authentication done by video connection, including identity verification and a digital signature. Since most individuals in wealthy nations like the UK and the US have current accounts, bank statements include a plethora of data on which algorithms can feed, making them a valuable resource for lenders. Analyzing them more thoroughly than banks and other competitors could give them a competitive edge. For instance, Customers may climb a “ladder” of customer categories in Oakam’s in-app game to win better discounts and status. It is an apt metaphor for those at the bottom of the credit pile (see Footnote 90).

2.3.2

Moving Toward a Cashless World

Fintech ushers in a cashless society: There is no need for real coins or banknotes in a cashless society since all financial transactions are carried out using digital information rather than physical currency.94 A cashless society is one in which its digital equivalent replaces cash—the existence of legal tender, which is recorded and exchanged electronically. Cash is becoming increasingly unpopular in daily transactions. Sizable cash sums are viewed suspiciously in some circumstances, most notably in money laundering and terrorism financing. Additionally, some suppliers and retailers have

90

Financial inclusion in the rich world, The Economist, May 4, 2018. House of Lords, UK government in Financial inclusion in the rich world, The Economist, May 4, 2018. 92 Centre for the New Middle Class in Financial inclusion in the rich world, The Economist, May 4, 2018. 93 Federal Reserve, USA in Financial inclusion in the rich world, The Economist, May 4, 2018. 94 “The cost of cash in the United States” (PDF). The Fletcher School Tufts University. p. 9. 91

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actively prohibited payment in large sums of cash (Tompor, 2016), coining the phrase “war on cash.” Since 2009, digital payments can be made via payment gateways such as Venmo and Square.95 Venmo enables individuals to send money directly to other individuals without having access to cash. Small businesses may now accept payments from customers using Square. Sweden was one of the first countries to declare war on cash. By 2016, cash transactions accounted for just 2% of all transactions in Sweden and 20% of retail sales (Henley, 2016). More than half of the country’s bank branches did not conduct cash transactions. Several reasons were responsible for Sweden to become a cash-light country: supporting direct deposit in the 1960s, charging cheques in the 1990s, encouraging small businesses to take credit cards in 2011, launching the Swish payment system from smartphone to phone in 2012, and the advent of digital payments and digital currency more recently (Henley, 2016). Several advantages of a cashless society include the following: Costs and Risks to the business are mitigated: Transacting with cash reduces the danger of fraud, employee theft, and burglary (Sivabalan, 2017). By becoming cashless, a firm reduces physical security expenses. Reducing disease transmission via cash: Cash is an excellent breeding ground for pathogenic organisms (e.g., Escherichia coli, Salmonella species, Staphylococcus aureus, and Covid-19) (Huang, 2020). However, cash is less likely to transmit disease, prompting Germany’s central bank to declare that “cash poses no particular risk of infection to the public.”96 Digital payments are almost instantaneous Elimination of high-denomination notes to combat crime: Proponents point to the difficulties of money laundering, tax evasion, conducting unlawful transactions, and sponsoring criminal activities in a cashless society (Rogoff, 2016). Countries like the United Kingdom, the United States of America, Canada, Sweden, Singapore, and the European Central Bank have banned banknotes exceeding a specific value. Improved economic data collection: With digitally recorded financial transactions, the government can better trace money transfers via financial records, allowing them to track black money and unlawful activities in the nation (Poh, 2017). Several concerns about the cashless system include: Inadequate privacy: Digital transactions become vulnerable due to the digital traces left behind, allowing the creation of personal profiles and widespread surveillance (O’Dwyer, 2018).

95

““Negative” Interest Rates and the War on Cash”. February 8, 2016. Deutsche Bundesbank in Rogoff, Kenneth S. (25 August 2016). “The Sinister Side of Cash”. WSJ.

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Issues confronting the unbanked: Cashless systems may pose difficulties for those who rely on cash, particularly the poor, elderly, and undocumented immigrants (Auyong, 2017). Many people in low- and moderate-income communities are underbanked or have no bank accounts. Nearly a third of the population in the United States does not have access to any financial services (Sivy, 2012); the situation is even worse in less developed countries. Around a quarter of households with an annual income of less than $15,000 do not have a bank account (Burhouse & Chu, 2016). 7.7% of Americans do not have a bank account, with numbers as high as 20% in certain rural and urban cities and 40% in some census tracts.97 Digital frauds: Hackers’ unauthorized infringements are highly probable when payment transactions are kept on servers. Cyber-attacks on financial institutions pose increased risks when going cashless. According to proponents of a ban on cashless companies, electronic payment methods discriminate against minorities, the poor, and other disadvantaged groups who may not have access to banking institutions or electronic payment systems. Following this, San Francisco and Philadelphia, New York, have passed legislation making it illegal for brick-and-mortar establishments to refuse to take cash payments. The city council approved the measure with a near-unanimous vote, with the primary goal of reining in the “digital economy’s excesses.” Businesses who refuse to take cash payments will face penalties under the restriction, which applies to shops and restaurants (see Footnote 98). Digital payments have been progressively increasing since it was introduced in North America over the last decade; Asia has seen the fastest growth in cashless payments (Fig. 2.19). Emerging Asian nations’ digital payments industry is predicted to rise to $352.8 billion in 2022 from $96.2 billion in 2017.98 In many ways, the cashless society has already arrived, except that it’s in China. (Fig. 2.20). “Recommend using WeChat Pay,” read a placard displayed by the beggar. It was a literal manifestation of the era. Payment via mobile phone applications such as WeChat is rapidly gaining traction. After establishing a foothold to make online purchases, mobile payments expanded to in-store purchases and are rapidly becoming the primary payment method for many people in China (see Footnote 102). Leading the trend, Tencent and Alibaba are taking the place of banks in regular trade, increasing their influence in everyday commerce. Their success suggests that digital businesses will continue to drive financial innovation as they have done in retail, automobiles, and media. While the United States saw $112 billion in mobile payments in 2016, mobile payments in China totaled $9 trillion.99 Mobile payments adoption in China is way ahead of all the leading economies

97

Corporation for Enterprise Development. “The Most Unbanked Places in America” (PDF). Asia Leading the Cashless Revolution, Statista, Jan 24, 2020. 99 Forrester Research in Asia Leading the Cashless Revolution, Statista, Jan 24, 2020. 98

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Fig. 2.19 Asia leading the cashless revolution. Source Capgemini in Asia Leading the Cashless Revolution, Statista, Jan 24, 2020

Fig. 2.20 China surging on digital payments. Source The Cashless Society Has Arrived— Only It’s in China, The Wall Street Journal, January 4, 2018

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Fig. 2.21 Mobile payment options way ahead in China. Source Forrester Research; iResearch, Statista in Asia Leading the Cashless Revolution, Statista, Jan 24, 2020

(chart100 ). The payoff for Alibaba and Tencent is more than simply the 0.6 percent in transaction fees they get from retailers. The user data converts their apps into marketing platforms for various businesses, from bike-sharing to travel and everything in between. Some of the consequences of growing mobile payment usage are only becoming apparent. Payments are not required to pass through the central bank’s clearing system, making it more difficult for China’s monetary authorities to monitor capital flows and detect money laundering and fraud. Additionally, consumers are being pitched more loans, investments, and other financial products via their smartphones. According to the central bank, short-term consumer credit in China increased 160% year on year in the first eight months of 2017. Meanwhile, the Chinese reduced their reliance on traditional cash, such as coins and folded money. In 2016, they spent nearly 66 trillion yuan (nearly $10 trillion) of traditional cash (Fig. 2.21). Alibaba paved the way for mobile payment by hosting online shopping bazaars where merchants sell their wares to consumers. Alibaba launched Alipay as an escrow service more than a dozen years ago, taking a page from PayPal in the United States. It would withhold payments from shoppers until they received their purchases. The service gained traction with buyers who were not always confident in vendors’ ability to deliver on their promises. Alipay evolved into an online and mobile payment service in 2013, surpassing PayPal as the largest mobile payment platform.

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eMarketer in Asia Leading the Cashless Revolution, Statista, Jan 24, 2020.

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China’s circumstances favored this innovation. Credit cards never gained widespread acceptance. Until recently, most people did not have discretionary spending, and China has long had a cultural aversion to debt. Additionally, the government made it difficult for Visa and Mastercard to establish operations. The rise of technology companies as financial titans has resulted in a fee squeeze for traditional banks. By 2020, it was estimated that annual fee losses could reach $60 billion (see Footnote 101). The more significant issue for banks may be that Alibaba and Tencent frequently understand their customers better than they do (because of data). Changes resembling those in China are occurring in some parts of the world. Nordic and Dutch banks have reduced total branch locations by approximately 50% from their peak levels, and Sweden has been without cheques since the late 1980s.101 Tencent and Ant Financial are forming partnerships with payment processors across Europe and investing in mobile payment companies in India, Thailand, and other countries. Tencent and Alibaba have stated that they have no plans to expand their payment platforms into the United States. Americans have been slow to embrace digital money. Many believe that mobile payments are unnecessary, as their plastic cards and cash are accepted, and some merchants continue to accept cheques. Rich countries are unprepared to cope with the implications of turning digital, despite the enormous advantages. People have been associating money with cash for the last 3000 years. Daily transactions entailed creased paper or clinking metal bits, from purchasing food to paying bar tabs. However, digital payments have exploded in popularity over the last decade—it’s become the norm to swipe your smartphone or touch your credit card on a machine. Due to this transformation, the currency is now on the brink of extinction in certain industrialized countries. This will increase economic efficiency—but it will also introduce new complications that could jeopardize the transition.102 Countries are moving away from using currency at different speeds (Fig. 2.22). However, the route is clear, and the voyage has already been completed in certain situations. In the previous decade, retail cash transactions per person in Sweden have fallen by 80%. Only 6% of all purchases in Norway are made using cash. Thirty-four percent of total payments were digitally paid in 2017 in China, a steep increase from 4% in 2012 (see Footnote 102). The United Kingdom lags behind the Nordic nations in technical progress by at least four to six years. America lags by at least a decade. Outside of the wealthy world, cash remains king. However, even in that region, the supremacy is waning.

101

The Cashless Society Has Arrived—Only It’s in China, The Wall Street Journal, January 4, 2018. 102 Rich countries must start planning for a cashless future, The Economist, 8 Jan 2019.

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Fig. 2.22 Number of cash transactions per person. Source Economist in Rich countries must start planning for a cashless future, The Economist, 8 Jan 2019

Two factors are driving cash to its slow death. One aspect is the desire of younger generations for payment methods that are smoothly integrated into their digital lives. Vendors in developed countries, notably banks and technology businesses, provide quick, easy-to-use payment methods to collect fees and data (sometimes surreptitiously). The infrastructure that supports the cash economy is expensive to operate—ATMs, note-carrying vans, and tellers who accept coins. Most financial firms are eager to abandon it or charge exorbitant fees to dissuade traditional customers. The prospect of a cashless economy is tremendously positive. The use of cash is inefficient. It is estimated that minting, sorting, storing, and distributing costs about 0.5% of GDP in developed countries. However, this does not begin to account for the gains of a cashless society. When payments become dematerialized, individuals and businesses become less vulnerable to theft. Governments can maintain a tighter rein on fraud and tax evasion. Digitalization significantly expands their market by enabling small businesses and sole traders to sell internationally. Additionally, it establishes a credit history that enables consumers to borrow. However, despite these advantages, there are several drawbacks to consider. Technical breakdowns, cyber-attacks, and power outages are all potential threats to electronic payment systems; for instance, the cyber assault on the American bank Capital One recently made headlines. The poor, the elderly, and rural residents may be left behind in a cashless economy. And substituting a digital system for cash, an anonymous payment method, would allow governments to monitor citizens’ shopping habits and private titans to profit from their data (see Footnote 112).

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Fig. 2.23 Cash on the decline in the US. Source Federal Reserve Diary of Consumer Payment Choice, USA in Digital-Payments Growth Has a Ways to Run Yet, The Wall Street Journal, June 6, 2022

Cash hasn’t gone away yet in the US. It is ebbing more slowly compared to its European counterparts. Payment companies wondered if the surge in digital payments was a one-time affair related to the pandemic period.103 Of the entire consumer payments, cash accounted for 19% in 2020, a sharp fall from 26% in 2016 (Fig. 2.23). Industry analysts felt that the cash-to-card conversion was in the “middle innings” than the “late innings.”104 The online buying trend has become more deeply rooted, especially after the pandemic. The declining usage of cash might prompt the introduction of Central Bank Digital Currency (CBDC).105 Also, Americans hoarded cash during the pandemic, which increased from $241 in 2019 to $347 in 2021 per person on average. Spurred by higher interest rates, they will likely reduce their physical cash holdings, providing an upside to several digital-payments stocks.106 According to a recent survey,107 roughly two-thirds of Americans once rejected a cashless society, but attitudes have altered recently. Stores that accept mobile payments and do not accept cash are increasing around the nation, with retailers like Amazon Go offering payment options such as Apple Pay. To take advantage of these services, one must access the banking system, either with a bank account

103

Visa in Digital-Payments Growth Has a Ways to Run Yet, The Wall Street Journal, June 6, 2022. Goldman Sachs in Digital-Payments Growth Has a Ways to Run Yet, The Wall Street Journal, June 6, 2022. 105 Federal Reserve, USA in Digital-Payments Growth Has a Ways to Run Yet, The Wall Street Journal, June 6, 2022. 106 Digital-Payments Growth Has a Ways to Run Yet, The Wall Street Journal, June 6, 2022. 107 CivicScience in Digital-Payments Growth Has a Ways to Run Yet, The Wall Street Journal, June 6, 2022. 104

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or a credit card. Nearly seven percent of American families are unbanked, which means they don’t have a savings or checking account. Almost 20% of Americans are partially banked, which means they have a savings or checking account but use non-banking financial services like money orders or payday loans. They’re worried that a cashless society would further impoverish the country’s homeless and working poor, many of whom are now unbanked or underbanked. Both New Jersey and Massachusetts have enacted legislation prohibiting retailers from discriminating against customers who pay with cash. And San Francisco, Washington, D.C., Chicago, New York, and Philadelphia have introduced laws to control the use of cashless payment systems in retail (see Footnote 102). Cashless retailers’ proponents point out that consumers benefit from faster payment times, accessible payment methods, and decreased theft rates. Specific cashless options, such as Square and PayPal, provide payment services without a bank account.108 The pandemic drove digital-payment surge resulting in the decline of the number of ATMs. The sluggish transition to a cashless world is making it harder for people who still rely heavily on cash since it is contributing to the collapse of the omnipresent ATM across the United States. The number of ATMs in the U.S. has declined annually over the previous few years, reaching 451,500 at the end of 2022 from a peak of 470,000 in 2019.109 Many people stopped using cash during the pandemic and haven’t started using it again. More and more consumers are choosing to transmit money digitally. The percentage of payments made in cash and cheques is expected to plummet from 42% in 2010 to 14% this year. The biggest decline occurred in 2020, just before the pandemic began (see Footnote 109). However, ATMs remain essential to the country’s financial system. According to former Federal Reserve chairman Paul Volcker, the automatic teller machine is the most significant financial invention of the last 20 years.110 ATM fraud, not electronic payments, is currently the industry’s largest concern. But as their population declines, those who still require them will have less access. They are also becoming rarer. Recently, JPMorgan Chase & Co. reported closing several 24-h ATM vestibules in New York early due to rising crime and vagrancy (see Footnote 111). Consumers are doing more transactions online and using branches and ATMs less frequently. The amount of cash withdrawn has also increased over the past few years, demonstrating that clients continue to prefer cash. Banks are also enhancing ATM features such as the capability to hold a remote videoconference with a teller that would initiate reducing the number of branches and staff.111

108

Americans Don’t Buy Into a Cashless World, Statista, April 9, 2019. Euromonitor International in The Number of ATMs Has Declined as People Rely Less on Cash, The Wall Street Journal, March 3, 2023. 110 American Bankers Association in The Number of ATMs Has Declined as People Rely Less on Cash, The Wall Street Journal, March 3, 2023. 111 The Number of ATMs Has Declined as People Rely Less on Cash, The Wall Street Journal, March 3, 2023. 109

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Fig. 2.24 Cash use versus Internet penetration. Source Bank of England, Economist in High internet use and state support help countries ditch cash, The Economist, Aug 1, 2019

Digitization and usage of cash have an inverse relationship. The most digitized societies use cash least often. Eventually, widespread internet use and state support will enable countries to phase out cash, ushering in a cashless economy. The majority of transactions continue to be conducted in cash throughout the world. However, its share is rapidly dwindling, falling from 89% in 2013 to 77% today. Despite the emphasis devoted to mobile banking in developing areas, wealthier nations with small informal economies and high financial inclusion have driven the trend. Less currency is exchanged in more technologically sophisticated cultures within the developed world. Around 80% of transactions in Nordic nations like Denmark and Norway, where 97% of the population has internet access, are already cashless (Fig. 2.24). Italy has a 61% internet penetration rate; 85% of transactions were still conducted in cash in 2016112 Internet penetration seems to correlate with cashless intensity positively.

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High internet use and state support help countries ditch cash, The Economist, Aug 1, 2019.

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The choices that companies and governments make go well beyond this general pattern. Investing in contactless payment infrastructure pays off rapidly for businesses. After contactless technology became widespread in industrialized nations, transactions per card increased by 20%–30%.113 Banks are speeding up the process by developing low-cost systems that enable direct account transfers (chart, see Footnote 112). Because it is the home to big companies advocating digitization, such as card networks (Visa, MasterCard), technological heavyweights (Google, Apple), and payment apps (PayPal), the United States has abandoned banknotes faster than its modest 75% internet penetration rate would imply. Additionally, public policy makes a difference. In some cities, including London and Amsterdam, cash payments on public buses have been prohibited. Estonia— home of Skype—pioneered digitization of government services, including tax filing and voter registration. Many of its citizens are comfortable using modern technologies and collaborating on datasets and seldom carry cash. On the other hand, Japan spends far more on cash than one would expect based on the country’s internet use. Historically, the country had a laid-back credit card monopoly protected by government legislation, making it difficult for outside investment. Cash has proven stubbornly difficult to eradicate thus far. Even in Sweden, a market leader, it accounts for one in every four transactions. However, a tipping point may be approaching. Managing cash is costly. The total cost to society is estimated to be 0.5 percent of GDP.114 As more transactions are conducted digitally, fewer retailers, customers, and banks will bear the cost. Even technophobes and geriatric customers may start paying for truffle fries with their phones if cash withdrawal rates are raised to $10 per transaction (see Footnote 112).

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A cryptocurrency is a digital asset (the lowest granular form is a coin/token) designed to function as a medium of exchange. It is typically not issued by a central authority and does not exist physically (as paper money does) (although this might change). Individual coin ownership records are stored in a ledger that takes the form of a computerized database and uses solid cryptography to secure transaction records, control the creation of additional coins, and verify ownership transfers. In contrast to centralized digital currencies and central banking systems, Cryptocurrencies typically operate under decentralized control (Allison, 2015).

113 AT Kearney in High internet use and state support help countries ditch cash, The Economist, Aug 1, 2019. 114 Bank of England, World Bank in High internet use and state support help countries ditch cash, The Economist, Aug 1, 2019.

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A cryptocurrency is a system that satisfies the following six criteria (Lansky, 2018): 1. The absence of central authority since the system’s state is maintained by widespread consensus. 2. The system maintains a record of all cryptocurrency units and their owners. 3. The system regulates the creation of new cryptocurrency units. If new cryptocurrency units need to be created, the system defines their creation circumstances and decides how these new units can be owned. 4. Cryptography is the only way to establish ownership of bitcoin units. 5. The system supports transactions that alter the ownership of cryptographic units. A transaction statement may be issued only by an entity that can substantiate its current ownership of these units. Numerous governments have been wary of cryptocurrencies, their lack of central control, and their potential impact on financial security.115 Bitcoins do not have customer protection against fraudulent transactions like chargebacks compared to credit cards.116 There is no intermediary with the power to restrict client damages if bitcoin is lost or stolen, unlike typical financial instruments that feature extensive consumer protection. According to central bankers, “widespread use of cryptocurrency would also make it more difficult for statistical agencies to gather data on economic activity, which governments use to steer the economy. Virtual currencies pose a new challenge to central banks’ control over monetary and exchange rate policy.”117 Cryptocurrency operations consume a substantial amount of electricity and have a sizable carbon footprint. Five years ago, it was estimated that bitcoin mining consumed 948 MW, the equivalent of two countries’ size of Angola or Panama. Between 1 January 2016 and 30 June 2017, it was estimated that Bitcoin, Ethereum, Litecoin, and Monero (different cryptocurrencies) added between 3 and 15 million tons of CO2 to the environment (Krause and Tolaymat 2018). Bitcoin was predicted to utilize 45.8 TWh of energy per year, generating 22.0 to 22.9 million tons of carbon dioxide, outpacing both Jordan and Sri Lanka in terms of carbon dioxide emissions (Stoll et al., 2019). Despite badmouthing digital money, the unabated cryptocurrency frenzy continues. The new-age digital currency is understood only by a few people. The highly speculative, Wild West market with no regard for any rules does attract

115

Cryptocurrency and Global Financial Security Panel at Georgetown Diplomacy Conf Archived 15 August 2014 at the Wayback Machine, MeetUp. 116 Four Reasons You Shouldn’t Buy Bitcoins Archived 23 August 2017 at the Wayback Machine, Forbes, 3 April 2013. 117 Decentralized currencies impact on central banks Archived 4 March 2016 at the Wayback Machine, RTÉ News, 3 April 2014.

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rogue players. Governments have very little clue about managing cryptocurrency. Is it a commodity or an asset? If it is an asset, what is the underlying? (there is no underlying). What is “crypto,” and why does bitcoin matter? A broad class of digital assets that started in 2009 with bitcoin is generally known as “cryptocurrency.” Although there are hundreds of cryptocurrencies, only a few will survive and flourish in the future. A few diehard cryptocurrency fans believe it will become a global reserve currency. Comparison with gold is frequently made to predict that whoever owns cryptocurrency will become very wealthy—some trash it as a temporary craze or a Ponzi scheme. Notwithstanding contradictory opinions expressed on the intrinsic value of bitcoin, it does enable two people connected by the internet to conduct a value transfer in a matter of minutes without the involvement of any third party. No banks, no foreign exchange. How does cryptocurrency work? The fundamental idea is that it is a piece of software. There is no physical form. Cryptocurrencies run on software networks, where many computers run distinct copies of the same program. No computer controls this network, albeit all the computers are connected to the internet. In bitcoin jargon, it’s called a “decentralized” network. Bitcoin was proposed as an alternative to the “centralized” function of the banks. The financial operation is called “decentralized finance” or “DeFi.” There are two main functions of the computer networks: one is to handle transactions, and the other is to maintain a log of all these transactions. Batched into “blocks,” they are connected in chronological order in a “chain.” Hence the name “blockchain” is given to the cryptocurrency (crypto for short) software. Who is in charge of the computers? The crypto software is “open source,” which means the source code is accessible for download and use by any person. The database used for logging transactions, generally known as “ledger,” is accessible to anyone. This scheme prevents anyone connected to the network from forging or spending the same bitcoins more than once. The participants agree on the transaction trail (a copy of the transaction is available to every user) and cannot be changed later. Transactions are immutable. The programmers are encouraged to compete and incentivized with a monetary prize. They vie to be the first to batch a chunk (block) of transactions. The first computer to recognize a block receives a batch of freshly issued bitcoins. Currently, the reward is 6.25 bitcoins (worth $308,270 in January 2022) and is given out roughly every ten minutes. Because the programmers perform something similar to gold mining, they are known as “miners.” The miners help maintain the network and help in the generation of new bitcoins. What is bitcoin’s promise? Bitcoin offered an alternative to the centralized banking system. After the 2008 financial crisis, bitcoin helped disillusioned people. Bitcoin is a technological masterstroke (although blockchain suffers from serious technical issues) that is now evolving into a social movement. The crypto fans truly believe that a bitcoin will cause financial upheaval.

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Since crypto code is open source, anybody can take the code and modify it to create their version to behave differently or redesign it ab initio. This freewheeling software has given rise to distinct crypto platforms such as digitized banking services (DeFi), decentralized operating systems (Ethereum), new supply chain networks (IBM), and new types of art and collectibles (NFTs, nonfungible tokens). It is truly a gigantic real-world experiment with unproven technology. An alternative to Blockchain: Cryptocurrency has been touted by fans as an elixir to the financial world. The same fans aver it will eliminate avaricious intermediaries such as banks by blockchain-based (distributed ledgers) smart contracts (self-executing rules). An automated, human-free, and innovative financial service is termed “decentralized finance” (DeFi). However, the underpinning of DeFi’s blockchains suffers from serious flawsthey are energy-guzzler, fiendishly complex, excruciatingly slow, and even centralized. Blockchains have serious impairments despite major efforts to resolve these issues, making them scale extremely difficult. Votaries of the blockchain-based financial system argue that current traditional banking suffers from severe flaws-banks sometimes operate against the interests of depositors by making poor investment decisions and suspending depositors’ accounts on instruction from governments. Blockchain, because there is no central authority, is seemingly a panacea for the ills of banking. Transactions are carried out on automated “consensus.” Blockchains must possess two essential characteristics: a “consensus mechanism” where users agree on how new transactions is to be recorded in the blockchain ledger. The other is a system of incentives to attract enough users (miners) to maintain the blockchain. This process is, known as “proof of work,” is yet to be breached by cyber thieves, although it consumes a gargantuan amount of energy. Bitcoin consumes the same amount of energy as Italy. The quest for a better blockchain is truly on. Chia is a proposed alternative based on “space and time proofs.” While the incentive remains the same (coins), the deterrent is distinct: instead of wasting computing power (and therefore energy), Chia consumes digital storage. The jury on the efficacy of Chia is still out. Consequently, smart digital money takes a different route: proof of stake. Decisions about updates are made by voting among crypto holders and not a computing competition. The share of rewards and voting power is dependent on the amount of money crypto holders are willing to bet on the outcome. The cryptocurrency does a fine job of balancing the stick with the carrot. Proof of stake decidedly consumes less energy and is faster than bitcoin. Early adopters include Avalanche, which can process hundreds of thousands of transactions per second, although experiencing teething problems.

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Fig. 2.25 Ethereum, annual estimated energy consumption, TWh. Source Digiconomist, Economist in The future of crypto is at stake in Ethereum’s switch, The Economist, 6 September 2022 (see Footnote 123)

The open architecture of blockchain is eminently suitable for the development of new financial products and services, and therefore, some compromise on the ideological goals of blockchain may become inevitable118 ,119 . Governments will have their hands tied in influencing blockchains that they currently do with the traditional banks (see Footnote 119). Ultimately, a certain amount of centralization may be necessary to avail of the other benefits of blockchains. A new avatar of blockchain might redeem its fortune. The future of crypto is at stake in Ethereum’s switch. Can decentralized networks reform themselves? Will blockchain performance improve dramatically? The crypto world is watching with bated breath Ethereum’s switch. The point at which the Ethereum blockchain switches from employing “proof-of-work” to “proof-of-stake” as a consensus mechanism—the process by which all the computers maintaining a blockchain agree to add new transactions to it—is known as the “merge” in the cryptocurrency world. This is not merely a technical adjustment. It is a major redesign of a $200 billion software project that has been in progress for seven years and, if all goes well, should be a smooth affair. Crypto experts liken the procedure to changing an airplane’s engine in mid-flight. Due to proof-of-work’s high energy consumption and high computing demands, blockchains like Ethereum and Bitcoin now use as much energy as small countries. Proof-of-stake will function with 99.9% less energy needed. Emissions will be affected as if Chile had been turned off overnight (Fig. 2.25). Even more crucially, if the merge is successful, it will demonstrate Ethereum’s capacity for growth, opening the door to even more significant improvements.

118

Wharton School. Is a greener, faster, and more decentralised alternative to Bitcoin possible? The Economist, 1 Jan 2022.

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Good news is needed for cryptocurrency because the previous year was terrible. A crypto hedge fund collapsed; a stablecoin was found to be everything but stable, and a few dubious deposit-taking businesses failed, wiping away funds. Cryptocurrency’s overall market value has shrunk to roughly $1 trillion, down about $2 trillion from last year. The advancements of Ethereum wouldn’t undo any of this devastation (see Footnote 123). However, it would imply that cryptocurrency has a better future than many believe by minimizing its environmental impact and showcasing the potential for future advancements. 2014 saw the initial publication of the Ethereum blockchain concept. It is a sizable database of every cryptocurrency transaction, similar to Bitcoin. The key realization was that the blockchain could do far more than that, including tracking code lines. As a result, Ethereum can keep track of cash transfers and any asset and function transfers that occur under “smart contracts,” self-executing contracts that trigger a series of events when criteria are satisfied. Using code on the Ethereum blockchain, developers have created a sizable network of financial institutions, including exchanges and lenders. The primary engineers work on a dozen or so “clients,” or pieces of software, which maintain the blockchain. These are created using several programming languages, including Go, Rust, Java, and C#, and the “nodes”—computers that run the client software to preserve the Ethereum blockchain’s history—execute the software. The Ethereum blockchain’s native token, ether, and those who have created applications on top of it or listed real-world assets on the network all come to a consensus when deciding what to do and whether updates will be adopted. Plans and code are posted in real-time on the programmers’ repository GitHub. Every two weeks, the main developers talk about prospective updates, whether they’re pandas or not. Theoretically, anyone who works on the software can advance to the position of core developer (see Footnote 123). Like the operating system Linux and the web browser Firefox, Ethereum is open source, but the opportunity to invest in its success through ether tokens incentivizes participation in upkeep. It’s not obvious how decentralized governance is. A significant level of agreement among the involved parties is necessary to accomplish a change like a merger. Most nodes must upgrade their software, all major clients must be updated to use the new code, and all blockchain-based applications—such as stablecoins backed by dollars in bank accounts—must agree that the newly combined chain will preserve the status of their assets. Watching in real-time can be disorienting. It’s as if The Wall Street Journal started streaming its editorial meetings live and letting readers commission stories and choose covers. Additionally, not all parties involved are in favor of the merger. Miners have spent up to $5 billion on hardware to power the proof-of-work consensus algorithm. They won’t get much return on that stuff after September 15 or thereabouts. Proof-of-work keeps a blockchain secure by rewarding hundreds of thousands of

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computers for working together to solve a mathematical challenge. When a computer discovers a solution, it notifies the other miners, who, if they agree, update the blockchain and receive payment. Therefore, having a lot of mining equipment pays with a proof-of-work regime. With proof-of-stake, bitcoin holders vote on whether or not to update the blockchain. The amount of ether staked determines voting power and a participant’s share of the prizes. Stakeholders’ stakes may be lost if they act improperly, for as, by putting through flawed transactions. Thus, the benefit of owning a lot of mining equipment will vanish. Instead, having ether on hand will be advantageous. The miners could rebel to delay the integration. However, it seems that the nodes are largely accepting the upgrade. Around 75% of Ethereum nodes have updated their software to be ready, according to ethernode, a service that monitors Ethereum activities. The other option is to “fork” the blockchain by continuing to use the outdated software and hoping enough other people would do the same to keep the older version alive. Institutions like Circle, a stablecoin operator, have backed the new proof-of-stake methodology (see Footnote 123). Wallet providers and exchanges also support the proof-of-stake chain. The manner through which Ethereum reaches a consensus is “kind of a messy and ad hoc process.”120 But if everything works out, there are significant advantages. Since Ethereum is mined globally, the effects of the overnight reduction of its energy requirements will be diffused. Around one-tenth of the nodes are in Germany, while nearly half are in America. Less than 5% live in other nations, including Singapore, Britain, and Finland. However, energy prices may decline in smaller nations like Singapore, where mining is disproportionately common (see Footnote 123). The modification lessens the requirement for mining equipment. Chip manufacturer Nvidia creates graphics cards for gaming and ether mining. The sales of its chips decreased by roughly 50% from May to July compared to the previous three months, partly because of rumors of an upcoming merger. The cost of used graphic cards on eBay is falling. Rewards for validating transactions can be scaled back because the network won’t require as much hardware or energy. “With proof of work, the scarce resource offered in return for rewards is computing power. That is very expensive because you have to pay electricity bills and cover hardware costs” (see Footnote 121). The scarce resource with proof of stake is instead digital currency. The opportunity cost of that money, which may be 3 or 4%, is what the maintenance cost is. As a result, Ethereum will only award 10% more tokens for each block validated by stakers post-merge than it did to miners before it (see Footnote 123).

120

Ethereum Foundation in The future of crypto is at stake in Ethereum’s switch, The Economist, 6 September 2022.

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Since the timing of the integration started to solidify in mid-July, ether prices have increased, and this change in the financial system is presumably one of the causes. Despite the sideways trading of bitcoin and other crypto tokens, the currency has increased by about 50%. The proponents of Ethereum believe that a successful merger might pave the way for “the flippening,” which would occur when ether’s market capitalization first surpasses that of bitcoin. Its value currently stands at almost half that of its main competitor, close to its highest share since 2017. Security is another significant advantage. An attacker needs 51% of the total processing power to mine Bitcoin or Ethereum to take over the blockchain. This is estimated to be $5 billion to $10 billion. Half of all tokens would need to be acquired and staked to attack a proof-of-stake blockchain, which would currently cost $20 billion (see Footnote 123). Since big holders receive more rewards under proof-of-stake, some believe these advantages will result in a concentration of power. However, this logic is flawed. Small stakes will earn less than large stakes, but they will continue to possess the same proportion of all outstanding tokens over time, maintaining the same relative strength. When using proof-of-stake, there are also scalability benefits from creating massive mining rigs, which are more productive. “There is no way someone could set up a competitive at-home mining rig.”121 The changeover failing in some way, which might erode public support, is another risk. Ethereum, however, is unconcerned. Because of all the testing, the blockchain elements will operate without a hitch (see Footnote 121). The larger community is the only thing that could be the missing piece in the changeover. Some participants may be confused due to difficulties installing new components and adapting to a new functioning method. However, there won’t be issues unless more than 40% are, which is improbable, says Ethereum. However, blockchain applications may have issues, such as exchanges. Major software updates uncover a wide range of problems in code that had previously appeared to be sound. Important DeFi apps are preparing themselves by halting ether transactions during the merge time, such as the loan portal Aave (see Footnote 123). The merger will be a step toward a considerably more valuable technology if everything goes according to plan. Because they automate a financial system’s operations, many financial apps that run on the blockchain are incredibly effective. At an exchange, smart contracts automatically pair buyers and sellers or borrowers and lenders. According to IMF research, DeFi applications’ marginal costs of financial intermediation were roughly one-third those of rich-country banks and one-fifth those of emerging-market banks. The Ethereum blockchain can be slow and expensive, reducing users’ efficiency. The fees for recording transactions, known as “gas fees,” can soar to as high as $100 for a single transaction during periods when the network is active.

121

ConsenSys in The future of crypto is at stake in Ethereum’s switch, The Economist, 6 September 2022.

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The first step toward all of these changes is successful integration. It would demonstrate that distributed groups of individuals can undertake important, contentious, and risky tasks.122 In spite of underwhelming show put up by Blockchain, there are stout supporters of the distributed ledger system. They believe that regulated financial institutions are well positioned to harness the revolutionary technology. A cryptocurrency exchange went from experiencing a liquidity crisis to filing for bankruptcy in six days. The sudden collapse cast suspicion on cryptocurrencies and blockchain technology, the program that underlies digital assets. Many still view blockchain as a viable technology if allowed to innovate under the appropriate circumstances as a lifelong participant in financial markets. Blockchain technologies can thrive under the direction of a licensed financial institution. In contrast to earlier innovation waves, blockchain technology entered and revolutionized severely regulated industries. FedEx or UPS are still in use today despite the development of email. Peer-to-peer payments and the tokenization of conventional assets are two examples of how blockchain technology alters businesses, from how they raise capital to how investors trade stocks (see Footnote 124). This has wide-ranging effects on the world economy. Blockchain developers who are aware of these consequences will benefit. It is not enough to create well-liked software or amass a sizable amount of venture cash if the idea is to completely disrupt the sector that transports capital around the globe and deal with the scrutiny of numerous regulators. Reducing risk, creating effective controls, and establishing trusting relationships with key players in politics and public policy are the secret sauce of success. Even if some blockchain startups are clamoring for regulatory monitoring, not all of them are yet mature enough to be able to comply. That’s especially true for cryptocurrencies, but that doesn’t mean blockchain should be dismissed. One shouldn’t lose sight of the forest for the trees because blockchain has numerous applications beyond just cryptocurrencies. Blockchain can encourage responsible innovation in the financial sector when used properly (see Footnote 124). Our work is already more productive thanks to technology. Using blockchain, we’ve been building trading platforms where clients can trade with each other in minutes. By cutting down each trade’s processing time from hours or even days, we’re freeing up capital that would otherwise be locked in limbo. Recently a e100 million two-year digital bond for the European Investment Bank with two other banks, all based on a private blockchain, was arranged. A bond transaction like this typically settles in five days. This was settled in 60s (see Footnote 124). We are lowering costs for issuers, investors, and regulators by reducing settlement times. Using blockchain, we can extend these benefits more broadly in fixed-income markets and across other asset classes.

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The future of crypto is at stake in Ethereum’s switch, The Economist, 6 September 2022.

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Attempts are being made to make the financial system more transparent. Many blockchain users use self-executing or “smart” contracts, whose trade terms and settlement instructions are written directly into the program code. Smart contracts are a double-edged sword: Since they are automatic, they can’t be easily changed. But if used responsibly, they can reduce the risk that either party won’t hold up its end of the bargain and build even more confidence in the financial system. Blockchain can also make the financial system more accessible if you are a small individual investor and want to participate in a real-estate investment fund. There are considerable barriers to getting involved today, such as minimum investment amounts and long waiting periods to get out. With tokenization, you could buy fractions of individual buildings and sell them whenever possible. No longer would real-estate investing be the preserve of the ultra-wealthy. This is the benefit of having regulated financial institutions develop blockchain applications. Because we are accustomed to high standards of regulatory oversight, we can work with regulators and policymakers to find the right balance between regulation and innovation.123 Bitcoin has skyrocketed in price. How am I going to afford it? Bitcoin reached a peak value of nearly $70,000 in 2021 but dropped to around $37,000 in early 2022 (see Footnote 126). However, each bitcoin is granular, meaning each bitcoin is divisible up to eight decimal places, implying that each bitcoin includes 100 million subunits (called Satoshis, named after the inventor). This would practically mean any amount of bitcoins can be bought or sold. DeFi? Bitcoin has no similarity to stock or bonds. Unlike stocks, bitcoin ownership does not mean any ownership of the business. The only way to make money with bitcoin is to sell it at a higher price than it was paid for. One rapidly emerging part of the crypto is called “defi” or decentralized finance. This is similar to the banking services at any bank, including borrowing or lending against crypto holdings. Lending cryptos can earn 5–20% interest; one can also borrow and invest elsewhere in the crypto market for gain. But defi is still in its nascent stage with loose business practices and therefore liable for fraud and pilferage. Every week, someone or the other loses money. Cybercrime is rampant in the defi world. Roughly $10 billion was lost due to fraud on defi platforms in 2021.124 This is a Caveat emptor (buyer beware) financial ecosystem.125 Bitcoin appears to be a fad or, at worst, a con to most people. However, it will not vanish. And its dollar value has increased by approximately 150% since March 2020.126 Along with notoriety, bitcoin benefits from ingenuity and scarcity. Begin with ingenuity. No one can deny that the technology behind Bitcoin is ingenious. It’s just a way to keep tabs on who’s spent how much. An electronic ledger distributed throughout the whole network of bitcoin users is used instead

123

Blockchain Is Much More Than Crypto, The Wall Street Journal, December 6, 2022. Elliptic in What Is Cryptocurrency, and How Does It Work? The Wall Street Journal, Dec 2, 2021. 125 What Is Cryptocurrency, and How Does It Work? The Wall Street Journal, Dec 2, 2021. 126 Getting down with the cool kids on bitcoin, The Economist, Oct 29, 2020. 124

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of a central exchange to keep track of transactions and validate payments and receipts. Because of the system’s dispersed design, accessing the accounts would need to take over most of the network’s servers and computers. This makes trust in Bitcoin almost infallible. No government, bank, or technological corporation controls; it is a significant element of its attractiveness to consumers. (This is also one of the reasons why many people dislike it). Self-regulation is inherent in the system. Additionally, it is a self-contained system. Bitcoins are “mined” when a machine solves a complicated mathematical problem. It must decode a large number encoded in the system’s code. Over time, it becomes more challenging to discover the remaining numerals. The mine will eventually exhaust itself. There will never be more than 21 million bitcoins (see Footnote 127). Cryptocurrency as a means of payment is a failure but exciting for speculators: The question is whether a cryptocurrency will eventually supplant cash. The answer is unclear, but there is hope with several central banks planning to launch digital currencies. The most popular cryptocurrency has been a colossal failure as a payment method but has been a goldmine for speculators. Bitcoin’s price volatility has made a small number of people very wealthy, tempted others to gamble in the hope of making quick riches, and left others with severe losses. Bitcoin will be worth $55,000 in 2021. A frequently made prediction is that by 2022, a bitcoin will be worth $250,000127 . Bitcoin was created to function as a digital form of currency or gold and a “censorship-resistant” alternative to online payment systems such as those handled by Visa and PayPal. If users were able to replace their confidence in a central authority with their trust in computer code and mathematics, they would be able to skip the intermediary and deal directly with each other. Electronic money is not a novel concept. Bitcoin’s secret creator, Mr. Nakamoto, solved one of the most confusing challenges with computerized money by barring users from repeatedly spending the same digital currency without an independent authority to authenticate each transaction. With a physical currency, this issue is largely resolved. An item can no longer be used by its original owner once it has been turned over. Digital currencies, on the other hand, are nothing more than slivers of data on a computer. Computers are built so that data can be moved around and copied with ease. Mr. Nakamoto found a solution by handing over control of the system to the end-users. Because of this, every Bitcoin transaction will be recorded in a permanent ledger that will increase over time as more people use the money in a “blockchain.” Because everyone has a replica of the system’s records, anybody trying to spend the same bitcoin twice would be caught. Bitcoin is decentralized. When one of its clients transacts business, a centralized institution, such as a bank, may update its internal data accordingly. To keep the blockchain up to date, all transactions must be broadcast to the network so that everyone can see them. To do business, two parties must first inform the other

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How to put bitcoin into perspective, The Economist, August 30, 2018.

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parties. A small group of miners assembles these transactions into blocks and stores them on the blockchain. Miners are tasked with maintaining and ensuring the records’ integrity. Each block is connected to the preceding one via a chain of cryptographic links, making it almost impossible to change records once finalized. Therefore, bitcoin needs “proof of work,” in which miners verify their commitment by competing to solve challenging mathematical problems whose solutions are readily verifiable to prevent dishonest miners from undermining the process. The winner of each competition is allowed to contribute one block to the chain. According to the network’s goal, an average block should be generated every 10 min. Mining becomes more difficult to slow down if blocks arrive more quickly than this (see Footnote 128). Bitcoin processing uses a lot of power and, therefore, money. So, each new block gives its miner a reward, which started at 50 bitcoin in 2009 and was halved every four years. It was 12.5 bitcoins, or approximately $80,000, in 2018. These rewards are considered the only way for the system to generate new bitcoin. Mr. Nakamoto contended that central banks couldn’t be relied upon not to devalue their currencies via money creation. Thus, he imposed a hard limit of 21 million bitcoins on the total number of bitcoins ever mined. As of February 24, 2021, 18.638 million bitcoin had been mined, leaving 2.362 million in reserve (see Footnote 128). Even though the technique seems to be convoluted, it is often successful. Using Bitcoin, you may transfer money between any two software users. Although the experience is not similar to using cash, it is a suitable electronic substitute. Despite this, bitcoin has yet to establish itself as a currency, much alone prosper as a viable alternative to conventional banking, as some of its more ideological supporters hoped. Each participant must download specialized software as well as transferring traditional currency in and out of the ecosystem of bitcoin is complicated. One reason is that it is still inaccessible to the majority of users. Furthermore, though the lack of centralized authority makes the system more resistant to coercion, it also implies that there is no one to resolve it if something goes awry. The initial goal was for Bitcoin users to “be their banks,” accountable for the security of their funds. However, this is more difficult than it sounds. If you mistakenly lose access to your bitcoins, for example, by misplacing a USB stick or overwriting a hard drive, recovery may be difficult. Consequently, many people keep their bitcoin on exchanges (companies that let users trade ordinary currency for the cryptographic sort). On the other hand, many exchanges are novice enterprises with an abysmal hacking track record. Chargebacks (the process by which a credit card holder disputes a transaction) are impossible with bitcoin. And there is no insurance scheme to compensate owners when bitcoins are stolen. Furthermore, there are no additional safety nets comparable to those enjoyed by current customers. There are also structural issues. Each transaction is contained inside a fixedsized block, and the network imposes a block production pace of one every 10 min on average (see Footnote 128). This effectively restricts bitcoin’s transaction pace to about seven per second. (Visa’s payment network can handle ten thousand

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transactions per second.) Hence, the system gets clogged with an increase in transactions of bitcoin. It must be accepted by the users that there can be a chance of their transactions failure or delay. Otherwise, they must offer some additional fees to the miners to prioritize the payments. Mr. Nakamoto envisioned that bitcoin’s transaction costs would remain in the tenths of a penny range, but they briefly reached $55 during the late 2017 boom. They are currently hovering around the $23 mark (see Footnote 128). Because bitcoin is a volatile, insecure, and occasionally congested currency, it has fared well on the economic fringes. One use is to purchase narcotics and other questionable things from online black marketplaces, where buyers and sellers are ready to ignore difficulties to hide their operations. It enables citizens of countries with currency controls to circumvent them, and some cybercriminals have used it to demand ransom. The volatility of Bitcoin, which makes it undesirable as money, also makes it an intriguing speculative target. With prominent personalities condemning the currency, currency’s appeal has only enhanced. Bitcoin has been dubbed “rat poison” by Warren Buffett. JPMorgan Chase CEO Jamie Dimon, a company that bitcoin fans loathe, called it a “fraud.” A Goldman Sachs research note refers to cryptocurrencies as a “mania” and concludes that they “attract far more…attention than is warranted.”128 But the same bank, citing client demand, revealed in May that it planned to launch a cryptocurrency trading desk. In 2017, 175 cryptocurrency funds were operating, up from 20 the year before.129 To succeed, bettors will have to have a thick skin and a thick stomach, and unusual trading patterns on exchanges have lent credence to rumors of large-scale price manipulation. Governments are taking notice. Many investors have been scared off by official scrutiny and the recent decline in prices. Goldman Sachs maintains that bitcoin is still excessively valued. However, for every bear, there is an equal number of bulls. Draper, who invested in software companies, predicts that a bitcoin would be worth $250,000 in 2022, based on current market conditions (see Footnote 128). Prominent valuation expert Ashwath Damodaran, a professor at New York University’s Stern School of Business, believes that bitcoin is a failure. “If bitcoin is a good currency, my question is, why aren’t more people using it in transactions. So when I run into bitcoin enthusiasts, they seem to push this notion that bitcoin is a great currency because they’ve made a lot of money on it. That’s not my measure of a good currency. In my view, a good currency is used to buy coffee, buy your house, buy a car, and on that count, bitcoin has failed, and not just failed, it’s failed miserably”.130 Damodaran also scoffed at the concept of cryptocurrencies as an asset class. Cash flows are necessary for an asset class, he explained. Bitcoin did not perform as well as gold as a hedge in Damodaran’s portfolio. “Gold’s biggest claim to fame is that when stocks collapse, gold holds its value. If I use the same test on bitcoin

128

Goldman Sachs in How to put bitcoin into perspective, The Economist, August 30, 2018. Autonomous Next in How to put bitcoin into perspective, The Economist, August 30, 2018. 130 Ashwath Damodaran, Money Control, June 29, 2021. 129

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and look at 2020, bitcoin doesn’t behave like a collectible. It behaved like a very risky stock. Put simply, if I add bitcoin to a portfolio of stocks, I’m just adding something that makes my portfolio even more volatile”.131 The forces underlying the crypto craze are many. Excess money from stimulus cheques to assist the most vulnerable with rent has also found its way to brokerage accounts that offer free trading. Meanwhile, people worldwide have spent more time at home and in front of screens due to the pandemic. Investors speculate that brokerage firm restrictions on stock trading earlier this year may have pushed some Reddit day traders to crypto. Elon Musk’s embrace of bitcoin and other digital currencies and Coinbase’s listing in the United States further propelled the rally. Trading volume has increased significantly throughout the pandemic, as many investors have gained access to crypto markets via various platforms. Notably, derivatives volume has surpassed spot trading, with investors betting more than $200 billion on digital assets on the year’s busiest days (see Footnote 133). The growing use of cryptocurrency derivatives is significant because it enables investors to make large bets with a small initial investment, effectively leveraging the practice of borrowing to increase returns. The majority of the growth in futures and options trading has occurred on lightly regulated cryptocurrency derivatives exchanges that allow for greater leverage than a US-based exchange such as CME Group. High transaction fees embedded in the network’s code, which vary according to traffic, impede bitcoin’s progress as a means of payment. The fees have skyrocketed with the meteoric rise in popularity of cryptocurrencies, severely limiting the rationale for using bitcoin for small transactions (Fig. 2.26).132 Mr. Nakamoto’s 2009 launch of bitcoin was a digital battle cry. He determined that the time had come for something new: a decentralized cryptocurrency independent of central banks and government. However, even though Mr. Nakamoto has withdrawn from the public eye, the popularity of his creation has increased— as well as, recently, in value as well (see chart133 ). When prices rose in the past, it was disregarded mainly by the financial elite, but this time it seems to have reawakened their attention. Miller Value Partners’ Bill Miller claims that the odds of the token’s value dropping to zero are “lower than they’ve ever been.” (famous final words?). Coinbase, the digital currency exchange, went public in 2021. In 2021, a long-awaited bitcoin exchange-traded fund (ETF) may finally become a reality (see Footnote 135). Bitcoin’s value might increase even more if certain portfolio managers decide to put money into it—or at the absolute least, there could be a floor to it. If the general public invests via an ETF, this will help keep the demand stable. On the

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BitInfo Charts in From Bitcoin to Dogecoin: What’s Driving Cryptocurrencies’ Rise and the Challenges Ahead, The Wall Street Journal, May 17, 2021. 132 From Bitcoin to Dogecoin: What’s Driving Cryptocurrencies’ Rise and the Challenges Ahead, The Wall Street Journal, May 17, 2021. 133 CoinDesk in Is the financial establishment coming round to bitcoin? The Economist, 9 Jan 2021.

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Fig. 2.26 Average transaction fees. Source BitInfo Charts in From Bitcoin to Dogecoin: What’s Driving Cryptocurrencies’ Rise and the Challenges Ahead, The Wall Street Journal, May 17, 2021

other hand, other investors, such as the directors of substantial pension funds, are more cautious. In general, they invest in those assets that produce predictable future cash flows, such as bonds or stocks, and avoid riskier assets, like bitcoins, gold, and other commodities. Bitcoin was designed to function as a medium of exchange for transactions and payments. It is necessary to be simple to use and stable to accomplish this. Yet, some fund managers prefer bitcoin precisely because it is scarcely traded, making it less liquid and volatile compared to gold. Regulation and individuals who purchase and sell the stock increasingly treat it as an investment. Other people investing in bitcoin is a positive to those who have already invested, but the excitement of speculators signals that cryptocurrency will fall well short of the ambitious goals set by its creators.134 Bitcoin’s software is distributed across a network of connected but autonomous computers, and its decentralized structure makes it ideal for quickly and cheaply moving money across borders. When the Federal Reserve cut interest rates last year, depressing the value of the US dollar, bitcoin became a trendy inflation hedge, though that status has yet to be established. Bitcoin’s total market value is just over $600 billion, significantly less than the market capitalizations of the most extensive individual stocks, such as Apple, which is currently worth more than $3 trillion. It is also significantly less than the total market value of gold, which was approximately $11.9 trillion at the end of 2019.135

134

Is the financial establishment coming round to bitcoin? The Economist, 9 Jan 2021. Bitcoin Surges Into 2021, Rose Nearly 20% Over Weekend, The Wall Street Journal, Jan 4, 2021.

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Cryptocurrency will not disrupt global finance: It gave rise to cryptocurrency billionaires, sent out bubble alarms, and made some early adopters regret their decisions once the bitcoin price soared to approximately $1000 in 2013. When a hard drive with 7500 bitcoins worth $7.5 million was lost at a Welsh waste dump by accident, the guy who owned it was devastated. Since then, the value of Bitcoin has risen precipitously. The computer disk buried underneath the Welsh waste dump has increased by threefold in the last three months to over $260 million. The total value of bitcoins in circulation is greater than Canadian dollars (see Footnote 138). On the other hand, only a few new crypto converts feel that it can replace government money, which was the dream or hope of early believers. Governments will move quickly to stifle any technology that threatens their monetary sovereignty. Bitcoin’s transaction processing speed is considered too slow to be used for payments; it can only handle less than ten transactions per second. Consumer finance disruptors like Alipay as well as Venmo, on the other hand, reduce friction. Facebook’s anticipated digital currency, Libra, was forced to rename (as “Diem”) and dramatically scale down its early objectives due to regulatory resistance. Central banks are also improving their payment infrastructure and launching new digital currencies, which increases competition. For Bitcoin mania to take hold, it must ultimately serve as a safe store of value comparable to gold but more readily accessible-it is easy to maintain a digital wallet compared to a physical safe. If investors flocked to Bitcoin in the same numbers as they did to gold (calculated by the market value of their positions), its price would soar to $146,000.136 Already, it appears as though millennial investors prefer cryptocurrencies to gold. There are, however, numerous reasons to doubt bitcoin’s ability to replicate gold. It has higher price volatility and moves in lockstep with the stock market, making it an unattractive safe-haven asset. Due to the lack of liquidity in the market, bitcoin trading is still a wild west where crimes like scams and thievery are common, making online drug sales feasible. Cryptocurrency investors must accept a high level of reputational and financial risk. The more conservative end of Wall Street, including pension funds, remains cautious, while hedge funds, which thrive on riskier bets, may patronize digital currencies. When Bitcoin was first introduced, it was touted as having the potential to transform the world’s monetary system. Securing a humbler role inside it is critical to its success going forward.137 Bitcoin on the balance sheet is a headache for accountants. Businesses that store bitcoin in their treasuries face an accounting hazard as bitcoin and other digital assets are classified as “indefinite-lived intangible assets” rather than currencies. Any decline in their value below what the company paid for them—even a temporary decline—can force it to write them down and take an impairment

136 137

JPMorgan in What explains bitcoin’s latest boom? The Economist, Jan 1, 2021. What explains bitcoin’s latest boom? The Economist, Jan 1, 2021.

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charge. The impairment must be determined on such assets at least annually or whenever the price falls below the company’s carrying value. Bitcoin’s volatile nature necessitates quarterly revaluations. In contrast, if the price has increased, the company cannot profit. This is only possible when the asset is sold.138 Combined with this accounting treatment, Bitcoin’s volatility makes it difficult for corporate officers to manage crypto holdings as cash, reducing its utility as a reserve asset. Only 5% of chief financial officers surveyed intended to hold bitcoin as a corporate asset this year.139 Bitcoin is currently suitable only for large purchases: Bitcoin is making progress and is gaining traction in payments, particularly at the high end. As a sign of Bitcoin’s growing acceptance, Vegas Auto Gallery, a luxury auto dealership in Las Vegas, has developed a reputation as a haven for wealthy bitcoin investors looking to cash in. The dealership recently sold two high-end sports cars for more than $6 million in bitcoin to a customer. According to the dealer, bitcoin transactions account for approximately 3%–5% of the dealership’s revenue. Few merchants accept bitcoins, and many people are still unfamiliar with them. It is generally reserved for high-end purchases, such as those high-end automobiles. Bitcoin bulls believe the tide may be turning soon. PayPal opened its platform to bitcoin two months ago, allowing 361 million users worldwide to buy and sell the asset. It will expand the options in 2022, allowing users to use their bitcoin balances to make payments to any of PayPal’s 28 million merchants.140 This endeavor has the potential to mainstream bitcoin. Nonetheless, there are several impediments to bitcoin’s widespread adoption as a form of payment. The first is that bitcoin is notoriously volatile—less than a month after surpassing $19,000 in value in 2017, it had lost nearly half of its value. For some merchants, this may entail charging a premium to customers who pay in bitcoin to offset the risk of a sharp price drop before converting the payment to dollars. In Vegas Auto Gallery, the fee for bitcoin buyers is 1% of the purchase price, which is comparable to the transaction fee charged by BitPay, a payments software startup that converted bitcoin to US dollars and wired the funds to the car dealer (see Footnote 141). Accepting bitcoin entails no additional risk for the dealership, as BitPay converts the bitcoin to dollars before completing the transaction. However, another issue that has historically afflicted currencies with resources restrictions, such as gold or gold-pegged currencies: hoarding. Due to the limited supply, increasing demand drives the price of bitcoin higher. Investors tend to tighten their grip on the currency rather than spend it when this occurs. This can result in deflationary spirals for national currencies. However, for those who purchased bitcoin when it was inexpensive, its rise has significantly increased their purchasing power. A particular stumbling block for US users is how the Internal Revenue Service classifies bitcoin. The agency declared in 2014 that it would treat

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Bitcoin on the Balance Sheet Is an Accounting Headache for Tesla, Others, The Wall Street Journal, June 14, 2021. 139 Gartner in Bitcoin Looks to Gain Traction in Payments, The Wall Street Journal, Dec 31, 2020. 140 Bitcoin Looks to Gain Traction in Payments, The Wall Street Journal, Dec 31, 2020.

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bitcoin as an asset, not money, which means that anyone selling bitcoin, regardless of the reason, will be subject to capital gains taxes on the transaction (see Footnote 141). Yet another roadblock is fees. At the moment, bitcoin is unworkable for small transactions due to the network’s fee structure. According to the website BitInfoCharts, the median transaction fee is currently around $5, but the average is more than $9, and it varies widely depending on network traffic (the fee increases during periods of increased traffic). In 2020, the average fee ranged from 29 cents to $13.141 As a result, bitcoin is an unattractive payment option for users looking to make a small purchase, such as a $4 cup of coffee at Starbucks. However, the fee issue becomes less of an issue with more significant transactions, and bitcoin has evolved into a network where large transactions are the norm. The average value of a transaction is $127,000. A $9 fee for a money transfer is insignificant at that size. For these reasons, bitcoin is a better option for the wealthy than converting gold or selling stock. “This is a high-end form of money.”142 The crypto party seems to be over, at least for now: The bitcoin sector exuded bravado, zeal, and optimism. These days, all three are in limited supply due to increased losses and layoffs. “Have fun staying poor” was the rallying cry of Bitcoin supporters in response to doubters. Those who didn’t join in were missing out on the future. Cryptocurrency has sometimes resembled a cross between Beanie Babies, dotcom stocks, and the Velvet Underground: it is hysterical, profitable, and all the cool kids are into it. Additionally, it has traits common to past bubbles throughout history, including greed, reckless disregard for danger, and speculation that borders on delusion. In these times of market decline and economic inflation, cryptocurrencies have been among the first assets to be liquidated. Over $2 trillion worth of cryptocurrency value—or more than two-thirds of all the cryptocurrency ever created—has been lost since bitcoin reached an all-time high in November. Approximately 69% below its all-time high of $67,802.30, Bitcoin has fallen to a price of $21,206. Users are leaving cryptocurrency exchanges, and several organizations are cutting staff or considering restructuring (Fig. 2.27). Booms and collapses, which many in the sector refer to as “winters,” are nothing new in the world of cryptocurrencies. However, many investors and workers feel this cryptocurrency meltdown more keenly than past ones. Some cryptocurrency-related products and businesses would not be around when the dust settles. According to a proverbial adage, “The reality is that like stock, with crypto, everyone is a genius in a bull market. Now that prices are falling for both, those companies that were unnaturally sustained by easy money will go away”.143

141

BitInfoCharts in The Crypto Party Is Over, The Wall Street Journal, June 18, 2022. Société Générale in The Crypto Party Is Over, The Wall Street Journal, June 18, 2022. 143 Mark Cuban in Crypto Volatility Creates Opportunity for Wall Street Traders, The Wall Street Journal, October 1, 2022. 142

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Fig. 2.27 Total cryptocurrency market capitalization. Source The Crypto Party Is Over, The Wall Street Journal, June 18, 2022 (see Footnote 144)

As more people entered, its price increased erratically, randomly, frequently violently, and with significant crashes interspersed throughout. Various factors fueled the growth, but many cryptocurrency investors believed that the current financial system had failed and that crypto was the way of the future. The bitcoin industry pushed small-time investors hard to get involved. Peter Thiel, the co-founder of PayPal, advised bitcoiners to create an “enemies list” of those who opposed the cryptocurrency.144 Traders and investors are selling off hazardous assets in their portfolios as the fear of inflation soars. The value of many newly public technology companies has decreased by more than half in the first half of the year, as shares of unproductive businesses have fallen sharply. Crypto is also quite high on the sell list. Bitcoin has lost more than half its value this year and is trading at its lowest price since late 2020. Another well-known cryptocurrency, Ethereum, has had a year-to-date decline of almost 68% (see Footnote 144). Many people are unaware of how a protracted stock market bull market and the market-stimulating practices of the world’s central banks have assisted the sector’s expansion. It was the system that crypto was supposed to replace. “That was good for cryptocurrencies.” The irony is that since the 2008 financial crisis, free money conditions have encouraged people to take more risks than ever. As these easy-money policies have been reversed and the stock bull run has ended, the braggadocio that characterized so much of the cryptocurrency sector is dwindling (see Footnote 144).

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CoinMarketCap in Crypto Volatility Creates Opportunity for Wall Street Traders, The Wall Street Journal, October 1, 2022.

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Most of an exchange’s business is driven by trading, and due to the selloff, revenues have sharply decreased. Companies that offer services in the market are now being destroyed along with the cryptocurrencies themselves. Some investors compare the present crypto industry shakeout to the internet businesses of the late 1990s. On the one hand, those who bet during that bubble were right: the internet was the wave of the future. However, this did not prevent many of them from suffering enormous financial losses as hundreds of internet businesses failed. “Long-term, we’re huge believers in crypto, but short-term, watch out.”145 With tried and true strategies, Wall Street is preparing for the next wave of cryptocurrency volatility. Investors in cryptocurrencies are using leverage once more. In 2022, the price of bitcoin and other digital assets has fluctuated significantly, driving several well-known crypto companies into bankruptcy. Additionally, it has created an environment that allows shrewd, wealthy traders to prosper. The price of bitcoin has decreased by around 60% in a year.146 Many predict that the current choppy market will become considerably more so, possibly even before 2022 is over. Market observers claim that institutional traders are using some of the same strategies that helped them succeed in conventional markets, including equities and commodities. This can entail following the activities of other significant investors or shorting a security to precipitate a wave of margin calls and forced selling. The key distinction with cryptocurrency is that users of so-called decentralized finance platforms don’t need banks or brokers to carry out transactions or borrow digital assets. Instead, things are performed by computer code. DeFi transactions are publicly accessible on a digital ledger, making it possible for anyone with the proper resources to find them even if the counterparties are concealed. According to cryptocurrency investors, brokers, and experts, this has provided skilled traders with a wealth of data they can use (see Footnote 146). Since DeFi loans are automated, many of them are overcollateralized, which means the value of the provided collateral exceeds the loan amount. However, the software platform immediately calls the loan if the value of that collateral drops below a particular level. In a margin call, the platform will sell the collateral, a digital currency, if the borrower doesn’t post more. If an investor receives a margin call from a bank or broker, there is rarely an opportunity for bargaining over such terms (see Footnote 146). The gain in bitcoin and other digital currencies encouraged crypto investors to borrow more money to expand their holdings, which raised the opportunity to drive these loans into liquidation and unleash a wave of forced selling. Crypto investors were increasingly turning to DeFi lending platforms last year to avoid

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Sequoia Capital in Crypto Volatility Creates Opportunity for Wall Street Traders, The Wall Street Journal, October 1, 2022. 146 Galaxy Digital in Cryptocoins are proliferating wildly. What are they all for? The Economist, 10 June 2021.

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Fig. 2.28 Bitcoin market capitalization as a % of total cryptocurrencies. Source CoinGecko in Cryptocoins are proliferating wildly. What are they all for? The Economist, 10 June 2021

the due diligence requirements and leverage restrictions imposed by centralized brokers and lending platforms and to trade in a wider variety of digital assets.147 “It’s not for the faint hearted.” (see Footnote 146).148

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The excitement surrounding cryptocurrency is palpable. El Salvador’s president announced plans to legalize bitcoin (lawmakers approved his proposal). At a cryptocurrency conference, Miami’s mayor crooned, “This is not a moment, we are in the midst of a movement.” The movement, however, is not on track to reach its destination. Bitcoin, which is now in its 13th year, has developed into an investment phenomenon. However, it continues to be a low-quality and infrequently used medium of exchange (see Footnote 149). Meanwhile, a slew of smaller cryptocurrencies is flooding the market. CoinMarketCap, a website, lists 10,000 cryptocurrencies, nearly double a year ago. Bitcoin now accounts for 40% of the total value of all cryptocurrencies, down from 70% in January (Fig. 2.28). Elon Musk, the electric-car tycoon whose tweets seem to dictate the crypto markets’ weather, has stated that he now prefers younger rivals. Could one of them usurp the throne of bitcoin?

147 Chainalysis in Crypto Volatility Creates Opportunity for Wall Street Traders, The Wall Street Journal, October 1, 2022. 148 Crypto Volatility Creates Opportunity for Wall Street Traders, The Wall Street Journal, October 1, 2022.

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Fig. 2.29 Major players of Cryptocurrency. Source Brave New Coin, The Economist in Cryptocoins are proliferating wildly. What are they all for? The Economist, 10 June 2021

The majority do not wish to. Many of the coins listed on exchanges are “tokens,” which can be used for speculation but, unlike “coins,” do not aspire to perform all of the functions of money. As with stocks and bonds, the purpose of “security” tokens is an investment: they represent ownership in businesses or other assets that are recorded on a distributed ledger. The more severe contenders fall into two categories: “bitcoin clones,” which aim to improve the cryptocurrency’s payment capabilities, and “ether clones,” which aim to perform new functions. Consider first the bitcoin clones. None of the clones has surpassed bitcoin in market capitalization (Fig. 2.29). One issue with bitcoin is its volatility: on May 19th, 2021, for example, prices fell by 30% in a matter of hours. To avoid such swings, so-called stable coins track the value of governmentissued (or “fiat” in crypto-speak) currencies. Some may not be trustworthy. In February, the largest cryptocurrency issuer, Tether, was fined $18.5 million by New York authorities for lying about its dollar stash. According to Brave New Coin analysts, alternative measures, such as activity on GitHub, a platform used by programmers to collaborate on projects, indicate that bitcoin remains unmatched in popularity. Instead, the threat comes from currencies with more agile blockchains capable of performing functions other than recording payments. Ethereum, which hosts ether, the second most valuable cryptocurrency, can run automated programs that, for example, move money between wallets only in response to a specific event. Ether and its derivatives have become central to the emerging field of decentralized finance (DeFi), in which “smart contracts” replicate sophisticated financial transactions such as lending money or offering insurance without needing a trusted intermediary. This is increasing adoption. DeFi accounted for 40% of ether transactions over the last 12 months, up from 7% in the previous period, according to data firm Chainalysis.149

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https://www.coindesk.com/price/bitcoin/.

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DeFi remains small, with approximately $59 billion in capital invested in its applications. However, it is increasing, and bitcoin is ill-equipped to ride the wave with its inability to support smart contracts. Bitcoin’s first-mover advantage and scarcity ensure that it will be an attractive speculative asset. That, however, may prove inadequate consolation.150 Bitcoin and other digital currencies’ best chance of becoming significant players in payments may be to remain in the background. In a positive move for cryptocurrency, payment companies have begun to accept bitcoins. To the extent that there is demand for using cryptocurrency holdings to make everyday payments, only a small number of merchants are willing to accept crypto directly. Accepting bitcoin or other cryptocurrencies may introduce a level of risk and complexity that all but a few devoted retailers may view as a big problem. However, the payments industry is now demonstrating a path forward. Recently, Visa and PayPal made moves that can subtly integrate blockchain and cryptocurrency into what appears to be everyday transactions—all without requiring merchants to consider accepting new-fangled money. PayPal announced that it would allow users who have purchased cryptocurrency to use it when making payments using their PayPal wallets. Crucially, regardless of the funding method chosen by the payer, the merchant receives the same payment in regular, fiat currency. Similarly, Visa announced that it has begun testing the use of digital currency to settle transactions on its network. Several digital wallet providers, including Crypto.com, already offer debit cards linked to users’ crypto holdings, such as bitcoin. Previously, this required the wallet provider to convert cryptocurrency to fiat to settle with the card network. Visa will now allow Crypto.com to settle its Visa debit-card obligations via the Ethereum blockchain using a stable coin denominated in US dollars.151 (Bitcoin price movement-courtesy CoinDesk Fig. 2.30). Taken together, these actions do not eliminate translation risk—but they direct it to areas where it is desired or more manageable. Of course, the consumer must still decide whether it is worthwhile to cash out something like bitcoin to make a payment. Additionally, there are tax implications in the United States, as bitcoin is classified as an asset by the Internal Revenue Service. This means that when bitcoin is used to make a purchase, any gains made on the currency since its acquisition are taxed as capital gains. However, these moves lay the groundwork for a central bank-issued digital coin or a privately held stable coin to begin replacing fiat as the medium of exchange. Additionally, today’s significant payments companies are increasingly positioned to become tomorrow’s.152 In a landmark development in the evolution of digital money, the first cryptocurrency exchange has been established. For cryptocurrency purists, the muchanticipated April 14th, 2021, listing of Coinbase, a cryptocurrency exchange, must

150

Cryptocoins are proliferating wildly. What are they all for? The Economist, 10 June 2021. Coinbase in Coinbase goes public with a pop, The Economist, 10 April 2021. 152 Payments Companies Are Playing Hide-the-Crypto, The Wall Street Journal, March 31, 2021. 151

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Fig. 2.30 The volatile Bitcoin price. Source https://www.coindesk.com/price/bitcoin/

have been a letdown. It began trading on a mundane, traditional stock exchange, and not—as might be expected of one of the world’s largest cryptocurrency firms. Nonetheless, Coinbase investors had nothing to complain about. The firm’s initial valuation was nearly $100 billion, putting it on a par with Facebook, the social media behemoth valued at $104 billion when it went public in 2012. Coinbase’s first-quarter results, released in April 2021, undoubtedly contributed to the excitement. It forecasted a profit of $730–$800 million on approximately $1.8 billion revenue (see Footnote 154). As impressive as that may sound, does it justify the asking price? To be sure, Coinbase appears mature in comparison to many cash-sucking unicorns (technology startups valued at more than $1 billion). Users traded approximately $335 billion worth of currencies on its platform over the last quarter. Additionally, they held $223 billion in cryptocurrency holdings—more than 10 percent of the total value of all cryptocurrencies (Fig. 2.31). Coinbase, founded in 2012, has always aspired to be more than a marketplace for buying and selling digital currencies. Instead, it aimed to act as a bridge between the chaotic crypto-world and traditional banking, which it did so successfully (see Footnote 154). Despite the company’s sometimes rocky past, it is on the verge of realizing its vision: users do not need a degree in cryptography to use its services; it is mostly on good terms with regulators and banks; and, unlike other crypto exchanges, it has thus far escaped becoming the victim of a catastrophic hack. However, the firm’s prospects are uncertain in other respects. Although it has expanded its offerings to include services for storing and saving crypto assets, transaction fees still accounted for 96% of revenue last year. It retained approximately 0.5 percent in fees of the $335 billion in trades in the first quarter of

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Fig. 2.31 Crypto craze (see Footnote 151)

2021—significantly more than Nasdaq, the stock exchange Coinbase will list.153 This means that its fortunes are highly dependent on the health of the crypto economy, which is notoriously volatile; it also means that its take may shrink if competition enters. Coinbase’s initial public offering marks a watershed moment for an industry that began as a digital currency experiment. Coinbase has become one of the most influential companies in the cryptocurrency space. It allows for the trading of approximately 50 cryptocurrencies in addition to bitcoin. It employs over 1000 people and serves over 56 million customers in 100 countries. Coinbase’s initial public offering feels similar to the initial public offerings of other sector-defining companies, such as Netscape, in the 1990s. Its valuation is comparable to that of Facebook on its initial public offering in 2012 and Airbnb in 2020. It is customary for Silicon Valley startups to go public before generating revenue. Coinbase, on the other hand, is already profitable.154 Coinbase’s profit increased significantly in the first quarter of 2021, owing to a manic rally in bitcoin and other digital assets, the cryptocurrency exchange reported in its first earnings report as a public company. Coinbase’s revenue and profit have been significantly boosted by the meteoric rise in popularity of bitcoin and other digital currencies. The number of active users increased to 6.1 million, up from 1.3 million. Coinbase currently supports 109 digital assets, but

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Coinbase goes public with a pop, The Economist, 10 April 2021. Coinbase Fetches $85 Billion Valuation in Market Debut, The Wall Street Journal, April 14, 2021.

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only two—bitcoin and ether—account for more than half of its trading volume. Bitcoin accounted for 39% of the quarter’s trading volume, while ether accounted for 21%.155 Wall Street’s recent foray has bolstered the legitimacy of cryptocurrency into cryptoland. The recent price swings in cryptocurrencies may raise questions about whether the markets are liquid or even reliable enough to attract institutional investors in large numbers. That is why it is worthwhile to take a look at Wall Street. America’s large banks have made forays into cryptoland. In March, Morgan Stanley became the first financial institution to offer wealthy customers access to bitcoin funds. This month, Goldman Sachs reactivated its crypto desk, which had been dormant since 2017; Citigroup indicated that it might offer cryptocurrency services. JPMorgan Chase, which was previously adamant that it would avoid cryptocurrencies until they were regulated, has hinted that it may begin trading operations if the market expands (see Footnote 157). Why are highly regulated financial institutions venturing into the unregulated crypto wilderness? It helps that American regulators have defined the services that banks may provide. They received government approval last year to offer custodial services for cryptocurrency assets. Bitcoin and other digital currencies are commodities, allowing banks to trade corresponding derivatives. However, the primary reason for banks’ enthusiasm is the obsessive interest of some customers. Wealthy clients are withdrawing funds from private banks, while retail punters are withdrawing funds from current accounts to wager on digital currencies via fintech firms and startups. Many, instead, would rather do everything through their banks, which, in turn, hope to profit from customer fees and data. Anyone interested in determining the future of cryptocurrency investing would be wise to observe what the banks do next.156 The most straightforward service is derivatives trading, which Goldman now offers, allowing clients to gain exposure to assets without purchasing them. Following that is custody: the storage and associated bookkeeping of assets on behalf of institutional investors. This requires investment in technology; a few banks have already begun outsourcing custody functions to specialized firms. Banks maintain that the majority of clients anticipate a rollercoaster ride. Wall Street’s ability to bring liquidity and distribution to new assets is unmatched (see Footnote 157). In a further boost to digital money, 401(k) programs have started investing in cryptocurrency. Beginning in July, a small number of employees will discover a new option in their 401(k) plan: the choice to invest in cryptocurrency. ForUsAll, a 401(k) plans provider, announced a partnership with Coinbase Global’s institutional arm earlier this month. This leading cryptocurrency exchange will allow employees in plans it administers to invest up to 5% of their 401(k) contributions

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Coinbase Profit Surges in Crypto Exchange’s First Report as Public Company, The Wall Street Journal, May 13, 2021. 156 As bitcoin lurches, Wall Street plots its way into cryptoland, The Economist, 20 May 2021.

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in bitcoin, ether, litecoin, and other cryptocurrencies (see Footnote 158). With only $1.7 billion in retirement plan assets, ForUsAll is a minuscule portion of the $22 trillion retirement account market. However, its embrace of crypto comes when mainstream interest in digital currencies is at an all-time high. Having said that, crypto-investing is currently absent from most 401(k) plans and individual retirement accounts.157 Proponents of incorporating a small amount of cryptocurrency into a portfolio argue that doing so can increase expected returns while lowering overall risk. Cryptocurrency, some believe, can act as a hedge against inflation. Cryptocurrencies have begun to appear in institutional investors’ portfolios. Specific retirement savings plans and university endowments in the United States have reportedly invested in cryptocurrencies or funds that purchase them or have acquired stakes in companies in the fast-growing industry.

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Central Banks Mull Issuing Digital Money

Is there a need for Central bank digital currency (CBDC)? China has begun conducting large-scale trials of the “e-yuan.” By 2025, European officials hope to introduce a digital euro. The Federal Reserve of the United States is considering whether to follow suit. The Bahamas has already introduced its version, the “sand dollar” (see Footnote 159). The Indian government, in its 2022 budget, declared its intent to launch a digital currency. This unexpected rush elicits feelings of both excitement and confusion. A central bank digital currency, or CBDC, sounds like a cutting-edge monetary innovation, perhaps a government-backed version of bitcoin. However, the point is not immediately apparent. Many people already use digital currency, whether for payments or transfers via mobile apps or bank websites. What are these new digital currencies, and why are they being created by central banks? CBDCs are a digital representation of cash—the physical currency issued by central banks. In most countries, their design will resemble existing online payment platforms. One important distinction is that money held on a CBDC app or website will be equivalent to a central bank deposit. Central banks’ primary motivation is to mitigate the risks associated with the global shift to cashless payments. They are accountable for the monetary system’s security, the most fundamental of which is ensuring that people can use cash to purchase goods. However, in a world dominated by Apple Pay or Alipay, private firms would facilitate daily transactions rather than central banks. Cryptocurrencies such as bitcoin and “stable coins” (which are pegged to the dollar or other assets), such as the Facebook-backed Diem (formerly Libra), are also a threat, as they have the potential to undermine state authority. Central banks will have a more substantial presence in online payments

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Cryptocurrency Comes to Retirement Plans as Coinbase Teams Up With 401(k) Provider, The Wall Street Journal, June 10, 2021.

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due to CBDCs (see Footnote 159). This would mitigate the threat to financial stability posed by purely private payment systems. Additionally, some individuals may prefer storing at least some of their digital cash on a trustworthy sovereign official platform. CBDCs are not merely a mechanism for central banks to defend their turf. Central banks, too, see possibilities. Cashless transactions are faster, more reliable, and less prone to counterfeiting. Issuing digital cash is less expensive than minting coins, as long as it is secure from hackers. Additionally, officials can more easily monitor how digital money is used, making it more challenging to fund criminal activities. Central banks in developing countries hope that digital currencies will bring previously unbanked citizens into the financial system, spurring economic development. These futuristic applications of digital currencies are a long way off. For years to come, central banks will continue to offer banknotes in addition to electronic wallets, recognizing that many people prefer hard cash or are unable to use smartphones.158 Central bankers are also, by profession, circumspect. The Federal Reserve’s chairman, Jerome Powell, has stated that America would prefer to “get it right” rather than “be first” with a digital currency. However, the general direction is obvious. As cash becomes obsolete, official digital currencies will emerge, and the ties between citizens and central banks will likely strengthen. Anyone who purchased a bitcoin a year ago will likely feel vindicated and wealthy. On February 16th, 2020, the cryptocurrency’s price surpassed $50,000 for the first time, a fivefold increase over the previous year.159 While investor interest in bitcoin as an asset is increasing, the inefficiencies and transaction costs associated with its use make it improbable that it will ever become a viable currency. The action now shifts to the central banks. As consumers abandon physical cash and private companies, such as Facebook, express interest in launching their tokens, several central banks plan to issue their digital currencies. By 2024, one-fifth of the global population will access central bank digital currencies (CBDCs).160 China is unquestionably the prime candidate to issue CBDC. It completed the third major test of its digital currency in February 2021, handing out 10 million yuan ($1.5 million) to 50,000 shoppers in Beijing (see Footnote 160). It announced a joint venture with Swift, a system for interbank messaging used for cross-border payments. Sweden, another champion, recently extended the duration of its pilot project. The European Central Bank (ECB) is the most recent major central bank interested in a CBDC. Christine Lagarde, ECB’s president, stated that she intended to seek approval from her colleagues before beginning preparations for a digital euro. Ms. Lagarde hopes to see the currency operational by 2025. As with other

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What is the fuss over central-bank digital currencies? The Economist, 16 Feb 2021. Bitcoin crosses $50,000, The Economist, 20 Feb 2021. 160 Bank for International Settlements in The digital currencies that matter, The Economist, 8 May 2021. 159

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central banks, the ECB wishes to provide consumers with digital cash as secure as physical cash. In contrast to bank deposits, a claim on central bank reserves does not involve any credit risk. Instead of using the pipes of card networks and banks, digital currency transactions could be settled instantly on the central bank’s ledger. This could serve as a backup system if private payment channels fail due to outages or cyber-attacks. Additionally, the bank views a digital currency as a potential tool for bolstering the euro’s international role, accounting for just 20% of global central bank reserves, compared to 60% for the dollar (see Footnote 160). It could enable foreigners to settle cross-border transactions directly in central bank money, which would be faster, cheaper, and more secure than routing them through a web of “correspondent” banks. This may increase the attractiveness of the digital euro to businesses and investors. Its primary selling point may be that it provides a level of privacy that neither America nor China can guarantee. The former seeks control by using its financial system to impose sanctions; the latter pursues control and surveillance. However, designing the system right will be challenging: the European Union would want to track laundered or hidden cash to avoid taxes. One solution could be to allow users to open e-wallets only after banks have vetted them, but the use of digital currency may remain untracked. A phenomenally successful digital euro could siphon deposits away from banks, jeopardizing credit availability. The term “settlement finality” refers to when payment is completed and cannot be reversed. This term varies across the euro zone’s 19 member countries and must be harmonized. The establishment of a CBDC will require more than token efforts (see Footnote 160). Technological advancements are upending finance. Yet the least-noticed disruption on the frontier of technology and finance may be the most revolutionary: the development of central government digital currencies, which typically aim to enable individuals to deposit funds directly with a central bank, bypassing traditional lenders. The CBDCs that matter are e-dollar, e-euro, and e-yuan. These “govcoins” are a new form of currency. They promise to improve finance, shift power away from individuals toward the state, alter geopolitics, and modify capital allocation (see Footnote 163). A decade or so ago, amid the devastation caused by the collapse of Lehman Brothers, Paul Volcker, a former Federal Reserve chairman, lamented that banking’s last helpful innovation was the ATM. The industry has stepped up its game in the aftermath of the crisis. Banks have modernized their aging infrastructure. Entrepreneurs have created an experimental world of “decentralized finance” in which bitcoin is the most well-known component and includes a slew of tokens, databases, and conduits that interact with traditional finance in varying degrees. Government-issued or central bank-issued digital currencies is the next step. They are based on a straightforward concept. Rather than opening an account with a retail bank, you would open one directly with a central bank via a user interface reminiscent of Alipay or Venmo. Instead of writing cheques or paying online with a credit card, you could use the central bank’s low-cost plumbing.

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And your money would be backed by the state’s steadfast faith, not a fallible bank. Want to buy a pizza or assist a financially strapped sibling? There is no need to deal with Citigroup’s call center or pay Mastercard’s fees: the Bank of England and the Federal Reserve can assist you. Still, they come with a catch: they would centralize power in the state rather than spreading it across networks or distributing it to private monopolies. This transformation of central banks from finance’s aristocrats to their workers may seem far-fetched, but it is already underway. Over 50 central banks, representing the lion’s share of global GDP, are studying digital currencies (see Footnote 163). The EU is pursuing a virtual euro by 2025, Britain has established a task force, and America, the world’s financial hegemon, is developing a fictitious e-dollar. Fear of losing control is one of the motivations for governments and central banks. Central banks today leverage the banking system to amplify monetary policy. Suppose payments, deposits, and loans are shifted away from banks and into privately run digital realms. In that case, central banks will struggle to manage the economic cycle and inject funds into the system during a crisis. Unsupervised private networks have the potential to devolve into a Wild West of fraud and privacy violations. The other incentive is the prospect of a more stable financial system. In an ideal world, money would serve as a secure store of value, a stable unit of account, and a convenient payment method. Today’s money receives mixed grades. Depositors who are not insured risk losing their money if banks fail, bitcoin is not widely accepted, and credit cards are expensive. Government-backed e-currencies would score highly, as they are backed by the state and utilize a low-cost central payments hub. As a result, govcoins can significantly reduce the global financial industry’s operating expenses, which come to $350 per person per year (see Footnote 163). This could increase access to finance for the 1.7 billion people who do not have bank accounts. Government digital currencies could also help governments expand their toolkits by making instant payments to citizens and reducing interest rates to zero. The appeal of a free, secure, instant, and universal payment method is self-evident to ordinary users. State-backed digital currencies are the next great financial experiment, and they have the potential to be far more consequential than the humble ATM.161 Once established, govcoins may serve as panopticons162 for the state to monitor and control citizens: like instant e-fines for bad behavior. They also can alter geopolitics by acting as a conduit for cross-border payments and a substitute for the

161

The digital currencies that matter, The Economist, 8 May 2021. A circular prison with cells arranged around a central well, from which prisoners could at all times be observed.

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dollar, the world’s reserve currency and a linchpin of American influence. The dollar’s dominance is partly due to America’s open capital markets and substantial property rights, which China cannot match. However, it relies on legacy payment systems, invoicing conventions, and inertia, making it vulnerable to disruption. Small countries fear that citizens will abandon the local currency and start using foreign e-currencies, wreaking havoc at home. Until recently, the concept of a retail CBDC was reserved for wishful economists; it was an intriguing but impractical concept. What precipitated the shift? Facebook’s Libra served as a wake-up call. Libra was the initial name for Facebook’s June 2019 digital currency and payments network announcement. A second factor was the decline in cash use. If cash cannot be used for transactions, it loses much of its utility, as it must function as a medium of exchange to function as a store of value. Yet issuing CBDCs, which threaten the traditional banking system, remains a radical intervention. Today, an autonomous central bank provides money in cash and bank reserves. This underpins much lending, particularly in poorer countries, and its abolition could jeopardize credit provision. With their user base of 2 billion adopting the new currency, the announcement from Facebook threatened the status quo. Libra gained instant credibility as a medium of exchange due to this. Its network would have been international. And it would have introduced a new unit of account in its original form. This increased the likelihood that citizens would use currencies over which central banks exercised no control. Regulators resisted the idea promptly. It has been reimagined as Diem, pegged 1:1 to the dollar or euro (see Footnote 164). In the cryptocurrency world, these are referred to as stable coins. Diem has yet to launch, but it will profoundly affect the world even if it never does. Due to the gravity of these issues, central bankers cannot decide unilaterally on the introduction of CBDCs. Public approval in legislation would be required for the new era of public money.163 An intriguing private milestone is a Facebook-led private initiative to launch a reimagined digital currency. A Facebook-backed digital currency project is being redesigned in response to US officials’ concerns that it could be used for money laundering and other illegal activities. Additionally, the Diem Association announced a collaboration with a bank. The lender will issue stablecoins denominated in dollars. Stablecoin prices are frequently pegged 1:1 to a stable asset, such as the US dollar, to avoid the volatility associated with other cryptocurrencies. Among other changes, the association announced that its subsidiary, Diem Networks, would oversee all operations for the proposed payment network and stable digital coin. According to the statement, Diem Networks intends to register with the Treasury Department’s Financial Crimes Enforcement Network, the agency’s antimoney laundering unit.

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When central banks issue digital money, The Economist, 6 May 2021.

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Diem claims that its blockchain-based payment network will be faster and more cost-effective than current payment and transfer systems while protecting consumers and preventing financial crime. The moves are the latest in a series of efforts to address regulatory concerns about potential cryptocurrency misuse. Holders of digital wallets would send and receive tokens backed by a basket of currencies. Facebook would develop its wallet that could be used for peer-to-peer payments and shopping on its platforms, though the platform would also accept other wallets.164

2.7

China Fires the First Salvo

For decades, China has wished to weaponize its currency to weaken the US dollar’s stranglehold on the global financial system and gain greater control over how people spend their money. It is expected that a digital currency will provide both. Pilots have already been established in four Chinese cities, with more than 2 billion yuan ($300 million) transactions (see Footnote 170). If the program is expanded nationwide, China will become the most powerful economy to offer a national digital currency, surpassing the European Central Bank’s upcoming digital version of the euro. Beijing has promoted the digital yuan as a futuristic currency that will simplify and make it safe to purchase goods online. Additionally, officials assert that it could benefit those without access to bank accounts or other traditional financial services. While China is nearly cashless and many transactions occur digitally, they occur outside the purview of the state on privately owned apps and platforms. An official digital yuan would change that. It would provide Beijing with unprecedented information about how and where people are and what they spend their money on. This approach runs counter to the original purpose of digital money. Bitcoin and other digital currencies are based on a decentralized blockchain system that makes it impossible for any single person or organization to exercise control. In essence, the digital yuan can assist the state in reinforcing its surveillance and control over the economy and society. It facilitates the dominance of authority, the very antithesis of cryptocurrency. That may be why the state has pushed and rushed to launch a Chinese CBDC.165 Chinese regulators have also suggested that widespread adoption of a digital yuan could assist them in achieving a much larger goal: dismantling the US dollar monopoly and expanding the yuan’s international influence.

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Facebook-Backed Digital Currency Project Revamps to Address U.S. Regulators’ Concerns, The Wall Street Journal, 12 May 2021. 165 Frank Xie, a professor in business at University of South Carolina Aiken in China wants to weaponize its currency, CNN, 4 Dec 2020.

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Other objectives are served by developing a digital currency. The digital yuan, like cryptocurrency, incorporates elements of blockchain technology: Each transaction is tracked and recorded in a distributed ledger. It would supplant some of the existing cash in circulation. With a more traceable yuan, the government would better manage the country’s monetary supply. Additionally, it satisfies Beijing’s desire to rein in the growing influence of private technology companies and their digital payment services over the country’s financial system (see Footnote 170). The Digital yuan offers “controllable anonymity,” according to the People’s Bank of China. That is to say, transacting parties may not know each other or the public, but the central bank is aware of the private information of both parties. Central bank-issued digital currencies are unlikely to provide the same amount of privacy as cash.166 This problem will affect more than just Chinese digital money. The establishment of a digital currency may also aid China in managing other economic risks, which is especially important when tensions with the United States are simmering. Individuals and companies would undertake cross-border transactions using the digital yuan if the United States government forbade Chinese banks from utilizing SWIFT, the messaging service that links the global financial system. Analysts caution, however, that Beijing’s loftiest ambitions will require considerable effort to realize fully. The yuan accounts for slightly more than 4% of international transactions, while the US dollar accounts for 88%167 (see168 Fig. 2.32). Additionally, it is unknown whether Chinese consumers will flock to the digital yuan in the first place. According to estimates published by the China Internet Network Information Center, more than 800 million people in China, or 86 percent of mobile internet users, already use mobile payment services such as Alipay and WeChat Pay.169 While these programs are not identical to digital currency—which the central bank would fully guarantee—they offer comparable convenience levels. Paper money was first created in China over a thousand years ago when all money was in coins. The Chinese government is now digitally minting cash, a recasting of money that threatens to undercut an American power pillar. When you use a credit card or payment software like Apple Pay or WeChat to make a purchase, money may already look virtual. However, those are merely electronic methods of money transfer. China is converting its legal tender into computer code.170 The fact that an authoritarian state and US adversary have taken the lead in introducing a national digital currency has elevated what was previously a nebulous subject for cryptocurrency theorists to a source of concern in Washington.

166

Goldman Sachs in China wants to weaponize its currency, CNN, 4 Dec 2020. Bank for International Settlements in China wants to weaponize its currency, CNN, 4 Dec 2020. 168 Because two countries are involved in each transaction, individual percentages add up to 200% instead of 100% 169 China wants to weaponize its currency, CNN, 4 Dec 2020. 170 IMF in China’s Digital Yuan Poses No Threat to the Dollar’s Dominance, The Wall Street Journal, April 19, 2021. 167

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Fig. 2.32 US dollar continues to be a dominant currency. Source China wants to weaponize its currency, CNN, 4 Dec 2020

By design, the digital yuan will eliminate one of bitcoin’s primary benefits: user anonymity (see Footnote 170). It is expected to provide China’s government with a slew of new tools to monitor its economy and people. Digitized money has the potential to reorder finance’s fundamentals in the same way that Amazon. Disrupted retailing and Uber shook taxi systems (see Footnote 170). According to economists and analysts, digitalization will not be enough to make the yuan a viable alternative to the dollar in bank-to-bank wire transfer transactions. However, the yuan’s new incarnation may gain traction on the periphery of the international financial system. It would enable people in impoverished countries to send and receive money internationally. Even limited international use could help mitigate the impact of US sanctions, which are increasingly being used against Chinese businesses and individuals. Money itself is a codable asset. Beijing has experimented with expiration dates to encourage users to spend their money quickly when the economy requires a boost. Additionally, it is trackable, providing another tool for China’s extensive state surveillance. The government uses hundreds of millions of facial recognition cameras to monitor its citizens and occasionally uses them to levy fines for offenses such as jaywalking (see Footnote 170). A digital currency would enable both the disbursement and collection of fines immediately upon detection of an infraction. What about volatility? Bitcoin and other cryptocurrencies are well-known for this. However, the People’s Bank of China will exercise strict control over the digital yuan to prevent valuation discrepancies between it and paper bills and coins. This means that investors and traders will be unable to profitably speculate on the digital yuan in the same way they do with cryptocurrencies. Anticounterfeiting

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measures will be implemented to prevent anyone other than the People’s Bank of China from creating new digital yuan (see Footnote 170). The possibility of weakening the impact of American sanctions is critical to Beijing’s marketing of the digital yuan and its broader efforts to internationalize the yuan. The digital yuan could provide those targeted by the US with a means of exchanging money without their knowledge. Exchanges would not be required to use SWIFT, the messaging network used by commercial banks and monitored by the US government. With a working model, China is ready to offer a ready-made solution for digital cash management. President Xi last year urged China to seize opportunities to establish international standards for digital currencies, much as Beijing has sought to influence and dominate a range of advanced technology standards, including those for 5G telecommunications, driverless cars, and facial recognition.171 There is no threat to the dollar’s dominance by China’s digital yuan for all the hullabaloo. The digitization of the yuan is fascinating in terms of political ramifications and the new economic levers it may provide the government with domestically. However, it is ineffective for bolstering the yuan’s meager international presence, let alone as a weapon for challenging the dollar’s supremacy. As the world’s largest trading economy’s currency, the yuan punches well below its weight. Around 93% of China’s imports and 95% of its exports were in dollars (see Footnote 172) (Fig. 2.33). Even this exaggerates its international reach: Hong Kong accounts for approximately three-quarters of its global payments. Transactions can be completed more quickly than with traditional bank transfers. However, immediacy is not a primary concern for the world’s largest corporations. While digitization may circumvent US sanctions, most international businesses will not desire to do so, and sanctions are not a significant factor in the yuan’s limited use abroad. With increased international use, the yuan’s global usefulness as a unit of account or a medium of exchange—two of money’s three traditional functions—may improve. However, China’s capital controls effectively eliminate its function as a store of value, the third leg of the stool.172 The dollar is pervasive because everyone uses it as the “unit of account.” Oil is invoiced in Dollars. The majority of global trade is conducted in dollars. The bulk of cross-border financial transactions is conducted in dollars. Travelers from all over the world keep $100 bills in their socks.173 For decades, financial markets and trade have grown faster than the global economy, increasing the dollar’s dominance. This endows America with unmatched influence, which it leverages through the use of sanctions and unparalleled insight into global finance.

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China Creates Its Own Digital Currency, a First for Major Economy, The Wall Street Journal, April 5, 2021. 172 China’s Digital Yuan Poses No Threat to the Dollar’s Dominance, The Wall Street Journal, April 19, 2021. 173 Will the dollar stay dominant? The Economist, 6 May 2021.

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Fig. 2.33 Percentage of imports invoiced in US dollars. Source IMF in China’s Digital Yuan Poses No Threat to the Dollar’s Dominance, The Wall Street Journal, April 19, 2021

It is difficult to envision all this giving way to the yuan. However, a transition could begin with tourists. It could start with souvenirs and museum admission tickets sold in yuan, and then businesses will begin transacting in Chinese currency. If hundreds of millions of tourists are traveling throughout Southeast Asia, requesting to use their Alipay and drawing attention to the app, they may eventually want to denominate transactions in yuan. Perhaps digital money will promote a currency, but it can also serve as a hedge against a digital dollar’s competition (see Footnote 174). Thus, digital money may pose a threat to the dollar’s hegemony. However, many countries, including China, are issuing their digital currencies primarily for defensive purposes. China is resisting the abolition of public money as cash usage declines. Additionally, it opposes the concentration of power in the hands of data-savvy technology companies. A primary reason for developing a digital currency is “to safeguard or protect our monetary sovereignty.”174 It bolsters the argument that most central banks are concerned about the prospect of a digital dollar. In theory, a central bank’s supply of digital currency should not impair another central bank’s ability to fulfill its mandate of monetary and financial stability. A more significant risk is what will happen when other currencies become digital. It is critical to note that the most advanced, active, and interested in CBDCs, aside from China, are medium-sized emerging economies. They are too large to

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Chinese central bank in Will going digital transform the yuan’s status at home and abroad? The Economist, 3 May 2021.

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Fig. 2.34 Value of mobile payments, $trn. Source Wind, eMarketer in Will going digital transform the yuan’s status at home and abroad? The Economist, 3 May 2021

accept the loss of monetary autonomy and too small to avoid foreign currency competition. They may believe they have no choice. Even if China launches the digital avatar of the yuan, it will function similarly to the existing yuan. While China will not be the first country to issue a digital version of its currency (that honor belongs to the Bahamas), it will serve as the primary launchpad. It is the global leader in mobile payments (Fig. 2.34); China’s market capitalization is in yuan trillions). China’s digital currency was first devised to restrict the country’s large mobile money providers. Three bold assertions have been made about it recently: it would considerably increase China’s surveillance capabilities, allow the government to exert much more control over money, and rival the dollar for significance.175 Many Chinese economists, on the other hand, are bearish. Due to the architecture of the eCNY and the structure of China’s economic system, none of these assertions are likely to be achieved anytime soon.176 Begin with the first assertion. “Even without eCNY, regulators have no significant blind spots remaining, except for old-fashioned cash. And as long as millions of senior citizens dislike using their smartphones to pay for things, the government will not phase out cash. The second audacious claim about eCNY is that it will

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Chainanalysis in Cryptocurrency Has Yet to Make the World a Better Place, The Wall Street Journal, May 20, 2021. 176 Will going digital transform the yuan’s status at home and abroad? The Economist, 3 May 2021.

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reshape China’s monetary policy. This, however, understates what the central bank is already capable of doing and exaggerates what the eCNY will allow it to do. Finally, the bold assertion is that eCNY will catapult the yuan to global prominence. However, this misconstrues why it now accounts for less than 2% of international payments, roughly equal to the Canadian dollar (see Footnote 175). When deciding which currencies to use, businesses and investors consider the ease with which they can convert them to other currencies, the degree of freedom with which they can invest in them, and their level of trust in the legal systems of the issuing countries. The yuan’s attractiveness is hampered by China’s determination to retain considerably stronger capital restrictions than any other major economy and widespread distrust of its political system. Policy and politics, not technology, are the limiting factors. “The eCNY will not eliminate such checks. Swift will remain indispensable in the long run. The swift system, headquartered in Belgium, which connects more than 11,000 financial institutions, is likely to be the most efficient means of exchanging payment information across borders.”

2.8

The Ills of Digital Money

A truly transformative innovation enables the development of entirely new business models that affect the lives of millions. Motels and shopping malls were made possible by automobiles, e-commerce was made possible by the internet, and ridesharing was made possible by smartphones and GPS. What business model, affecting the lives of millions, has been enabled by cryptocurrencies such as bitcoin? Ransomware. In such attacks, hackers encrypt and occasionally steal the victim’s data, demanding a ransom for decrypting the data and refusing to release it. Colonial Pipeline used cryptocurrency to compensate hackers who took down a conduit that supplies 45 percent of the East Coast’s fuel in April 2020 (see Footnote 179). Soon after, Tesla said it would no longer accept bitcoin as payment for its automobiles due to the high carbon emissions associated with computer processing needed to create a new currency. The two incidents demonstrate how an innovation intended to supplant the dollar as a medium of exchange has proven ineffective at purchasing legal goods but frighteningly effective at facilitating extortion. Legitimate business does get conducted through the use of cryptocurrency. However, not much; most cryptocurrency transactions involve trading and speculation. Illicit entities received 75% of the $4.9 billion in revenue last year, though this is a significant decrease from 2019 (Fig. 2.35). Ransomware is the fastestgrowing category, with payments quadrupling to $348 million in a year. That figure is almost certainly an underestimate, as many ransoms go unreported. Data recovery, interruption of operations, and reputational harm caused by hackers publicly revealing stolen data drive significantly raise the real cost. Due to the Colonial

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Fig. 2.35 Trading with illicit entities is predominant. Source Chain analysis in Cryptocurrency Has Yet to Make the World a Better Place, The Wall Street Journal, May 20, 2021

breach, countless Americans were forced to pay more and wait longer for petrol (see Footnote 179). The ransomware economy’s growth is mainly due to Russia’s large pool of unemployed tech workers with easily accessible software tools like malware for hacking into computer systems.177 These three components (labor, currency, and raw materials) are the bedrock of the cyber extortion industry. 100% of ransoms are demanded in cryptocurrency, and it is frequently the victim’s first cryptocurrency transaction. Generally, cryptocurrencies are not used to finance tangible investments. Because issuance is typically restricted, cryptocurrencies are intended to hedge against inflation. However, this is true only for a single currency. Cryptocurrency inflation is out of control as an asset class: there are now over 5000 coins (see Footnote 179). Gold was never confronted with competition from the dozens of new precious metals introduced each month. Gold became a store of value because it was also used as a medium of exchange for most of history: Coins were minted from it, and paper money was long backed by it. If cryptocurrency is never accepted as a medium of exchange, its utility as a store of value is also in question.178

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Coveware in Cryptocurrency Has Yet to Make the World a Better Place, The Wall Street Journal, May 20, 2021. 178 Cryptocurrency Has Yet to Make the World a Better Place, The Wall Street Journal, May 20, 2021.

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US regulators draft rules and legislation governing cryptocurrencies is expected to set a precedent. It exemplifies a larger truth about the majority of digital currencies: Apart from the two biggest, bitcoin and ether, the majority of the hundreds of other cryptocurrencies have struggled to establish a practical value that transcends speculation. Numerous token projects have failed to generate returns for investors in the cryptocurrency space.179 Throughout 2017 and 2018, hundreds of new businesses raised billions of dollars via initial coin offering tokens; nearly all of those projects failed, and several companies were charged with fraud. While investors have reinvested in bitcoin and ether in recent months, some view the cryptocurrency sector as rife with manipulation on unregulated exchanges and limited to momentum traders. Even bitcoin, critics assert, has yet to fulfill its initial promise of becoming a digital form of cash. The debate is getting strident. Should cryptocurrency be banned to fight ransomware? Nobody is immune to ransomware attacks. That was demonstrated by the Colonial Pipeline hack and the nearly 2500 cases of ransomware—a type of malware that encrypts computer files and holds them for ransom—reported to the Federal Bureau of Investigation last year, a 66% increase year over year. In the year 2020, victims of ransomware paid hackers $350 million in cryptocurrency. Because many victims pay the ransom without reporting the incident, these figures understate the extent of the damage. The Wall Street Journal has proposed an unconventional way to halt the ransomware pandemic: put an end to cryptocurrency (see Footnote 181). Without cryptocurrency, ransomware cannot succeed. Cryptocurrency’s pseudonymity has made it the exclusive method of payment for hackers. It makes their job relatively risk-free and straightforward. There is even a new business model where developers sell or lease ransomware, enabling malicious actors who are not technologically savvy to receive payment quickly and securely. Before the advent of cryptocurrency, attackers had to establish shell companies to accept credit card payments or request ransom payments via prepaid cash cards, which left a trail. It is no coincidence that ransomware attacks increased exponentially following the advent of cryptocurrency. While prohibiting anything goes against the American ethos, as the experience with social media should teach us, innovation is not always a good thing. A rational assessment of cryptocurrency must conclude that the harm caused by cryptocurrency-fueled ransomware vastly outweighs any benefits. A growing chorus of critics is pointing out that the emperor is naked. Cryptocurrency does not appear to provide any benefit other than the opportunity to make a quick buck. It is difficult to pinpoint a single task or process that crypto simplifies, improves, or accelerates except for speculation. The Colonial Pipeline

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Cryptocurrency Startup Ripple’s Future Hinges on SEC Case, The Wall Street Journal, Jan 24, 2021.

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incident caused a gas supply disruption on the East Coast. The next attack may be lethal. Consider one that causes the power grid to shut down during a heatwave or contaminates a municipal water supply.180 An alternative solution could be a central bank-backed digital currency with a digital trail to track down any ransomware. Bitcoins are not ecologically friendly. The environmental cost of bitcoin is steep. Environmentalists, in particular, are concerned about how much energy bitcoin consumes. A group of academics examines bitcoin’s energy consumption in China in a paper published in Nature Communications. They conclude that absent legal restraints, bitcoin could become a “non-negligible” impediment to China’s efforts to decarbonize its economy by 2024.181 Bitcoin’s energy consumption is a result of its design. It eschews centralized record-keeping in favor of a “blockchain,” a distributed transaction database. The blockchain is maintained by “miners,” who validate transactions by solving mathematical puzzles with difficult-to-find but easily verifiable solutions. Each block of transactions successfully mined generates a reward, currently 6.25 bitcoins ($357,000) (see Footnote 184). The system automatically adjusts the difficulty of the puzzles to ensure that one new block is created every ten minutes on average. Because of the high value of bitcoin, it makes sense to spend more computing power—and thus more electricity—chasing mining rewards. However, bitcoin’s automatic stabilizers will respond by increasing the mathematical difficulty. Competing miners are forced to run faster simply to remain stationary. Despite the democratic aspirations of the currency, mining is concentrated among a small number of professional operators. Around 70% occurs in China. By 2024, Chinese bitcoin mining could consume roughly the same energy as Italy or Saudi Arabia. Annual carbon emissions would approach those of Nigeria at 130 million tons. The broad picture—that bitcoin is a dirty business—is consistent with research. According to one frequently cited model, based on publicly available blockchain data, its global energy consumption is already equal to that of Kazakhstan, and its carbon footprint is comparable to that of Hong Kong182 . As bitcoin’s price has increased, so has its environmental cost. The total value of bitcoins in circulation now exceeds the market capitalization of Facebook. However, as the price of bitcoin has increased, so has its energy consumption. Bitcoin mining consumed electricity at a rate equivalent to 150 terawatt-hours per year in the week ending May 13th, 2021 (Fig. 2.36), more than the Netherlands’ annual energy consumption (see Footnote 183). According to one study, cryptocurrency

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Ban Cryptocurrency to Fight Ransomware, The Wall Street Journal, May 25, 2021. Nature Communications in Totting up bitcoin’s environmental costs, The Economist, 10 April 2021. 182 Totting up bitcoin’s environmental costs, The Economist, 10 April 2021. 181

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Fig. 2.36 Bitcoin electricity guzzling. Source Cambridge bitcoin electricity consumption index, Economist in As the price of bitcoin has climbed, so has its environmental cost, The Economist, 14 May 2021

could consume as much energy as all of the world’s data centers combined. Bitcoin proponents assert that digital currency will play a critical role in expediting the transition to renewable energy. The coin does have two sides.183 In the backdrop of the war on Ukraine, one unsavory side-effect of cryptocurrency is that Russia could evade sanctions with bitcoins. The West’s initial barrage of economic sanctions against Russia was ineffective in deterring President Vladimir Putin from launching a full-scale invasion of Ukraine. The US is now taking a punitive stance, announcing another round of sanctions aimed at Russian banks and “corrupt billionaires.” However, some experts assert that those measures are becoming increasingly difficult to circumvent due to Russia’s surge in cryptocurrency adoption. Sanctions imposed by the US and EU heavily rely on banks to enforce the rules. If a sanctioned business or individual wishes to conduct a transaction in a traditional currency such as dollars or euros, the bank must flag and block the transaction. However, digital currencies operate independently of conventional global banking, with transactions recorded on a public ledger dubbed the blockchain (see Footnote 189). “If the Russians decide — and they’re already doing this, I’m sure — to avoid using any currency other than cryptocurrency, they can effectively avoid virtually all of the sanctions”.184

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As the price of bitcoin has climbed, so has its environmental cost, The Economist, 14 May 2021. 184 Ross S. Delston, an expert on anti-money laundering compliance in Is this the end of crypto? Economist, 17 November 2022.

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The US Treasury is conscious of this problem and warned that digital currencies “potentially reduce the efficacy of American sanctions” by allowing bad actors to hold and transfer funds outside the traditional financial system. “We are mindful of the risk that, if left unchecked, these digital assets and payments systems could harm the efficacy of our sanctions.”185 Consider Eastern Europe as one of the highest rates of cryptocurrency transactions associated with criminal activity. Darknet markets, or websites used for illicit trades, brought in a record $1.7 billion in cryptocurrency in 2020, most of it in Bitcoin.186 And virtually all of the growth in the darknet market in 2020 can be ascribed to one particular Russian-language-only market called Hydra. Hydra is “by far the largest darknet market globally, accounting for over 75% of darknet market revenue worldwide in 2020” (see Footnote 187). Of course, evading sanctions isn’t as easy as dumping all the dollardenominated funds into Bitcoin. It’s hard to buy anything with crypto, especially big stuff. Take food for example, which Russia traditionally has imported. “Is a food exporter somewhere in the world going to accept cryptocurrency that fluctuates every day—every moment of every day—or are they going to want the world’s reserve currency, US dollars?” (see Footnote 189). A further complication: the oil trade, which makes up a huge portion of Russia’s economy, is denominated in US dollars. To use cryptocurrency to buy anything, one has to have an off-ramp to a fiat currency such as the dollar. There are additional ways for Russia to mitigate the pain of sanctions by following the example from Iran’s playbook. Iran, like Russia, is an oil exporter, and it remains subject to a decades-old US economic embargo, which includes bans on all imports and sanctions against Iranian financial institutions. However, even as a pariah state, Iran has discovered a way to mitigate the impact of sanctions by turning to Bitcoin mining.187 Iran has surplus energy it cannot export, so it uses it to power Bitcoin mining, which consumes enormous amounts of electricity but compensates miners in Bitcoin.188 “The mining process effectively converts energy into cryptocurrency,” Iranbased miners are paid directly in Bitcoin, which can then be used to pay for imports, which has devolved into a de facto official policy of the Iranian government. Elliptic estimates that Iran-based miners account for approximately 4.5% of all Bitcoin mining, equating to nearly $1 billion in annual revenue (see Footnote 188). The collapse of FTX has dealt a catastrophic blow to crypto’s standing and ambitions. The cryptocurrency exchange FTX saw a swift and brutal fall from grace. The results are one million enraged creditors, dozens of dubious crypto businesses, and a profusion of regulatory and criminal investigations. An industry

185

US Treasury in Is this the end of crypto? Economist, 17 November 2022. Chainalysis in Is this the end of crypto? Economist, 17 November 2022. 187 Elliptic in Is this the end of crypto? Economist, 17 November 2022. 188 Financial sanctions are easier than ever for Russians to evade. Thank Bitcoin, CNN, 24 Feb 2022. 186

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with a track record of failure and scandals has suffered a catastrophic blow as a result of the fast-moving implosion of FTX. Cryptography has never appeared to be so inefficient, illegal, and pointless. Does it herald the end of crypto? The story of FTX’s downfall grows more frightening as more information is revealed about it. According to the exchange’s service rules, its trading arm cannot borrow customer assets. However, of the $14 billion in such assets, it is said to have borrowed $8 billion from Alameda Research, a trading company owned by Mr. Bankman-Fried (see Footnote 190). It then accepted its digital coins, which it had created out of thin air, as collateral. A deadly run revealed the exchange’s enormous hole in its financial sheet. To top it all off, hundreds of millions of dollars mysteriously vanished from FTX’s accounts when the company filed for bankruptcy in America. Big personalities, incestuous loans, and overnight crashes are the hallmarks of historic financial manias, such as the tulip fever of the seventeenth century in Holland, the South Sea Bubble of the eighteenth century in Britain, and the early 1900s banking crises in America. The market value of all cryptocurrencies soared to a dizzying height of about $3 trillion last year, up from just under $800 billion at the beginning of 2021. It is now back to $830 billion (see Footnote 190). The question of whether crypto will ever be useful for anything other than fraud and speculation is now in focus, as it is after any euphoria. The promise was of a technology that could speed up, reduce the cost, and increase the effectiveness of financial intermediation. The likelihood that genuine inventors will be scared away and the sector will decline increases with each new scandal that breaks out. Nevertheless, there is still a slim chance that some significant breakthroughs will one day appear. That minuscule likelihood ought to be maintained as crypto crashes to Earth. The technology’s underlying potential amid the recent devastation is important to keep in mind. To preserve confidence between strangers, traditional banking needs a substantial infrastructure. This is pricey, and insiders frequently profit from its capture. In contrast, public blockchains are constructed on a network of computers, making their transactions open and, in theory, reliable. They can be the foundation for interoperable, open-source functionality, such as self-executing smart contracts that always perform as intended. Tokens and the rules that govern them can be used innovatively to reward open-source contributors. And agreements that would be expensive or difficult to execute in the real world become feasible, such as letting artists keep a portion of the proceeds from selling their digital creations. The regret is that only a small portion of this promise has been fulfilled 14 years after the Bitcoin blockchain was created. The craze over cryptocurrencies attracted funding from VC firms, sovereign wealth funds, and pension funds, as well as expertise from bright grads and Wall Street experts. What essentially amounts

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to virtual casinos has been constructed with enormous amounts of money, time, talent, and energy (see Footnote 190). There are efficient, decentralized versions of common financial operations like loan and currency exchange. But many customers don’t trust them because they’re worried about losing their money. Instead, they are employed in unstable token speculation. There are many scammers, money-launderers, and sanctions-breakers. Given all of this, a skeptic may argue that it’s time to control the sector completely. However, capitalist society must permit investors to take chances while also letting them know that if their bets lose money, they will lose money. The ripple effects on the larger financial system have been controllable even as bitcoin has crashed. Supporters of FTX included the Ontario Teachers’ Pension Plan, Sequoia, a Californian venture capital firm, and Temasek, a Singaporean sovereign wealth fund. However, none of them have lost money drastically. Furthermore, skeptics should accept that no one can foretell which ideas will succeed and which won’t. People should be allowed to invest time and money in unproven technologies like fusion energy, airships, the metaverse, and various other things. Cryptography is the same. Who knows, perhaps useful decentralized applications will emerge when the virtual economy grows. The underlying technology keeps getting better. The Ethereum blockchain underwent an upgrade in September that significantly lowered its energy usage, enabling it to handle large numbers of transactions easily. Regulators should follow two guiding principles rather than overregulate the industry or outlaw cryptocurrency. As with any financial activity, one should ensure that theft and fraud are minimized. The other is to protect the traditional banking system from additional crypto-ructions (see Footnote 190). Although blockchains were specifically created to be unregulated, these principles support controlling the organizations that serve as the cryptosphere’s gatekeepers. It makes sense to require exchanges to back consumer deposits with liquid assets. The exchange’s trading arm may have received a massive loan with dubious collateral, for example, which would be disclosed per disclosure laws. Stablecoins, intended to maintain their value in fiat money, should be governed similarly to how banks would. Regulation won’t ultimately determine whether cryptocurrency thrives or fades into obscurity like the tulip bulb in finance. The enterprise as a whole and its goals grow more and more tarnished as scandals continue to unfold. Innovation’s allure is useless if consumers and investors worry that their money may vanish into thin air. Cryptography needs to find a legitimate use that leaves the shadiness behind if it is to rise once more.189

189

Is this the end of crypto? Economist, 17 November 2022.

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Fig. 2.37 The world of high frequency computing

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HFT could be characterized as Algorithmic trades run at superfast speeds in simplified terms. High-frequency trading (HFT) is the most common algorithmic trading in the financial sector. Specifically, it uses cutting-edge technology tools and computer algorithms to execute quick stock trades. High-frequency trading (HFT) does not have a widely agreed-upon definition; nonetheless, significant traits include complex algorithms, co-location, and short investment time frames. In algorithmic trading, trades are done by computer programs that follow predefined instructions in an algorithmic fashion, sometimes called automated trading, black-box trading, or algo-trading (an algorithm) (Fig. 2.37). Theoretically, there is no way a human trader could make as much money at a rate and frequency as the automated system does. Using established instructions, the computers know exactly what to do since they’re set in stone. In addition to providing traders with increased profit potential, automated trading promotes market liquidity and streamlines trading by reducing the impact of human emotions.190 HFT is algorithmic trading executed at high speeds and automated. The trades are exemplified by high turnover rates, lightning speeds, and elevated order-totrade ratios that use high-frequency data and software programmed trading tools (Aldridge, 2013). Virtu Financial, a high-frequency trading business, announced in March 2014 that over five years, on 1277 out of 1278 trading days, the company made money while losing money just once, demonstrating the importance of trading thousands to millions of transactions per day.191

190 191

Basics of Algorithmic Trading, Shobhit Seth, Investopedia, May 5, 2021. Laughlin, G. Insights into High Frequency Trading from the Virtu Financial IPO WSJ.com.

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To enter and exit positions quickly (within seconds or fractions of a second), high-frequency trading uses proprietary trading methods carried out by computers. HFT accounts for between 50 and 75% of overall stock market trading volume today.192 Smaller, less well-known hedge funds and larger investment banks utilize high-frequency trading. HFT allows traders to benefit from minute price differences that may remain for a short time. Algorithms operate as middlemen between buyers and sellers. Computer-assisted rule-based, algorithmic trading places orders through dedicated programs that make automated trading decisions. Furthermore, the algorithms control the timeline for submitting orders to the market in real time. Data is sent into these algorithms in real-time at high speeds, and trading signals are identified and calculated at acceptable price levels; then, the trade orders are triggered when the logic embedded in the algorithms is satisfied. They can also spot arbitrage and trading possibilities based on trend tracking, news events, and even conjecture.193 Algo trading accounts for three-fourths of global electronic trading (Fig. 2.38). By 2000, HFTs were executing trades in the order of seconds.194 Most highfrequency trading trades can now be executed in a tenth of a microsecond, down from a hundred microseconds in 2010. Working at nanosecond and picosecond frequencies with HFT may be conceivable soon, given the increased processing power available.195 HFT businesses do not spend significant quantities of cash, do not build positions, and do not keep their portfolios overnight.196 Consequently, HFT has a far greater Sharpe ratio than traditional buy-and-hold strategies (The Sharpe ratio quantifies the excess return received in exchange for the increased volatility associated with holding a riskier asset). High-frequency traders often compete against other HFTs, rather than long-term investors. HFT firms compensate for their low margins with the astronomical volume of trades, frequently in the millions. In the United States, HFT accounted for 73% of total equity order volume. According to consultancy Tabb Group, in the United States, HFT accounts for 56% of equities transactions and 38% in Europe (Grant, 2010). Profits from high-frequency trading in the United States have declined since reaching an estimated $5 billion in 2009 (Cookson, 2013). HFT accounted for more than 60% of total futures market activity on US exchanges (Polansek, 2013).

192

The Growth And Future Of Algorithmic Trading, Quanti Insti, https://blog.quantinsti.com/gro wth-future-algorithmic-trading/. 193 The World of High-Frequency Algorithmic Trading, Investopedia, April 30, 2020. 194 Seven Pillars Institute. “The Ethics of High-Frequency Trading,” Page 18. Accessed May 18, 2020. 195 Bank for International Settlements. “Andrew Haldane: Patience and Finance,” Page 10. Accessed May 18, 2020. 196 “Trade Worx/SEC letters” (PDF). April 21, 2010. Retrieved September 10, 2010.

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Fig. 2.38 Algo dominates global trading. Source The Growth And Future Of Algorithmic Trading, Quanti Insti, https://blog.quantinsti.com/growth-future-algorithmic-trading/

The spotlight of attention is becoming more intense. The arrest of a former employee of Goldman Sachs on suspicion of stealing the firm’s secret computer programs in July 2009 drew attention to the largely hidden realm of high-frequency trading (HFT). High-frequency traders, who account for about half of all trading activity on the New York Stock Exchange, might claim to have decreased bid-ask spreads. Many believe, however, that HFT is at the cost of other investors.197 The fundamental premise of HFT is to detect and exploit market movements through clever algorithms and ultra-fast computers. Institutional investors place huge orders in tiny blocks, often in lots of 100–500 shares and within specified price ranges to avoid exposing their intentions to the market. Another frequent HFT method is to take advantage of exchange-provided liquidity provider rebates. High-frequency traders swiftly outbid buyers before selling the shares at a slightly higher purchase price, collecting a quarter-cent rebate on both deals. The lightning speeds are mind-blowing. Exchanges handle transactions in fewer than 500 microseconds or one-millionth of a second, whereas high-frequency traders may carry out 1000 transactions per second (see Footnote 192). Asymmetric information is the norm in high-frequency trading. Even its detractors admit that the majority of HFT is perfectly legal. However, high-frequency traders seem to have an unfair edge. Flash orders posted for less than 500 µs on certain exchanges only provide helpful information to individuals with the quickest computers. Companies may boost their performance by placing servers close to exchanges or data centers.

197

Rise of the machines, The Economist, Jul 30, 2009.

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Additionally, systemic risk is introduced when a small party holds roughly half of a market’s shares. A rogue algorithm going awry is a distinct possibility, although the market can resolve some of these issues. To confuse high-frequency traders, institutions are developing their algorithms. The most prominent investors are moving to electronic trading platforms known as “dark pools,” which hide order size and origin. Regulators are getting ready to roll up their sleeves. As trade advances from milliseconds to microseconds to nanoseconds, everyone learns to respond faster (see Footnote 192). Due to the increasing demand for ultra-low latency (ULL) and advances in quantum computing in financial services, the market is expected to grow. Of late, market participants have focused on reducing latency in the system, which makes the difference between success and failure. Large investment banks and hedge fund companies increasingly turn to high-frequency trading (HFT) applications, creating new business prospects. HFT servers are a subset of high-performance computing applications that incorporate AI and deep learning capabilities. Stock market trend forecasting and trade execution in milliseconds are possible with these systems’ help. A high-frequency trading environment requires a feed with extremely low latency that enables the management of multiple orders and rapid analysis and data correlation. As a result, trading businesses have moved their data centers closer to stock exchanges to give trading apps speedier feeds. Since the stock market is nearby, companies may use high-bandwidth networks with minimal latency, resulting in improved product demand. Algorithmic Stock trading is expected to gain momentum in the next several years. Algorithmic trading enables equity traders to implement and modify stop-loss strategies more efficiently. Due to the volatility and unpredictability of the stock market, managing large portfolios becomes difficult. With stop-loss methods integrated, trading businesses will be better able to control risk and reduce losses while also increasing income from the servers that run these apps.198 The Forex market is predicted to expand quickly between 2021 and 2028. The market is segmented into equities trading, foreign exchange, commodities markets, and so on (Fig. 2.39). In terms of revenue, the equity trading segment held a market share of more than 41% in 2020. High-frequency trading systems, especially in large-cap equities markets, are responsible for most of the segment’s development. Because of the success of stock trading, high-frequency trading has spread to the FX market, opening up new revenue streams. Algorithmic trading has increased trading firms’ power in a rapidly evolving market by removing human error and altering how financial markets are currently interconnected. It is credited with the success of several of the best-performing hedge funds. Devoid of human emotions, it has low latency and instantly executes

198

Global View Research, High-frequency Trading Server Market Size Report, 2021–2028.

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Fig. 2.39 Globalt HFT market share. Source Globalview research in The stockmarket is now run by computers, algorithms and passive managers, The Economist, Oct 5, 2019

trading commands. Trading occurs in microseconds, with a single millisecond accounting for millions of dollars in annual revenue from market trades. Apart from ease of use and customization, anonymity, cost, and speed are just a few of the many desirable characteristics of Algo trading. Machine learning-blended Algo trading has the possibility of creating a complete paradigm shift in electronic trading. • Trading with nanotechnology • Custom-built chips that enable high-frequency trading execution in 74 nanosecs199 • Microwave transmission technology that broadcasts data faster than the speed of light • Reduction of latency to under 20 ns. Algo trading has penetrated deep into commodities and foreign futures trades (Fig. 2.40). It may be capable of simultaneously monitoring multiple market conditions across the globe, saving considerable time, and eliminating the possibility of even the smallest time lag or occurrence of an error. Future Algo systems could easily analyze all of the historical data that we have archived throughout our trading history to determine trends and decide what would work and what would not. Additionally, it could teach itself to accurately predict futures markets while trading multiple accounts and strategies to spread risk and reject or accept real-time

199

Snipethetrade in The stockmarket is now run by computers, algorithms and passive managers, The Economist, Oct 5, 2019.

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Fig. 2.40 Algo trading usage. Source Seven Pillars Institute. “The Ethics of High-Frequency Trading,” Page 18. Accessed May 18, 2020

bids and offers. If the market does not favor specific trading strategy rules, the system’s self-learning algorithms will adjust trading patterns and rules to market conditions. Market crashes may become a thing of the past as trading becomes sensitive and understands the impact of a failed buy/sell, or market volatility dips in the exchange and rises to the challenge of recovering without human intervention. As a result, we can anticipate the near elimination of certain inconsistencies, such as Flash Crashes. Algorithms could be directly programmed into the chips to improve efficiency and communication. Additionally, customized global regulations and kill switches could be programmed. It is conceivable that a system this powerful, with such a broad reach through Big Data and connectivity as the Internet of Things, would incorporate structured and unstructured data, utilizing real-time global news feeds, live social media, and current and historical stock data across the globe in a single algorithmic engine (see Footnote 194). To say that digitization has upended the staid world of stock trading is an understatement. Algorithms and Computers now run the stock market. And the managers remain passive. Investing was very much a human activity fifty years ago. Individuals would have to humor one another, dealers would entertain fund managers, and no one would know the prices. Technology was primitive. Traders analyzed data gleaned from company reports using pocket calculators; their senior colleagues used slide rules. One investor recalls that even in the 1980s, “reading the Wall Street Journal on your way to work, a television on the trading floor, and a ticker-tape” provided a significant information advantage.

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The advent of HFT fundamentally altered the trading landscape. Today, instead of the clamor of traders, you’ll hear the buzz of servers if you visit a trading floor. High-frequency trading (HFT) takes advantage of minor price discrepancies between identical securities by quickly executing many transactions. High-frequency traders are critical liquidity providers on the New York Stock Exchange, accounting for roughly 50% of the trading volume. 60% of institutional equity assets, 35% of the US stock market, and 60% of trading activity are accounted for by funds managed by computers that follow the rules devised by humans (see Footnote 201). Artificial intelligence algorithms also create rules for investing in ways their human supervisors do not fully understand. While technology is transforming industries from pizza delivery to Hollywood, finance can influence companies via voting, transfer wealth, and wreak economic disaster, unlike any other business sector.200 Humanity’s role in trade has shrunk dramatically since then. Instead of actively managing a portfolio of companies to beat the market, index funds invest in a basket of equities to match the market or sector return.201 In 2019 September, passive equity assets valued at $4.3 trillion overtook human asset management for the first time.202 The pace and content of the stock market are changing because of financial robotization. It also raises questions about the market’s functioning, the economy’s influence, company governance, and financial stability. Algorithmic traders now dominate order execution on the stock market. There are fewer trades on the NYSE’s raucous floor and more on New Jersey’s quietly purring computer servers. 90% of equity-futures agreements and 80% of cash-equity trades are completed without a person’s involvement.203 Similarly, automatic execution rules the equity derivatives market.204 Each day, the stock market in America trades approximately 7 billion shares worth $320 billion. A significant portion of that volume is accounted for by highfrequency trading, in which stocks are rapidly flipped to profit from short gains. High-frequency traders acting as middlemen accounted for half of the daily trading volume. Even when traders are excluded and only investors are considered, rules-based investors now account for most trades. In the US stock market, quantitative funds, such as quantitative hedge funds, had eclipsed all other institutional traders in 2016 (see Footnote 205). Thus far this year, they have accounted for 36% of institutional volume, up from 18% in 2010. Traditional equity fund managers account for approximately 10% of institutional trading.205

200

The stockmarket is now run by computers, algorithms and passive managers, The Economist, Oct 5, 2019. 201 JP Morgan Chase, US Equity Strategy & Global Quant Research, EPFR. 202 Morningstar in Ahead of the tape, The Economist, 21 June 2007. 203 Deutsche Bank in Ahead of the tape, The Economist, 21 June 2007. 204 Tabb Group in Ahead of the tape, The Economist, 21 June 2007. 205 JP Morgan Chase in Ahead of the tape, The Economist, 21 June 2007.

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Fig. 2.41 US public equities assets. Source Russell 3000, Federal Reserve, Bloomberg, Morningstar, ETF.com, HFR, Preqin, JP Morgan Chase in Ahead of the tape, The Economist, 21 June 2007

The total market capitalization of American public equities is $31tn.206 Index funds, exchange-traded funds, and quant funds are the three categories of computer-managed funds that account for around 35% of total assets under management. Human asset managers, such as classic hedge funds and other mutual funds, are accountable for just 24% of total assets under their control (Fig. 2.41). (The remainder, about 40%, is more difficult to quantify because it includes other types of owners, such as corporations that own many of their shares.) Additionally, machines are increasingly purchasing with the intent of holding. Most of the $18–$19 trillion in managed assets are handled by computers, accounting for most of the total. Index funds are responsible for nearly half of that total, or approximately $9 trillion, in assets under management. Other quantitative equity managers handle an additional 10–15 percent of the company’s market capitalization. Or approximately $2 trillion. Humans are responsible for the remaining 35–40%, or $7 to $8 trillion.207 Hedge funds serve as a proxy for the advancement of algorithmic investing. The proportion of quant funds in overall hedge fund assets under management was around a quarter ten years back; now, they account for 30% of total assets under administration.208 Four of the world’s five most prominent investment firms—Renaissance, Bridgewater, Two Sigma, and AQR—were founded to utilize quantitative methods.

206

Russell 3000 index in Ahead of the tape, The Economist, 21 June 2007. Bernstein in Ahead of the tape, The Economist, 21 June 2007. 208 HFR in Ahead of the tape, The Economist, 21 June 2007. 207

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As a result, the stock market has become incredibly efficient in recent years. Costs are significantly reduced with the new robot markets. Passive funds have annual expenses ranging from 0.03 to 0.09% of assets under management. Active managers, in some instances, charge twenty times as much. Due to lower execution costs, new information about a firm is immediately reflected in the price of that company’s stock. Exchange commissions are negligible: $0.0001 per share for buyers and sellers.209 Fees are also kept to an absolute minimum. Starting on October 1, Charles Schwab, a large consumer brokerage firm, and its rival, TD Ameritrade, announced that they would be removing trading fees. The machines’ market share is only going to increase. When technology was more primitive, the strategy of factors conceived by humans is now readily available through ETFs. Thirty years ago, intuition selected the best fund manager; today, those who use a “scientific approach,” incorporating technology, data, and artificial intelligence, have an advantage.210 Creators of trading algorithms—computer programs that create buy and sell orders and execute transactions in milliseconds—have absorbed some timeless knowledge from old stock operators. Algo traders get their tips from news headlines: “The best of all tipsters,” Edwin Lefèvre wrote in a 1923 fictional account of the markets, “is the tape.” Algorithms are being created to respond to news items quicker than the human eye can read them as the processing time for computer-generated transactions continues to reduce to thousandths of a second. The news providers Dow Jones and Reuters now supply “tagged” electronic news items for automated trading algorithms to make trading choices. (According to Dow Jones, the industry is so private that no consumer information may be disclosed). The Financial Services Authority in the United Kingdom also intends to utilize computers to sift through trade data for signs of questionable conduct, which it believes happens before around a quarter of all takeover announcements. Algorithmic trading accounts for nearly half of all stock trades in the United States and a fifth of all options trades.211 Trading times on the London Stock Exchange are now as low as ten milliseconds, thanks to a new electronic system launched in 2007. On its first day, it handled 1,500 orders per second, compared to the prior system’s 600. Customers may be less likely to migrate to faster platforms if volume increases (see Footnote 213). Order-handling algorithms that break up massive deals must be lightning quick to get the greatest electronic pricing. The objective is to minimize the time interval between an order and its execution, referred to as latency. Every second counts in “black-box” and “statistical arbitrage” trading, in which computers scour the

209

Chicago University in Ahead of the tape, The Economist, 21 June 2007. Two Sigma in Ahead of the tape, The Economist, 21 June 2007. 211 Aite Group in Ahead of the tape, The Economist, 21 June 2007. 210

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market for temporary price distortions.212 Due to the emphasis on speed, even location is considered, and servers located closest to a trading venue can shorten trade duration and thus obtain a better price. Now that they are reading the news, can trading algorithms capture the story faster than journalists? Regulators suspect that some price movements preceding takeover announcements result from algorithms detecting early-warning market signals. The news may be generated by analyzing algorithmic transactions in the future rather than the other way. Investors may get a head start on economic data because of reduced latency. While high-frequency trading has several legitimate benefits, it can also harm the stock market. Around half of all stock trading in the United States is conducted via computer algorithms that operate in nanoseconds or billionths of a second. These high-frequency trading algorithms make trading more affordable, if not wholly free, for the general public. However, there are costly speed races at the heart of HFT, which dilute the savings to public stock markets. Equally concerning, because these races occur in public markets, there is an incentive to circumvent their costs through off-market transactions. For those involved, this is entirely reasonable. The issue is that these transactions are parasitic on public markets, as they use those markets’ prices to determine the private-deal price. The percentage of US stock trading on public exchanges such as the New York Stock Exchange fell to just 53% in January, down from around 60% just a few months ago.213 While the exchanges have since regained some of their lost market shares, a continued decline would jeopardize the public markets’ ability to set informative prices. Additionally, there is a possibility that the parasite will consume the host. What gives rise to these types of speed races? A good illustration occurs when the price of a futures contract changes, which is universally known to professional traders by its ticker symbol, ES. In theory, the ES (which is traded in the Chicago Mercantile Exchange’s computer data center in the city’s suburbs and should not be confused with Eversource Energy, a small company that uses the same two letters on the New York Stock Exchange) tracks the S&P 500 stock market index. In practice, however, the ES frequently moves ahead of the underlying stocks or the SPY, the exchange-traded fund that tracks the index (see Footnote 215). The majority of stock and ETF trading in the United States occurs in data centers in northern New Jersey, making the speed with which prices are transmitted from Chicago critical to HFT’s success or failure. Therefore, an HFT algorithm trading stocks and ETFs gains a significant advantage if it receives ES price data even a microsecond—one-millionth of a second—faster than its competitors. In

212

Ahead of the tape, The Economist, 21 June 2007. Securities and Exchange Commission in High-frequency trading brings real benefits but still could wind up hurting the stock market—here’s why, Donald McKenzie, Market Watch, June 3, 2021.

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2011, a quick trading system could react in as little as five microseconds. By 2019, systems capable of reacting in 42 ns were available. Often, winning comes down to being the fastest (see Footnote 215). Today’s speeds are not possible with conventional computer systems. You now require specialized silicon chips called FPGAs, which stand for fieldprogrammable gate arrays. You must pay whatever it takes to locate your FPGAs as close to the exchanges’ computer systems as possible and to ensure that those FPGAs receive the fastest possible data feeds. Fiber-optic cables, which were the industry standard until 2010, are far too slow. Microwave or millimeter-wave wireless links (or 5G in the future) are required, and lasers mounted on towers or tall buildings now transmit stock market data between New Jersey data centers.214 According to the Wall Street Journal, high-frequency traders are using an experimental kind of cable to speed up their computers by billionths of a second, the latest development in a technical arms race to execute stock deals as quickly as possible. The hollow-core fiber cable is a next-generation fiber-optic cable that connects households and businesses to the internet today—because light travels 50 percent faster through the air than through glass, delivering data over a hollowcore fiber takes approximately a third less time than data sent over a standard fiber of the same length (see Footnote 216). The difference is often just a fraction of a second. However, this can mean the difference between profits and losses in high-frequency trading. HFT firms do rapid-fire trades in stocks and futures using sophisticated algorithms and ultra-fast data networks. Fast traders employ hollow-core fiber as the latest in a long series of technical advances to remain ahead of the competition. Spread Networks spent around $300 million a decade ago to install fiber-optic cable in a straight line between Chicago and New York, allowing traders to exchange data back and forth in only 13 ms, or thousandths of a second (see Footnote 216). The link was supplanted by microwave networks within a few years, which reduced transmission times to less than nine milliseconds along the route.215 HFT corporations send data between the New York Stock Exchange and Nasdaq data centers via lasers, and their algorithms are embedded in superfast computer chips. Traders are now squabbling over nanoseconds, restricted by physics and technology. High-frequency trading is a contentious topic, with detractors saying that specific rapid tactics levy an invisible cost on investors. Such allegations, according to industry leaders, are unfounded. Space may be the final frontier in the never-ending quest to accelerate stock trades. Satellites could provide the ultimate speed boost for high-frequency traders in their quest for speed. Today, high-frequency traders shave fractions of a second off the time required to execute trades by utilizing microwaves, lasers, and

214

High-frequency trading brings real benefits but still could wind up hurting the stock market— here’s why, Donald McKenzie, Market Watch, June 3, 2021. 215 High-Frequency Traders Push Closer to Light Speed With Cutting-Edge Cables, The Wall Street Journal, Dec 15, 2020.

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advanced types of fiber-optic cable. It is a business that relies heavily on transmitting data between financial centers as quickly as possible. Price movements in major markets cause volatility in other markets. HFT firms must race from one exchange to the next to adjust their trading activity in response to the latest data. Otherwise, they risk losing money to faster HFT firms with more recent data access (see Footnote 217). Satellite networks orbiting a few hundred miles above the Earth’s surface have the potential to be the next technological leap. Satellites in such constellations would orbit the Earth much closer than satellites from previous generations of telecommunications. With such a network, a Chicago trader could beam US futures prices to an overhead satellite, then relay them to London via a chain of several satellites. Such space-based connections could be significantly faster than existing terrestrial networks. This can alter how high-frequency traders send data between North American, European, and Asian exchanges. HFT traders are focused on reducing “latency,” or time delays, to a minimum. Others will likely follow suit once a single high-frequency trading firm adopts satellite technology. Otherwise, they risk being left behind in a millisecond-sensitive industry.216 There is a reasonably broad consensus that high-frequency trading activity reduces bid-offer spreads and improves market liquidity. The May 2010 “flash crash” was traced to a single independent rogue trader operating out of his bedroom, using primitive systems and dishonest motives. Today, the majority of volume traded on the world’s exchanges is generated by a handful of sizeable proprietary trading firms with extensive experience, sophisticated systems, and robust risk controls. Their orders are either monitored by brokers, filtered and throttled at the exchange level, or combined. Regulators have a firm grasp of trading strategies and are generally comfortable with the role of HFT in today’s markets. Due to their sheer speed and volume, HFT orders create an omnipresence that fills market gaps and reduces slippage for most other orders (see Footnote 218). To dismiss high-frequency trading as “skimming”—a form of theft—demonstrates a fundamental misunderstanding of how electronically traded markets work. The pennies earned in microseconds by high-frequency traders are not stolen from anyone. They represent the HFT firms’ share of the overall reduction in bid-offer spreads brought about by their omnipresence. These firms face the same risks as the rest of the market, but they invest heavily in technology and knowledge to effectively manage those risks—and when they fail, they also lose money. The critical point is that high-frequency trading firms are entirely agnostic about their trade products and are highly adept at resource allocation. If a market becomes restrictive or unprofitable, they immediately reduce their commitment to it, possibly abandoning it entirely, and they move to another market. Their infrastructures enable them to accomplish this at a low cost.217

216

High-frequency traders eye satellites for ultimate speed boost, The Wall Street Journal, April 1, 2021. 217 The pennies earned by high-frequency traders in microseconds are not stolen from anyone, March 19, 2019.

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No, high-frequency algorithmic traders are not causing havoc in the stock market. The reality is that HFT (high-frequency trading) is assisting in the stabilization of the exchange-traded fund (ETF) market by ensuring that the fund’s price remains close to the holdings’ net asset value (NAV). One of the positive side-effects of HFT is that it provides stability to EFT trades. This benefit should accrue to all investors, not just Wall Street insiders271. A study looked into the impact of high-frequency algorithmic trading on ETFs. Increased algorithmic trading in ETFs, according to the study, resulted in more small and less lasting swings in funds’ net asset values. Algorithmic traders’ arbitrage strategies reduce the size and permanence of ETF price deviations from NAVs. By decreasing spreads and allowing for arbitrage, algorithmic trading enhances ETF liquidity.218 These findings are more critical than ever before, as the ETF market has exploded in size compared to a decade ago. Without algos buying and selling ETFs, the market would be vulnerable to shocks/instability. Alternatively, if algos maintain a healthy ETF market, the stock market has a chance of remaining healthy.

References Aldridge, I. (2013). High-frequency trading: A practical guide to algorithmic strategies and trading systems (2nd edn). Wiley. ISBN 978-1-118 Allison, I. (2015, September 8). If Banks want benefits of blockchains, they must go permissionless. International Business Times. Archived from the original on 12 September 2015. Auyong, H. (2017, September 4). Inclusivity the key to success of cashless drive. Today. Burhouse, S., & Chu, K. (2016, October 20). 2011 FDIC National survey of unbanked and underbanked households. Cookson, C. (2013, May 12). Time is money when it comes to microwaves. Financial Times. Dimon, J. (2021). CEO of JPMorgan Chase in How fintech will eat into banks’ business, The Economist, 6 May 2021. Dixit, R., & Ghosh, M. (2013). Financial inclusion for inclusive growth of India—A study of Indian States. International Journal of Business Management and Research., 3, 147–156. Ginovsky, J. (2017). What really is “digital banking”? Consensus on this oft-used term’s meaning eludes. Banking Exchange. Retrieved May 9, 2017b. Grant, J. (2010, September 2). High-frequency trading: Up against a bandsaw. Financial Times. Henley, J. (2016, June 4). Sweden leads the race to become cashless society – via www.thegua rdian.com. Huang, R. (2020, March 9). WHO encourages use of contactless payments due to COVID-19. Forbes. Retrieved July 3, 2020. Krause, M. J., & Tolaymat, T. (2018). Quantification of energy and carbon costs for mining cryptocurrencies. Nature Sustainability, 1(11), 711–718. https://doi.org/10.1038/s41893-018-01527.ISSN2398-9629.S2CID169170289 Lansky, J. (2018). Possible state approaches to cryptocurrencies. Journal of Systems Integration, 9(1), 19–31. https://doi.org/10.20470/jsi.v9i1.335

218

Archana Jain, Chinmay Jain, and Christine Jiang, Active Trading in ETFs: The Role of HighFrequency Algorithmic Trading, CFA Institute’s Financial Analysts Journal, 4 March 2021.

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Locke, C. (2017). The irresistible rise of digital banking. Banking Technology. Retrieved May 9, 2017a. McKinsey. (2018). World Bank in The battle for the remittances market, The Economist, May 5, 2018. Nanda, K., & Kaur, M. (2016). Financial inclusion and human development: A cross-country evidence. Management and Labour Studies, 41(2), 127–153. https://doi.org/10.1177/0258042X1 6658734.S2CID158002205 O’Dwyer, R. (2018). In I. Gloerich, G. Lovink, P. De Vries (Eds.). MoneyLab, Overcoming the Hype. Institute of Network Cultures, Amsterdam (p. 151). Poh, J. (2017, October 17). Why is the Singapore Government so adamant about going cashless. YahooFinance. Polansek, T. (2013, August 23). CFTC finalizes plan to boost oversight of fast traders: official. Reuters. Rogoff, K. S. (2016, August 25). The sinister side of cash. WSJ. Schueffel, P. (2017, March 9). Taming the beast: A scientific definition of Fintech. Journal of Innovation Management, 4(4), 32–54. https://doi.org/10.24840/2183-0606_004.004_0004. ISSN 2183-0606. Sivabalan, S. (2017, July 17). Going cashless? Bad for tax cheats, privacy, poor. Bloomberg Businessweek. Sivy, M. (2012, November 20). Why so many Americans don’t have Bank accounts. TIME. Stoll, C., Klaaßen, L., & Gallersdörfer, U. (2019). The carbon footprint of bitcoin. Joule, 3(7), 1647–1661. https://doi.org/10.1016/j.joule.2019.05.012.ISSN2542-4785 Tompor, S. (2016, Sept 4). A cashless society? Some retailers turn noses up at currency. USA Today. World Bank (2013, July 11). Global financial development report 2014: Financial inclusion. The World Bank. https://doi.org/10.1596/978-0-8213-9985-9. hdl:10986/16238. ISBN 978-0-82139985-9. Xinhua. (2018). China’s state news agency in Mobile financial services are cornering the market, The Economist, May 4, 2018

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3.1

The Changing Nature of Work

The world of the future of work is dangerous. Robotics, artificial intelligence, and other cutting-edge technology changing how we work are peppered along this gorgeous road. The gig economy is another variable, where everyone works but isn’t technically “employed.” The topic of the Future of Work touches on a number of themes. The influence of automation and artificial intelligence on work and jobs, as well as the question of whether there will be enough work and jobs left after that, is a moot point. The second part of the discussion focuses on how the work and work structure models have changed over time. This brings up concerns about self-employment and the gig economy, where people provide services that are outsourced. Then, these are concerns regarding the structure of the workforce and how individuals will interact with machines. Will the number of jobs we produce be sufficient to compensate for the lost employment? Humanity has always been concerned about where its ability for creativity would lead the globe. In the nineteenth century, Karl Marx voiced worry that “machinery does not merely act as a superior competitor to the worker, always on the verge of making him superfluous. It is the most effective tool for stopping strikes.” (Marx, 1867) John Maynard Keynes foresaw massive unemployment as a result of technical development in 1930 (Keynes, 1930). Innovation has raised living standards despite this. Most people have witnessed a rise in income, broad access to fundamental healthcare and education, and life expectancy. Although there is optimism, future worries still exist. People in developed economies are worried about how technology may drastically affect jobs. They contend that a race to the bottom in terms of working conditions is fostered by rising inequality, made worse by the emergence of the gig economy (where businesses hire independent freelancers for temporary jobs).

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 V. Kumar, The Economic Value of Digital Disruption, Management for Professionals, https://doi.org/10.1007/978-981-19-8148-7_3

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On the whole, nevertheless, this worrying prospect is unfounded. Automation is undoubtedly displacing manufacturing jobs in some developed and middle-income nations. Workers who undertake routine, “codifiable.” Duties are the most vulnerable. However, technology also boosts productivity, creates new jobs, and provides efficient public services. Through innovation, technology develops new industries and jobs (World Bank, 2019). The current wave of technological development has a few notable features. Digital technologies give businesses the ability to quickly scale up or down, blurring organizational barriers, and upending conventional manufacturing methods. Local startups to multinational behemoths are transforming into digital platform companies, often with few workers or physical assets (Fig. 3.1). The development of platform marketplaces makes it possible for the effects of technology to spread quicker than ever. Businesses and individuals can transact business online simply needing a broadband connection. Millions of people who do not reside in developed nations or even industrialized areas are given access to economic opportunities by this “scale without mass.” (Brynjolfsson et al., 2008) The shifting talent need impacts the same folks. Automation raises the value of higher-order cognitive skills in developed and developing economies. Making human capital investments a priority is essential to take advantage of this changing economic opportunity. Advanced cognitive talents like complex problem-solving, socio-behavioral skills like teamwork, and skill sets linked to adaptation like reasoning and self-efficacy are three categories of skills that are becoming more and more significant in the labor market. It is essential to have

Fig. 3.1 Recent technological advances accelerate the growth of firms. Source WDR 2019 team, Walmart annual reports, Statista, IKEA, NetEase

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a solid human capital foundation and to keep learning throughout one’s life in order to enhance these talents. A technological revolution is changing the nature of work in emerging economies. No matter what the future holds, investing in human capital is a failsafe strategy that empowers individuals to take on new challenges. The impact of digitization on employment and working circumstances for both individuals and society as a whole has a significant impact on value creation in the digital economy. Global digital platforms lead the market in terms of market valuation, but their contribution to the creation of new jobs directly is less significant. For instance, despite the fact that Walmart was established as a brick-and-mortar retailer, Amazon overtook Walmart as the largest retailer in the world. On the other hand, Walmart has 2.2 million employees, which is four times as many as Amazon.1 Two crucial problems in this context, aside from the issue of direct employment produced by multinational digital platform corporations, are whether digitization results in net job gains or losses and how platform work changes the labor market and influences working conditions. These are the main topics under discussion in the global “future of work.” debate.2

3.1.1

What Is Impacting the Nature of Work

The issue of the evolving nature of work has been dominated by a few stylized facts. First, the firm’s borders are becoming hazier as a result of technology, as seen by the expansion of platform markets. Entrepreneurs use digital technologies to create global platform-based enterprises that are separate from the conventional manufacturing process, where inputs are provided at one end, and output is delivered at the other. By facilitating interactions in a multisided paradigm, platform enterprises usually add value, Digital platforms can scale more swiftly and affordably than traditional businesses. IKEA, a Swedish corporation founded in 1943, took over 30 years to grow across Europe. After more than seven decades, it reached a global yearly sales income of US $42 billion. Alibaba, a Chinese business, acquired over 9 million online retailers and $700 billion in annual revenue in 15 years using digital technology (World Bank, 2019), reaching 1 million users in just two years. Platform-based companies, including Flipkart in India and Jumia in Nigeria, have become increasingly well-known. Integrated virtual marketplaces, however, create new issues of global privacy, competition, and taxation policy. Second, the skills needed for employment are changing due to technical improvements. The demand for lower-level talents that technology can replace is

1

Forbes, 15 May 2019, Amazon surpasses Walmart as the world’s largest retailer. ILO, The Future of Work, at: https://www.ilo.org/global/topics/future-of-work/lang--en/index. htm. 2

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decreasing. Demand is rising at the same time for advanced cognitive skills, sociobehavioral skills, and skill sets that promote adaptation. This pattern is already apparent in industrialized nations and is beginning to emerge in certain developing nations. Thirdly, the idea of machines replacing people is unsettling. However, history has repeatedly shown that the threat of technology to jobs is overblown. Data on industrial employment around the world simply do not bear out these worries. While industrial employment in advanced nations has been lost, East Asia’s industrialization has more than made up for this shortfall. Reductions in industrial employment have been a well-documented trend over the past 20 years in a number of high-income economies. The employment landscape has changed as a result of the transition away from manufacturing and toward services. Comparatively, the percentage of manufacturing-related industrial employment in the rest of the globe has stayed constant. The demand for industrial products and, by extension, industrial labor, is rising due to two factors. First, declining connectivity costs enable both emerging and mature economies to export more labor- and capital-intensive goods. The demand for new products and the consumption of present ones rise when earnings rise. Fourth, many workers in emerging nations continue to hold low-productivity positions, usually in unorganized businesses with no access to technology. Despite advancements in the business regulatory environment over the past 20 years, informality has remained significant.3 Indeed, in certain developing economies, the informal sector employs up to 90% of the workforce. The informal economy has remained relatively constant in spite of economic expansion and changes in the nature of work. Fifth, social media, in particular, has an impact on how many nations view growing inequality. A higher standard of life and a larger part of the economic prosperity they see around them set up aspirational goals with people. Social media and other digital interactions expose people to a wider range of diverse, frequently unique lifestyles and opportunities, which exacerbates this feeling. However, the information on income inequality in developing nations challenges this belief. Over the past ten years, inequality has dropped or remained stable in the majority of rising economies. The Gini coefficient, which measures inequality, showed a drop or no change in 37 of 41 of these economies between 2007 and 2015 (a Gini coefficient of zero indicates perfect income equality. Where one person has all the income, the Gini coefficient is one). All employment (including low-skill jobs) now requires more sophisticated cognitive abilities as technology plays an increasingly important role in daily life and business. Automating jobs that need communication with others will be challenging. However, strong socio-behavioral skills—developed in childhood and shaped

3

WDR 2019 team, using household and labor force survey data from the World Bank’s International Income Distribution Data Set (panel a); Djankov et al. (2002); World Bank’s Doing Business Indicators (panel b).

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throughout one’s life—are necessary for success in these occupations. Due to the increased value placed on adaptability, human capital is essential. The rising need for socio-behavioral skills further increases the significance of human capital (World Bank, 2019). The effect of technology on the workforce is being constantly observed somewhat anxiously. Robots in several industries are replacing humans. In other industries, robots are boosting worker productivity. Technology also generates jobs in other industries by influencing consumer demand for novel products and services. Economic predictions of employment losses owing to technology are meaningless due to these different effects of technology. Predictions overstate the effects of technology and arouse panic, especially in low-skilled individuals performing repetitive activities. Technology does, however, change the demand for talent. In emerging nations, employment in occupations requiring a high degree of non-routine cognitive and socio-behavioral abilities has climbed from 19 to 23% since 2001, whereas in advanced economies, it has increased from 33 to 41%. The payouts of having more skills are growing in those economies (World Bank, 2019). One feature of the present technological wave is that it has hastened the formation of superstar enterprises and increased the permeability of firm borders. These companies’ increased output and employment favorably affect the labor market. These enterprises also play a crucial role in integrating new, creative businesses, frequently facilitating small businesses’ access to larger markets. Robotization was created to replace people in the workforce. In fact, the Slavic word for work, robota, was utilized for communicating the purpose of these devices by the Czech writer Karel Capek, who first used the name “robot” in 19,208. Machines have replaced a number of human-performed tasks throughout the past century. However, overall, job creation has outpaced job loss due to technology. Technology has enhanced labor productivity in several industries by lowering the need for humans to complete repetitive tasks. But in doing so, it has also given rise to new industries that once upon a time belonged to the realm of science fiction. In the current economy, market prospects are growing for all participants. Several platform firms are developing new marketplaces for the exchange of products and services. Many Internet companies and services use a platform or “two-sided market” model to function. Platforms link potential buyers and sellers or customers and service providers (World Bank, 2016). Even tiny enterprises conduct global operations. Additionally, they are growing more quickly. Companies selling on eBay are younger than those selling in offline markets in Chile, Jordan, Peru, and South Africa (eBay Inc., 2013). Chinese startups dominate Alibaba’s platform (Chen & Xu, 2015). The expansion of service delivery alternatives and empowering citizens to hold their states accountable benefits societies at large.

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Workers, businesses, and governments gain new competitive advantages as conditions change. Danish businesses, for instance, increased their dominance of the worldwide hearing aid market in the 2000s by being the first to use 3D technologies (Freund et al., 2018). India’s government made investments in technical universities around the nation, and as a result, the nation rose to prominence in the world’s high-tech industries. Through integration into global value chains, Vietnamese employees increased their language skills, building up more human capital that allows them to enter new markets. Disruptions continue despite the opportunities. Workers in low-skill jobs performing regular tasks are particularly at risk because of the declining cost of machines. These are the professions that face the greatest threat from automation. Individuals who have been laid off are likely to compete with (other) low-skilled workers for low-paying jobs. Retooling is sometimes impossible or unreasonably expensive, even when new employment is created. The resultant worker dislocation causes worry, as it has in the past. “Consider thou what the invention would do to my poor subjects,” she pointed out. “It would assuredly bring them to ruin by depriving them of employment,” Queen Elizabeth I of England warned when clergyman William Lee sought a royal license for the knitting machine in 1589 (McKinley, 1958). The Qing dynasty fought tenaciously in the 1880s to prevent the building of railways in China, arguing that the elimination of jobs for people transporting luggage would result in civil upheaval (Kunhua, 1973). Despite the overall economic expansion of steam power earlier in the nineteenth century, the Luddites in England damaged machinery to save their jobs. Discussions on the future of employment have been dominated by worries about machines taking our jobs. In the industrial sector, these worries are the most noticeable. There has been a well-documented fall in industrial employment in certain high-income economies over the past 20 years. The United Kingdom, Singapore, Spain, and the Republic of Korea are among the nations where industrial employment has decreased by more than 10%. However, as those nations develop, employment is shifting away from manufacturing toward services. Despite many projections of job losses due to technology, the share of industrial employment in developing countries has generally stayed steady (World Bank, 2019). In contrast, since the late 1980s, developing nations have added millions of manufacturing jobs. In fact, the proportion of industrial employment has dramatically expanded in a few emerging markets, such as Cambodia and Vietnam. However, technology is changing the blend of skills. Despite a large rise in the supply of skilled workers, private returns to education continue to be high globally, at roughly 9% annually. Tertiary education has an annual return of around 15%. More skilled individuals are better able to adjust to the shifting nature of the workforce. For instance, returns to basic education rose in India during the Green Revolution of the 1960s and 1970s as better educated farmers embraced new technologies.

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While technology can improve living conditions worldwide, its effects are not felt by all. Despite the fact that certain industries stand to gain significantly from technological development, others are displaced and must retool to survive. Platform technologies provide vast wealth but also get concentrated in the hands of a select few. Only when the game’s rules are fair can job creation serve society as a whole, not just a small segment of it. Despite technological developments, the most serious threat to rising economies remains the persistence of unorganized work. In Sub-Saharan Africa, South Asia, and Latin America, informal employment is 70%, 60%, and more than 50%, respectively. Even though India’s economy is expanding quickly, and technology is being used widely, the informal sector still makes up about 90% of the country’s economy. Wages and productivity are much lower in the unorganized sector. Social security and health insurance do not apply to informal workers. Due to technological limitations, Africa and South Asia are unable to industrialize and move workers into the formal sector. “They are always polite, they always upsell, they never take a vacation, they never show up late, and there is never a slip-and-fall or a case of age, sex, or race discrimination,” claimed a CEO.4 The statement was made in the context of swapping people for machines. Workers have good reason to be alarmed when statements like these are made. Robotization undoubtedly causes employment losses, yet automation actually creates more jobs overall (Taylor, 2016). The number of robots in use across the globe is rising quickly. In 2019, there were 2.6 million industrial robots operating worldwide.5 The nations with the highest robot density per worker are Germany, Korea, and Singapore. These nations continue to have strong employment rates despite the widespread use of robots, although it did lead to a decrease in hiring new hires. Younger workers may be more affected by automation than older workers. Robot adoption had no noticeable net impact on employment in Germany, although it did lead to a decrease in hiring of new employees (Dauth et al., 2017). Therefore, the effects of automation may differ between nations with an aging population and those with young people that expect a significant influx of new workers. The emergence of a jobless economy is concerning because machines, especially those with artificial intelligence, are taking over occupations that once required humans. Although it is true that robots are displacing people, it is unclear to what degree. Over 23 million jobs were added in Europe between 1999 and 2016 due to technological advancements that replaced ordinary work, accounting for nearly half of the overall rise in employment over the same period (World Bank, 2019). Recent data from European nations show that, while technology does eliminate some employment, it generally raises the demand for labor (Gregory et al., 2016). For instance,

4 5

Hardee’s Food Systems in Taylor (2016). International Federation of Robotics, Frankfurt, https://ifr.org/.

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to develop algorithms for automated lending, JD Finance, a top fintech platform in China, hired almost 3000 risk management and data analysis positions as opposed to recruiting conventional loan officers (World Bank, 2019). People now have more options to pursue jobs in virtual reality design and mobile application development due to the quick change in consumer tastes. Smartphones, tablets, and other products are being used more and more by people for work, managing their accounts, securing, and heating their homes, and entertainment. The creation of the web interfaces that drive this expansion creates new employment opportunities. Technology has also made it easier to create jobs through online work or involvement in the so-called gig economy. The business strategy of Andela, a U.S.based organization that specializes in teaching software engineers, is predicated on Africa’s digitization. It has educated 20,000 software developers throughout Africa through free online learning resources. Once qualified, programmers can either join one of Andela’s international clients or work directly for the company. The business wants to train 100,000 African software developers by 2024. With additional offices in Nairobi, Kenya, and Kampala, Uganda, 90% of its staff are headquartered in Lagos, Nigeria (World Bank, 2019). Technology makes establishing new and effective value chains easier by bringing marketplaces closer together. A network of more than 200,000 farmers in Ghana can link with one another using a mobile phone application called Farmerline in their own languages. It offers customers, governments, and development partners weather and market data collection. The company’s offerings are being expanded to include credit services. To be sure, a part of the workforce will be replaced by technology throughout this adoption process. Workers who work at low-end jobs are the most vulnerable. There are countless examples. More than two-thirds of robots work in the automotive, electrical/electronic, metal, and equipment industries. The largest electronics assembler in the world, Foxconn Technology Group, based in China, decreased its labor by 30% when it introduced robots to the production process. Businesses are more open to moving production close to consumer markets as robots become more economical than conventional manufacturing methods. Over 1000 jobs in Vietnam were lost when Adidas opened two “speed factories” for the production of shoes in 2017: one in Ansbach, Germany, and the other in Atlanta, Georgia. In 2012, the Dutch multinational technology corporation Philips Electronics relocated production from China back to the Netherlands. The automation of some service-related jobs is also a possibility. Mobileye, an Israeli company, is creating navigation systems for autonomous vehicles. Chinese internet giant Baidu is working with King Long Motor Group to roll out selfdriving buses at business parks. Financial analysts, who spend the majority of their time conducting research using formulas, risk losing their jobs: The largest bank in Russia, Sberbank, presently bases 35% of its lending decisions on artificial intelligence, with plans to raise that to 70% in less than five years (TASS, 2017). Three thousand human workers have been replaced with “robot lawyers” in the legal division of Sberbank. The number of back-office employees will drop from

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59,000 in 2011 to 1000 by 2023. A Chinese fintech business called Ant Financial evaluates loan agreements using big data as opposed to employing hundreds of loan officers or attorneys. However, it is impossible to determine the exact magnitude of employment displacement. Even the greatest economists have seen only modest success in this attempt. According to John Maynard Keynes’ 1930 prediction, technology will usher in a century of leisure and luxury. While everyone would need to work to be happy, he thought three hours each day would be sufficient (Keynes, 1930). The world we live in today is very different from that. Estimates exist, but economists still find it difficult to pin down the effect of technology development on employment losses. These estimations have a wide range. Between 2 and 41% of Bolivian jobs are predicted to be automated. In other words, between 100,000 and 2,000,000 employment in Bolivia might be mechanized. The variation is significantly broader for advanced economies. Between 5 and 56% of jobs in Lithuania are threatened by automation. It is estimated that between 6 and 55% of jobs in Japan are in jeopardy (World Bank, 2019). The vast span of expectations indicates how challenging it is to foresee how technology will affect employment. The majority of estimations are based on machine learning likelihood created by specialists at the University of Oxford (Frey & Osborne, 2017). Initial estimates put 47% of U.S. occupations at risk of automation. Using expert judgment to calculate probability is enlightening but not definitive. Additionally, it is challenging to forecast future job losses due to automation in another country using occupational categories from one. Forecasts for job loss do not take technology adoption rates into account, are usually painfully slow, and differ greatly between nations and between enterprises within nations. Therefore, the absorption rate influences the potential for job destruction by technology. Within and among countries, the tension between automation and labor varies. Mobile phone use, for instance, spreads more quickly than other technology. Even so, many businesses, particularly those in the informal sector, have had a somewhat delayed adoption of the Internet. Agriculture has uneven adoption mechanization similarly. Even the development of the spinning jenny employed in the textile sector was hampered in France and India by the relatively low labor costs; in 1790, France had just 900 spinning jennies, compared to 20,000 in Great Britain (Aspin, 1964). Technology is disrupting the workplace’s need for three different sorts of talents. First, non-routine cognitive and socio-behavioral talents appear more in demand in developed and developing countries. The demand for common jobspecific talents is also declining. Thirdly, it appears that mixing different skills kinds will pay off more often. New occupations are created to replace old ones as a result of these changes, and the skill requirements for current jobs alter as well (Fig. 3.2). In emerging economies, the percentage of jobs needing non-routine cognitive and socio-behavioral skills has climbed from 19 to 23% since 2001, while it has increased from 33 to 41% in advanced economies (World Bank, 2019).

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Fig. 3.2 Socio-behavioral skills are becoming more important. Source 1986: Wenhui News, August 17, 1986, http://www.sohu.com/a/194532378_99909679; 2018: https://www.hosco.com/ en/job/waldorf-astoria-shanghai-on-the-bund/management-trainee-front-office

Automating operations like planning, creating art, performing research, leading teams, providing care, and cleaning has been challenging. Workers that conduct non-routine jobs, such as teamwork, relationship management, human resource management, and caregiving, which call for sophisticated analytical, interpersonal, or manual dexterity, may be supplemented by robots. In these activities, people communicate with one another based on tacit knowledge. In the past, robots have had difficulty imitating such skills in order to compete with humans. These jobs include some cognitive ones like processing payroll or bookkeeping. Others involve physical labor or manual labor, including operating forklifts or welding equipment. Automating these operations is a comparatively easy process. Information and communication technology adoption by businesses in Norway helped skilled workers by allowing them to complete non-routine abstract activities and replace unskilled labor (Akerman et al., 2015). The fluid nature of employment demands skill sets that increase people’s capacity for adaptation, facilitating smooth job switching. Employers regularly place a high emphasis on socio-behavioral and higher-order cognitive (technical) skills.

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Teamwork, communication, and problem-solving skills are ranked as the secondmost significant skills by employers in Benin, Liberia, Malawi, and Zambia (Arias et al., 2018). The impact of technology on the abilities needed to execute a job is shifting, even within a single occupation—and not always in the way one might assume. Chile’s use of sophisticated computer software for client management and corporate operations between 2007 and 2013 resulted in a decline in the demand for abstract jobs and an increase in the need for routine manual work. Because of this, employment moved away from administrative, production, and skilled personnel (Almeida et al., 2017). In industrialized nations, employment growth has been most pronounced in lowskill dexterity and high-skill cognitive occupations. Contrarily, employment has moved away from jobs requiring moderate competence, like machine operators. The incomes of both middle- and low-skilled workers may decrease, the former because of automation and heightened competition. This is one of the elements that might contribute to rising inequality in advanced economies. Studies show that the demand for interpersonal and non-routine cognitive skills is increasing far more quickly than the demand for other talents. While low-skilled individuals—particularly those engaged in manual labor—seem to lose out as a result of technology improvements, high-skilled workers appear to profit. According to other studies, changing jobs has been advantageous. Information and communication technology usage boosted job churn in Argentina, with workers being replaced, jobs being abolished, new jobs being created, and the proportion of unskilled workers declining. On the other hand, employment levels rose for all skill levels (Brambrilla & Tortarolo, 2018). Technology also undermines traditional business borders, develops global value chains, and changes manufacturing processes. Technology, as a result, changes the location of employment. The Industrial Revolution mechanized agricultural production, automated manufacturing, and increased exports, leading to a large labor migration from farms to cities. Earlier waves of technology have achieved the same result. Commercial passenger aircraft allowed travel to areas outside the traditional Northern European vacation spots, such as new resorts on the Mediterranean Sea. In new locales, many new jobs have been created. East Asia has moved up the world economy’s value chains due to improvements in transcontinental communication technology and falling transportation costs. However, outsourcing is influenced by a wide range of factors in addition to technology. Due in part to lower taxes, the Philippines outperformed India in terms of market share in the call center sector in 2017. Technology, meanwhile, makes it possible for economic clusters to emerge in impoverished rural areas. 2009 saw the emergence of rural micro-e-tailers on China’s Taobao.com Marketplace. Alibaba owns one of the biggest Chinese ecommerce platforms. These “Taobao Villages,” aka clusters spanning 28 provinces,

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have risen quickly from three in 2009 to 2118 in 2017. There were 490,000 internet shops in 2017. Sellers are expanding their product lines to include high-tech things like drones (World Bank, 2019), even though conventional commodities like clothing, furniture, shoes, luggage, leather goods, and auto accessories remain to be the most popular. Through the use of online work platforms, many of the geographic restrictions formerly connected to particular activities are removed. With 650,000 freelancers, Bangladesh contributes 15% of the global internet labor force (Aowsaf, 2018). Indiez is a team-based online freelancing platform established in India in 2016. The platform brings together a geographically dispersed group of experts, especially from India, Southeast Asia, and Eastern Europe, to work together on technological projects for clients around the world. Its customers include the Aditya Birla Group, an Indian conglomerate, and the Domino’s pizza restaurant franchise in India. Wonderlabs use a comparable model (World Bank, 2019) in Indonesia. The advent of gig work: Lastly, technology is changing how individuals work and the environments in which they operate. Digital technologies have boosted the availability of short-term labor, typically through online job platforms, as opposed to the once-standard long-term contracts. Through the use of laptops, tablets, and smartphones, more people have access to digital infrastructure, which fosters the expansion of on-demand services. Certain sorts of jobs are made more accessible and flexible because of gigs. Examples include transportation and food delivery services and more complex accounting, editing, and music creation jobs. Asuqu, based in Nigeria, links businesses with specialists and other creatives across the continent. A participant in the South African film industry is Crew Pencil. Students can find local private tutors through Tutorama, an organization with headquarters in Egypt’s Arab Republic. In Russia, students work as Yandex drivers when their academic schedules permit. To enhance passenger turnover, they look for peak times at various sites. The magnitude of the gig economy is hard to estimate. The numbers are still minuscule where data are available. According to data, only 0.4% of the labor force in Germany and the Netherlands is employed in the gig economy. Around 84 million people, or less than 3% of the world’s 3.5 billion workers, identify as freelancers globally. This number was calculated using a number of publicly available information, including the following: 57.3 million people in the United States, 2 million in the United Kingdom, 10 million in the European Union, and 15 million in India (World Bank, 2019). These are the nations or areas where freelancing is most successful. The total number undoubtedly reflects a sizeable fraction of the world’s independent workers. A person who falls under the category of a freelancer may also hold traditional employment. For instance, in the United States, more than two-thirds of the 57.3 million freelancers also hold a regular jobs and use freelancing to supplement their income (Upwork, 2017). Less than 0.5% of the active labor force in emerging nations is employed in the gig economy.

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The prevalence of informality predates the new millennium’s technology revolution. In industrialized economies, where technology is prevalent, and labor markets are more organized, changes in the nature of employment are more obvious. But many of the same factors have been affecting emerging economies for years. It has always been challenging to abolish informality, with noteworthy exceptions in Eastern Europe. Only one out of every five workers is working in the official sector in El Salvador, Morocco, and Tanzania. Two out of every three employees in emerging economies work informally. While the informality of the labor market is still present in emerging economies, it is becoming more fluid in industrialized economies. Even in industrialized economies, the majority of the difficulties faced by short-term or temporary workers are the same as those faced by those employed in the unorganized sector. Self-employment, informal wage work without written contracts or rights, and low-productivity jobs, in general, are the norm in the bulk of the developing world. Because most labor laws are vague concerning the obligations of employers and employees, these workers operate in a legal gray area. A recent decision by the UK’s highest court determined that UBER’s drivers should be treated as “workers;” UBER has complied with the court’s directive, which could stunt its global expansion. But for this ruling, there are no pensions, health, or unemployment insurance, and none of the other protections provided to formal workers. A model of changing work. Will robots bring about the ancient Luddite fear of machines replacing people? Will widespread automation mark the end of the previous industrialization-based road to wealth followed by China, Japan, and the United Kingdom? How can public policy make sure that as work changes, the world becomes richer and more just? Once a certain threshold is reached, high labor costs push businesses to automate production or move jobs to nations with cheaper labor costs (Glaeser, 2018). A corporation reduces costs consciously or implicitly due to market rivalry. The overall relative labor cost has decreased as a result of greater job relocation to cities in developing nations. Automation lowers the need for manufacturing jobs globally. Keynes predicted that conventional industries, especially agriculture, would experience a sharp drop in employment during the course of the twentieth century. He did, however, misjudge the massive production and consumption of new kinds of food by employees in the twenty-first century. Most importantly, he was unable to foresee the enormous service industry that would employ people from wealthy nations. Businesses can automate, replace labor with machines, and innovate using digital technology to increase activities and goods. The conflict between innovation and automation will determine the future of work. Automation leads to a decrease in employment in traditional industries. Innovation leads to the emergence of new industries or tasks. Both have an effect on how jobs will be distributed in future. Because robots can replicate increasingly complicated jobs, human capital has served as a barrier to automation for the last four decades. What happens in the end? The demand for lower-skilled jobs has greatly dropped due to automation, and historically, the more educated have benefited from the innovation process.

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Whether people displaced by automation will have the skills required for new opportunities produced by innovation is a big question. But it’s important to keep in mind that although certain innovations, like Henry Ford’s assembly lines, raised the demand for lower-skilled laborers, others, like quartz timepieces, disproportionately reduced employment opportunities for higher-skilled laborers (World Bank, 2019). Automation and innovation are frequently unintentional byproducts of a single innovation, like the introduction of the Internet or the outcome of more focused capital spending made by companies looking to cut labor costs or boost profitability in new markets. In the middle of the twentieth century, automation in washing machines and dishwashers changed homemaking and allowed millions of women to work outside the house. Women typically found employment in the service sector, which developed by adding new goods and services, from Caffe lattes to financial planning, allowing for an even finer division of labor, resulting in professions like personal trainers and traders in the financial markets. Whether more of these services will be the trend and whether service providers will congregate in the same metropolitan region as their customers are important questions for the twenty-first century. China, Japan, Korea, and Vietnam all reaped the benefits of globalization, including competitive manufacturing exports made possible by cheap labor costs. These nations made the decision to invest in special economic zones, infrastructure, and, most significantly, human capital, which produced a workforce with strong connections. The challenge faced by later industrializers is best illustrated by Shenzhen, China, which went from low-skilled, low-cost manufacturing to a high-skilled, technologically demanding industry. They face competition from capital- and labor-intensive businesses in the wealthy West as well as labor- and technology-intensive producers in Asia and Eastern Europe (World Bank, 2019). The future of work presents a hazy picture.

3.1.2

What Kind of Jobs Will Be in Demand in 2029?

In 2029, what kinds of jobs will be in demand? In the fields of technology and health care, millions of new employment will be created as the population gets older and the nature of work changes (Fig. 3.3). The highest-paying employment in the upcoming ten years will probably be related to helping the country’s digital transformation and caring for an older population, including their pets. Workers may anticipate a growing requirement for education and a desire to update their skills during the coming ten years in order to survive. Older workers will fill a growing number of occupations, and the healthcare and high-tech industries are among the most promising.6 While employment opportunities for house

6

US Labor Department’s projections for employment in 2029.

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Fig. 3.3 In-demand jobs, 2019–2029. Source US Labor Department’s projections for employment in 2029

helpers and restaurant workers are anticipated to increase by millions, their remuneration is often the lowest. Those looking for manufacturing and office support jobs will find fewer options. Over the next ten years, employment in the healthcare sector is predicted to expand by 15%, a rate much higher than the national average of 3.7% (Fig. 3.4). Some of the growth, driven by the baby boomer generation’s aging, will be in higher-paying positions like nurse practitioners. Their population will expand by 111,000, or more than 50%. Nurse practitioners, who normally need a master’s degree, made an average of $109,820 per year in 2019. Over the following ten years, employment of physician assistants, which likewise calls for a master’s degree and pays about $112,000, is predicted to increase by 31.3%. In 2019, there was a 220,000 increase in registered nurse employment, a profession that normally takes a bachelor’s degree and earns roughly $73,000. With an anticipated 1.2 million new roles, home-health assistant jobs will have the highest growth during the ensuing ten years. This employment requires a high school graduation. Although hiring should be strong, the pay might not be. In 2019, the typical yearly pay for the position was $25,280 in the US, which was less than half the median pay for all occupations. As the economy shifts to the digital economy, there will be an increase in the demand for high-tech personnel. Over the next ten years, jobs involving computers and math will grow at a rate of 12.1%, which is three times higher than the average for all occupations. Software developers will be one of the four professions adding the most jobs over the next ten years, with a growth of 316,000 professionals, and will earn a median pay of $107,500 in 2019. Additionally, there will be a stronger need to secure data, which will lead to a 30% rise in the number of information security analysts—a position that in 2019 cost nearly $100,000.

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Fig. 3.4 Employment prospects, 2019–2029. Source US Labor Department’s projections for employment in 2029

Among the fastest-growing professions are those in the energy sector (Fig. 3.5). Despite starting from a tiny foundation, employment for solar photovoltaic installers and wind turbine specialists will expand by more than 50% from 2019 levels. Derrick operators, roustabouts, and rotary drill operators will see almost as much growth in employment as the US shale explosive growth. As clerical workers are replaced by machine learning and other forms of automation, the office and administrative support sector, which includes secretaries, administrative assistants, bookkeepers, and customer service representatives, is predicted to lose close to 1 million jobs. The shift to remote work brought on by the epidemic may quicken this development. As robotics technology develops, the economy is projected to lose 420,000 manufacturing employment. Sales employment will be lost as a result of the ecommerce boom, which accelerated during the epidemic. There will be 270,000 fewer tellers in the system. By 2029, almost 25% of the US labor force—up from 12.5% in 1999 and 23.4% in 2017—will be 55 years of age or older. The magnitude of the baby boom generation and the fact that people are living longer and working longer both play a role in this. The demand for workplace flexibility, exacerbated by the coronavirus epidemic, will rise as the percentage of older workers increases. As a result, the hiring process will probably involve larger geographic considerations and criteria, forcing candidates to compete for more on their capacity to present their talent rather than on their school background or prior work experience, as they do now.

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Fig. 3.5 High tech, energy jobs boom, 2019–2029. Source US Labor Department’s projections for employment in 2029

Even with a greater focus on skills, higher education will still be necessary for the fastest-growing professions (Fig. 3.6). Jobs needing a master’s degree are expected to grow at the quickest rate over the next ten years, at 15%. Occupations requiring all other types of degrees are predicted to expand by 6%. Entry-level positions requiring a bachelor’s degree will add 2.4 million jobs, and master’s degree-required roles will add 400,000 jobs. However, businesses are becoming increasingly interested in candidates who try to improve their abilities through, for instance, online certification programs.7 These middle-aged props are rapidly becoming mainstream for upskilling.8 The number of skills businesses seek increased significantly, with HR managers including almost a third more skills on job adverts in 2020 than in 2017. In 2020, just 50% of the talent that was in demand in 2017 will still be relevant; the other 50% will be obsolete (see Footnote 8).

3.2

The Specter of Automation

Automation has posed a serious danger to future job losses for ages. Economic advancement has historically been slowed not by a dearth of original ideas but rather by the powerful desire of the governing class to preserve the status quo. When it came to deploying a new device to shift columns to the Capitol, Vespasian, the Roman Emperor from AD 69 to AD 79, passionately objected, asking,

7

Jobs in 2029: health care booms, employers want more, The Wall Street Journal, Jan 8, 2021. Gartner in Jobs in 2029: health care booms, employers want more, The Wall Street Journal, Jan 8, 2021. 8

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Fig. 3.6 Degree requirements, 2019–2029. Source US Labor Department’s projections for employment in 2029

“how will it be possible to feed the populace?”9 When the stocking frame knitting machine was created in the sixteenth century, Queen Elizabeth argued: “…. what the invention could do to my poor subjects. It would assuredly bring them to ruin by depriving them of employment, thus making them beggars.” (see Footnote 9). The Queen declined to award a patent for the creation out of concern for the future of hand knitters’ jobs. William Lee, the creator, was compelled to leave the nation due to the knitters’ adamant objection (Frey & Osborne, 2013). Businesses were recommended to replace employees with automated systems since they “can’t quit, forget or get pregnant,” heralded a 1967 advertisement for an automated accounting system.10 It’s frightening to think of actual wages dropping because of outsourcing and automation, among other things. It is unknown how automation and artificial intelligence will affect jobs in the long run. While economists disagree on whether the rising use of robots and artificial intelligence would considerably raise long-term unemployment, they largely concur that it may be beneficial if productivity gains are dispersed more fairly.11 Economic advantages of artificial intelligence include better healthcare (for example, more accurate disease diagnosis and disease prevention), increased farming efficiency, contribution to reducing and adapting to climate change, and increased

9

The Future of Innovation and Employment, Oxford Martin School and Citibank, Feb 2015. The Machines are coming, New York Times, April 18, 2015. 11 “Robots and Artificial Intelligence”. www.igmchicago.org. Archived from the original on 1 May 2019. Retrieved 3 July 2019. 10

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production system efficiency through predictive maintenance.12 China would profit economically from AI, accounting for 26% of GDP by 2030, per PwC research.13 Demand for unskilled labor falls more slowly than demand for skilled labor rises (Saint-Paul, 2008). Long-term and for the benefit of society, this has led to reduced prices for goods, shorter average workweeks, and the emergence of new sectors (i.e., robotics, AI, and design industries). These new industries create many high-paying, skill-based jobs for the economy. Between 3 and 14% of the world’s workforce will be required to switch job categories by 2030 as a result of automation-related job losses across whole sectors. Although the number of jobs acquired through technical breakthroughs typically offsets the number of jobs lost to automation, the type of job lost is not always the same as the type of work replaced, which leads to increased unemployment among the lower-middle class. This is especially true in industrialized nations where the demand for low-wage labor has decreased, and the demand for highly trained labor has increased as a result of technological improvements (McKinsey Global Institute, 2017). Workers opposed change vigorously during the start of the Industrial Revolution when innovations like the steam engine rendered some job categories obsolete. For instance, English textile workers known as Luddites destroyed weaving machines in opposition to their adoption. Residents of Chandler, Arizona, have vandalized autonomous automobiles with rocks and slashed tires in protest due to the apparent threat the vehicles have to economic prospects and public safety (Romero, 2018). According to surveys, there is a direct correlation between the strength of organized labor in a certain country or region and the level of fear about automation there. For instance, whereas 82% of Swedes saw automation and artificial intelligence positively because of their strong national safety net, the Pew Research Center reported that 72% of Americans were apprehensive about workplace automation (Goodman, 2017). Automation poses a threat to even highly trained professions like those of a lawyer, doctors, engineers, or journalists.14 In the United States, the United Kingdom, and France, among other nations, since the 2010s, nationalist, protectionist, and populist movements have seen a comeback. Automation is usually blamed for job losses and downward mobility (West, 2018). The future looks dismal for professions that don’t now require a university degree, like truck driving.15 Concern is mounting about a future in which many adults struggle to sustain productive employment, even in high-tech hubs like Silicon Valley.16

12

White Paper: On Artificial Intelligence—A European approach to excellence and trust (PDF). Brussels: European Commission. 2020. p. 1. Archived (PDF) from the original on 20 February 2020. Retrieved 20 February 2020. 13 “Sizing the prize: PwC’s Global AI Study—Exploiting the AI Revolution” (PDF). Retrieved 11 November 2020. 14 “Technology Will Replace Many Doctors, Lawyers, and Other Professionals”. 11 October 2016. 15 “Death of the American Trucker”. Rollingstone.com. 2 January 2018. 16 “Silicon Valley luminaries are busily preparing for when robots take over”. Mashable.com.

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Although innovation has been the main force behind economic growth, little is understood about how it will affect employment. The historical record shows that contrary to what was initially projected, rapid employment growth and innovation have coexisted in industrialized economies. However, it is well-known that innovation destroys mundane and non-cognitive jobs. IT and AI have expanded at dizzying rates for more than 50 years. Advances in machine learning and artificial intelligence are taking over more and more commonplace tasks, including computations, speech recognition, search, psychotherapy, and robotic tasks like self-driving cars and military drones. Given the exponential rise of computational power, it is feasible that information technology will ultimately replicate the human brain (Schmidt & Cohen, 2013). The processing speed of modern computers must match that of the human brain, rated at 1018 Flops, to achieve this. Although computational speed matching is required, it might not be enough. Even on a computational level, estimates for the time it will take for computers to imitate the human brain range from ten to twenty years. Clairvoyants believe that computers will someday exceed humans in terms of scientific inventiveness, economic performance, and social skills (Nordhaus, 2015). When it comes to detecting faces, Facebook’s pattern recognition algorithms already outperform humans.17 Pre-trial legal brief preparation is increasingly becoming automated. Symantec’s Clearwell system employs language structures to scan millions of pages of archived legal cases in a matter of days (Markoff, 2011). The Internet of things using sensor-based technology helps solve issues that call for prolonged attention and are therefore vulnerable to failure because of human weariness. In order to regulate water loss and cut leaks by 40–50%, sensors are employed in cities like Doha and Beijing to track the health of pipelines and pumps (MGI, 2013). Automation is replacing paper cheques. In the UK, over a million physical cheques are processed every day. Digital versions of cheques will soon replace paper ones in the UK, eliminating two-thirds of the personnel involved in their processing.18 Over the next five to ten years, the software is expected to disrupt practically all well-established industries. If programmers were to replace programmers, would that happen? A wealth of anecdotal evidence exists. Uber has developed into the biggest taxi firm without owning a single taxi. Without owning a single piece of real estate, Airbnb has become the largest hotel in the world, thanks to the internet. Ten years earlier than anticipated, a machine defeated the top-ranked Go player in the world in 2016 (see Footnote 18). Low-level anesthesia administration is automated by J&J’s FDA-approved system for a fraction of the expense of hiring a dedicated anesthesiologist. In comparison with humans, IBM’s Watson has shown to have a considerably greater rate of lung cancer diagnosis: 90% versus 50%.19

17

Why not Utopia, New York Times, March 20, 2015. Where paper checks go-for now, Bloomberg Businessweek, Oct 31-Nov 6, 2016, pg. 41. 19 5 white-collar jobs robots already have taken, Fortune, Feb 25, 2015. 18

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Watson is most recognized for its ability to win the television game show Jeopardy. A statistical model that researchers have built is remarkably accurate at predicting the outcome of about 71% of Supreme Court cases (see Footnote 19). The mythical Tricorder from Star Trek actually exists today. The Tricorder can evaluate biomarkers that can be used to detect almost any ailment by scanning the retina, taking blood samples, and capturing breath (see Footnote 18).20 Advanced speech recognition improves interactive voice response and call center efficiency, resulting in savings of about 60–80%; the collateral harm is job loss.21 Automated software creates business earnings reports for AP without human participation. The equity market is one of the parts of the financial system with the most advanced electronic infrastructure. With computers replacing people and trading expenses falling, about 95% of all stock trading is now done online. Over the past ten years, electronic trading has caused a 50% manpower reduction (see Footnote 9). Ironically, the software developers who make automation software are now actually threatening to wipe them out. Machine learning algorithms help programmers identify software faults and optimize difficult parameter and design decisions (Hoos, 2012). These algorithms might eliminate one hundred and forty million software developers globally (MGI, 2013). Automation in medicine is well-established as it is deep-rooted in healthcare. At Sloan-Kettering Hospital, oncologists use computerized diagnostics to guide their treatment decisions. A pattern recognition database used by computers is composed of 600,000 prior cases, nearly two million patient records, and two million pages from medical journals. With a very high chance of success, intelligent computers use the always expanding knowledge base to diagnose and suggest treatments (Cohn, 2013). In order to speed up the development of new immunooncology drugs, which harness the immune system to combat cancer, IBM and Pfizer have teamed up. A further application of artificial intelligence is in clinical treatment, where it helps to define tumor boundaries in pictures from MRI and CT scans in minutes rather than hours, as would be the case if done manually, producing reliable outcomes. Artificial intelligence programs can identify the two main causes of blindness, macular edema, and diabetic retinopathy, in retinal scans.22 Medical automation is regularly pushed as a way to ease the strain on nursing personnel and address the rising cost of healthcare. Without automation, process improvement alone may cut the cost of healthcare by 3%. However, process improvement endeavors can be strengthened with the right automation. By using robots, for instance, Japanese hospitals have shown a threefold gain in laboratory efficiency over US hospitals.

20

Udo Gollub at Messe Berlin, Germany. https://forums.tesla.com/forum/forums/authors-lookfuture. 21 Cisco (2012). Cisco Visual Networking Index. 22 The shoulders of gAInts, The Economist, Jan 7–13, 2017.

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Medical mistakes happen far more frequently than in other businesses. For instance, according to statistics, there are 0.2 fatalities for every million people flying. On the other hand, two to five people pass away after anesthetic treatment for every million doses. For every million blood transfusions, the virus infects about 29 individuals. The mistake rate in pharmacies is unknown; however, there are roughly 100 erroneous chemical tests for every million tests performed (classified as tests beyond the normal range by seven standard deviations). There is a one in twenty chance of getting the wrong prescription in a neighborhood or hospital pharmacy. Contrarily, hospital inpatient prescription mistake rates are close to 37% (based on personal communication from Becton Dickinson and Company, Franklin Lakes, NJ). In critical-care facilities, drug errors cost between $200 and $400 million annually. Employee mistakes cost a typical 300-bed hospital $200,000 per year. According to estimates, pharmacy errors cost the US economy more than $4 billion annually. The price of keeping drug inventories in pharmacies has been cut by 48% thanks to robots. $3 billion might be saved if robotics were utilized to fill the 2.6 billion prescriptions that are written annually in the US. There are now automated drug distribution systems and related technology in hundreds of hospital pharmacies. The pharmacy information system can be linked to these devices to boost the effectiveness of medicine distribution. The fundamental core clinical laboratory idea is in danger from point-of-care (POC) technology. Point-of-care testing may, in some cases, assist in lowering medical expenses. For instance, the frequency of emergency room visits and hospital days for asthmatic patients was reduced at the Massachusetts Respiratory Hospital when a computerized system was utilized to assess peak expiratory flow (PEF). ER visits now cost $32 instead of $2656, and hospital stay costs $120 instead of $4380 for every patient (Robinson, 1983).

3.2.1

Automation Threatens Unskilled Jobs

Will automation lead to large-scale joblessness? It is all too common to worry that new technologies would remove all occupations, benefiting only a select few and upending society. Such worries fueled raging discussions when Britain industrialized two centuries ago. However, rather than referring to a “machinery question,” people started talking about the “industrial revolution.” David Ricardo, an economist, presented the topic for the first time in 1821. It was about the “opinion held by the working class that the employment of machinery is frequently detrimental to their interests.” Thomas Carlyle berated the “demon of mechanism” in 1839, saying that its disruptive power was to blame for “overturning whole multitudes of workmen.”

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Ten times faster and 300 times larger in scope than the Industrial Revolution, or nearly 3000 times more influential, civilization is being transformed thanks to AI.23 The machinery topic has resurfaced today, albeit under a different name. Workers like radiologists and legal clerks, whose jobs had previously seemed impossible to automate, are at risk. AI’s “annual creative disruption impact” is expected to be between $14 trillion and $33 trillion by 2025. This includes a $9 trillion decrease in employment costs due to the automation of knowledge work enabled by AI, an $8 trillion decrease in manufacturing and healthcare costs, and a $2 trillion increase in efficiency gains due to the use of self-driving cars and drones.24 Economic mobility will stop, middle-class jobs will vanish, and a wealthy plutocracy will “cloak itself in gated communities or elite cities, perhaps guarded by autonomous military robots and drones.” according to doomsayers. Others worry that the development of artificial intelligence may result in the extinction of mankind since highly intelligent machines may not share their objectives and may even turn against their designers. “With artificial intelligence, we are summoning the demon,” Elon Musk says. Musk is worried about a future AI overlord becoming too powerful for humans to manage despite the fact that some of his Tesla cars are self-driving. Amazing recent developments in artificial intelligence, a technology long known for falling short of its promises, have given rise to these worries. An artificial intelligence method known as “deep learning” is already being used to power internet search engines, block spam emails, suggest email responses, translate web pages, recognize voice commands, detect credit card fraud, and steer self-driving cars. Deep learning enables systems to learn and improve by crunching large amounts of data rather than being explicitly programmed. We now have data writing software instead of having people develop software.25 Where some see danger, others see opportunity. Money is coming into the industry from investors. Giant tech companies are buying AI startups and bidding for the top academic experts. Almost every industry that produces data of any type, from DNA to photographs to language, will use the technology.26 AI raises many questions and elicits a mix of enthusiasm and dread. However, it is important to remember that many of those queries have already been made and answered (see Footnote 26). Will jobs be lost as a result of smarter machines? Unlikely. A computer that offers expert radiological guidance is one example of how cutting-edge deep learning and other types of artificial intelligence can automate duties currently carried out by highly skilled white-collar people. Experts claim that the routineness of the

23

McKinsey Global Institute in The return of the machinery question, The Economist, June 25, 2016. 24 Bank of America Merrill Lynch in The return of the machinery question, The Economist, June 25, 2016. 25 NVIDIA in The return of the machinery question, The Economist, June 25, 2016. 26 The return of the machinery question, The Economist, June 25, 2016.

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Fig. 3.7 US employment, by type of work, m. Source US Population survey, Federal Reserve Bank of St. Louis, Economist in Automation and anxiety, The Economist, June 23, 2016

labor, rather than its manual or white-collar nature, is what defines automation vulnerability. Machines can carry out a variety of repetitive manual operations and some repetitive mental functions. Economic experts are already concerned about “job polarization,” a situation in which low- and high-skill employment is rising while middle-skill positions (such as those in manufacturing) are diminishing. For non-routine activity, the workforce is split into two groups: highly compensated professional workers (such as architects and senior managers) and low-paid unskilled workers (cleaners and burger flippers). In the United States, employment in non-routine physical and cognitive jobs has consistently increased since the 1980s, while employment in regular jobs has remained mostly unchanged (Fig. 3.7). As more jobs are mechanized, this trend appears to be here to stay.27 Offshoring has moved many routine jobs (including manufacturing and call center work) to nations like India and the Philippines. The stagnation of median wages in several Western countries is often cited as evidence that automation is already having an impact. And this is only the start. “We are only scratching the surface. No office job is secure,” says Stanford professor of artificial intelligence Sebastian Thrun. According to another Stanford scientist, Jerry Kaplan, automation is now blind to the color of your collar. Now, the “big data” techniques that enable businesses to

27

Automation and anxiety, The Economist, June 23, 2016.

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improve their marketing and customer service operations provide the raw material for training machine learning systems to perform the jobs of an increasing number of people. Automation will make humans obsolete, as was previously foretold. According to a brochure from the Industrial Revolution, “never before has human invention devised such expedients for relieving the poor of their labor.” The New York Times described the resurgence of such worries as the “revival of an old argument” in the 1940s. Before this, outbreaks of concern occurred in the 1920s (“March of the machine creates idle hands,” declared a 1928 New York Times headline) and in the 1930s (when John Maynard Keynes coined the term “technical unemployment”) (see Footnote 27). President John F. Kennedy stated that the fundamental domestic problem of the 1960s would be to “maintain full employment at a time when automation…is displacing men” as computers and robots proliferated in offices and factories. President Lyndon B. Johnson was cautioned in 1964 by a group of Nobel laureates about the risks of a revolution brought on by “the combination of the computer and the automated self-regulating machine.” They contended that it would lead to a new era of production that “requires decreasing amounts of human labor” and threatened to split society into an unskilled underclass and elite. Concern over possible job losses increased once personal computers were introduced in the 1980s. But historically, technology has created more jobs than it has destroyed. This is due to the way automation functions, says David Autor, an economist at the Massachusetts Institute of Technology: When an activity is automated to improve its efficiency or cost-effectiveness, demand for human labor to complete the nonautomated activities that surround it rises. James Bessen, an economist at Boston University School of Law, claims many such instances exist in the weaving industry. The weaving process became increasingly automated over the Industrial Revolution, which forced employees to concentrate on activities that machines couldn’t do, such as operating a machine and maintaining numerous machines to keep them operating properly. As a result, productivity increased dramatically. In nineteenth-century America, one weaver produced 50% more coarse cloth per hour while 98% less labor was needed to manufacture one yard of cloth. This brought down the price of clothing and raised demand, which led to more people needing to work as weavers, whose population went up four times between 1830 and 1900. In other words, technology changed the nature of the weaver’s job rather than entirely replacing it and the expertise needed to do it. In a more contemporary example, it was anticipated that automated teller machines (ATMs) would replace cashiers by taking on some of their normal duties. In fact, the average number of cashiers per branch in the US came down to thirteen in 2004 from twenty in 1988. However, because the cost of running a bank branch was reduced, banks were able to grow in response to client demand. During the

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same period, there were 43% more urban bank branches, increasing employment overall. Instead of eliminating jobs, ATMs redirected the attention of bank personnel away from regular duties and onto areas that computers cannot accomplish, like sales and customer service (see Footnote 27). Following the invention of computers, the same pattern can be seen in industry after industry: automation redefines employment rather than destroying them to lower costs and boost demand. According to a recent research study on the American workforce, employment rose substantially quicker between 1982 and 2012 in professions that used computers more frequently, such as graphic design, as professionals were able to do the remaining jobs more quickly as a result of automation.28 Overall, more computer-intensive occupations within an industry replaced less computer-intensive ones. Computers redistribute jobs instead of extinguishing them, compelling workers to develop new skills. During the research period, only manufacturing occupations grew more slowly than the total number of jobs, but this was attributable to economic cycles and offshoring to China rather than technology. The same seems to hold true for industries that use AI so far. In the “discovery” phase of a legal case, for instance, one might anticipate a decrease in the number of legal clerks and paralegals who act as human search engines as a consequence of the introduction of software capable of analyzing large volumes of legal documents; however, automation has actually reduced the cost of discovery while increasing demand for it. The number of legal assistants in America increased marginally between 2000 and 2013 (see Footnote 27). Similarly, the automation of online shopping paired with more accurate recommendations encourages consumers to spend more money overall and has increased jobs in the retail industry. With the help of technology, radiologists can advance from being rookies to professionals. Technology expands capacity rather than displace workers, which can help the developing world, which has a shortage of specialists. Just as there was a great deal of worry about the effects of the changeover from horses to automobiles a century ago, many are worried about the potential effects of self-driving cars today. While employment in the equine sector fell, new opportunities were established in the motel and fast-food sectors, which emerged to cater to drivers of cars and trucks. New ones will grow when the old ones shrink. Self-driving cars will provide individuals with more time to spend on purchasing goods and services, driving increased demand in other sectors of the economy. The demand for locally delivered goods could considerably expand as a result of autonomous vehicles (such as food). Customer service and business chatbots AIs will need to be created, trained, and have dialog written for them (reportedly, AI companies are recruiting poets); they will also need to be updated and maintained on a regular basis, just like webpages. And no matter how sophisticated AI gets, some occupations will always be better served by people, especially those needing empathy or social connection. Doctors,

28

Boston University School of Law in Automation and anxiety, The Economist, June 23, 2016.

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therapists, stylists, and personal trainers fall under this group. Nursing assistants climbed by 909%, teaching assistants by 580%, and care workers by 168% over the past 20 years, according to a study of the British workforce.29 Nevertheless, is it not feasible that this time will be different? The effects of automation today are more widespread than they were two centuries ago since every industry now uses computers. During past waves of automation, people were able to transition from one sort of routine labor to another; however, this time, many workers will be compelled to switch from routine, unskilled employment to non-routine, skilled jobs in order to stay ahead of technology. As a result, it is more important than ever to help employees quickly pick up new skills. And while everyone is worried about artificial intelligence, outsourcing has accentuated unemployment by workers in other nations. Additionally, the software may be implemented considerably more quickly than moving from agriculture to industry, which generally takes decades. Google can develop a service similar to Smart Reply and have millions of users in a matter of months. What about the worry that more modern, high-tech companies employ fewer people than traditional ones? This is illustrated by the fact that only 0.5% of American workers are employed in sectors that have come about since 2000 (see Footnote 27). The possibility that technology might reduce the number of hires while increasing the share of tasks that are automated cannot be discounted. Who is right? The pessimists, many of whom are technologists, who think that this time is different and that computers will actually eliminate all jobs, or the believers—mostly economists and historians, who think that technology will always create more employment than it destroys? The reality most likely lies somewhere in the middle (see Footnote 27). While AI won’t cause massive unemployment, it will hasten the trend of computer-related automation, upending the labor market in the same way that earlier technical advancements did and forcing people to learn new skills more quickly than in the past. Nevertheless, almost everyone concurs with the prescription that governments and businesses should make it simpler for employees to change occupations and pick up new skills as needed. If the pessimists are right and artificial intelligence has a bigger impact than most people think, upskilling would be the best defense. The evolving job profile: While human cognitive capacities hardly, if at all, develop, computers and robots continue to advance in speed and intelligence relentlessly. More skilled people will be needed as computers advance, virtually eliminating low-skilled occupations. Middle-skilled workers in the United States have lost jobs since 1980 as they become “victims” of increased automation30 (Fig. 3.8). Numerous low-skilled jobs, such as bookkeeping, repetitive factory work, and back-office duties, were replaced by automation, but extremely highskilled jobs (like neurosurgery) and very low-skilled positions were left unaffected

29 30

Deloitte in Automation and anxiety, The Economist, June 23, 2016. In the future, will there be any work left for people to do? Fortune, June 2, 2014.

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Fig. 3.8 Unskilled jobs lose out to automation. Source In future, will there be any work left for people to do? Fortune, June 2, 2014

(gardeners, cooks). Manufacturing used to have many choices for people without a college degree, but today, it favors high-end occupations involving math and computers. These high-end positions made up 10% of all manufacturing jobs in 2017.31 Information Technology may endanger occupations at both ends of the employment spectrum due to a quick series of improvements. Search engines can review past legal precedents and provide pertinent case law (see Footnote 30). It does not mean the lawyers would become redundant, but fewer are needed. On the other hand, in the following five to ten years, the most in-demand abilities will be those that are fundamentally human, such as relationship-building, co-creativity, managing different people, and cultural sensitivity (see Footnote 30). The connection between innovation and employment is still unclear in general (Harrison et al., 2008). Keynes foresaw widespread unemployment as early as 1933 as a result of extensive computer use (Keynes, 1933). The observation that some regular functional employment, including cashiers, telephone operators, and bookkeepers, have essentially disappeared in sophisticated nations over the past few decades due to computerization seems to support his theory (Bresnahan, 1999) (Fig. 3.9). Theoretically, widespread computerization will improve the coordination, problem-solving, and creative tasks carried out by skilled workers

31

Employ technology, hire skilfully, Bloomberg Businessweek, June 19, 2017.

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Fig. 3.9 Professions affected by automation. Source Frey and Osborne (2013)

(Autor & Dorn, 2013). Numerous observers have linked the spread of automation (as well as the outsourcing of manufacturing jobs to China) to the current rise in unemployment (Brynjolfsson & McAfee, 2011). While service jobs are more intricate and thus less susceptible to automation, there is a distinct shift from lowwage manufacturing to higher-wage service jobs (Autor & Dorn, 2013). However, harsh forecasts have been made regarding the loss of jobs in the unskilled group due to automation. The low-skilled employment category of legal clerks grew by only 1.1% between 2000 and 2013 as a result of automation essentially replacing jobs like the search for specific case histories in the legal profession.32 A study found that automation might result in the loss of 80 million jobs in the US and 15 million in the UK (Bowles, 2014). By 2025, AI-induced job losses will cost a total of $14 trillion, according to Bank of America Merrill Lynch; this figure rises to $33 trillion when accounting for the $9 trillion in lost wages, $8 trillion in health care and manufacturing savings, and the $2 trillion in efficiency gains from the widespread use of selfdriving cars and drones. According to McKinsey, the impact of AI will be 3000

32

Automation and Anxiety, The Economist, June 25, 2016.

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times greater and ten times faster than that of the Industrial Revolution.33 Automation has the risk of forcing nations into “premature deindustrialization,” depriving them of the chance to advance through industrialization. Although it has already peaked at less than 15% in Brazil, China, and India, manufacturing employment peaked at 45% in the United Kingdom shortly after World War I. Manufacturing is now considerably more automated than it formerly was, and China is currently the world’s largest manufacturer with the largest number of industrial robots in use.34 The grave forecasts of employment losses brought on by automation are frequently proven to be overstated. Misjudging how quickly humans can adapt to new technological developments is common. The number of cashiers and checkout counters rose after supermarket scanners were installed. Paralegal employment has expanded in reaction to the threat posed by the introduction of legal-discovery technologies (Sharma, 2016). According to research by Oxford University professors to assess the chance that different industries would be influenced by automation [Chart (Frey & Osborne, 2013)], around half of all US employment are high-risk candidates for automation in the next ten to twenty years (Frey & Osborne, 2013). Employees in the office and administration, production, logistics, and transportation sectors—the latter of which will be particularly hard hit by the rapid advent of self-driving cars—will immediately feel the effects. Industrial robots are anticipated to replace the personnel required for regular production operations, while big data algorithms enable automated information storage and retrieval, removing the need for office support functions. Due to automation, some professions are more vulnerable to job losses (Fig. 3.10). No matter how much human work is automated, certain professions that demand social connection or empathy, like those of a doctor, personal trainer, therapist, or hairdresser, are challenging to automate. Care workers have climbed by 168%, teaching assistants by 580%, and nursing assistants by 909% in the UK over the past 20 years (see Footnote 32). Digital enterprises will need 500% more workers in crucial digital business vocations compared to business processes, which will need 50% fewer workers.35 A different (and more optimistic) hypothesis is that if 50% of German manufacturing companies adopted new technologies like robotics and 3D printers, industry revenue would rise by 1%, adding 350,000 jobs (Bowles, 2014). The nation’s employment structure limits how much work is automated. Between 45 and 60% of occupations in Europe are anticipated to be affected by automation, with southern Europe likely to be the region most exposed to it (Bowles, 2014). A recent study found that innovation may have an impact on nearly half of US jobs. The impact is negatively correlated with educational attainment and wage levels: highsalaried jobs and those requiring highly skilled workers are generally resistant to

33

See Footnote 26. Re-educating Rita, The Economist, June 25, 2016. 35 Gartner Predicts Big Change for Digital Business: Will You Be Ready? Gartner Symposium, ITExpo, 2014. 34

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Fig. 3.10 Automation impacts routine jobs. Source Automation and Anxiety, The Economist, June 25, 2016

innovation and automation (Frey & Osborne, 2013). Because the Frey and Osborne study 83 assumes automation of entire occupations rather than specific job functions, it has been criticized for overestimating the automatability of jobs (Arntz et al., 2016). When occupational heterogeneity is considered, only around 9% of employment in the major OECD countries is automatable and thus subject to elimination. Additionally, when country-level heterogeneity is dove-tailed, the share of automatable employment varies throughout the OECD countries from 6 to 12% (Arntz et al., 2016) (Fig. 3.11). In a more modern example, the broad adoption of ATMs in place of bank tellers made opening more branches easier, creating more sales and customer service jobs. In the United States, the number of bank tellers decreased from twenty per branch to thirteen in 2004 as a result of the introduction of ATMs. The opening of more branches (43% over the same period) was made possible by the lower running costs of a branch, leading to an increase in employment (see Footnote 32). E-commerce has similarly increased retail net employment. It indicates that there is “creative destruction of jobs; new jobs are created while existing jobs are destroyed.”36 The automatability of employment varies among nations due to various heterogeneous factors, including each nation’s economic standing, educational system, and workplace structure (see Footnote 32). The influence of automation on occupations, in particular, depends heavily on education. The consequences of automation are less likely to be felt by highly qualified workers. These workers conduct fewer regular jobs that can be automated than those with less education (Fig. 3.12).

36

March of the machines, The Economist, June 25, 2016.

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Fig. 3.11 Impact of automation on jobs varies with country. Source Arntz et al. (2016)

The automatability of employment is significantly similarly influenced by wage levels. Low-wage people (needed to execute routine tasks) are the most vulnerable to automation, whereas highly compensated professionals (whose occupations involve sophisticated, high-cognition skills) are unlikely to be affected.

Fig. 3.12 Education moderates automatability. Source Arntz et al. (2016)

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Last but not least, even if the 9% estimate is correct, millions would lose employment. The number of jobs at threat rises to 26% because the majority of persons in this sector work in regular jobs that are vulnerable to automation. The most vulnerable groups of people are those who are the poorest.37 There is a long history of this concern about losing jobs to automation. In the 1960s and 1980s (when robots and computers were being deployed), fears of “technological unemployment” were first raised (when computerization became widespread). Every time, the danger of extensive automation of specialized professions was present (see Footnote 36). Instead, because the demand for workers to perform similar, non-automated occupations increased as a result of the automation of one type of activity, a new wave of technological innovation has produced many more jobs than it has eliminated. The process of manual weaving became progressively automated throughout the Industrial Revolution. As a result, common jobs were eliminated, freeing up employees to focus on more difficult duties like managing a group of machines or running a single machine. As a result, the coarse fabric industry grew rapidly: output per person climbed 50 times, but labor costs per yard dropped by 98%. Because of this, demand for cloth soared, prices decreased, and between 1830 and 1900 (see Footnote 32), the number of new weaving positions quadrupled. Given how quickly automation progresses, predicting the trend is risky. It was said in 2004 that cars cannot be self-driven. Six years after logging millions of kilometers in testing, Google presented its fully driverless vehicle (Levy & Murnane, 2004). In August 2016, both Singapore and Philadelphia announced the introduction of fully autonomous taxis. The prevalence of robot use has not resulted in an increase in unemployment; rather, it has receded in recent years despite sluggish economic growth. The industrialized nations with the highest robot employment rates, including South Korea, Japan, and Germany, have excellent employment prospects. Despite all the hype surrounding robots, their population of 1.6 million is still dwarfed by the world’s 320 million workers; deployment of robots to fill labor shortages is an easier sell (Sharma, 2016). Economists will probably start seeing robots as a source of growth as people do now. In nations with a high level of manufacturing, robots will be counted as a source of labor alongside immigrants, women, and the elderly (Sharma, 2016). To the dismay of the anti-automation camp, robots have the ability to save the global economy.38 The UN predicts a sharp reduction in world population, which will cause the number of employable individuals to fall even further. Robots might intervene and fill the void. Robots will likely be valued more than mocked by society. In nations like Korea, Japan, and Germany, where the number of people

37 38

Automation: I’m afraid I can’t do it, Economist, June 4, 2016. Free exchange, The Economist, April 1–7, 2017.

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who are working age is at its highest, there may not be enough robots available to fill the hole. Industrial automation companies receive incentives from China, the world’s “factory”.39 The two main AI debates—whether it will eliminate jobs and ultimately destroy humanity—are essentially ones about the speed of transformation. Let’s say you think that artificial general intelligence (AGI) at the level of humans is imminent because AI is developing quickly. If such is the case, you are more likely to be concerned about rapid, widespread job losses, and the potential for technological chaos. But it seems more plausible that during the next decade or two, AI will continue to advance, steadily but surely (see Footnote 39). Although significant, its effects won’t be on the same epochal scale as the switch from a primarily agrarian to a primarily industrial economy. Ironically, many now feel that artificial intelligence is moving too quickly after years of frustratingly slow progress. AGI is probably still a few decades away, if not longer. The discussion of what it could or might not be able to do and how society should react to it is, therefore, totally speculative. A more realistic evaluation, however, contends that AI should be welcomed rather than feared. Rapid upskilling is needed to counter automation, and if educational systems are modernized and made more flexible, which is starting to happen, then that ought to be possible. It is tempting to utilize robots wherever feasible since they are flexible and affordable, especially in factories that are automating. Robots can do various tasks, including flipping burgers, caring for plants, picking cabbage, driving cars, transporting parcels, running warehouses, assembling iPhones, and outperforming people at chess and Jeopardy. Amazon’s “Kiva” robots are equipped to pick and ship packages, replace shelves, and move 3000 pounds (see Footnote 17). Large segments of blue-collar workers are under siege. Six types of occupations were destroyed, and overall earnings were cut by 0.5% in the United States between 1990 and 2007 due to the addition of a robot for every thousand workers (see Footnote 38). To counteract rapidly growing wages, Foxconn, which employs more than 1.2 million workers, has extensively invested in robots to produce Apple iPhones (Markoff, 2012). Manufacturing jobs in the US have surely declined as a result of globalization and automation. The United States had the largest manufacturing workforce in 1979 (19.5 million). This cohort had decreased to 16.7 million by 1983. Only 7.1% of Americans will be working in manufacturing by 2024. China has benefited greatly from this. Between 1991 and 2013, China’s global manufacturing contribution expanded considerably, from 2.3 to 18.8%.40 Automation, on the other hand, has an impact in both China and the United States. Fewer personnel are needed

39 40

Answering the machinery question, The Economist, Jun 25, 2016. The jobs that weren’t saved, Time, June 5, 2017.

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to complete a task. Today, it only needs 6.5 jobs instead of 25 in 1980 to produce $1 million in manufacturing production. BCG predicts robotic production to make up one-quarter of all manufacturing output by 2025, significantly reducing the number of ordinary manufacturing jobs (see Footnote 40). According to Gartner, robots and drones will displace one-third of workers by 2025.41 A six-story skyscraper was built in China using 3D printers, and it is predicted that by 2027, 3D printers will make up 10% of all production, which is not good news for those who work in the construction industry (see Footnote 40). Every industrial robot added to every thousand workers in the US between 1990 and 2007 resulted in the elimination of six jobs and a 0.5% wage reduction for the entire economy (see Footnote 40). Claims against automation are intense: Battle lines have been established in a recent automation case regarding automation at the USA’s West Coast Port. Dockworkers worry that robots will replace them in the workplace, despite shipping officials’ claims that automation makes it possible to handle larger volumes of cargo and reduces delays in US supply chains. The union claims that international shipping businesses will be the beneficiary of the cost savings brought about by increased automation. “The bottom line is that automation has killed jobs at the ports.”42 The disagreement at the docks is part of a larger discussion over the issue of rising automation in sectors like goods-picking robots in US industrial facilities, warehouses, and drones for cargo delivery. Automation poses an existential risk to dockworkers.43 The case for the opposing position is quite strong. Experts believe automation, in particular at the LA and Long Beach locations at the center of America’s supply chain distresses, can relieve port congestion. Due to growing automation, docks in Asia and Europe can quickly remove congestion (see Footnote 43). The lack of automation at the docks renders them uncompetitive in the face of automationheavy competitors like China and Europe. According to automation proponents, robots helped handle boxes twice as quickly during the pandemic, but without automation, they would have entirely blocked the southern California ports. According to other studies (see Footnote 43), US ports don’t stand a chance compared to ports in the rest of the world. The most effective ports in the world are in Asia and the Middle East, which are highly mechanized.44 The port complexes in Long Beach and Los Angeles are the least effective, falling behind even Angola and Luanda.

41

One in three jobs will be taken by software or robots by 2025, Computerworld, Oct 6, 2014. International Longshore and Warehouse Union in A Deep Divide on Automation Hangs Over West Coast Port Labor Talks, The Wall Street Journal, June 9, 2022. 43 A Deep Divide on Automation Hangs Over West Coast Port Labor Talks, The Wall Street Journal, June 9, 2022. 44 World Bank and S&P Global Market Intelligence in A Deep Divide on Automation Hangs Over West Coast Port Labor Talks, The Wall Street Journal, June 9, 2022. 42

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Robotization

“One addition of a robot per thousand workers reduces the employment-topopulation ratio by 0.2 percentage points and wages by 0.42%.” (Acemoglu & Restrepo, 2020) These numbers are projected to increase dramatically as automation is predicted to triple (conservative estimate) or quadruple (generous estimate).45 According to a McKinsey Quarterly study, computerization’s impact is more about improving productivity since robots support human labor than replacing employees (Lohr, 2015). According to a research study, only 9% of 21 OECD countries’ employment is automated (Arntz et al., 2016). Around 2,439,543 industrial robots were in use in 2017, according to the International Federation of Robotics (IFR). This number reached 3,788,000 by the end of 2021.46 In 2,018,105, it was anticipated that software, peripherals, and systems engineering would contribute to the annual income generated by robot systems at $48.0 billion. With 154,032 units sold and 649,447 operational industrial robots as of the end of 2018, China had the largest operational stock and the largest market for industrial robots worldwide.47 The market for industrial robots is dominated by the automobile sector, which accounts for 30% of the market, followed by the electrical/electronics industry (25%), the metal and machinery industry (10%), the rubber and plastics industry (5%), and the food industry (5%). The textile, garment, and leather sectors each have 1581 operational units (see Footnote 46). Between 1991 and 2013, China’s manufacturing contribution expanded considerably, from 2.3 to 18.8%.48 Robotics raises fears that they would hinder developing nations’ efforts to industrialize through export-driven manufacturing and that rich economies will progressively “reshore” manufacturing jobs using robots. 73% of the total robot sales volume was made in the top five markets: China, Japan, the United States, Germany, and the Republic of Korea. China makes up 36% of the market, making it the country with the biggest demand (UNCTAD, 2017). The world needs Japan’s automation industry. In the past ten years, the number of industrial robots on the planet has tripled. Japan provides 45% of the new ones each year (Fig. 3.13). Specifically, Japanese producers of industrial equipment have seen a rise in orders as businesses moved toward automation, initially due to the disruption caused by Covid-19 and subsequently due to competitive labor markets and rising wage expenses. The four biggest manufacturers in Japan— Keyence, Fanuc, SMC, and Lasertec—are worth more than twice their five-year

45

Acemoglu, Daron; Restrepo, Pascual. “Robots and Jobs: Evidence from US Labor Markets”. Archived from the original on 3 April 2018. Retrieved 20 February 2018. 46 “Executive Summary World Robotics 2019 Industrial Robots” (PDF). ifr.org. Archived (PDF) from the original on 6 April 2018. Retrieved 10 October 2019. 47 “Operational stock of industrial robots at year-end in selected countries” (PDF). Archived from the original (PDF) on 2019-10-11. Retrieved 2019-10-26. 48 See Footnote 40.

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Fig. 3.13 Industrial robot production, 2020, % of total. Source International Federation of Robotics, Refinitiv Datastream, Bloomberg in Why Japan’s Automation Inc is indispensable to global industry, The Economist, Feb 12, 2022

Fig. 3.14 Market capitalization of robot manufacturers, $bn. Source International Federation of Robotics, Refinitiv Datastream, Bloomberg in Why Japan’s Automation Inc is indispensable to global industry, The Economist, Feb 12, 2022

value despite the recent decline in technology stock prices.49 Keyence and its rivals in the equipment industry are not well-known. However, its hardware is increasingly important to many industrial supply chains, rivaling semiconductors in importance. It is hardly unexpected that Japan, a country known for its preoccupation with robots, has given rise to a substantial Automation hub. The fall in Japan’s workingage population in the 1990s made this source of competitive advantage imperative for domestic firms to continue operating. It is combating an aging society with automation as other wealthy nations age demographically. The top robot manufacturers in Japan have had a stellar five-year performance (Fig. 3.14). More than half of Keyence and SMC’s current sales come from international markets. Fanuc and Lasertec are considerably more globally oriented, with more than 80% of their sales taking place outside the US (see Footnote 49).

49

Why Japan’s Automation Inc is indispensable to global industry, The Economist, Feb 12, 2022.

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Fig. 3.15 Japan’s robot manufacturers, operating margin, %. Source International Federation of Robotics, Refinitiv Datastream, Bloomberg in Why Japan’s Automation Inc is indispensable to global industry, The Economist, Feb 12, 2022

Being indispensable has turned out to be profitable. The four pillars of Japan’s automated industrial complex have more than 20% profit margins (Fig. 3.15). Faced with geopolitical difficulties with the West brought on by technology, China aims to lessen its reliance on foreign providers of cutting-edge technology, especially robotics. If China’s policy is successful, it will deny Japanese businesses access to a huge market while spawning new international rivals. Robotization has accelerated by China’s rising salaries in addition to Japan’s. Many commentators think that China’s economic approach is especially wasteful, as shown by the nation’s skyrocketing debts. For every additional yuan of GDP, there are currently about four new yuan of debt added; ten years earlier, only two yuan were needed to accomplish the same effect. Due to the increased robotization in recent years, this dynamic has been changing. In 2010, China had less than 50,000 industrial robots. Eighty thousand robots, or over one-third of all robots on the earth, are present there now. This is due to the fact that robots are now more capable and affordable than they once were. It is also partly because wages have greatly increased as China has gotten older and wealthier. Workers in factories who made about 8000 yuan ($1000) annually in 2000 may now make almost ten times as much. This has significantly skewed the scales in favor of automation (Fig. 3.16). Chinese manufacturing has quickly transitioned from being labor-intensive to becoming robot-intensive.50

50

China’s future economic potential hinges on its productivity, The Economist, 14 August 2021.

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Fig. 3.16 One-third of world’s robots are in China. Source Qianhzan Research, International Federation of Robotics, National statistics

China deploys robots to combat labor shortages: By putting nearly as many robots into its factories as the rest of the world put together, China has intensified the drive to automate and secure its manufacturing dominance despite a decline in the number of people of working age. In 2021, China imported almost 243,000 industrial robots, a 45% increase from the year before.51 China, the world’s largest robot manufacturer market, deployed just under half of all heavy-duty industrial robots last year. Nearly twice as Chinese manufacturers added many new robots as those in the Americas and Europe.52 The United States, as well as manufacturing behemoths like Japan, Germany, and South Korea, have more ratio of robots on assembly lines than the secondlargest economy in the world. The fact that China is only now catching up to its wealthier competitors helps to explain some of its growing automation. The rise in automation also reveals China’s growing awareness that its businesses must adapt as the availability of cheap labor shrinks and wages rise (see Footnote 52). The majority of China’s labor force, which is made up of people between the ages of 20 and 64, may already have peaked, and after 2030, as the population of the nation continues to age and birth rates are low, the population will start to fall

51

International Federation of Robotics in China’s Factories Accelerate Robotics Push as Workforce Shrinks, The Wall Street Journal, September 18, 2022. 52 China’s Factories Accelerate Robotics Push as Workforce Shrinks, The Wall Street Journal, September 18, 2022.

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dramatically (and the one-child policy starts to bite harder). Chinese manufacturers are using more robots to address a growing labor shortage and keep costs down, making it less advantageous for Western businesses to relocate production to other developing markets or their own countries. According to many economists, automation is China’s most reliable option for raising the productivity of its current workforce, which is essential if it wants to go beyond the group of middle-income nations. A growing labor force can no longer fuel China’s economy. In 2021, China’s labor productivity per hour was one-fifth that of the United States and one-fourth of the average for the Group of Seven advanced nations.53 China’s productivity growth has also slowed recently. After rising on average at a 9% yearly rate between 2000 and 2010 (see Footnote 52), China’s output per hour climbed at 7.4% annually in the following decade. Despite trade tensions with the United States and growing Western anxiety about a perceived overdependence on Chinese-made goods, China remains the world’s factory floor, accounting for 29% of global production. In 2021, 174 million people were employed in China’s manufacturing industry, slightly up from 169 million in 2012. There were an estimated 365 million individuals working in the services sector at the end of that period, a 32% growth in employment. Many younger workers choose out of factory jobs in favor of more adaptable careers in the nation’s expanding service industry.54 Automation can help Chinese manufacturers focus more on high-end production tasks that require greater precision than most humans can handle. It can also reduce stress caused by the shift in labor from manufacturing to services, while robots are becoming more versatile and affordable. Global installations of industrial robots increased by 27% from 2020 to 2021 to 486,800. Early projections from China indicate that installations by electronics manufacturers grew by 30% in 2021 as exporters struggled to meet the West’s rising demand for consumer goods (see Footnote 52). The manufacturers of plastics, rubber, metals, and machinery, together with the automotive industry, are additional sectors that have heavily invested in robots. In 2017, the number of robot installations in China’s automobile industry rose by almost 90% (see Footnote 51). Although China’s domestic robotics industry is expanding, most industrial robots installed there last year were made elsewhere, particularly in Japan. In a typical heavy construction company, the manufacturing line employs 56% fewer humans than before automation, yet the daily output capacity is 50% higher. To assemble a loader before automation, teams of 11 workers had to sort more than 10,000 components throughout two 10-h shifts. Two employees overseeing a robot in a single shift can now do the same task.

53

Conference Board in China’s Factories Accelerate Robotics Push as Workforce Shrinks, The Wall Street Journal, September 18, 2022. 54 International Labor Organization in China’s Factories Accelerate Robotics Push as Workforce Shrinks, The Wall Street Journal, September 18, 2022.

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China is undoubtedly experiencing a boom in the deployment of robots, as evidenced by the economics of the country’s shifting labor market and innovative robot technology. China will have between 3.2 million and 4.2 million industrial robots working on production lines by 2030, up from the current figure of roughly one million.55 The pandemic experience in China has brought to light the advantages of automation because of the severe workforce shortages brought on by the massive lockdowns that have negatively impacted industry output. Manufacturing companies discovered the hard way that they needed automation to produce (see Footnote 52). Under Xi Jinping, Beijing has pushed for a decrease in China’s reliance on export markets and an expansion of domestic companies’ participation in global supply chains, while the United States and other Western countries have begun to reduce their excessive reliance on China for manufactured goods. China cannot achieve that without automation (see Footnote 52).

3.3.1

Profiling Robots

Industrial and professional services comprise the two separate enterprise robotics market divisions. Industrial robots and professional service robots perform vastly different tasks, cost vastly different sums of money, and have had—and will likely continue to have—dramatically different growth trajectories, despite the fact that both types of robots are frequently grouped under the general term “robot,” Industrial robots have existed since the 1970s. The mechanical arm serves as the model for industrial robots and is used in industries worldwide with varied degrees of freedom and flexibility. The automotive, electrical/electronics, metal, plastics and chemicals, food and beverage, and verticals related to electronics are the ones that use industrial robots the most in the manufacturing sector. Professional service robots are a more recent innovation, with the market growing rapidly in the previous ten years. In contrast to industrial robots, professional service robots are utilized mostly outside of manufacturing and often support rather than replace humans. A small number of professional service robots have arms, but they are in the minority. Most are built with wheels to permit mobility or semi-mobility. The heavy duties carried out by the majority of industrial robots cannot or are not meant to be completed by the arms of professional robots. Retail, hospitality, healthcare, and logistics have historically been the industries where professional service robots are most common (in warehouses or fulfillment environments). Some, however, are also employed in the military, agriculture, and demolition.56

55

Bernstein in China’s Factories Accelerate Robotics Push as Workforce Shrinks, The Wall Street Journal, September 18, 2022. 56 IFR press conference presentation, Shanghai, September 18, 2019; Deloitte analysis and prediction for 2020.

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Fig. 3.17 Robotization. Source IFR press conference presentation, Shanghai, September 18, 2019; Deloitte analysis and prediction for 2020

In the modern world, robots grabbing products off warehouse shelves could still seem futuristic. The future, though, might be closer than most people think. Professional service robots will account for over half of the approximately one million robots anticipated to be sold for enterprise usage in 2020, earning more than US$16 billion in revenue—a 30% increase over 2019. Additionally, the market for industrial robots is increasing considerably more slowly than for professional service robots (Fig. 3.17). In terms of sales and units, professional service robots could overtake industrial robots in the next couple of years if current trends hold.57 This is not to imply that the market for industrial robotics is struggling. Industrial robot sales revenues increased 9% from 2019 to around US$18 billion in 2020. Industrial robots will still be important in the years to come, but the market for professional service robots will soar thanks to advancements in 5G telecom services and artificial intelligence (AI) chips (see Footnote 57). Geographically, China is the largest market for industrial robots, making up 36% of the demand for these machines worldwide in 2018. This is about three times as many sold in Japan, the second-largest market, and nearly four times as many in South Korea and the United States, the third- and fourth-largest markets, respectively.58 Alarmist predictions, which are frequently reported and can conjure up images of robots taking over the world, include a 2015 Bank of England prediction that the United Kingdom would lose 15 million jobs to robots, a 2018 Brookings study postulating that one-quarter of all US jobs were at high risk of automation, and a

57

Robots on the move, Technology, Media, and Telecommunications Predictions 2020, Deloitte Insights, 2020. 58 Cision PR Newswire, “The edge AI market in hardware to grow at CAGR of 20.64%,” April 15, 2019.

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Fig. 3.18 Nearly four million robots by 2021. Source IFR press conference presentation, Shanghai, September 18, 2019; Deloitte analysis and prediction for 2020

2017 World Bank estimate that robots would take over 600 million jobs globally by 2032.59 The upper (more concerning) end of the spectrum is usually chosen by reporting on these estimates. Artificial intelligence, robotic process automation technologies, and physical robots (for industrial and professional services) are all included in the projections. Industrial robots are widely used and are still expanding on a global scale. Between 2.5 and 3 million industrial robots were already hard at work around the world, even as sales slowed in 2018 and 2019. This global installed base had grown 93% between 2016 and 2021 (Fig. 3.18). Industrial robots can work for up to ten years (80,000–100,000 h), varying depending on the application.60 Professional service robotics is, without a doubt, the area of robotics that is expanding the quickest. Some may claim that the industry’s recent youth and tiny size are responsible for the professional service robotics sector’s explosive rise. As of 2015, there were probably under 100,000 professional service robots operating globally.61 On such a small base, achieving double-digit growth from 2017 to 2019 was rather simple. The impact of two technological developments is the reason for the rapid growth of professional service robots: the improvements in wireless connectivity made possible by 5G network technology and the declining cost and rising power of edge

59

Cision PR Newswire, “The global semiconductor market at a CAGR of close to 9% during the forecast period,” June 26, 2019. 60 Technology Business Research, “Telecom edge compute market landscape,” June 11, 2019. 61 Cision PR Newswire, “The edge AI market in hardware to grow at CAGR of 20.64%.”.

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AI chips, which can perform processor-intensive AI tasks directly on the robot rather than through the cloud. Together, 5G and edge AI chips can address several issues that currently limit the viability of professional service robots, making them more beneficial and alluring to enterprise customers. Some of the issues with 4G connectivity may be resolved with 5G. With a 99.9999% (six nines) reliability rate, the entire 5G standard expects just five minutes of outage annually.62 Additionally, 5G has sub-millisecond latencies as opposed to LTE’s and Wi-Fi’s 100 ms or more, which allows for far faster reaction times. In contrast to the 4G specification, which only allows for 607 devices to be connected, 5G permits connection densities of up to one million per square kilometer.63 For instance, in a big factory or warehouse of 10,000 m2 , a 5G network may connect 10,000 devices. Despite the fact that 5G service providers would still charge a monthly fee, companies might keep expenses under control by constructing their own private 5G network.64 Robotics is anticipated to make up a major share of the enterprise IoT industry, which will benefit most from 5G. One recent headline shouted, “cloud robots: The killer 5G application.” (Yang & Wegner, 2018). Which end markets utilize professional service robots the most? Logistics rules the market for professional service robots, just as automotive and electronics do in the industrial robot sector (Fig. 3.19). Inspection and defense, which accounted for an additional 33% and 4% of professional service robot unit sales in 2019, are in second and third position. The fact that medical robots only made up 2% of professional services robot sales in 2019 is noteworthy. However, their high price tag—roughly half a million dollars each in 2019—puts their collective price tag at US$3.7 billion, or just under 30% of the professional service robot industry’s total revenue for that year.65 Robotics is rapidly being used for things besides raising commodity efficiency, cost, or quality. Due to developments in 5G and edge AI chips, their cost profile, competence, and flexibility will be radically different in 2025 than they were in 2020. A new generation of more capable and flexible robots will increasingly influence decisions about where and what to manufacture and how to deal with labor shortages or high costs (McGregor, 2019). Future strategists will undoubtedly have a crucial role in helping both people who produce and sell robots and those who utilize them by accurately anticipating use cases and return on investment.66

62

Gartner, “Gartner Says worldwide smartphone sales will decline 2.5% in 2019,” press release, August 1, 2019. 63 IDC, “Worldwide tablet shipments return to growth in Q3 2019, fueled by new product launches, according to IDC,” October 31, 2019. 64 Deloitte Global estimates. In Daniel Yang & Stacy Wegner, “Apple iPhone Xs Max teardown,” Tech Insights, September 17, 2018. 65 TMT Predictions 2020. 66 Technology, Media, and Telecommunications Predictions 2020, Deloitte Insights.

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Fig. 3.19 Professional service robot deployment. Source IFR press conference presentation, Shanghai, September 18, 2019; Deloitte analysis and prediction for 2020

3.3.2

Embracing Robots

Robotics are now being increasingly deployed in manufacturing, warehouses, and back offices, accelerated due to the epidemic. Businesses are now embracing automation after years of resistance. The capacity of robots to significantly cut risks and improve company resilience is the main drivers of their growing adoption (Fig. 3.20). The confluence of software and hardware, previously primarily visible in carpeted parts of businesses, is now evident on factory floors throughout every industry.67 These are indications of a quiet but potent transformation. Bosses have long bragged about automating their business processes without having much to show for it. Between now and 2030, American corporations will spend $10 trillion on automation.68 According to a new McKinsey poll, two-thirds of global corporations are expanding their automation investments, as seen by the robust growth of shares of robot manufacturing companies (Fig. 3.21). The winners are undoubtedly robots. More than twice as many factory robots will be

67

After years of dithering companies are embracing automation, The Economist, 16 Jan 2021. Bain Consulting in After years of dithering companies are embracing automation, The Economist, 16 Jan 2021.

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Fig. 3.20 Goals for automating. Source Bain, Refinitiv Datastream in After years of dithering companies are embracing automation, The Economist, 16 Jan 2021

Fig. 3.21 Share prices of robot manufacturers. Source Bain, Refinitiv Datastream in After years of dithering companies are embracing automation, The Economist, 16 Jan 2021

installed globally by 2023 as in 2015. Market analysts anticipate the industrial robots market will increase from $45 billion in 2020 to $73 billion in 2025.69

69

Robo Global in After years of dithering companies are embracing automation, The Economist, 16 Jan 2021.

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Companies that have moved their manufacturing to the United States have tried to use engineered labor to reduce the high cost of human labor. And the capabilities of robots are expanding quickly. The fastest can now pluck individual strawberries. Equipment for material handling and “collaborative robots” that communicate with people are in higher demand. These “cobots” are particularly useful for e-commerce. While cobots help maintain social distancing, robots carrying items to workers will increase productivity. Because of their low margins, online grocers are developing solutions to fill the recent spike in online orders with less labor. Businesses with completely automated fulfillment centers may see a 50% growth within a year. Businesses may be better able to deal with the pandemic’s long-term effects if they use the data produced by their operations and prediction algorithms to support real-time decision-making (see Footnote 67). Emerson’s remote monitoring revenue increased by 25% last year thanks to “pervasive sensing,” which blends AI and clever sensors.70 ABB also notes a growth in the use of remote-operations systems on everything from paper mills to marine vessels. From pre-pandemic levels, annual sales of these items have increased by more than a factor of two to $400 million. An American business called Drishti has created a technique for studying busy video streams of assembly line employees using computer vision and artificial intelligence (AI). Drishti’s kit was utilized by Hella, a German auto component supplier, to identify and fix problems on a high-volume assembly line. Throughput last year increased by 7% as a result of this. Due to the pandemic’s alteration in consumer behavior, Publicis Sapient automated the inventory forecasting for a division of a major European retailer that frequently ran out of stock. Using the consultancy’s algorithms, its client could keep 98 of its top 100 goods from falling short. Automation is not just used in warehouses, factory floors, or back offices. Sales of goods for process automation are predicted to more than quadruple globally, rising from $1.6 billion in 2019 to around $20 billion in 2027.71 One estimate claims that automating the paper-pushing process might save the American healthcare system $150 billion annually. In December, the ground-breaking Romanian firm UI Path announced plans to go public and had a market value of $20 billion at launch. Industrial robots are widely used in production environments and have a variety of uses in supply chains (Fig. 3.22). The outcomes of a more ambitious endeavor with the codename Xunxi (“fast rhino”) were revealed by Alibaba, the biggest e-commerce company in China, last year. For this, the entire value chain had to

70

Emerson in After years of dithering companies are embracing automation, The Economist, 16 Jan 2021. 71 Allied Market Research in After years of dithering companies are embracing automation, The Economist, 16 Jan 2021.

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Fig. 3.22 Asimov’s algorithm. Source Deloitte, McKinsey in after years of dithering companies are embracing automation, The Economist, 16 Jan 2021

be digitalized and integrated from product design to component sourcing to production to logistics and after-sales service (see Footnote 67). The time between manufacture and delivery was slashed from several months to one week. This made it possible for retailers using Alibaba’s e-commerce platforms to quickly fulfill customized orders while minimizing extra inventory. Robots will continue to flourish, according to optimists. The biggest winners from automation historically were big, well-capitalized businesses. Smaller enterprises can now enjoy similar advantages, thanks to modern business paradigms and technical breakthroughs. This should boost interest in intelligent systems and eventually lower their price. And so on, in a completely automatic, self-reinforcing circle. Some robots become your coworker, so they’re not all job killers. For a long time, robots have effectively eliminated occupations: just ask the iceman, the elevator operator, or the travel agent (if you can still find one). But what if the robots assault your workplace, are successful, and your job is unaffected? This might seem bizarre but think about the contradictory reality of bank workers and the robot designed to replace them: the automated teller machine (ATM). Technology prospered with sufficient consumer protection and financial incentives. The first ATM was introduced in America in 1969. A few decades later, ATMs and the debit cards needed to use them gained popularity. Today, there are more than 500,000 ATMs in America. And counting. Additionally, as if ATMs weren’t convenient enough, technology developed further and turned a device practically everyone carries into a pseudo-ATM. People can transfer money, deposit cheques, and pay bills using smartphones. It’s not even

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necessary to speak to a person or visit an ATM.72 The bank tellers and the retail outlets that ATMs were supposed to replace—remained. In fact, there were more bank branches in 2017 than in 2007. Look at the people who work in the branches. There were 472,000 bank tellers in 2018, an increase of more than ten percent from 2000. In fact, there are currently only slightly fewer bank tellers than there were in 1990 or 1890. Is there a lesson to be learned from this that would disprove the myth that the robot apocalypse will eliminate jobs in the service sector? Why could some bank tellers escape the robot onslaught while others could not? Start by drawing comparisons to mechanized jobs. In 1930, there were over 67,000 elevator operators in the United States. In 1910, there were about 167,000 phone and telegraph operators. Robots now do the majority of these jobs. The elevator operator has been completely declassified. However, there are a lot more phones, elevators, and jobs overall in the globe today (see Footnote 72). The elimination of work or high-quality work has not occurred due to this process of creative destruction, in which new technology initially creates jobs before eliminating them through automation. The sophistication of robots is a persistent argument that this is a different era. Indeed, Moore’s Law and the logarithmic expansion of technology have allowed robots to go from simpler to more complicated duties. And many jobs are in danger as a result. Travel agents may not be completely extinct, even though some may not remember telephone or elevator operators. Nearly 270,000 travel agencies helped Americans book hotels, train, and airline tickets and organize their business and leisure travel in 1990. Then, the internet happened. With modern technology, people may now make reservations more quickly and successfully. The number of jobs for travel agents has now decreased by 80%. Kayak, Expedia, Priceline robots, and hotel and airline apps73 have replaced over 210,000 jobs. This brings us full circle to bank tellers, who have survived substantial technical developments, the widespread use of online and mobile banking, and the effective deployment of half a million robots devoted to automating this role (Fig. 3.23). Some tasks carried out by bank tellers and branch locations have not been automated or are not preferred to be done by machines. The next generation of artificial intelligence and machine learning tools may crack these codes. More likely, banks and consumers have learned to employ tellers to complement and supplement the capabilities of machines. ATMs and teller counters coexist harmoniously and offer complimentary services. Given that this cohabitation has occurred and endured for this long, it is almost expected to continue. Future bank branches could have novel shapes. Several banks are now testing completely new organizational structures. Others contend that branches will keep developing to offer additional services. Bottom line: It’s unlikely that bank

72

Not all robots take your job, some become your co-worker, Brookings Institution, Oct 30, 2019. Deloitte, McKinsey in Robots threaten jobs less than fearmongers claim, The Economist, 5 April 2021.

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Fig. 3.23 Impact of automation on bank tellers and travel agents, US. Source Brookings Institution, US Census in Not all robots take your job, some become your coworker, Brookings Institution, Oct 30, 2019

branches or their employees will replace blockbuster or video store workers. Not all robots that try to take your place are successful. Some do operate together (see Footnote 72). Fearmongers overstate the threat of robots to jobs. Pandemics and recessions speed up automation, but catastrophic prophecies of an unemployed world are overstated. The epidemic is widely believed to hasten industrial automation. Numerous examples of robots are used to lower infection risks, from automated slaughterhouses to airport self-service baggage drop-offs. Many people worry that the current wave of automation will result in job losses, especially for those with less marketable abilities, which would increase inequality and unemployment. Automation booms are common during recessions, but few are as significant as this one. When profits decline but salaries stay the same, hiring people becomes substantially more expensive, encouraging employers to deploy machines. Businesses have high goals for automation (see Footnote 73). “There are now more reasons for employers to consider ways to replace workers with machines, and recent evidence indicates that they are already doing so.”74 Businesses may have dabbled in automation before 2020, but the pandemic is forcing them to try out novel approaches to problem-solving. However, doomsday forecasters find it difficult to provide specific examples of how automation is speeding up. Many focus on the next spine-tingling prediction, although the evidence is contrarian. In 2020, the United States imported

74

MIT in Robots threaten jobs less than fearmongers claim, The Economist, 5 April 2021.

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3% fewer industrial robots. Growth in investment in automation slowed in 2020.75 The largest industrial automation company in the world, Rockwell Automation, reported a 5.5% fall in sales last year. The epidemic laid off many workers in automatable occupations, but the impact was minimal. Take taxis, which many economists believe will soon be operated by robots. In 2020, their numbers decreased, but not as a result of driverless taxis. Since the 1980s, there have been fewer low-skilled jobs, but this tendency has slowed since the epidemic. Given America’s total employment, there are currently at least 900,000 “additional” rote jobs compared to a year ago.76 Similar outcomes are seen even in Australia: Automatable employment is roughly as widespread as it would be in the absence of the epidemic. Instead of reducing employment, technology increases it. Automation saw a wave in the 1920s but mostly had positive effects. In contrast to some concerns, unemployment was quite low in the 1960s. Prior to Covid-19, employment was rising as robot technology improved. In 2012, employment growth was higher in nations in danger of “automation,” which is consistent with the idea that using technology increases productivity.77 Surprisingly, South Korea, Singapore, and Japan all have lower unemployment rates than the rest of the globe while simultaneously achieving world-beating rates of robot adoption (see Footnote 76). How could doomsday prophets have been so mistaken? The so-called “lump-oflabor fallacy,” which holds that there is a finite amount of work and that automating some of it diminishes the amount that is on offer, is one well-known problem. Automation can, in fact, stimulate demand for goods and services by reducing production costs, which will support occupations that are challenging to automate. Although the economy may call for fewer grocery store checkers, more massage therapists are needed. It is still early to say the pandemic has not yet led to the elimination of all jobs. And some claim that this time will be unique. The level of technological sophistication makes it challenging to classify jobs as automatable or non-automatable. Risks do exist for massage therapists. A robot that massages the entire body has been built by the French company Capsix Robotics. It doesn’t seem like the best massage, to be honest! However, it is an illustration of technology encroaching into new areas, from gadgets creating Bach-inspired music to machines analyzing medical scans. It is challenging to take the worst predictions seriously on a fundamental level, given the history of ludicrous and unsuccessful predictions. Perhaps this marks a turning point in how people interact with machines. If something were to cause such a drastic change in the labor markets, it might be a pandemic that occurs just once every generation.

75

Gartner in Robots threaten jobs less than fearmongers claim, The Economist, 5 April 2021. Robots threaten jobs less than fearmongers claim, The Economist, 5 April 2021. 77 OECD in Robots threaten jobs less than fearmongers claim, The Economist, 5 April 2021. 76

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Although the third aspect is more challenging to measure, it is crucial to understand how technology shapes work. Many automation thinkers don’t fully get how economic production works. They view people as being many different inputs that are switchable in place of machinery. However, that presumption seems to be false in the economy of today. Humans are both an input and an output for many goods and services. An example of this occurred in Japan earlier this year. The South China Morning Post said that a 37-year-old man described his line of work as offering companionship to customers, including one who visited the grave of a lost friend, as “rent a person who does nothing.” The man claimed that I do “absolutely nothing,” yet he charged the equivalent of $95 for his assistance. This illustration highlights a crucial concept in the economy. An increasing number of vocations demand physical presence. Jobs in the healthcare and education sectors are growing quickly. Face-to-face contact is expected when someone is unwell or needs to be educated, not because individuals are more skilled at it but because it elicits empathy and a sense of community. Something essential would be lost without them. Blind tasting suggests that robots or other devices are better at brewing coffee than people. However, those same tests show that people grow angry when they discover they are paying for a beverage that was made by a machine. It turns out that they appreciate the taste of the coffee and the idea that it was brewed by a real human (see Footnote 76). Labor shortages are getting worse as economies start to recover. In America, there had never been more than 9.3 million open positions. In Canada, there are 20% more job openings than before the outbreak. Many firms lament the difficulty in hiring workers, even in Europe, which has taken longer to recover from the postlockdown period. Discussions about the labor shortage have focused on welfare reform and economic upheaval. The phenomenon, however, imparts a deeper lesson. It provides information regarding the automation myths.78 The pandemic—is it speeding up automation? Confidently, economists said that a wave of job-killing robots was sweeping the labor market. The epidemic, according to the IMF, is hastening a shift away from industries most vulnerable to technology. Nobel laureate Joseph Stiglitz claims that the additional costs of Covid-19 are “accelerating the development and adoption of new technologies to automate human work” in a recent article that he coauthored. The Massachusetts Institute of Technology’s Daron Acemoglu testified before Congress that more businesses were “substituting machines for workers.” The economists had good reason to predict that automation would kill more jobs. During recessions, businesses frequently turn to automation because labor costs rise as revenues, but not wages fall. It is not necessary for robots to maintain social distance. They do not get sick, either. In large part because of government

78

Is the pandemic accelerating automation? Don’t be so sure, The Economist, 19 June 2021.

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stimulus initiatives, businesses have also stockpiled extra cash that they may now be able to invest in robots or artificial intelligence software. Those who think automation is speeding up can provide a lot of examples. The restaurant company Lee’s Famous Recipe Chicken has automated voice systems in Ohio to receive orders from the drive-through window. The international airport in Pittsburgh has made history by using UV robots to clean for the first time in the country. British farmers take pride in their extensive use of machinery for weed control and strawberry picking. The frequency of news articles using the words “pandemic” and “automation” is rising by 25% annually (see Footnote 78). Speculation and anecdotes abound in the automation issue. There is a lack of supporting data to postulate with clarity. One well-known expert asserted that automation was “already” happening by citing a New York Times story and theoretical microeconomics research. Some research suggests that a sizable portion of automatable positions disappeared last year; nonetheless, it might be challenging to separate the impact of technology advancement from lockdowns. Despite a 7 million decrease in employment, America’s GDP has, in fact, almost reached pre-pandemic levels. Some claim that this shows the economy can function with a lot fewer people. However, this could simply indicate an increase in productivity per employee, perhaps due to remote working. As the virus-related fear fades and more people find jobs that suit them, the output will increase above pre-pandemic levels (see Footnote 78). Many people who have been on the sidelines will also find work as the virus-related dread fades. The myth of an invasion of job-killing robots is challenged by labor shortages. The lowest paid American workers’ earnings are rising more quickly than the national average, in contrast to the years after the financial crisis. The Federal Reserve Bank of St. Louis’ technique was used by The Economist to split roles in the American labor market into “routine” and “non-routine” categories. Robots can more easily pick up patterns when performing routine jobs, like data entry or checking out groceries at the store. Routine jobs have steadily diminished over the past 40 years as robots have become more effective as a share of all employment (Fig. 3.24). Fig. 3.24 March of the machines. Source Federal Reserve Bank of St. Louis, Bureau of Labour Statistics, The Economist

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The decline brought on by Covid has so far withstood the trend. In May 2021, routine jobs would have made up 40.9% of all employment if the pre-pandemic rate had been maintained. They currently make up 41.4% of all jobs, suggesting that there are around 1 million “extra” routine jobs in America. The number of industrial robots imported into the US fell by 3% in 2,020,146. Perhaps some robotics investments are being put off because of the uncertainty around variants. In an environment where there are quarantine and travel limitations, installing new machinery is much more difficult. Australia might be a better place to search for signs of a tsunami that would eliminate jobs. The nation has been under relatively moderate domestic restrictions for more than a year now after a string of tight lockdowns, which suggests what may come next. Three hundred thirty-five professions (ranging from “hotel and motel managers” to “complementary health therapists”) were given a score between zero and one, indicating their potential automatability, using information from a 2015 government research. Before the pandemic, the percentage of automatable jobs was on the decline, reaching 57% in 2019. Fifty-five percent of Australians today work in dangerous occupations, showing that the trend has continued with evidence of a Covid-19 acceleration (A similar pattern may be seen in New Zealand) (see Footnote 78). Australia’s unemployment rate is essentially unchanged from before the pandemic, notwithstanding this. Even louder than in America, employers are wailing about a labor shortage. It doesn’t seem like automation is throwing people off the economic ladder. The pessimists might end up being right. Even if they are not, prophecies of a world without employment will still be made. This is due to the fact that the widespread dread of the march of the machines is not supported by a careful analysis of the available data. That is improbable, considering that massive structural unemployment has never been a result of centuries of technological improvement. Instead of having greater unemployment rates, nations with higher robot percentages had lower unemployment rates. Concerns about technological unemployment, though, are a sign of something else. They represent a pervasive preoccupation with technological phobia. Additionally, they are a reflection of the desire of many economists to influence policymakers to give more consideration to the employment prospects of individuals with the least marketable talents, who are invariably the most sensitive to changes in the economy (see Footnote 78). A significant achievement has finally been reached. Robots turn 100, and we’re still fascinated by them. Although the sentient, humanoid machines that science fiction has long prophesied have not yet come to pass, they have had a tremendous impact on the modern imagination. Robots might appear as forklifts, machine tools, medical devices, or bomb defusers. The Motown song “Do You Love Me?” can even be danced to by a new human-shaped robot. However, when the name “robot” was first used by Czech playwright Karel Capek in his play “R.U.R.,”

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which had its Prague premiere 100 years ago, he had a much larger vision in mind: a new, artificial species capable of arduous labor as well as love, hope, and self-sacrifice. In the play’s last scene, a robot says, “We have evolved into beings with souls.” The idea that the technology we create to help us would one day turn against us has always worried humans. To prepare the world for robots in the form that we currently see them—mass-produced intelligent machines capable of competing with or exceeding the human race—another century of scientific and industrial advancement is necessary. The word “robot” is derived from the old Czech word “robota,” which was used to describe the forced labor that feudal kings imposed on peasants. This etymology was perfect for Capek’s play since it depicts the robot as a machine made to free humans from all tedious work. Even if the world is currently in turmoil, we have not yet given up the future to robots.79

3.4

Future of the Office Is Home

Home is the office of the future. Work from home (WFH) appears destined to become commonplace. The transition brought about by the Covid epidemic may be comparable to the significant changes in the workplace that occurred in the nineteenth and twentieth centuries. Facebook predicts that half of its workers will work from home within ten years, while Twitter has already announced that all staff will be allowed to do so permanently.80 How many people now work from home? Dingel and Neiman examined the correlation between per-capita income and the proportion of employment performed from home in a seminal paper (Fig. 3.25). The percentage of jobs performed from home is very low in less wealthy countries, but the opposite is true in wealthier nations-one out of every five persons on the planet, one out of every 26 in low-income nations, and one out of every three in high-income nations.81 Poorer nations face more ICT restrictions and fewer telecommutable jobs. In future, more people will work from home. As a result of the high cost of office space in commercial hotspots like London and New York, many companies encourage their staff to work from home to save money. They have the option of working through email, Zoom, and virtual private networks rather than sticking their noses in people’s armpits on crowded trains. However, a London Business School study found that presenteeism is rewarded by employers. Telecommuters are less likely to be promoted, according to a study in the MIT Sloan Management Review.82 In one experiment, participants were asked to rate situations where the worker’s location—at his desk or home—was the only distinction. Regardless of the caliber of their work, managers regarded

79

Robots turn 100—and still enthral us, The Wall Street Journal, Jan 16, 2021. Working life has entered a new era, The Economist, May 30, 2020. 81 Who on Earth Can Work From Home? World Bank, July 6, 2020. 82 MIT Sloan Management Review, 2012. 80

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Fig. 3.25 Prevalence of home based work versus GDP per capita. Source How many jobs can be done at home? Jonathan I. Dingel and Brent Neiman Working Paper 26948 http://www.nber. org/papers/w26948 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 April 2020

office workers as being more dependable and industrious.83 WFH has a wide range of consequences. Productivity rise? Will the booming real estate market collapse? Will offices eventually vanish? Will people move to suburbs with lower housing costs? WFH portends favorably for the labor market, which saved the day during the pandemic. The Covid-19 pandemic has severely impacted the global labor force. In comparison with the financial crisis of ten years ago, it has destroyed millions of jobs, increasing unemployment by a factor of 14 times. Unemployment has increased to levels not seen since the 1930s in several nations, with the lowskilled suffering disproportionately. The pandemic has also brought attention to underlying inequalities that are common. Even if many of their office-based colleagues could protect themselves at home, “essential” workers were compelled to continue commuting to and from work, exposing themselves to the virus and passing away in enormous numbers. Many people are now concerned that the postpandemic labor market will continue to be unfair and under-employed, with work being outsourced to other nations or simply given to robots.

83

See Footnote 82.

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The pandemic has been a catastrophe for many. However, because it accelerates already-underway changes and emphasizes issues for future improvement, its lasting impact might be a better working environment. The labor market was far from ideal prior to Covid-19, but it was better than many detractors had claimed, and it was getting better. Due to the increase in remote employment, more people will have more freedom over how, when, and where they make a living. There aren’t many employers who don’t care whether their staff members are located in Niue or New York. However, the transition to a “hybrid” model of work, where some tasks are completed at the office and some at home, is already pressuring managers to enhance their communication skills, boosting employee satisfaction. It also encourages helpful and long overdue modifications to employment law.84 And what about automation, another well-known worry about how work will develop? Some worry that the experience of the last few years will just provide employers with a reason to hire machines rather than people, leading to widespread unemployment (see Footnote 84). Indeed, there is often a surge in automation during recessions and pandemics. The prospect of a world without labor, as claimed, is doubtful and might even fade. Many tasks performed in huge, shared offices, according to self-styled visionaries and those who enjoy lounging in their jammies, could be performed more effectively at home. Their theories were put to the test using Covid-19 in a sizable, if not randomized, experiment. People’s working patterns have had to drastically change as a result of the pandemic. Preliminary data show that a lot of work can be done at home, and many people actually prefer it (Fig. 3.26). However, it is wrong to conclude that the non-home office is out of vogue. Some companies don’t seem to care about a domestic shift. Some people seem to be against it. To create a “more distributed workforce,” social media business Pinterest spent $90 million to end a fresh lease obligation on office space close to its San Francisco headquarters.85 That same month, Facebook also extended the lease on a sizable Manhattan office. A stipend of up to $75 a day is reportedly being offered by Bloomberg to entice staff members to return to the business’s London headquarters. Governments are adopting a similar strategy, urging people to return to work, which they define as going “back to the office.” (see Footnote 85). They have a challenging task before them. Many white-collar workers seem to be suited to working remotely. Lockdowns loosened, and individuals started to return to society. In the industrialized world, retail sales soared, and restaurant bookings rose dramatically. Even when schools have resumed, many parents still avoid going to the workplace, making it a less appealing option for parents who are

84 85

A bright future for the world of work, The Economist, April 10, 2021. Covid-19 has forced a radical shift in working habits, The Economist, 12 Sept 2020.

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Fig. 3.26 Working 9 to 5, at home. Source Morgan Stanley in Collaborating during Coronavirus, Evan DeFillippis et al., 2020, Economist

also working. Only 50% of the workforce in five major European nations spends their workdays in offices, according to current statistics. One in four women work full-time from home. Until social distancing guidance is eradicated, offices cannot function at their maximum potential. This might be because offices with smaller capacities are inconvenienced, and there is still some lingering concern about Covid-19. A normal office may continue to function with 25–60% of its staff while keeping a 2 m (6 foot) distance between employees (see Footnote 85). When only two individuals are permitted inside one lift, access lines might extend around the block in offices with more than five stories. Some workplaces are making an effort to make their environments safer. The managers of a new skyscraper in London have turned off the building’s recirculated air conditioning. Others have installed plastic barriers and hand-washing stations. Even if workplaces are safer, accessing them can be challenging. Many workers are unwilling or discouraged from using public transportation, and 25% of New York City commuters reside more than 24 km from their workplace, making walking or cycling there impractical. On the other hand, it seems that working from home can make people happier. Workers are ready to forgo an 8% wage raise in order to work from home, suggesting that there are other benefits.86 It seems that meetings are getting shorter

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American Economic Review in Collaborating during Coronavirus, Evan DeFillippis et al., 2020, Economist.

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Fig. 3.27 Average meeting length, % change before lockdown. Source Collaborating during Coronavirus, Evan DeFillippis et al., 2020, Economist

in length on average (Fig. 3.27). Additionally, fewer or no commutes are made by employees. That is advantageous to one’s health. One of the least enjoyable tasks that people routinely engaged in was commuting.87 Commuters “have lower life satisfaction…lower levels of happiness and higher anxiety levels on average than non-commuters.” according to the UK’s Office for National Statistics.88 Working from home could make employees happier, which would boost output. The majority of workers indicate that they were more productive during the lockdown than they would have been at work. Establishing which mode is more productive in the current climate is challenging: working from home or in an office. Many people, especially women, have been forced to work while caring for kids who would be in school. Because of this, working from home may appear less effective than it is (i.e., when the kids are at school) (see Footnote 85). The opposite bias, however, is created by lockdown-specific effects, unduly increasing work-from-home productivity. Because more than half of American workers are worried about losing their jobs as a result of the outbreak, workers may have increased their performance during the lockdown out of fear of being laid off by their company. Another problem is that most lockout studies rely on employees self-reporting their productivity, and the results are frequently unreliable (see Footnote 85). The results of pre-pandemic research provide a complete picture. Nicholas Bloom of Stanford University and associates studied Chinese call center employees. They found that those who worked from home were more productive (they processed more calls). The quieter environment was responsible for one-third of the rise. Longer workweeks were the cause for the balance. Employee sick days

87

Princeton University study in Covid-19 has forced a radical shift in working habits, The Economist, 12 Sept 2020. 88 Britain’s Office for National Statistics in Covid-19 has forced a radical shift in working habits, The Economist, 12 Sept 2020.

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Fig. 3.28 US, share of full-time employees who usually work from home, %. Source IPUMS, USA in Covid-19 has forced a radical shift in working habits, The Economist, 12 Sept 2020

substantially dropped.89 Similar findings were made by another study that looked at workers of the USPTO. Another American Bureau of Labor Statistics study found that home employees made somewhat more money than office workers of equal pay, suggesting greater productivity.90 The lockdown has only sped up already established patterns. That might be overstating things. Prior to the pandemic, the proportion of persons working from home climbed often, but the overall number stayed low (Fig. 3.28). One viewpoint holds that the fact that office work was so common until recently proves that it must be more effective for businesses and employees alike. This reasoning states that the number of people who have gone back to their desks can be used to measure the effectiveness of a nation’s transition out of lockdown. The epidemic is a significant shock that is upsetting the global balance. There is an alternative meaning, though. This suggests that the days of the office being the pinnacle of productivity are over and that working from home is really more effective than working at the office. After all, the office developed as a result of the need to process a large amount of paper in the workplace. It might indicate a market failure that it held such dominance for so long. Before Covid-19, there might have been a “bad equilibrium,” in which homework wasn’t as important as it should have been.

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Stanford University study in Covid-19 has forced a radical shift in working habits, The Economist, 12 Sept 2020. 90 America’s Bureau of Labour Statistics in Covid-19 has forced a radical shift in working habits, The Economist, 12 Sept 2020.

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Up until recently, three things have choked home-based firms from expanding. The first is about information. Bosses merely did not comprehend the necessity of in-office clustering. Over the past six months, they have learned this. The second argument is about coordination. It might have been challenging for a single company to make the switch to remote working alone on its own, possibly because its suppliers or clients would have thought it odd. However, the epidemic forced companies that could switch over to home-based labor to do it right away. During this great switch, people were less inclined to see businesses suspiciously (see Footnote 85). The third element is money. Businesses may have refrained from switching because of the high fixed costs of doing business from home. This is one of the reasons why, since the pandemic started, worldwide trade has fared better than projected. According to studies, businesses have recently invested significantly in technology, including laptops, to enable workers to work from home. The household level is where these kinds of investments are also made. The market for single-family homes is often more developed than the market for apartments in developed nations. This suggests that people require more room, perhaps for a separate home office (see Footnote 85). MIT looked at the regional distribution of MIT researchers and their publications and patents. As a result, they found that closeness and collaboration are positively correlated. However, when they looked at the structures on the MIT campus, they found that the idea that “centrally located, densely populated, and multidisciplinary spaces would be active collaboration hotspots.” had no statistical evidence. In other words, proximity can help people come up with fresh ideas, but they don’t have to be in an office.91 Working from home is not always enjoyable, though. Researchers from Harvard, Stanford, and New York University’s Departments of Economics found that the average workday was approximately 50 min longer than it had been before the lockdown. Emails sent outside of regular work hours are now more common. The degree to which workers like working from home varies widely as well. A dedicated office and desk space impacts how happy people work from home (see Footnote 85). And not everyone, even if they wanted to. A report written by Stanford University’s Erik Brynjolfsson and colleagues claims that in May, approximately half of the individuals employed before the outbreak started working from home. In affluent nations, about 40% of the workforce was employed in jobs that could be done at home or at a kitchen table—observable data on work arrangements during the pandemic support those hypotheses.92

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MIT in Covid-19 has forced a radical shift in working habits, The Economist, 12 Sept 2020. University of Chicago in Covid-19 has forced a radical shift in working habits, The Economist, 12 Sept 2020.

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The flip side is that it’s not certain if the advantages of telecommuting can last over time. Large-scale remote work initiatives have been abandoned by some companies, notably Yahoo, in 2013. “Some of the best decisions and insights come from hallway and cafeteria discussions, meeting new people, and impromptu team meetings,” read a leaked internal memo from that year. After a while, many folks started to feel desperate to return to work, partly because they had been without human contact for a long time (see Footnote 85). It is hypothesized that “bursty” communication produces better performance than continuous but unfocused conversation, in which people talk quickly for a short while (see Footnote 85). A scholar at MIT said, in reference to the rise of open-plan offices, coworking spaces, and fashionable “innovation districts” during the past two decades, “a lot of people made a lot of money selling this watercooler idea.”93 Bursty communication can be created in a variety of ways beyond just sometimes coming into the office. For instance, corporate retreats and get-togethers might achieve the same goal. Gitlab is a software company that has operated only in remote mode since its founding in 2014. Without offices, it gathers its 1300 “team members” from 65 different nations at least once a year for social gatherings and team-building (see Footnote 85). Many firms currently house large data centers; however, these facilities are ineffective as more employees work from home. Working from home more regularly will also require new hardware to be purchased and older hardware to be discarded. Investment in conventional data infrastructure will decrease by 3% annually between 2019 and 25.94 Businesses will likely spend more money on technology that allows staff to simulate being in the same physical place as another individual (higher-quality cameras and microphones, for instance). There are significant policy ramifications to all of this. It’s impossible to say if home workers will find it simpler or more challenging to negotiate salary raises and better working conditions with their employers. Additionally, firing remote workers might be simpler for employers than doing so face-to-face. If this is the case, there may be a rise in calls for governments to tighten safeguards for home workers. But asking for a raise over video chat is not that tempting. Laws governing employment are another matter. Similar to how the emergence of the gig economy has sparked discussions and legal battles over what it means to be an employee or self-employed, the expansion of home-based employment has put pressure on regulations that were drafted under the presumption that people would be working in offices. No one has yet thought about how firms should manage contractual work hours in a scenario where nobody physically clocks in or how far they can monitor employees at home.

93

Mr. Claudel of MIT in ‘Where Is My Office?’ Review: The Commute to Nowhere, The Wall Street Journal, Jan 4, 2021. 94 Goldman Sachs in ‘Where Is My Office?’ Review: The Commute to Nowhere, The Wall Street Journal, Jan 4, 2021.

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The epidemic offers a rare opportunity to rewire the workplace, whatever its drawbacks (see Footnote 93). Legal disagreements regarding employers’ responsibility to their workers who work from home won’t be far behind. Should a company pay for an employee’s internet service or winter heating? Is it more advantageous to merely hire space for a week once every three months to bring dispersed teams together instead of investing in central hubs and office towers? Work has changed from being a destination to something people do. A well-designed and well-run workplace favorably impacts the performance of its occupants. Many bosses are adamant that their staff members must be present in the workplace and visible to them. Managers worry that nothing will get done if they can’t see their staff members at their workstations. A large part of this argument seems to be moot after ten months of Covid. The percentage of Americans who have ever worked from home will have doubled by March 2020. Even if “normal” life resumes, there is every reason to think that many companies will try to keep at least some of their workforce away from office buildings and central business districts and that many workers will refuse to endure commutes after avoiding them for a year or more.95 The flexibility offered by WFH has altered how employees view time. A couple of centuries ago, a tool started to rule the workplace. The clock, as opposed to the steam engine, was the device. When factories first appeared, workers were paid according to the number of hours they put in rather than the quantity of goods they produced. The totalitarian control of the clock might finally be breaking down. Even before the pandemic, flexible work schedules were common. However, it allowed workers to decide when to perform their assigned shifts. Flexibility has improved with remote work. Flexible working is seen favorably, enhancing work-life balance and productivity, according to a poll of 4700 remote workers in six nations. The feeling of “belonging” to their organization was also rated higher by flexible workers than those who follow the conventional 9-to-5 schedule (see Footnote 95). The inclination for flexibility among workers is not surprising. A strict eighthour schedule is quite constricting to keep up. Unsurprisingly, those who work from home believe they are more productive. Few people, after all, are capable of maintaining focus for eight hours. The temptation to look out the window or go for a walk tempts people; these could be creative or recharging breaks before the next job on hand. They can work when they are most inspired at home; they run the danger of the boss’s disapproval if they do this at work. Employees must arrive at work on time in a variety of sectors, including emergency services, hospitality, and retail. Naturally, not everyone can work remotely. For many office workers, remote work is completely acceptable. Although they

95

‘Where Is My Office?’ Review: The Commute to Nowhere, The Wall Street Journal, Jan 4, 2021.

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may have staff meetings at certain times each week, many of their responsibilities can be accomplished anytime, day or night. Now, office workers might be paid depending on their duties instead of how much time they spend on them (which firms would have to monitor by spying on people at home). The survey’s overwhelming support for home-based employment is what stands out. Only 12% of the workers polled wanted to return to their regular work schedules.96 In contrast to their white counterparts, people of color, Asians, and Hispanics showed even more enthusiasm at work. Generally speaking, women with children were upbeat and reported an improvement in their work-life balance, yet there is a gap between American women who are unsatisfied and women in other nations who are substantially happier (the availability of state-subsidized childcare helps explain the difference). Businesses may use a hybrid approach where employees report to work for a portion of the week in order to keep some human interaction. However, it is a good thing that office workers are generally freed from the constraints of time. Many people will rejoice at the idea of escaping the clock’s control because it was a harsh master (see Footnote 96). Some employers’ efforts to get employees back into offices are incompatible with workers who have accepted remote work as the new norm, given that the coronavirus epidemic is waning with each vaccine that reaches an arm. The workforce is unwilling to abandon WFH. Many CEOs have publicly praised the benefits of working from the office, despite the fact that organizations like Google, Ford Motor, and Citigroup have promised greater freedom. Some people are worried about the risks of remote work, saying that it undermines teamwork and corporate culture. According to Jamie Dimon, CEO of JPMorgan Chase & Co., it doesn’t work “for those who want to hustle.”97 If anything, the past year has shown that a lot of work can be done remotely without the need for protracted travels on congested trains or roadways. Many companies, however, disagree. Several people have changed addresses. Some people are still worried about the virus and their anti-vaccine cynical coworkers. Additionally, some managers, who are non-believers in remote working, are eager to regain tight control over their staff. “They feel like we’re not working if they can’t see us. It’s a boomer power-play.” However, some employees are demanding different arrangements when office returns increase. A survey of 1000 adults in the United States found that 39% would think about leaving their jobs if their employers were unaccommodating to remote work. This statistic, which was 49 percent among millennials and Gen

96 97

Countering the tyranny of the clock, The Economist, 17 Oct 2020. Employees Are Quitting Instead of Giving Up Working From Home, Bloomberg, June 3, 2021.

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Fig. 3.29 Not having to commute is the top benefit for remote workers. Source Bloomberg in Employees Are Quitting Instead of Giving Up Working From Home, Bloomberg, June 3, 2021

Z, clearly shows the generational gap.98 The elimination of commutes and cost savings is the top advantages of remote work, per a new FlexJobs study of 2100 respondents (Fig. 3.29). Working remotely saves people at least $5000 annually, according to more than one-third of survey participants (see Footnote 97). Naturally, not everyone has this choice. For the millions of frontline workers who stock grocery store shelves, care for patients in hospitals and nursing homes, or carry items to people’s doors, there are few options besides showing up in person. Nevertheless, many of those who have a choice are considering their options. To be sure, working remotely has several drawbacks, including lost opportunities for junior staff to collaborate and develop (see Footnote 97). Many white-collar employees claim that they are unwilling to return to corporate office full-time after working from home for about a year and a half. Some professionals have already started looking for new jobs due to rumors of a comeback; many firms welcome them with the promise of remote work, at least in the near future. More flexibility is becoming a reward that employers may provide to attract top talent. As a new signing bonus to draw in new talent, the option of working from home is dangled. According to recruiters, the wave of resignations sweeping the country and forcing many businesses to reconsider their work-from-home policy is partly caused by a need for flexibility. The Canadian video software business Vidyard reports a recent increase in job applications after stressing that many positions can be carried out primarily from home. And at Allstate Corp., the question “why cannot this be done remotely?” is being asked before every new post.

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Morning Consult on behalf of Bloomberg News in Employees Are Quitting Instead of Giving Up Working From Home, Bloomberg, June 3, 2021.

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Fig. 3.30 Share of hacker news job postings mentioning “remote” and “onsite”. Source Hacker News, Economist, Zillow in For programmers, remote working is becoming the norm, The Economist, 11 August 2021

Following employee feedback that they did not want to work at Allstate’s headquarters full-time, the business found that the majority of tasks do not require an office environment (see Footnote 97). The Labor Department reports that more Americans are leaving their employment today than at any time in the previous 20 years. Executives claim that there is a trend toward more firms outlining their return-to-work plans, giving workers a clearer idea of what to anticipate next. Future CEOs need to use more judgment when making rules and procedures. It is the only means of survival.99 On Hacker News, a well-known news aggregation platform for programmers, a thread titled “who is hiring” is published every month on the first working day. Numerous companies submit listings, ranging in size from individual proprietorships to multibillion dollar organizations. Most of them are in the US, while prominent startup hubs like Berlin and London are also included. According to The Economist’s analysis, only 13% of jobs offered on the thread in 2011 indicated remote employment. More than 75% did in 2021.100 The pandemic amplified a trend that was already underway: between January 2016 and March 2020, the percentage of positions citing remote work rose from 20 to 35% (Fig. 3.30). The shift to remote employment is “permanent.”101 Since the start of the pandemic, mentions of remote employment have more than doubled, according to “Indeed” website’s statistics on job opportunities across numerous industries,

99

Remote Work Is the New Signing Bonus, The Wall Street Journal, 26 June 2021. For programmers, remote working is becoming the norm, The Economist, 11 August 2021. 101 Indeed, a job website in For programmers, remote working is becoming the norm, The Economist, 11 August 2021. 100

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Fig. 3.31 Share of people working from home, 2020 versus 2021. Source Hacker News, Economist, Zillow in For programmers, remote working is becoming the norm, The Economist, 11 August 2021

which is the most complete in the United States. As offices reopen, the percentage of remote labor has declined recently, but rates for some professions, such as software engineering, law, and finance, have stayed high. A significant portion of the working population in many industries migrated to WFH (Fig. 3.31). The Silicon Valley region seems to be most open to remote work. The Valley’s coders strongly favor WFH. Twitter stated a year ago that it would always permit staff to work remotely. Facebook announced it would permit remote work and pay employees based on their location shortly after Twitter did. Apple has adopted a hybrid strategy and mandates that staff members report to work three days per week (see Footnote 100). Technology companies are increasing the number of remote job opportunities for a number of reasons. San Francisco home prices have climbed by an incredible 80% over the past ten years, according to the house-price index.102 Buying a home in the Bay Area can be difficult, even for workers making good FAANG’s—Facebook, Apple, Amazon, Netflix, and Google—salaries. From 30% in 2014 to fewer than 15% in recent months, the proportion of jobs offered on Hacker News that

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Human Capital Solutions in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023.

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include “San Francisco” has plummeted by half. “Silicon Valley is a state of mind, not a location.” a Silicon Valley veteran once said.103 Many workers are content to work remotely, yet studies reveal that individuals who commute to the workplace may receive all the promotions. Elon Musk maintains that “a minimum of 40 h in the office per week” is required to succeed at Tesla or even maintain employment. From behind a desk or in front of a screen, managers “cannot lead.”104 Morgan Stanley, Goldman Sachs, and JPMorgan Chase’s disdain for WFH has never been concealed. Companies look for experts who can lead dispersed teams well (see Footnote 102). Employees at Citigroup, though, can still work from home. With the knowledge that those who put in only the bare minimum will still have an “equitable opportunity to develop and advance their careers,” employees are free to work a minimum of three days per week in the office. However, if someone works from an office, they are noticed and paid more. While both job types received the same amount of promotions, a study indicated that remote workers’ earnings increased more slowly.105 Home employees received fewer promotions at companies where WFH was uncommon.106 After the meeting, an employee who warms up to the employer typically receives a higher offer. Proximity bias.107 While surveys reveal that workers from underrepresented groups strongly like remote work, there is a risk that organizations using hybrid teams would exacerbate long-standing imbalances.108 WFH employees are not a legally protected class, either. Remote employees who believe they are getting a raw deal have very few options (see Footnote 107). Europeans and Asians return to the workplace as Americans work from home. Three years into the Covid-19 pandemic, offices in the United States are still largely empty, but business is picking up in Europe and Asia. In contrast to their peers abroad, more Americans now prefer remote work and frequently avoid going to the office. Office occupancy in the United States is currently between 40 and 60% of pre-epidemic levels. In contrast, Europe and the Middle East had rates

103

GitLab in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023. 104 JPMorgan CEO Jamie Dimon in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023. 105 Moovit Inc. in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023. 106 A 2020 study of more than 400 tech workers by researchers at Rensselaer Polytechnic Institute and Northeastern University. 107 Think Working From Home Won’t Hurt Your Career? Don’t Be So Sure, The Wall Street Journal, June 9, 2022. 108 Kathlyn Perez, a New Orleans labor lawyer in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023.

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between 70 and 90%.109 In Asia, rates of returning to work ranged from 80 to 110%, meaning that in some cities, more people are working today than there were before the pandemic. The reason why Americans spend less time at the workplace than Europeans and Asians is due to larger homes, longer commutes, and a tighter labor market (see Footnote 109). Cities in Asia and Europe have recovered fairly well. However, in American cities like New York and San Francisco, where neighborhood eateries, shops, and other businesses that depend on office employees as their main clients have suffered,110 recovery has been hampered by empty office towers and missing commuters. Due to its reliance on commuting workers, Manhattan has been particularly heavily hit, but other U.S. core business centers are also having difficulties. Office property values are declining, putting pressure on local budgets that depend on property taxes. Public transportation authorities are struggling financially as a result of decreased transit use. In 2021 and 2022, some foreign cities went through periods when more than 75% of their employees were back at work. Asia’s Tokyo, Seoul, and Singapore are included in this. The city with the most employees back at the office in Europe was frequently Paris. Stockholm wasn’t too far behind, with many months at a return-to-office rate of over 75%. During that time, no significant American city attained that high a return rate (see Footnote 109). One factor contributing to the variation in work habits is living arrangements. The majority of Americans want to live in large suburban homes (Fig. 3.32). As a result, it is simpler to set up a home office where there are no interruptions. Working from home is less desirable in Hong Kong’s compact apartments, where numerous generations are frequently housed (see Footnote 110). Many Americans’ commutes are getting longer and more difficult due to suburban growth, which is another excuse to stay at home. New York and Chicago are unmatched, even though a number of European cities also have longer average commutes (Fig. 3.33). Commuting to work in Europe and Asia is simpler since their public transportation systems are frequently more dependable and less prone to delays. The labor market in America is another reason for the country’s office exceptionalism. The U.S. unemployment rate, at 3.4%, is just more than half of the 6.1% jobless rate in the European Union. Although there is a labor shortage in Europe as well, U.S. businesses have been particularly hard hit (see Footnote 109). As a result, they now have to hire remotely and go further afield for workers. Tech companies have historically been more accepting of remote labor, accounting for a disproportionately high proportion of employment in some major U.S. cities (see Footnote 110). In certain American locations, coworking companies are reporting

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JLL in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023. 110 As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023.

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Fig. 3.32 Rooms per person in the average home. Source OECD Better Life Index in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023

Fig. 3.33 Average one-way commute time in minutes. Source Moovit Inc. in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023

decreasing occupancy. As of the fourth quarter of 2022, WeWork Inc. said that 72% of its workstations in New York were leased, compared to 80% in Paris, 81% in London, and 82% in Singapore. The fact that American offices were less occupied before the outbreak does not help. A development oversupply caused high vacancy rates, and even inside leased offices, businesses tended to put fewer employees per floor than their counterparts

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in Europe and Asia. Now that there is so much empty space, a vicious cycle is being reinforced.111 Americans are more likely to stay at home overall when the experience of sitting in large, mostly empty offices is found to be dreary (see Footnote 110). “It feels less energetic” (see Footnote 111).

3.4.1

Move Toward a Hybrid Model

The idea that Covid-19 enhanced pre-existing tendencies was a common saying in 2020. But that only scratches the surface of the significant disturbance to office operations. Five percent of Americans’ workdays were spent at home prior to the pandemic. The percentage increased to 60% by spring of 2020. Contrary to expectations, the transition proceeded more easily. Despite working more hours, people were happier and more effective. As lockdowns are removed, working from home is likely to continue. A body of studies on potential post-pandemic labor habits is developing. The average employee now wants to work nearly half of the time from home due to the epidemic. While employers are less enthused, their expectation that one day per week of work be done from home constitutes a considerable departure from the prior standard. Additionally, it offers office workers significant potential. Working from home has persisted in areas where Covid-19 has been conquered—though perhaps not as much as some had hoped. According to New Zealand data, 27% of employed persons worked from home at least once a week in the three months to December 2020. Even while there aren’t any clear pre-pandemic comparisons, there’s little doubt that this marks a large increase. Google tracking data shows that South Korean office attendance has stabilized at a marginally lower level than it was before Covid-19.112 If the workforce was fully remote, it could be enticing for companies to replace full-time employees with freelancers, but this is not the case. Businesses that are “remote-only” will still make up a tiny minority. Cities won’t be left in ruins. But blurring the barriers between the home and the office will have long-lasting effects. It will inspire managers to work harder, enhancing the working environment for everyone. To ensure that employees who spend less time in the workplace are properly protected will lead to changes in employment legislation. It will also worsen political and cultural divides between elite knowledge workers and the rest of the population, which is perhaps even worse. One explanation is that firms find it harder to treat office workers like robots when the lines between work and home are blurred. Another is that people have been forced to enhance their communication skills as a result of distant work. Managers cannot just assume that employees will pick up knowledge by osmosis,

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McKinsey & Co. in As Americans Work From Home, Europeans and Asians Head Back to the Office, The Wall Street Journal, February 28, 2023. 112 The rise of working from home, The Economist, 4 April 2021.

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as they would in an office. Instead, they must make an effort to propagate the message. Because of the pandemic, managers now have more faith in the technology enabling workers to connect and work together efficiently even when not in the office. The rate of new work-from-home technology patent filings has significantly increased, which is a welcome collateral consequence. Although it may be disturbing, it is mostly legal for managers to use tools to connect with and monitor employees in their homes. The second effect of the rise of hybrid work is that it has additional legal repercussions. The rise of work-from-home options pushes the boundaries between employee and employer obligations, just as the gig economy makes it harder to distinguish between those who are employees and those who are self-employed. After all, the foundation of employment law is the idea that work occurs in an office or factory. The political effects of this new split are hard to foresee, but they don’t seem to be positive. Usually, the best occupations are those that can be done from home (see Footnote 112). Therefore, those with steady jobs and good pay are more likely to pick up their kids from school or perform other errands. Education increases the likelihood of being allowed to work outside the office for part of the week. Their interactions with individuals in lower-paying jobs—the “essential workers” who use public transportation and keep the economy going—might, in the worst case scenario, amount to little more than holding open the door for delivery. The office remains despite the commotion around WFH. We have been very obstinate in our belief that work should be done in an office setting even when it might be done elsewhere since the Industrial Revolution. In order to increase our efficiency, we have made considerable investments in office space. We also made them travel a significant amount of time and money to those offices. Many individuals think the model needs fresh thinking. But that is not what will happen, at least overnight. After the epidemic is over, no one thinks it is beneficial for college students to continue conducting remote learning or attending religious services virtually. However, a lot of individuals think it’s wise to keep doing remote work or, at the very least, to use less actual office space. Given the enormous number of people who are currently unemployed,113 it is impossible to say, but some estimates imply that up to 40% of the American labor force works remotely. This is significantly more than are still employed in offices. Technology corporations seemed to be setting the bar for restricting employees exiting from their campuses only yesterday. Some now hint that they won’t ever need to go back, like Twitter. Of course, cutting back on workplace space is done to save money. This would resemble Uber for office jobs in that it requires employees to offer and pay for their own workspace, which they already have (such as their kitchen table), saving the business a lot of money on offices and real estate. Additionally, the idea is

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Why the Office Isn’t Going Away, The Wall Street Journal, Dec 13, 2020.

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that they can be paid less by hiring remote workers instead of relocating to pricey cities like Silicon Valley and New York. Additionally, it seems to be enjoyable for the staff, and work is getting done. It is true that people who work from home frequently claim to have a better work-life balance, which is not surprising given that tensions over having to be somewhere both at work and at home at the same time disappear when they are both in the same place. This does not equate to never going into an office again, either. However, this does not mean that work and home life are any better than they were before the epidemic, even though working remotely is considerably preferable to not working or traveling in crowded office settings during a pandemic. Social life is considerably reduced without an office, especially for young adults and those without children. Fifty-eight percent of adults claim to have dated someone while at work, which is an impossibility with Zoom. The idea that we should move our family permanently from Silicon Valley to Iowa on the assurance that our current job with a huge technology firm will continue indefinitely is non-sensical in a nation where the average 50-year-old has previously worked for 12 different employers. In order to land their next job, people choose to reside in pricey cities like New York. The high salary is not intended to cover the high living expense but rather to reflect the great demand for their skills (see Footnote 113). Employees who shift to less expensive areas to work remotely cannot be paid lower remuneration by their employers. Offices are necessary, despite their high cost. Their physical interactions do help them finish tasks, especially ones that need teamwork. Architecture is important because, when done well, it structures our interactions in ways that are useful. Coffee breaks, the casual relationships we make in the office, and our overall office social life are important office rituals that influence our involvement (see Footnote 113). These encounters reveal cultural information about the organization. It is challenging to sustain that level of communication through infrequent video conferences. CEOs are fully aware of this; maintaining corporate culture is their top worry with remote work arrangements. Complete office closures indicate a preference for efficiency over cost-cutting, which poses a serious risk. Companies are also reducing office space, even though the office will continue to play a significant role in workplace culture. Some businesses’ need for office space may be permanently diminished as a result of the rise of remote labor. The most recent evidence suggests that remote employment is reducing demand for this essential piece of business real estate. Companies trying to sell significant blocks of office space include JPMorgan Chase, Salesforce.com, and PWC.114 Large corporations frequently sign office leases that last ten years or longer, leaving them with little choice except to sublease floors to other tenants if they want to reduce their footprint. One hundred thirty-seven million square feet of

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JPMorgan, Salesforce Join Growing List of Firms Dumping Office Space, The Wall Street Journal, March 30, 2021.

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office space in the US was available for subleasing by the end of 2021.115 The greatest level since 2003 is a 40% increase over the prior year. Enterprises often increase office space after the economy rebounds, even though subletting space rises during recessions as struggling businesses look for cost savings. Many companies that are giving up on real estate are financially stable; they assert that they need less room because they plan to let more workers work from home. This increases the chance that some businesses’ need for office space will decline permanently, much like the demand for and rents for street-level retail have decreased as a result of the growth of e-commerce. Landlords are already experiencing new difficulties due to this surge in subleasing activities. Office rentals for more expensive space, including concessions, decreased by 13% globally and about 17% in New York and San Francisco over the past year, according to real estate firm JLL. Additionally, increasing sublease availability might serve as an early warning sign of the true status of the office market because companies can sublet on short notice. It’s incredible how quickly sublet availability has grown (Fig. 3.34). Technology businesses are leading the sublease boom, having previously been the most aggressive buyers of office space in areas like San Francisco and New York. These businesses are more willing to limit their exposure to real estate because they have more swiftly adopted remote work than other sectors (see Footnote 114). Subleasing space frequently results in significant losses for businesses. In a recent earnings call, Dropbox revealed that it expects to generate more than $800 million from subleasing real estate but will also write down the value of its leases by about $400 million because the income from subleasing is less than the rent it pays (see Footnote 114). Large financial institutions and law companies, who were both well-liked tenants because they were willing to pay premium prices, are reportedly also giving up their office space, according to brokers. Furthermore, the suburbs are not unaffected. Many companies are searching for low-cost locations to combine call centers and other back-office functions.116 The future of work will include a lot more virtual meetings. Remote work is made possible via videoconferencing services like Microsoft Teams and Zoom, which has become so commonplace it has become a verb. At the end of December 2019, there were about 10 million Zoom meeting attendees per day. Four months later, there were more than 300 million. Everything that was formerly done in person, including yoga sessions and doctor checkups, has gone online. Employees now need authorization to visit the office; previously, they needed permission to work from home. The environment has benefited from the change. Videoconferencing uses less than a tenth of the energy needed for in-person meetings after accounting for travel and equipment. Less is known about the advantages of people’s network with

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CBRE Group Inc in JPMorgan, Salesforce Join Growing List of Firms Dumping Office Space, The Wall Street Journal, March 30, 2021. 116 JLL in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021.

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Fig. 3.34 Space available in the US for sublease as a share of all office space, %. Source CBRE Group Inc in JPMorgan, Salesforce Join Growing List of Firms Dumping Office Space, The Wall Street Journal, March 30, 2021

coworkers and mental health. Some people have a preference for communicating through displays. Others are exhausted by their colleagues’ ineffective usage of the mute button. The trick will be to keep the positive elements and find solutions for the negative ones. A year after the pandemic began, many people still experience Zoom fatigue. New research from Stanford University has clarified the underlying science. The first drawback of video calls is that they force users to stare intently at their coworkers. Zoom’s default settings make a person’s face appear as big as if you were standing 50 cm apart when you talk to them on a laptop. The brain is built to anticipate a punch or kiss when two people are this close. Making constant eye contact increases the stress of the situation. In-person meetings rarely feature prolonged eye contact between participants. On video calls, participants frequently stare into their displays and then ponder why they think as though everyone is glancing at them. This is comparable to forcing coworkers into a lift while forbidding them to divert their eyes.117 Additionally, important non-verbal communication is removed during videoconferencing. In in-person interactions, people frequently nod dramatically to convey non-verbal information. That is very draining. You can see your colleagues squirming as your presentation goes on. Online browsing makes it less noticeable. People

117

Stanford University in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021.

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shout 15% louder on video chats than in person, which is exhausting.118 Communication problems are made more difficult by transmission delays, which are frequent when internet connections are unreliable. Participants’ assessments of attentiveness, friendliness, and conscientiousness are all affected by a 1–2 s gap. Suspicion grows with each delayed email response and sideways gaze during a video chat. As negotiators become frustrated and have a hard time understanding one another, virtual conversations are “more likely to come to a halt.”119 Additionally, it can be exhausting to see yourself on these calls all the time. According to female respondents, they stare at their faces for 40% on average of the time they spend on video calls. Your self-esteem will suffer if you constantly focus on your wrinkles and swollen eyes.120 Virtual meetings have also been a mixed blessing for women in other ways. Nearly one-third of respondents claim that through conferences rather than in person, they are talked over, interrupted, or ignored more frequently. But virtual gatherings free women from unpleasant criticism. It’s less difficult to dress for a virtual meeting. The past year has also shown that many workers put in more effort when working from home. A September research by Harvard Business School on 3 million employees at 21,500 organizations found that when the epidemic hit, and work shifted online, they worked longer hours, dealt with more emails (Fig. 3.35), and attended more meetings (a questionable productivity indicator).121 “One of the big questions in March was whether people would spend their days essentially watching Netflix.”122 They don’t seem to do that. Virtual employment has a number of benefits. This has a democratic feel to it; an equal-sized, randomly arranged square represents each participant. Employees worldwide can participate in large meetings and communicate with distant coworkers while accounting for time differences. Status indicators like being seated at the head of the table or next to the boss are no longer relevant. As a result, managers will find it more challenging to turn down workers’ requests to work remotely. While some people might feel uncomfortable blurring the barriers between their personal and professional life, it also fosters workplace relationships. During the pandemic, one in five people virtually got to know their coworkers’ pets

118

Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021. Oxford University in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021. 120 Washington University in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021. 121 Harvard Business School in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021. 122 Jared Spataro, head of Modern Work at Microsoft in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021. 119

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Fig. 3.35 Number of emails sent per person. Source Harvard Business School in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021

or families. This promotes camaraderie. According to the same poll, the stress of lockdowns has caused one in six employees to sob with a coworker.123 In the wake of the pandemic, a hybrid model of online and in-person encounters seems unavoidable, for better or worse. A PWC poll done near the end of 2020 found that more than 80% of employers thought remote work had been successful (Fig. 3.36). The majority of executives—roughly 70%—plan to raise their spending on virtual collaboration technologies—nearly 65% plan to train managers to oversee a virtual workforce. Moreover, 40% of workers polled in 31 nations after a year of telecommuting said they still lacked office necessities like a printer. A tenth of the population lacks a strong enough internet connection.124 A more sophisticated use of technology will improve the experience of working virtually. Many companies hurried to use videoconferencing for everything last year after being forced to go online (see Footnote 118). However, other applications, including Jamboard and Google Docs, are great for a variety of jobs. With the use of new filters, Zoomers may now add a unicorn horn to their pictures. In order to allay privacy worries, the company has also added an end-to-end encrypted alternative. While working on Zoom should be less taxing and isolated when the rest of life goes offline, such a future may sound lonely and draining.

123

Microsoft survey in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021. 124 PWC in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021.

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Fig. 3.36 How successful work from home was? Source PwC, Microsoft in Love them or hate them, virtual meetings are here to stay, The Economist, 10 April 2021

The future of Silicon Valley’s opulent, costly quarters has become more apparent in the midst of a horrifying pandemic. People have long found Silicon Valley to be strange and even absurd as a location for businesses. The bulk of large corporations’ work processes were strikingly analog for an industry whose professed objective is to digitize everything by letting software “eat the world.” Daily attendance at work was required before the pandemic. A significant chunk of the staff is housed at headquarters and a number of businesses have spent hundreds of millions developing. Uber had previously indicated that it would spend $1 billion on leases in the city over the next 20 years; the company’s new San Francisco headquarters reportedly cost $130 million to build. Software business Salesforce has agreed to lease 30 of the building’s 61 floors for about $560 million over 15 years from the developer of Salesforce Tower. Costing $5 billion, or $385,000 per person, is Apple’s spaceship-like Cupertino headquarters, which has room for up to 13,000 people.125 California’s tech heartland will change as offices are rearranged and reconstructed. Following the example of Oracle, Tesla, and other organizations, more businesses will move their headquarters to less expensive, less crowded, and tax-friendly locations like Texas or Florida (see Footnote 125). Businesses will increasingly use remote labor from other areas. Although less as a physical area and more as a worldwide network, Silicon Valley will continue to exist. How can the pandemic’s repercussions affect workplace technology? Predictions include the growing use of virtual reality, new performance measurement techniques, and tools that make working from home more convenient. Technology in the workplace will alter in response to the coronavirus pandemic, and these changes must continue well after the virus has been eradicated. Increased use of

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The future of Silicon Valley headquarters, The Economist, 1 July 2021.

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artificial intelligence can both help and hurt employee engagement, advances in video communications that let people have one-on-one conversations with avatars (a la Metaverse) during group calls, and technological developments that can help organizations improve workplace safety are among the possible changes. There has been a huge burst of innovation to make working from home more efficient. One major drawback of video calls, for instance, is that there is only one channel for communication. You are not allowed to engage in a side chat on the phone. On a Zoom call, there are no other participants. The technology at our offices will be built to merge effortlessly with our home lives. Home offices, especially those in apartments, will no longer have the typical black and metallic office furniture and equipment. As a result, there is an increase in office equipment utilized in homes that is softer and more naturally built to blend in with home furnishings.126 Prior to Covid, there were more open workplaces and crowded coworking spaces. Now, the tendency toward densification might be changing. Redesigned workspaces will have less congestion and more adjustability. A greater distance will separate workstations. Through videoconferencing spaces, virtual and physical employees would be able to work together without any issues. The workweeks of the employees will alternate between days spent at home and in the workplace. It is highly likely that businesses will use satellite offices in smaller locations more frequently than in large-city centers. Modern video conferencing and collaboration tools will be installed in satellite locations. This makes talent more available to corporations and makes it more affordable for them to access talent. Collaborative technology, which enables people to collaborate with anybody, anywhere, and at any time, will receive more attention. Teams will rely on project management tools to work together remotely on projects. The need for more frequent meetings will be understood, but they will be shorter and more impromptu—five minutes, fifteen minutes. Increased virtual meeting and collaboration software make it possible for people to enter and leave meetings more readily, leading to shorter meetings.127 Health check: Technology will monitor and safeguard the health and safety of employees. Identifying those who are feverish and making sure that everyone is appropriately isolated are priorities as the outbreak peters out. Technology can improve workplace safety by warning workers when they are too close to potentially hazardous equipment. In future, workers could be warned when lifting heavy objects in potentially hazardous ways using some of the same imaging

126

Nicholas Bloom, professor of economics, Stanford University in How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020. 127 Mohanbir Sawhney, associate dean of digital innovation, Kellogg School of Management, Northwestern University in How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020.

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sensors and computer vision techniques that can help in identifying whether workers are wearing the proper personal protective equipment or following distance requirements.128 The virtual conference: Events and conferences are now held virtually. In-person events will almost probably return, but they will include a virtual component. Organizations must work with webcasting, content distribution, event scheduling, and analytics companies to hold such virtual events. A single technology vendor cannot completely solve large multisession events. It is unlikely that any video conferencing or meeting solutions manufacturers will soon be able to offer the full package. Virtual whiteboards are being added to meeting solutions as companies explore methods to engage their workforce. In the past, businesses have mostly used big conference rooms to house videoconferencing equipment. However, other businesses are going a step further and using a digital canvas or more specialized whiteboard solutions. Digital canvases have more material, including Post-it Notes, photos, embedded videos, and connections to files, and may be expanded indefinitely. Additionally, as more individuals work remotely, firms will probably equip smaller conference spaces for videoconferencing.129 Increased use of AI at work: Following the epidemic, there may be an increase in the use of AI. Due to Covid-based constraints, there was a greater demand for contactless technologies and systems that can intelligently monitor the workplace for health and safety. The use of wearables and other sensors in the workplace and interactions with automated interfaces like chatbots may become more common due to safety concerns. At work, more data are produced as well. As we transition to digital channels like phone and video chat, we leave behind a bigger digital trail. This is crucial since technologies built on artificial intelligence typically perform better when given more data. AI in the workplace presents substantial privacy and decision-making integration issues. The pandemic’s increase in digital interaction may impact businesses’ propensity to adopt AI technologies and the caliber of the data used to develop and train these systems. Of course, there are also substantial obstacles. We observe a rise in the regulation of company data usage.130 Buildings will become more intelligent: The epidemic has raised awareness of the significance of sustainable surroundings, leading to a renewed emphasis on smart

128

Michael Chui, partner at the McKinsey Global Institute, a research arm of consulting firm McKinsey & Co. in How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020. 129 Christopher Trueman, principal analyst, digital workplace applications, at Gartner Inc., a global research and advisory company in How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020. 130 Prasanna Tambe, University of Pennsylvania’s Wharton School in How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020.

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buildings and energy management. As a result, buildings will become more intelligent. The built environment influences nearly all facets of our lives which is also responsible for 40% of all carbon emissions. These healthy structures will act as the cornerstone of a plan for redesigning responsible workplaces. In future, temperature, air quality, and water quality will all be continuously monitored by data, analytics, and sensors. Artificial intelligence will also help in predicting occupancy needs.131 Flatter organizations: Organizations will become more flattened as a result of the pandemic. There will be rapid adoption of new techniques for assessing the performance of frontline employees, doing away with the necessity for midlevel managers. Employers will utilize online monitoring technologies. Software exists that can keep track of how well people who work online perform. In other cases, companies use online surveys to measure client happiness with the customer facing staff. Because executives will be able to know who is working effectively, organizations won’t need human supervisors in future. As a result, there is more accountability but less privacy for employees.132 Virtual Reality: Businesses are experimenting with virtual reality and augmented reality to improve the corporate learning environment during videoconferences. The industry is changing as a result of the use of virtual reality in everything from employee training to helping employers find qualified candidates.133 At PwC, it has been employed in diversity training to help participants imagine themselves in others’ shoes.134 Understanding the elements affecting employees’ willingness to use technology at work can be helpful. Any new technology will involve a learning and adoption curve. People may object to contact tracking, for instance, out of concern for their privacy. Something is less likely to be used widely if it is difficult to use.

3.4.2

A Vote for WFH

Increased productivity from WFH: Before the epidemic, remote work was largely absent but has since become commonplace. Five percent of Americans worked from home before Covid-19. The percentage rose to 62% by May 2020. By the end of 2022, 40% of workers were still avoiding the office. Employees and companies have both voiced their displeasure at the disruption brought on by the move

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Sanjay Rishi, Americas CEO of Corporate Solutions, JLL in How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020. 132 Darrell West, senior fellow at the Brookings Institution think tank’s Center for Technology Innovation in How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020. 133 How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020. 134 Bhushan Sethi, people and organization leader at accounting and consulting firm PwC in How Covid-19 Could Change Workplace Technology, The Wall Street Journal, Nov 18, 2020.

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Fig. 3.37 Effect of remote work on the productivity of call center workers. Source “Working remotely? Selection, treatment and market provision of remote work,” Emma Harrington and Natalia Emanuel, 2020

to remote work. New research, however, suggests that businesses might fare better because of the onset of the pandemic.135 The study found that distant call center workers spent 40 s more on each call compared to their onsite compatriots, amounting to a reduction of productivity by 12% (Fig. 3.37). This seems to raise questions about the effectiveness of employees who are wearing pyjamas. But as the researchers looked deeper, they found that individuals who accepted the online retailer’s offer of remote jobs for office workers in 2018–2019 increased their productivity by 7%. They became more dependable by being away from their phones. Its newly homebound staff raised their production by 7.6% in April 2020 when lockdowns made workplaces close. Despite the distractions, the study’s findings suggest that working from home might boost productivity in call centers and possibly in other industries as well.136 Following the epidemic, from 5 to 22% of American workers will choose to work from home.137 The study found that rewarding employees for working remotely would be more effective for organizations. Such incentives, though, might not be required. Before the onset of Covid-19, 11% of Americans had remote jobs

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Harvard University in “Working” remotely? selection, treatment, and the market provision of remote work, Natalia Emanuel and Emma Harrington, Harvard University, April 9, 2021. 136 “Working” remotely? selection, treatment, and the market provision of remote work, Natalia Emanuel and Emma Harrington, Harvard University, April 9, 2021. 137 Stanford, the University of Chicago, and the Mexico Autonomous Institute of Technology.

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(Brynjolfsson et al., 2020). Fifty-six percent of remote workers said they plan to continue working from home after workplaces reopen (PwC, 2020). Will WFH succeed? Reduced stigma, better experiences working from home, investments in physical and human capital that enable working from home, reluctance to return to pre-pandemic activities, and innovation that enables working from home are all factors that have been linked to the persistent shift to working from home.138 A consistent move in work arrangements has a number of effects. High-income workers will first feel the benefits of working from home. Second, the post-pandemic shift to remote employment is projected to result in a 5–10% decrease in worker spending in key urban areas.139 Do remote workers put in more hours but not necessarily more productivity? Early 2000s surveys found that remote work did not lower productivity. A recent study on over 10,000 employees at an Asian technology company, carried out between April 2019 and August 2020, paints a different image.140 Software that tracked which programs or webpages were open on employees’ computers and whether they were using a keyboard, or a mouse was installed by the company. The study found, without a doubt, that the workers were dedicated to their work. The total number of hours worked increased by 30% compared to before the pandemic, with labor done outside of regular hours increasing by 18%. This extra effort did not, however, result in more output. This could explain the earlier survey results showing that both employers and employees believed their efficiency was the same. However, output per working hour is the proper statistic for assessing productivity. With this metric, given the surplus time on the job, productivity fell by 20%. What’s interesting is how this came about. Despite working more hours, employees had less time than they had before the pandemic. Instead of that, meetings took up all of their extra time. According to an old proverb, meetings waste 80% of the time of 80% of the attendees. This study clearly shows the validity of the claim. One explanation is that managers meet with their teams more regularly to make sure they are on track since they are less confident in their dedication. Managers hold so many meetings in order to justify their existence even when they are not there. Additionally, remote workers spend fewer hours on coaching, training, and being assessed. Surprise, surprise—time spent in meetings was the real cause of inefficiency. In contrast to jobs like customer service, where employees might adhere to a scripted set of responses, businesses that “involve significant cognitive work, such as developing new software or hardware applications or solutions, collaborating with teams

138

Does working from home make employees more productive? The Economist, Dec 27, 2020. Why Working from Home Will Stick, Jose Maria Barrero, Nicholas Bloom, and Steven J. Davis, working paper # NO. 2020-174, Becker Friedman Institute, University of Chicago, Dec 2020. 140 “Work from home and productivity: evidence from personnel and analytics data on IT professionals”, by Michael Gibbs, Friederike Mengel and Christoph Siemroth. 139

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of professionals, interacting with clients, and engaging in innovation and continuous improvement” may present a special challenge in remote settings. And the answer is simple: hold fewer meetings, making them more productive.141 Coworkers aren’t typically close friends. We lose out when we do not see our coworkers. However, daily conversations and check-ins with coworkers can greatly reduce loneliness and improve well-being. These are the people we interact with occasionally. They are neither strangers nor close pals. It is far too simple to write them off as non-essential. But fewer people appreciate how important our interactions with these coworkers are to our sense of belonging to a community. Our loneliness is reduced, and our sense of contentment in life is increased when we spend time with the people we care about. Recent studies on human sociality have shown that social encounters with friends and complete strangers can also reduce loneliness and improve well-being. These studies reflect the wide range of potential conversation settings, including the coffee shop, the gym, and mass transit. Undoubtedly, socializing can also be done at work (see Footnote 141). Being physically close to others fosters a discourse regarding business and personal problems. Furthermore, it offers a chance for companionship. The workplace (25%) was the most frequent location for making new friends, following the neighborhood (35.8%). Even after spending hundreds of hours together at work, we don’t always become friends with everyone we work with. But every friendship has to start somewhere.142 The epidemic has changed the company for the better. A London Underground strike in February 2014 educated management academics about adaptability and resilience. Frustrated Londoners were forced to reconsider their everyday trips because the shutdown only affected a small area of the Tube network. Oxford and Cambridge University researchers found that 5% of passengers continued using their modified itineraries even after reinstating regular service. One in twenty travelers switching to new, more efficient means of transportation to get to work was shown to have longer-term economic benefits than the short-term costs.143 The strike-hit transportation employees are a far lesser threat to industry than the global Covid-19 pandemic. Profit warnings are disseminated almost as quickly as diseases. According to analysts, the S&P 500 index businesses’ earnings growth may come to a standstill.144 As the coronavirus spreads, markers of business activity, such as purchasing managers’ indices, have fallen in Asia, and are predicted

141

Remote workers work longer, not more efficiently, The Economist, 10 June 2021. What We Lose When We Don’t See Our Work Acquaintances, The Wall Street Journal, March 20, 2021. 143 Covid-19 has foisted changes on business that could be beneficial, The Economist, 5 March 2020. 144 Goldman Sachs in Covid-19 has foisted changes on business that could be beneficial, The Economist, 5 March 2020. 142

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to get worse abroad. Consumers spend their money on Campbell’s soup cans, face masks, and sanitary wipes. The market value of publicly traded companies around the world decreased by $7 trillion when the pandemic broke out. The outbreak of the pandemic was disastrous. Businesses are beginning to value telecommuting more and more. Important business events are being postponed. By shifting some of their major events wholly or partially online, Google and Facebook have given “teleconferencing” a whole new meaning. While testing its backup plans, JPMorgan Chase ordered thousands of its bankers in the United States to work from home. Twitter has asked its 5000 staff members to follow suit. Sony even completely closed down a few of its European offices, just in case. The plan was to have the impacted employees work remotely. Virus contingency plans may also show how ineffectively office space is used and how out of control some travel costs were. Large British and American companies pay $5000 on average per employee in rent annually. Only 40–50% of desks are used during business hours, often inefficiently. In a poll conducted by Leesman data provider last year of 600,000 office workers, 2 out of 5 said their workspace made it difficult for them to be productive (see Footnote 143). The case for teleworking might be indisputable if their bosses find that productivity rises—or, at the very least, doesn’t fall—as workers isolate themselves at home. Investors believe it will happen. In early 2020, the share prices of Zoom, a provider of videoconferencing software, and Slack, a business messaging platform, climbed by 18% and 35%, respectively (see Footnote 143). Businesses are currently reevaluating their supply chain strategies as a result of another side effect of the pandemic. In the 1970s, Toyota pioneered just-in-time component delivery and lean manufacturing, which increased production efficiency but also increased sensitivity to disruption as businesses accumulated fewer and fewer essential resources. Since the 1980s, these have grown increasingly complicated worldwide, and huge companies now depend on thousands of suppliers. According to Bloomberg statistics, the median firm of the S&P 500 has a buffer of 66 days of inventory, but others have far smaller buffers than that—Apple, for instance, has a buffer of just nine days (see Footnote 143). Large corporations generally survive natural disasters by temporarily moving output away from disaster-affected areas and toward disaster-unaffected places. Covid-19, on the other hand, might impact all of a company’s current and potential subcontractors, unlike flood, earthquake, or even a Sino-American trade war, which all need disaster management planning. In this situation, carrying greater stocks and having suppliers nearby might no longer seem wasteful. It might become a compulsion. Nearly 38% of the world’s workforce, or 1.25 billion people, work in industries that are currently suffering a sharp fall in output and a high risk of layoffs and furloughs. With 4.6 billion flights, the world was more mobile than ever in 2019. Only 47 million people were transported by air in April 2020; extrapolating that number annually will put us in the year 1978 (see Footnote 143).

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Business travel and tight worldwide supply chains won’t stop because of the coronavirus. Chinese factories are starting up again, and high-flyers will soon, if sparsely, return to airport lounges. Nevertheless, the crisis offers a chance to try out novel approaches and examine the value of conventional thinking. The foundation has been set for a more established culture of working from home. It has been up to employers to determine whether to permit travel, conference attendance, or even remote work. The answer is negative in each of these three situations. Many prominent corporations have outlawed all non-essential travel, including Amazon and JPMorgan Chase. Both airlines and hotels reported sharp drops in reservations (see Footnote 143). The impact might last six months, according to Corporate Travel Management, an Australian publicly traded company that arranges business travel. Its full-year earnings projection has been reduced by 16.5%. Business travel, which costs corporations over $1 trillion a year (and generates roughly as much carbon as Ukraine in flights alone), might decrease by more than a third as the epidemic persists, according to a poll performed by an industry organization.145 Work from home has come to stay.

3.5

Gig Working

Parts of the gig economy are different from the platform economy because the term “gig economy” is sometimes used widely to include traditional offline temporary and contract jobs (Woodcock, 2019). The term “gig economy” is used to describe work that is made possible through online labor market platforms like PeoplePerHour. In this restricted sense, it is crucial to understand the difference between local and remote gig employment. Most local jobs on TaskRabbit and Uber need the worker to be present in person. Tasks can be accomplished remotely, often known as in the “human cloud,” from anywhere in the world, as is frequently the case with Mechanical Turk or the Upwork platform. Around 70 million workers have registered on remote labor platforms globally, claims a research study (Wood et al., 2018). The gig economy is projected to grow to $455 billion by 2023.146 The number of users on gig platforms is predicted to increase by 26% annually (Lehdonvirta, 2018). Temporary agreements similar to those connected with a musical event are referred to as being part of the “gig economy.” (Woodcock & Graham, 2020) Gig jobs are temporary employment opportunities in the United States, not full-time or even hourly rate ones (Gray, 2019). There has been a significant increase in gig workers over the past few years. In contrast, there are fewer people working full- and part-time. Employers can now recruit workers from anywhere in the world and communicate with them via

145

Global Business Travel Association in Covid-19 has foisted changes on business that could be beneficial, The Economist, 5 March 2020. 146 Mastercard and Kaiser Associates. Mastercard Gig Economy Industry Outlook and Needs Assessment. May 2019.

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telecommunications thanks to access to a global labor market. An estimated 36% of American workers actively participate in the gig economy and make some or all of their income there. For these workers, the gig economy accounts for 44% of their income, rising to 53% for those between 18 and 34. Additionally, 33% of American companies are thought to regularly use gig labor for various tasks. According to surveys conducted in 2020, about 40% of executives worldwide anticipate that independent contractors and freelancers will make up the majority of their organization’s workforce within the next five years because they offer a variety of hard-to-find skills and diversify the organization’s talent pool. The potential for gig job activities to increase grows as technology develops. New types of work are now possible thanks to online technologies, which may further change the gig economy. The growth of gig employment is not the product of isolated economic shifts. Businesses are under growing pressure to respond quickly to market developments as a result of globalization and technological advancements. Employers can swiftly change the size of their workforce by securing employees through non-traditional arrangements like gig work. Businesses may benefit from this by being able to increase their earnings. From this vantage point, it appears that ad hoc gig employment is an important part of the current economy and is unlikely to disappear anytime soon (Weil, 2019). At all levels of an organization, including top executives like CEOs, CFOs, CROs, and vice presidents—often referred to as interim or fractional executives— gig workers are present. Eight percent of Americans (8%) received payment for using digital platforms to finish an activity or service. In the meantime, 1% of Americans have made money by renting out their homes on home-sharing websites, and nearly one in five (18%) Americans have made money by selling something online. About 24% of American adults engage in these three activities in order to make a living in the “platform economy.” (Aaron, 2016). One of the terms most frequently used in today’s corporate environment is “gig economy.” Despite the fact that gig labor has been around for a while, it has only recently become more popular as a result of the success of platform-based businesses like Uber (for ride-sharing), Swiggy (for food delivery), and Urban Company (in personal services, home renovations, and repair). Today, more than 200 million people globally are categorized as being part of gig labor due to the spread of technology-enabled gig work platforms. The majority of this employment falls under low-wage categories such as deliveries, ride-sharing, microtasks, care, and wellness,147 and research shows that engagement in the gig economy is higher in poor countries (between 5 and 12%) than in industrialized economies (between 1 and 4%).

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How governments should deal with the rise of the gig economy, The Economist, Oct 6, 2018.

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Implications of a thriving gig economy: When analyzing the cyclical patterns of significant aggregates like labor force participation, employment, hours worked, and underemployment, we should be aware that the expansion of flexible work (such as gig) arrangements may change the natural employment rate and how the labor market reacts to shocks. One likelihood is that new technology will lessen barriers to entry into the workforce, increasing employment and labor force participation. The typical work arrangement embeds incentives for people to work on a single job because it limits the fixed costs of getting and keeping a job, such as job hunting, job training, and daily commuting to the working site. These fixed expenditures may also have historically influenced those who chose to work fewer hours or stay unemployed. But suppose technology makes it less expensive for people to look for work, manage various working relationships, and put in as many or as few hours as their schedule permits. In that case, it might greatly expand the alternatives available to employees and have an impact on the labor market behavior. Notably, any such increases in participation and employment would almost definitely be structural, not cyclical, allowing the economy to operate at a higher level for an extended period.148 People may find it simpler to align their actual work hours to their ideal work hours per day or week as a result of new technologies. The number of hours worked in a week may vary instead of hovering around forty. If there are fewer obstacles to employment, more people may find it more appealing to work a few hours each week if they can afford it. New technologies may also lead to more people working more than full-time hours each week since it is possible to locate additional work. Additionally, people might alter their work schedules more frequently if these changes become less expensive. The popularity of gig labor is likely to have an impact on both productivity and unemployment. As gigs provide a simple route to employment, unemployment may decline. However, job loss may increase if gig work becomes ridden with insecurity. The overall effect on unemployment is, therefore, unknown. In terms of productivity, gig labor could lower it to the extent that it enhances the number of hours put in by low-skilled individuals or requires less human capital or specialized knowledge than traditional jobs. However, gig labor, particularly when supported by new technologies, may enable hours to be more flexible in response to fluctuations in demand and allow individuals to interact with diverse clients or employers more easily (see Footnote 148). As a result, there might be less downtime for employees and less time needed to find new clients and manage existing ones, which would boost resource usage and productivity.

148

The “Gig” Economy: Implications of the Growth of Contingent Work, speech by Governor Lael Brainard at “Evolution of Work,” Nov 17, 2016.

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It goes without saying that contingent work increases when the economy worsens. If gig workers can find new gig jobs easily, assisted by new technologies, we might observe a decline in recessionary unemployment. Additionally, the growing popularity of gig labor may change the workweek, participation, and unemployment cyclical patterns, which will impact how we compute slack. However, a lot of employees would probably choose regular full-time employment over contract labor, especially if the employer has substantial control over the hours worked under alternative work arrangements. Thanks to technological improvements, businesses can now use just-in-time workers, who are essentially on call. This is becoming increasingly common in industries like retail and food preparation. Economists extensively study the challenges faced by these just-intime workers. These workers must adapt their schedules to the daily and even hourly ebbs and flows of business, frequently not knowing whether they will have employment until they call in to inquire that morning (Ansel, 2015). These arrangements can make it challenging for workers to participate in regularly scheduled activities that increase their income and opportunities, like a second job or career training, while also leaving them scrambling to arrange childcare, elder care, and transportation to meet the frequently unpredictable demands of their workplace. These individuals are typically asked to work full-time hours even though they are regularly denied full-time jobs. According to a survey, half of the retail workers in New York said their bosses might adjust their hours at any time, while 71% said their hours fluctuated from week to week (Wessler, 2014). Additionally, the percentage of workers who work part-time but would want to work full-time has increased by a third over the past ten years, from 3% before the Great Recession to roughly 4% today (see Footnote 148), which is in line with the rise in contingent work. Additionally, compared to those who have traditional jobs, contingent workers could make less money, receive less training, and enjoy fewer benefits. Social conventions surrounding pay equity typically increase the salary of low-skilled workers within an organization. Non-monetary rewards are commonly distributed equally across employees, as required by law in specific circumstances. However, it is unlikely that gig workers’ compensation will reflect the same fairness considerations. In addition, employers rarely give the advantages and protections that come with typical job possibilities, such as paid sick days, overtime pay, minimum wage protections, health insurance, and the right to a family leave of absence. Managing income variability and perks is one of the freelancers’ top concerns, according to Upwork research. For lower-income workers, unpredictable income changes can lead to extreme hardship. Forty-six percent of households said they had to sell something or borrow money to pay a $400 unplanned bill.149 As a result of its more erratic and uncertain hours and pay, contingent labor may pose greater dangers for some people than typical full-time employment. Recent technological

149

The survey is available on the Board’s website at https://www.federalreserve.gov/community dev/shed.htm.

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developments that can magnify and reroute this trend coincided with the apparent trend toward contingent work. These changes are still in their infancy, so making predictions about how they will develop would be premature. However, the effects on the labor market could be severe and protracted (see Footnote 148). Specifically, in a fast-growing economy, the potential of India’s gig economy is among the most intriguing in the developing world. One can orchestrate and unleash the gig economy’s potential at scale by bringing together stakeholders from the private, social, and public sectors as well as philanthropies and investors, which will help India grow and provide jobs and other opportunities for millions of low-income workers nationwide. BCG avers that in India’s non-farm economy alone, the gig economy has the potential to support up to 90 million workers, transact over USD 250 billion in work, and add an additional 1.25% (roughly) to GDP over time. Additionally, India currently has a number of entry points for combining auxiliary services, public goods, and government regulations to allow India and its workers to engage in the gig economy.150 The following are some long-term benefits of the gig economy: • Around 35 million skilled and semi-skilled jobs exist in various industry sectors. • Five million people work in shared service industries, including facility management, transportation, and accountancy (approximately 12 million). • An estimated 37 million jobs in various sectors are considered to be unskilled. Over 70 million of the theoretically “gigable” employment might be accounted for by just four main industry sectors: construction, manufacturing, retail, transportation, and logistics. Existing jobs that move to gig platforms and newly developed ones within the economy will make up the gig economy. Increased market transparency (ability to match supply and demand), improved delivery efficiency (lower cost), and rising demand (as a result of the availability of smaller consumption increments or “sachetization”) would all lead to net new job creation. The gig economy can generate about one million net new jobs over the next two to three years by aligning businesses’ and employees’ near-term goals due to the high potential and demand for gig-based employment. Up to 24 million jobs could move to technology-based gig platforms in the short to medium term, including over three million positions in shared services and more than eight million occupations meeting household demand. This possibility can be tapped significantly by creating universal qualifications, job-specific employer needs, and job drivers relevant to gig workers. In the long run, changing employee-acquisition methods in the sector as well as more acquaintance with and optimization of gig-based services will be necessary to realize the full potential of the gig economy (i.e., up to 90 million jobs).

150

Unlocking the potential of the GiG economy in India, Boston Consulting Group.

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A significant and expanding portion of the workforce works through contracting, temporary arrangements, on-call arrangements, or as freelancers hired for episodic “gigs” as opposed to traditional employment relationships, where an employee has a long-term relationship with a single principal employer. They frequently offer substantially greater flexibility than long-term employment contracts, allowing workers and employers to enter and depart work ties easily (see Footnote 148). The fall in unemployment in the last decade can largely be attributed to the growth in gig jobs, with no net growth in traditional work. Over the past ten years, the number of contingent workers has approximately doubled, making up about 16% of the workforce. This explosive growth starkly contrasts with the previous ten years when the percentage of contingent workers in the workforce remained largely steady at 10% (Katz & Krueger, 2016). Numerous people have worked in temporary employment, such as contracting and freelancing, long before Uber and TaskRabbit. Over the past ten years, these groups’ workforce share has increased the most (see Footnote 148). During the same time, technological platforms have appeared that are transforming how people locate, plan, and do contract labor as well as how they monetize their assets to make money. These innovations, often known as the “gig,” “on-demand,” “platform,” or “sharing” economies, have the power to completely alter industries. In addition to or in place of more conventional and formal job arrangements, 36% of the adult population are engaged in an informal paid labor activity (see Footnote 148). Eleven percent of adults in the US have been involved with an online platform to pay for services like booking rides with Uber, finding jobs on Care.com, Amazon Mechanical Turk, or TaskRabbit, participating in projects with services like Fiverr, selling goods and crafts on eBay and Etsy, or renting out rooms or homes. Others tend to choose contingent work arrangements based in large part on their ability to balance their professional and personal lives. One constant element is the desire to earn more money, which is the main driving force for 68% of full-time employees and freelancers and 74% of part-time employees. As they shift to technologically enabled “just-in-time” scheduling of employees and outsource non-core jobs to contract firms, employers have had to get used to fluctuating and occasionally unpredictable hours. On-call and contract employees have had to become used to fluctuating and occasionally unpredictable schedules. Many others are required by their employers to participate in highly variable work arrangements, not of their own free will. Public functionaries from all across the world have commented on gigs, and they are not flattering. It is, in the words of Archbishop Canterbury, “the reincarnation of an ancient evil.” It is the “next step in a losing effort to build some economic security in a world where all the benefits are floating to the top 10%,” claims Massachusetts Senator Elizabeth Warren. Luigi Di Maio, Italy’s deputy prime minister, is pursuing it as part of his “war on precarious work.” What part does the government play in promoting the gig economy’s growth, then?

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The “gig economy,” which involves the assignment of temporary work via internet platforms, is a striking symbol of modern capitalism’s failure for many. Critics claim that doing so enables companies to replace pricey full-time staff with cheaper independent contractors. Workers who previously relied on their company to make pension fund contributions or pay for their health care in the event of illness now have to make their own retirement savings. This perspective holds that the gig economy exacerbates uncertainty and undermines workers’ rights. Even if Uber drivers and Deliveroo bicycles are clogging up metropolitan streets, gigging is not ready to take over the world. Since the financial crisis of 2008–2009, more people have been working full-time employment across the OECD’s primarily wealthier member nations (see Footnote 147). Over the past three decades, the typical job tenure in America has stayed largely steady. Between 1 and 5% of Americans work as independent contractors, depending on who you ask; nonetheless, many hold salaried roles. The gig economy’s biggest defense is not its small size. This is predicated on the financial advantages that gigging offers. With a swipe or a click, almost anyone can arrange for Rover to be walked in the park or to have a crucial document copy corrected in a matter of hours. It is obvious that consumers gain from this. Most significantly, employees gain as well. Platforms for the gig economy’s algorithms enhance the “matching” of giggers with jobs, reducing idle time. There is conflicting evidence indicating gig workers make less money than traditional employees, and many contend that they favor their greater autonomy over salaried employees. In the event that other sources of employment become insufficient, gig platforms can efficiently augment income or stabilize earnings. Furthermore, they might allow for the opening of previously closed industries. According to studies, the number of independent cab drivers rose by 50% when Uber entered American cities. But there are drawbacks to the gig economy. Platforms claim to be nothing more than impartial markets that link employees and customers. According to this reasoning, employees should be regarded as self-employed. However, certain platforms’ standards present a different picture. Riders for food deliveries are frequently forced to wear uniforms, while drivers for ride-hailing apps are under pressure to maintain favorable ratings or face expulsion from the site. Platforms have a legitimate interest in maintaining the quality of their service. However, it is not acceptable for some companies to dictate how workers must perform employee-like tasks while refusing employer-like obligations (see Footnote 147).

3.5.1

Gig Worker-Employee or Contractor?

Do gig workers count as employees? Instead of receiving a salary as employees do, gig workers are usually paid on a “piece rate” basis (for each task accomplished). Several services are offered, ranging from house cleaning to preparing PowerPoint

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presentations. There are tens of thousands of these websites, including PeoplePerHour, Handy, Upwork, and Uber. Young urbanites are used to having food brought to their homes for Sunday lunch or hiring someone to go with them to IKEA, the biggest furniture store in the world, and help them bring home a sofa. A third of Americans and Britons both utilize ride-sharing services like Uber. Australia has more gig economy job advertisements online than any other significant country.151 It is difficult to track people who work through online platforms in labor force surveys, and there are few official statistics on the gig economy. The gig economy strongly opposes the traditional economy of full-time employees who infrequently change jobs and follow one career path. The gig economy is characterized by temporary and flexible employment, and firms favor hiring independent contractors and freelancers over full-time employees. According to official figures, gig labor makes up roughly 1% of all employment in the United States; however, some surveys suggest a greater percentage. They all almost universally suggest that the gig economy is growing rapidly (see Footnote 151). It’s a moot point if this is a good or terrible thing. Activists stress the versatility of gigging, which can be beneficial for parents, people with disabilities, and the elderly in particular. They see it as a practical stopgap while searching for work or as a method to augment the meager pay they receive at their regular employment. On the other hand, there’s worry that the gig economy will eliminate regular, adequately paid employment for most people. The Labor Party condemns it in the UK for promoting “a more rapacious and exploitative form of capitalism.” An Australian government report roars, “the gig economy is normalizing working conditions in this country that took generations of political struggle to eradicate.” The future of employment and policymakers concerned with inequality and the best approach to protect low-skilled employees from persistent insecurity depends on who is right. The average worker in the developed countries in the twentieth century was a full-time, permanent employee. The gig economy challenges that framework. It is built on “two-sided markets,” serving employees and customers in two cohorts. Each group does better if there are more of the other group. When labor markets are two-sided, economic activity can be organized more easily around pricing than firm boundaries. Online advertisements for various professions include accountants, drivers, attorneys, and cleaners who describe their experience, availability, and fees. As more users sign up, platforms increase their efficiency significantly. Without making a permanent hiring, clients that need assistance can rapidly get the expertise they need. There are many advantages for employees. The clincher is that obtaining gig employment is a breeze, which is the most obvious advantage. On a big platform like TaskRabbit or Uber, someone looking for work nearly always succeeds because they have so many potential consumers at their fingertips.

151

Worries about the rise of the gig economy are mostly overblown, The Economist, Oct 4, 2018.

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Furthermore, the gig economy creates temporary employment which would otherwise not come into being. Instead of decreasing the demand for traditional taxis, ride-hailing services appear to increase the demand for private-hire transportation. Spider removal requests are frequently made on Airtasker in Australia, where people used to do it themselves. As a result, gigging is advantageous in places that lack traditional employment. The official young unemployment rate in Italy is higher than 30%. The Deliveroo driver in Turin, Cecilia, also works part-time as a receptionist and hopes to land a full-time position in future. Until then, Deliveroo is a lifeline (see Footnote 151). Gig work may help smooth out kinks in the conventional labor market. Earnings from labor platforms, according to research, make up for losses in traditional earnings (see Footnote 151). More than twice as many giggers work part-time as there are in the overall workforce.152 People who are looking to enter the formal labor market again may benefit from gigs. A survey by Uber and others found that about two-thirds of American Uber drivers stopped working six months after their first trip, suggesting that they had found work in more favorable conditions. Many gig workers appreciate the independence, with the remuneration being fairly competitive. Delivering parcels, cleaning, and operating a cab are just a few jobs that don’t pay well. Such employment, however, is never adequately paid. A step up for folks with low-skilled occupations might be gigging. According to a survey, selfemployed taxi drivers in American cities where Uber operates make more money per hour on average.153 This might be due to the increased productivity of Uber drivers. After all, their waiting time for passengers is shorter. On the opposite end of the labor spectrum, coders and consultants can work three or four jobs at once while selling their knowledge to the highest bidder globally. Employees at Expert360 make hundreds of dollars each day. When age, sex, and education level are considered, gig workers typically make more per hour than regular jobs.154 However, because gig workers generally do not receive employer-provided benefits, such as pension contributions, their apparent salary advantage can be less than it appears to be. Uber drivers typically make a lot more money than London’s minimum wage. But this is hardly the whole tale. Low-skilled workers with little negotiating power suffer significantly from the gig economy. When critics bemoan the passing of conventional means of work that is what they have in mind. Businesses in the gig economy reject the idea of being employers and instead position themselves as middlemen in the two-sided market for employees and jobs. The problem is how different categories of workers are handled under the

152

Aspen Institute in Californians vote on the future of Uber, The Economist, 27 Oct 2020. Oxford University study in Californians vote on the future of Uber, The Economist, 27 Oct 2020. 154 Stanford University study in Californians vote on the future of Uber, The Economist, 27 Oct 2020. 153

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legislation. For instance, “Workers perform Tasks for Requesters as an independent contractor, not as employees of a Requester or Amazon Mechanical Turk,” states the “participation agreement” between the gig-seeking public and Amazon’s platform Mechanical Turk (see Footnote 151). Employees are entitled to a number of legal protections, such as sick pay and immunity from reprisal. Contrary to those who work for themselves, they are entitled to the minimum wage. The requester and the employee bargain over rates. Is it any different when hiring workers through Mechanical Turk? Many employees’ salaries fall below the federal minimum wage. For some gig workers, which is a pittance. Gig workers usually make minimum pension contributions. Every courier has a personal story about a friend or acquaintance who was hurt while driving and had to take unpaid leave. Generally speaking, selfemployed people have fewer rights than workers. That is the “price” for selecting when and for whom they work. Only one out of every six consultants who apply to sell their services through the platform in Australia are accepted by Expert360. Like other ride-hailing services, Lyft gives its drivers a rating out of five stars. It tells them, “Anything above 4.8 is fantastic. If your rating falls below 4.8, you should consider ways to boost it. Consistently low ratings may result in deactivation.” (see Footnote 151). In certain circumstances, traditional firms successfully incorporate gig economy platforms with the people who work for them. TaskRabbit was purchased by IKEA last year. IKEA clients will receive assembly assistance from taskers. In Sydney, there is a window sticker from Uber Eats, Deliveroo, or Foodora on every other restaurant (see Footnote 151). The claim that platforms are nothing more than marketplaces is complicated by all of this. Workers are also coming together more frequently to demand that platforms treat them like employees. After moving from hourly to per-delivery payment in 2016, Foodora drivers in Turin ceased operations (they were unable to have the decision reversed). Because they are not considered employees, few gig workers are unionized. Several gig workers have brought their cases before the courts with varying degrees of success. A Turin labor tribunal recently dismissed Foodora riders’ claims to be employees. An Australian industrial relations tribunal, the Fair Work Commission, determined that an Uber driver was a self-employed individual rather than an employee. In contrast, a London tribunal ruled in 2016 that Uber drivers should be paid the minimum wage, calling the company’s London vision of “a mosaic of 30,000 small businesses [i.e., the drivers] connected by a common ‘platform’” as “faintly ridiculous” (Uber challenged the decision, but the UK Supreme Court upheld their order) (see Footnote 151). Recently, the California Supreme Court made it more challenging for companies to identify their employees as independent contractors.

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For those willing to use them, the gig economy enables more inexpensive, effective services like Uber or Airbnb since there are many people eager to work part-time or temporary jobs. A recent study found that 162 million people in America and Europe, or more than 20% of the working-age population, are employed in non-traditional jobs. Nearly half of them depend on it as their main source of income.155 The benefits of the gig economy often leave behind individuals who do not use modern services like the Internet. America looks to become one of the world’s largest gig economies (see Footnote 151). The legislation that would determine the legal status of gig workers is currently a matter of public/legal debate. Uber established the model for the gig economy eleven years ago. The software automatically balances supply and demand. In the beginning, clients and drivers benefited from ride subsidies offered by Uber and Lyft as they fought for market dominance. The pair started lowering expenses in recent years as the company became public. The portion of fares that Uber keeps for itself, known as its “take rate,” has climbed to an average of 26%, up from 20% in 2017.156 Drivers are given a comparable discount (Rosenblat, 2019). Their hourly pay is a contentious issue. There are no benefits, though, regardless of the pay. For people who use driving to augment their income from other occupations, this might not matter. According to Uber, part-time employees make up the bulk of its drivers. In the opinion of detractors, the bulk of rides are given by drivers who work full-time. Recognizing these issues, the state of California passed AB5, which defined independent contractors as those who are not under the authority or direction of the hirer. Gig economy businesses claim to comply with AB5’s requirements. A court of appeals decided in October 2020 that they very likely do not, pending a thorough trial (Rosenblat, 2019). According to Mr. Khosrowshahi, the CEO, complying with AB5 would change Uber from an internet marketplace into a conventional black-car service. He says the corporation would have to fire 76% of its nearly 200,000 Californian drivers. The balance workforce would end up working mostly during peak times and not get paid commensurately “exactly in proportion to the value they add to the system,” which is “one of the underappreciated features of the gig economy.” Uber also mentions that the price of a trip might rise by 25–111% (Rosenblat, 2019). Those who disagree with Uber claim that this is absurd. Veena Dubal of the Hastings College of Law at the University of California claims that AB5 would quadruple the cost per driver. But she claims that it would still allow for flexibility and protect vulnerable workers. Research from New York, where ride-hailing businesses must pay the city’s minimum wage and abide by other laws, suggests that fare hikes may be less than what Uber forecasts.

155

McKinsey Global Institute in Californians vote on the future of Uber, The Economist, 27 Oct 2020. 156 New Street in Californians vote on the future of Uber, The Economist, 27 Oct 2020.

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The moot point is whether independent drivers, couriers, and other app-based workers ought to be classified as employees deserving of benefits like unemployment insurance and paid time off. “Prop 22” makes an effort to balance the need for worker protection with the need for flexibility so that people can work when and where they want while ensuring customers are not waiting too long for a ride or food delivery. Prop 22 would eliminate AB5’s tight definition of independent contractors while granting these workers perks like net earnings at least equivalent to 120% of the hourly minimum wage and healthcare stipends. It might open the door for portable benefits, which renowned economists, including the late Alan Krueger, have campaigned for and which Mr. Khosrowshahi has described as a “third way” between the current situation and AB5 (though it has no provision for collective bargaining, which Krueger had backed). Benefits would be determined by “engaged time;” downtime between rides would not be considered. For instance, in order to be eligible for the full healthcare payment, drivers must be “engaged” for 25 h each week. Additionally, a supermajority of seven-eighths of the California legislature would be needed to change the proposition (Rosenblat, 2019). In any event, Uber’s business model needs to be improved. Investors are impatient as it continues to lose money. Its share price has decreased by 5% since its IPO. Due to Covid-19 lockdowns, ride revenue decreased by 75% in the second quarter compared to last year’s period. Mr. Khosrowshahi wants to switch from providing passenger transportation to ferrying goods throughout the city. As diners withdrew, quarterly revenues from its meal-delivery arm more than doubled and currently, make up close to 70% of overall revenue. According to Mr. Khosrowshahi, “Just as Facebook created a social graph of relationships between friends, we can create a local graph of relationships between people and things.” That is utopian and infeasible under AB5 until self-driving cars entirely replace human drivers, an occurrence that is still some distance away.157 In his book In Uberland: How Algorithms are Rewriting the Rules of Work, technology ethnographer Alex Rosenblat claims Uber’s failure to designate its drivers as “employees” deprives them of their agency, the company’s revenue-generating workforce, resulting in lesser compensation and, in some circumstances, putting their safety at risk. Uber’s rating system is notably criticized by Rosenblat, who claims that it elevates passengers to “middle managers” without allowing drivers to challenge unfavorable reviews (Rosenblat, 2019). Rosenblat points out that Uber drivers may be “deactivated,” a procedure similar to being fired without warning or justification, as a result of low ratings and other unexplained conduct issues. It is noted that “the ability to fire at will is an important factor in showing a company’s workers are employees, not independent contractors.” Prosecutors have used Uber’s ambiguous firing policy as proof of unlawful worker misclassification. The last word has not been said on the topic.158

157 158

Californians vote on the future of Uber, The Economist, 27 Oct 2020. See Footnote 157.

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Goodman, P. S. (2017, December 27). The robots are coming, and Sweden is fine. The New York Times. Gray, M. L. (2019). Ghost work: How to stop Silicon Valley from building a new global underclass. ISBN 978-1-328-56624-9. OCLC 1052904468. Gregory, T., Salomons, A., & Zierahn, U. (2016). Racing with or against the machine? Evidence from Europe. ZEW Discussion Paper 16-053. Center for European Economic Research. Harrison, R., Jaumandreu, J., Mairesse, J., & Peters, B. (2008). Does innovation stimulate employment? A firm-level analysis using comparable micro-data from four European countries. NBER Working Paper Series. Working Paper 14216. http://www.nber.org/papers/w14216 Hoos, H. H. (2012). Programming by optimization. Communications of the ACM, 55(2), 70–80. Katz, L. F., & Krueger, A. B. (2016). The rise and nature of alternative work arrangements in the United States, 1995–2015 (PDF). Working paper. Keynes, J. M. [1930] (1963). Economic possibilities for our grandchildren. In Essays in persuasion (pp. 358–373). W. W. Norton. http://www.econ.yale.edu/smith/econ116a/keynes1.pdf Keynes, J. M. (1933). Economic possibilities for our grandchildren (1930). In Essays in persuasion (pp. 358–373). Kunhua, Z. (1973). Zhongguo tie lu shi [The history of Chinese railway development] (Vol. 1). Wenhai Press. Lehdonvirta, V. (2018). Flexibility in the gig economy: Managing time on three online piecework platforms. New Technology, Work and Employment, 33(1), 13–29. http://doi.org/10.1111/ntwe. 12102. ISSN 0268-1072. S2CID 117223134 Levy, F., & Murnane, R. J. (2004). The new division of labor: How computers are creating the next job market. Princeton University Press. Lohr, S. (2015, November 6). Automation will change jobs more than kill them. The New York Times. Markoff, J. (2011, March 4). Armies of expensive lawyers replaced by cheaper software. The New York Times. Markoff, J. (2012). Skilled work, without the worker. The New York Times. Marx, K. (1867). Das Kapital: Kritik der politischen Ökonomie. Verlag von Otto Meissner. McGregor, J. (2019, April 13). Qualcomm brings AI, vision processing to IoT. EE Times. McKinley, R. A. (Ed.). (1958). The city of Leicester. A history of the county of Leicester (Vol. 4). Victoria County History Series. Boydell and Brewer. McKinsey Global Institute. (2017). Jobs lost, jobs gained: Workforce transitions in a time of automation (pp. 1–20). Mckinsey & Company. MGI. (2013). Disruptive technologies: Advances that will transform life, business, and the global economy. Technical Report. McKinsey Global Institute. Nordhaus, W. D. (2015). Are we approaching an economic singularity? Information technology and the future of economic growth. Cowles Foundation discussion paper no. 2021. Yale University. http://cowles.yale.edu/sites/default/files/files/pub/d20/d2021.pdf PwC. (2020). When everyone can work from home, what’s the office for? PwC’s US remote work survey. Technical Report. PwC. Robinson, B. (1983). Validation of a caregiver strain index. Journal of Gerontology, 38, 344. Romero, S. (2018, December 31). Wielding rocks and knives, Arizonans attack self-driving cars. The New York Times. Rosenblat, A. (2019). UBERLAND: How algorithms are rewriting the rules of work (p. 149). University of California Press. ISBN 978-0-520-32480-0. OCLC 1088531727. Saint-Paul, G. (2008). Innovation and inequality: How does technical progress affect workers? ISBN 9780691128306 Schmidt, E., & Cohen, J. (2013). The new digital age: Transforming nations, businesses, and our lives (Kindle edition). Knopf Doubleday Publishing Group. Sharma, R. (2016, December 5). One thing that could save the global economy: Robots. Washington Post. TASS. (2017). Sberbank receives more than $2 billion in profits each year from the introduction of artificial intelligence. September 25. http://special.tass.ru/ekonomika/4590924 (in Russian)

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Taylor, K. (2016). Fast-food CEO says he’s investing in machines because the government is making it difficult to afford employees. Business Insider, March 16. UNCTAD. (2017). Trade and development report 2017: Beyond austerity—Towards a global new deal (United Nations publication, Sales No. Sales No. E.17.II.D.5. New York and Geneva). Upwork. (2017). Freelancing in America 2017 (database). Mountain View, CA. https://www.upw ork.com/i/freelancing-in-america/2017 Weil, D. (2019). Understanding the present and future of work in the fissured workplace context. RSF: The Russell Sage Foundation to the Social Sciences, 5(5), 147–165. http://doi.org/10.7758/ rsf.2019.5.5.08. S2CID 211388126. Wessler, S. F. (2014, May 10). Shift change: ’Just-in-time’ scheduling creates chaos for workers. NBC News. http://www.nbcnews.com/feature/in-plain-sight/shift-change-just-time-schedulingcreates-chaos-workers-n95881 West, D. (2018). Will robots and AI take your job? The economic and political consequences of automation. Brookings Institution. Wood, A. J., Graham, M., Lehdonvirta, V., & Hjorth, I. (2018). Good gig, bad gig: Autonomy and algorithmic control in the global gig economy. Work, Employment and Society, 33(1), 56–75. http://doi.org/10.1177/0950017018785616. PMC 6380453. PMID 30886460 Woodcock, J. (2019). The gig economy: A critical introduction. Polity. Woodcock, J., & Graham, M. (2020). The gig economy: A critical introduction. ISBN 978-1-50953635-1. OCLC 1127990082. World Bank. (2016). World development report 2016: Digital dividends. World Bank. World Bank. (2019). World development report 2019: The changing nature of work. World Bank. http://doi.org/10.1596/978-1-4648-1328-3. License: Creative Commons Attribution CC BY 3.0 IGO. Yang, D., & Wegner, S. (2018). Apple iPhone Xs Max teardown. Tech Insights, September 17, 2018.

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4.1

Digital Platforms

While it used to take Fortune 500 companies an average of 20 years to reach a billion-dollar valuation, today’s digital start-ups can get there in four years. Digital platforms are largely responsible for this shift—Accenture. Platforms-the Digital Economy’s lynchpin: A digital platform has no universally recognized definition (Evans, 2011). One of the most frequently cited definitions of platforms is as follows: “A platform is a business built on the ability to facilitate value-creating interactions between external producers and consumers.” The platform facilitates these interactions by establishing governance conditions and providing an open and participatory infrastructure. The platform’s overarching goal is “to facilitate matches between users and exchange goods, services, and social currency, thereby enabling value creation for all participants”.1 There are currently over 200 platform businesses with a market value of $1 billion or more. Four of the top five tech companies globally are based on platforms.2 Platforms’ growth has elicited a mixed response from observers. Many were optimistic, claiming that platforms may boost productivity, lower prices, remove ineffectiveness in present markets, support creating new markets, provide workers with accessibility and flexibility, and benefit less developed countries. The reasons against platforms are that they can exacerbate technological unemployment, replace conventional occupations with insecure employment with significantly less

1 Valuation of digital platforms, Kasper Tengel Hessellund and Klysner Sørensen, Copenhagen Business School, May 15, 2019. 2 Emerce Keynote: Rise of the Platform and What it Means for Business, Amsterdam, The Netherlands, Nov. 26, 2013.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 V. Kumar, The Economic Value of Digital Disruption, Management for Professionals, https://doi.org/10.1007/978-981-19-8148-7_4

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labor protection, exacerbate declining tax revenues, and may be psychologically harmful and corrosive to groups. “Platforms do not own the means of production; they create the means of connection,” it is said (Moazed, 2016). Asia drives Platform business growth: Which countries excel at establishing new platforms? Even with favorable underlying conditions, platforms rely on supportive underlying conditions. According to Accenture research, the best environments for platform growth are found in China, India, and the United States. While size matters in these countries, five factors such as digital user size and savviness, technology and governance, open innovation culture and policy, digital talent and entrepreneurship, and regulation can influence whether platforms thrive and prosper (see Footnote 3). A review of selected G20 member nations reveals significant regional differences in platform readiness. China, Germany, India, the UK, and the US will benefit from increased platform activity and harvest-related economic benefits.3 Between 2010 and 2015, more than USD 20 billion was spent on digital platforms through nearly one thousand officially announced transactions.4 North America is the largest region for digital platform investment, followed by the Asia Pacific, accounting for 33 percent of global investment, up from 6% in 2010. China accounts for the lion’s share of investment in the Asia–Pacific region.5 The overall platform readiness index (developed by Accenture)6 and each of the five index components differ widely within the G20 countries (Fig. 4.1). Except for the top five ranked countries—China, the US, India, UK, and Germany, Europe and developing markets lag in platform readiness. This is unsurprising given Europe’s fragmented digital economy and contrasting entrepreneurial and creative culture degrees.7 India, the US, and China benefit significantly from their large digital user bases and high user savvy, specifically smartphone usage. Additionally, China and India are expected to improve by 2022, owing primarily to the boost provided to the internet infrastructure and helpful public policies. While size is important, these high-ranking states also have other criteria: a high level of digital entrepreneurship and an open innovation culture conducive to forming platform ecosystems and collaborating with numerous stakeholders (see Footnote 3). Asia is home to the most platform firms, with a combined market capitalization of well over $2 trillion. The majority of Asian platform businesses are located in Hangzhou and Bangalore (). China accounted for 73% of market capitalization, and in China, homegrown platforms lead the entire platform economy, with the majority of large American platforms being prohibited. Tmall (Alibaba) commanded the lion’s share of China’s e-commerce market with 61.5 percent, followed

3

Five Ways to Win with Digital Platforms, Accenture, 2016. Accenture Research based on CB Insights, Tracxn and CrunchBase data. 5 The Center for Global Enterprise in Five Ways to Win with Digital Platforms, Accenture, 2016. 6 Accenture Platform readiness index computed on Digital User Size and Savviness, Open Innovation Culture, Policy and Regulation, Digital Entrepreneurship and Technological preparedness. 7 http://ec.europa.eu/priorities/digital-single-market_en. 4

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Fig. 4.1 Platform readiness index, 2020. Source Accenture Research in Five Ways to Win with Digital Platforms, Accenture, 2016

by JD with 24.2%.8 Outside of China, Asia-based platforms have experienced a fast development in fields such as e-commerce but have lagged in areas such as search and social media. For instance, Facebook is India’s most prominent social media site, with several large indigenous platforms. At the same time, the New York Times characterized Facebook as “so dominant” in Myanmar that “it is the internet itself to many people.” North America, specifically the US, is home to five of the world’s largest platform firms–Facebook, Apple, Amazon, Google, and Microsoft (LinkedIn) (Evans & Gawer 2016a).

4.2

The Platform Model

A digital platform is a business model enabled by technology that generates value by enabling interchanges between two or more interdependent organizations. Typically, platforms facilitate transactions between producers and end-users. Additionally, they enable businesses to share information to facilitate collaboration and develop new services and products. The ecology of the platform links two or more parties, generating strong network effects (explained later) that increase

8

“Tmall and JD had a combined market share of over 85% in China’s B2C e-commerce market in Q4 2018”. China Internet Watch. 2019-02-13. Retrieved 2020-01-04.

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value as more people join.9 Platforms that are successful function under welldefined governance rules that safeguard intellectual property and data ownership while also promoting trust among users. Cloud technologies enable platforms to offer resources in a SaaS mode. Platform business models are rapidly emerging as the digital revolution’s golden child. As digital platforms disrupt and dominate markets, creating communities of mammoth scale while delivering satisfying customer experiences. Regarding the form of transactions, there is a trend toward moving away from linear, “pipeline”-based models to platform-based transaction forms (Rochet & Tirole, 2006). Pipeline models describe how products and services are created along with a series of linear activities and "pushed" to the consumer via valueadding stages. While platformization does not preclude the presence of a supply chain, it involves a gravitational change in value creation toward the platforms themselves. Companies and people can offer various products and services to customers through platforms at relatively low entry costs. They transition from “push” to “pull” modes of operation by supplying the necessary services and support for parties to conduct transactions on the platform (Cusumano & Gawer, 2002). At their most fundamental level, virtually all platforms contain ratings, filers, reviews, and comments that (in theory) assist consumers in selecting the best product or service. However, several platforms have grown beyond this point. For instance, to assist MSMEs in China, Alibaba has gradually expanded its services offering to attract them to its platforms, such as free cloud software, warehousing, and credit for small businesses, to enhance their capability to trade expertly on the Alibaba platform. Additionally, they facilitate the customer’s lock-in to the platform.10 Thus, the traditional view of demand and supply (consumption and production) as openly separable dualities—with production containing a linear supply chain of integrated companies, each contributing a piece of value to an outcome from which a passive customer derives a private utility—is no longer applicable in the platform economy. The new economic model operates circularly as a feedback loop, with data and interactions (e.g., the network) serving as the primary source of value and resources. The virtuous cycle of value creation in the digital economy is depicted in the (Fig. 4.2). The upper portion of the figure depicts the conventional model, from raw materials to customer products, whereas the entire figure depicts the digital economy. The figure’s lower half also depicts the data value chain. An omnichannel approach (virtual + physical) is widely used in the digital economy. As the world transitions to a digital world, production processes and transactions may occur in various combinations between the virtual and physical worlds. Thus, they can be entirely physical, partially physical, partly digital, or entirely digital.11

9

“Two-Sided Markets: An Overview,” by Jean-Charles Rochet and Jean Tirole, March 2004: http:/ /web.mit.edu/14.271/www/rochet_tirole.pdf. 10 Digital Economy Report, 2019, United Nations Conference On Trade And Development (UNCTAD), 2019. 11 Courtesy Digital Economy Report, 2019, United Nations Conference On Trade And Development (UNCTAD), 2019.

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Fig. 4.2 Virtuous cycle of value creation in the digital economy. Source Courtesy Digital Economy Report, 2019, United Nations Conference On Trade And Development (UNCTAD), 2019

Till recently, digital platforms were the domain of technology and digital-born firms like Google, Apple, Facebook, Amazon, and digital start-ups like Uber and Airbnb that power the on-demand or sharing economy. Entrepreneurs with foresight who act as digital partners-affiliate providers, complementors, or app developers are now reaping the benefits of the platform economy. They can deliver revenue, cut costs, innovate new products and services, and accelerate time to market. And they can do so from any location. Traditional incumbents are also active in building their platforms, collaborating with creative entrepreneurs, and forming alliances or acquiring businesses. Philips, for instance, is reinventing itself in this manner in the rapidly growing health technology market.12 According to research, the overall market value of platforms is estimated to be US$4.3 trillion, with more than 1.3 million direct workers and many million indirect workers at partner firms that service or supplement platforms.13 Globally, digital platforms are transforming market competition, and platformbased businesses are rapidly gaining market share.14 While conventional incumbents have begun to respond, fewer than 15% of Fortune 100 firms currently have a created platform model.15 Nevertheless, the platform adoption is predicted to

12

Accenture Technology Vision 2016, https://www.accenture.com/us-en/insighttechnology-tre nds-2016. 13 The Rise of the Platform Enterprise: A Global Survey, January 2016, The Center for Global Enterprise. 14 For more details, on the origin and the impact of the platform economy, in-depth analysis in “Platform Revolution”, by Geoffrey G. Parker, Marshall W. Van Alstyne and Sangeet Paul Choudary, W.W. Norton & Company, 2016. 15 Based on Accenture Research data collected in May/June 2016.

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continue—IDC forecasts that more than half of big companies will develop or collaborate on industry platforms by 2022.16 The platform revolution, which began in the business-to-consumer (B2C) space with e-commerce, financial technology, and circular economy business models, has spread to the business-to-business (B2B) sector. B2B is more than twice the size of B2C.17 The monetization of data continues to be among the most exciting possibilities for platforms. Platforms generate an abundance of data—whether it is through a study of user experience, behavior, service usage, or productivity metrics. Platforms facilitate data collection and generate real-time insights about consumers, market trends, and operations. This results in a multiplier effect, where the value of data rises proportionally to the number of customers and partners in the ecosystem. Indeed, the vast amounts of data and the rapidity with which intelligent service enhancements can be implemented on platforms may be beyond the reach of the conventional economic model. The most significant data-driven possibility is for a platform to generate value through the development of new goods and services, the improvement of user experiences, the management of risk, and the increase in productivity. These are internal revenue streams generated by data-driven improvements inside the organization. The effect is challenging to quantify, and the opportunity is often not optimized. Data monetization may also be accomplished by offering third-party data-related services—a lucrative business model for platform players. Although internal monetization will be the primary source of revenue, external monetization is also a possibility if the platform owns unique data and can package new services for third parties around that data. Whereas some platforms are mainly transactional and heavily data-driven, all platforms benefit from data monetization. Internal and external monetization is not solely determined by the quality, uniqueness, and richness of data. Technology and human capital must be capable of deriving insights from data. Alibaba, for example, is a master in monetizing data. It operates on an assetlight strategy, enabling China’s largest online retailer to spend on next-generation technology and services, like big data and cloud computing, to keep its competitive advantage. Data—and a deeper comprehension of it—are critical to a business’s operations. Alibaba employs over 37% of STEM talent, primarily in database administration, AI, and machine learning. The resulting data insights are monetized in many ways. Alibaba, for example, derives 49% of its group income from advertising services, including those provided by 3rd party advertisers. The choices of 630 million customers, most of China’s internet population, are tracked

16

“IDC Predicts the Emergence of “the DX Economy” in a Critical Period of Widespread Digital Transformation and Massive Scale Up of 3rd Platform Technologies in Every Industry,” IDC, November 4, 2015. 17 Accenture, Circular advantage: Innovative business models and technologies that create value, 2015: https://www.accenture.com/in-en/insight-circular-advantageinnovative-business-mod els-value-growth.

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using data-tracking software (see Footnote 10). Sellers pay a monthly charge for the Alibaba software, which analyzes relevant data and tailors services to individual users. Smart logistics data forecasts supply and demand and directs platform merchants to pre-transfer products to high-demand warehouses. Finally, Alibaba has created an industry-first business credit system by aggregating information on sellers’ financial records, including sister concern Ant Financial records, prior transactions, and data from partner banks. Distinct data may be extremely valuable to companies and societies outside the platform business. For instance, Tickled Media, based in Singapore, is a community platform for Asian parents with over six million customers from Thailand, Singapore, the Philippines, Malaysia, Indonesia, and India. The firm established a separate division called Asian parent insights to generate half of its revenue by offering data on the niche segment, the parents, to major corporations like Nestlé, Unilever, and Pfizer. By conducting surveys, contests, and testing goods and marketing traits among its large user network on behalf of business clients, the data business unit can generate on-demand market research services faster than any consumer survey.18 Platforms’ discrete sources of power: The strength of digital platforms is derived from three different characteristics. First, the network effect of connecting market participants implies that increasing consumers attract retailers and partners and vice versa. As the network gains momentum on its own, the platform owner serves as an organizer, distributing the load across an increasing number of users. This changes the risk and cost associated with market creation away from the company to the network. Second, the convergence of technologies such as the industrial internet, mobile, artificial intelligence (AI), analytics, automation, and cloud is resulting in the emergence of a new “as-a-service” economy, in which services are dynamic, ondemand, as well as targeted, with a significant influence on the investment levels, cost to serve, and time to market. Small and large businesses may profit from the plug-in, flexible, scalable services by combining business processes, infrastructure, and software and making them accessible “on-demand.” Entrepreneurs benefit significantly from this; without the restrictions of upfront funding, the entire cost of a platform business, they gain access to new markets and distribution channels (see Footnote 10). Lastly, open & shared data may be intelligently mined to create new forms of value by specialists, including those from adjacent industries. Insights can be gleaned from large-scale monitoring of customer behavior or field use of products or machines. Indeed, massive amounts of data are produced daily and are expected to grow twofold biannually.19 This innovative, collaborative, and agile method of working is rapidly gaining traction, and it has been quite disruptive. According to a recent survey of Chinese SMEs, the primary benefits of platform businesses

18 19

http://tickledmedia.com/for-brands/mum-market-research/. . IDC: http://www.idc.com/promo/thirdplatform/fourpillars/bigdataanalytics#.

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Fig. 4.3 Platform effect on revenue and costs of China’s SMEs

to SMEs are increased revenue and cost savings (Fig. 4.3).20 Similar gains will accrue in other global markets as well (see Footnote 10). Alipay, based in China, provides online payment rates that are a small percentage of those offered by domestic and international competitors, averaging 0.6% versus PayPal’s 2.9%. However, the corporation is profitable because its consumer base is two and a half times the size of PayPal and payment volumes seven times those of its American rival. The scale has the potential to transform pricing strategies. A significant factor driving platform development is known as "network effects," or the advantages that accrue to platform users due to new users joining (Van Alstyne et al., 2016). Platforms facilitate transactions between two or more distinct transacting parties, such as Airbnb hosts and visitors, Facebook advertisers, and users. Therefore, in addition to direct network influences, platforms have crosssided (indirect) network effects, in which the growth of one segment of the market raises the value of another segment (Rochet & Tirole, 2006). The presence of network effects incentivizes successful platforms to expand rapidly as additional users increase their attractiveness. Additionally, network effects may result in "lock-in effects," where users are more likely to stay on a platform instead of migrating to a competitor, posing a challenge for policymakers to ensure markets remain competitive (see Footnote 11).

20

Accenture survey of more than 100 Chinese SMEs, 2016.

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Four of the world’s top five companies operate on a platform business model. Due to the success of these admired businesses, the platform business model has become the holy grail of business models (Fig. 4.4). Platforms enable the sale of products or services and the generation of content. On the other hand, the platform owner does not produce the goods offered on the platform (such as Alibaba, eBay). They do not offer any of the services listed on its platform (e.g., Airbnb, Uber, Taskrabbit, Freelancer). They do not generate daily content (YouTube, Twitter, Facebook). Therefore, how do they generate value? They are today’s middlemen. But this is an incomplete description. To remain relevant, they must contribute extra value to the entire exchange—while still extracting value for themselves. Numerous platforms have struggled because they were unable to accomplish this. Here are a few instances of platforms creating value: Platforms for asset sharing (like Airbnb) create value: • Assist the supply side (homeowners/hosts) in maximizing the use of their existing assets to generate revenue for the homeowners. • Assist the demand side (travelers) by locating more affordable, more private accommodations. Additionally, locate accommodations during peak periods (during special events) when all hotels are completely reserved. • Airbnb generates revenue by charging a commission on every reservation. They are contrasted to big hotel chains on the surface, but their balance sheet looks

Fig. 4.4 Multi-sided platforms. Source Dr Murat Uenlue/Platform business model, Platform business model fundamentals, June 26, 2017

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more like an online travel site. They are not responsible for funding their accommodation inventory. Airbnb is an asset-light company. Social media, as well as content platforms (such as Facebook), promote interaction with friends by allowing users to create user-created content: • The supply side: The users do the supply of content (two billion are attached to Facebook). Facebook does not charge its users for the content they generate but analyzes it and assists in the placement of (targeted) advertisements. • The demand side: Advertisers are on the demand side who advertise on social media. Facebook brings value by enabling advertisers to create precise advertisements (and gain access to the Facebook audience in common). By processing users’ data, posts, and likes, Facebook garners more than 2000 data points about us (interests, education, demographics, income, and numerous other things) (see Footnote 21). Thus, advertisers on Facebook may spend their income on more targeted advertising (Facebook gets the ad revenue, the largest source of income for the company) than conventional media to achieve a higher return-on-investment (see Footnote 21). Facilitating the buying/selling of products & services (for example, through eBay): • The supply side consists of individuals who sell used items, online merchants, small businesses, etc.) They derive value from the ease with which they can get started, the cost savings associated with advertising, and the ability to utilize a commercial framework and eBay’s legal and payment platform, Paypal. • The demand side (buyers) can shop easily, have a single point of contact for shopping inquiries, know they are getting a good deal because many sellers do not have the overhead of “brick-and-mortar” shops, and benefit from eBay’s buyer protection framework, among other benefits. • eBay generates revenue by charging on a per-transaction basis. They can do so due to the benefits they provide to both parties. They accomplish all of this with significantly lower capital expenditures and overhead prices. They do not maintain any inventory, develop, or produce any products. They, like malls, provide agglomeration profits. And they are not subject to the location-specific risks that have resulted in the death of many malls.21 The platform business model must provide value to each participant. However, it must also provide sufficient economic benefits in aggregate to be relevant. Consider Uber. One economic advantage is that it enables better utilization of idle assets. The annual average cost of ownership in the United States: $8558 ($23 each day). Cars are driven five percent of the time (72 min per day) and are

21

Dr Murat Uenlue/Platform business model, Platform business model fundamentals, June 26, 2017.

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parked 95%. This has resulted in economic benefits of $2.9billion in user surplus in select four US cities, New York, San Francisco, Chicago, and Los Angeles. Extrapolating the consumer surplus of $6.8 billion for the entire United States. In another example, in Australia, taxicab plate expense (cab owner spends $200,000– $300,000) manifests as an increase of $1.47 for an 8 km journey to the rider (see Footnote 21).

4.2.1

Profiting from Platforms

The critical role of big companies in economic growth is not novel. Nevertheless, the emergence of digital platforms has altered the course of this phenomenon. Digital platforms are displacing traditional malls by connecting shoppers to various brand stores, increasing brand efficiency, and producing income for platform owners. Data collected via the platform are often utilized to enhance company efficiency in markets, often in places other than those where the data were gathered. JD Finance, a financial services business owned by China’s JD.com Group, uses transaction data from its marketplace to integrate it into its loan evaluation methodology. Platform-based companies are becoming more popular throughout the world. Consider VIPKID, a prominent Chinese online education business established in 2013, pairs 500,000 Chinese students with 60,000 North American instructors for virtual, one-on-one English lessons. Jumia is a Nigerian e-commerce business that provides consumers with electronics, food, and apparel. It was established in 2012 and has grown into 23 African nations (World Bank, 2019). Flipkart connects suppliers and consumers in India to enable consumer electronics. It works similarly to a market but without the constraints of firms. As previously stated, digital platforms enable rapid scaling. There are numerous instances of billion-dollar start-ups developed on platforms. In China, e-commerce behemoth JD.com began as a small retail operation in a tiny booth at Beijing’s “Zhongguancun Electronics Shopping” Market; JD’s platform had 320 million active users as of July 2018. Ant Financial, a subsidiary of the Alibaba Group, is the world’s most valued fintech company. The company took off in a matter of years due to advancements in AI. Ant leverages big data to process loans less than a second from applying. Its online lending strategy, dubbed “3-1-0,” entails a three-minute app process, a one-second processing time, and no manual intervention. Since 2014, China has lent money to over 4 million small and medium-sized businesses (World Bank, 2019). Digital platforms provide entrepreneurs with instant business possibilities, thereby generating jobs. Since 2009, numerous groups of rural “micro-e-tailers” have established shops on Taobao.com Marketplace, fostering China’s “Taobao Villages.” Taobao Village merchants specialize in agricultural products, consumer goods, and handicrafts. Taobao Villages have generated over 1.3 million jobs,

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relocating young people from cities to their hometowns to establish their businesses (World Bank, 2019). For this type of e-commerce to thrive, reliable Internet connectivity and a high smartphone penetration rate are required. In 2018, the service sector employed most people in many countries: It accounted for more than 70% of total employment in Uruguay, Saudi Arabia, and Argentina and more than 80 percent in Jordan, Israel, China, and Hong Kong SAR. Job opportunities have increased as a result of platforms. Freelancers may now access numerous platforms at affordable entry fees because of the growth of platforms. Additionally, customers are more likely to utilize online services because of their confidence in brand certification, digitalized social capital, and 3rd party validations. Platforms can quickly diversify their revenue streams by gaining consumer confidence. Grab, Singapore-based ride-sharing, ultimately acquired 95% of the Southeast Asian market before expanding to include food ordering and payment systems (World Bank, 2019). GrabPay enables electronic payments for the two-thirds of individuals in the area who lack bank accounts. Certain platforms increase labor supply by expanding new and flexible kinds of employment to supplement conventional gig economy jobs. For the majority of platforms, employees set their working hours. Meanwhile, the additional income may help secondary earners manage their income fluctuations. Additionally, Platform employment allows more women to join the workforce because of its flexibility. However, these characteristics blur the distinction between formal and informal employment. While flexibility can be advantageous in certain circumstances, it raises worries about income volatility and the safeguards associated with traditional employer-employee relations, such as pension plans, paid leave, and health insurance. Finally, digital platforms allow companies to transform underused physical and human capital into active capital via digital platforms. For example, individuals may make money by advertising their free time and extra vehicle capacity— whether it’s a luxury vehicle, a moped, or a tuk-tuk—on ride-hailing services. Unemployed software developers in remote locations may use freelancing websites to display their skills and find employment with international companies. Regulation is necessary if platforms drive working conditions to the ground. In Indonesia, Grab and Go-Jek drivers staged massive protests in early 2018 to demand a hike in their tariffs. As a result, the Indonesian government revised its legislation to make it mandatory for these businesses to register as transportation companies, comply with safety regulations, and charge a minimum floor price. In response to a taxi driver lawsuit, Egyptian courts temporarily revoked the operating permits of Uber and Careem at the beginning of 2018. Uber and Careem were allowed to restart operations and compete with conventional taxis shortly after Egypt’s government approved legislation regulating them in May 2018 (World Bank, 2019). The digital economy raises questions about the existing framework of mergers and acquisitions, consumer welfare, and even competition legislation. The rise of platform firms dominates their offline counterparts and causes concerns about market power (Fig. 4.5). Certain online products’ network effects frequently result

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Fig. 4.5 Platform firms dominate their offline competitors. Source WDR 2019 based on data from Safaricom; KCB Bank group; Airbnb; Marriott; Financial Times

in substantial advantages for early adopters, increasing market concentration and making it easier for monopolies to form. Safaricom, Kenya’s biggest mobile phone provider, with an eighty percent market share, introduced M-Pesa, the country’s digital payment system, in 2017 in the country. A year later, M-Pesa had a similar market share of 80% in digital payments. At times, platform firms exclude rivals by charging greater costs for interconnection with other networks. Zimbabwe forced e-money providers to share infrastructure and maintain interoperability, resulting in a 15% increase in subscribers. In Peru, the country’s telecom regulator forced the country’s major communication networks to offer banks new e-money messaging capabilities (World Bank, 2019). Platform as Marketplaces: Marketplaces like Uber or Airbnb create new opportunities for a radical restructuring of economic activity organization (Parker et al., 2016a, 2016b). Marketplaces, an emerging platform, facilitate and support transactions between unaffiliated supply and demand sides (McIntyre & Srinivasan, 2016). They are also known as transaction platforms and are characterized by open business models based on the co-creation of value by independent players (Evans & Gawer, 2016a, 2016b, 2016c). As a result of winner-take-all dynamics, they are often linked with fast development and market dominance (Hagiu & Wright, 2015). Consequently, researchers from various disciplines have developed an interest in these organizational forms, suggesting that they could serve as the organizing basis for a new economy (Kenney & Zysman, 2016). Digital technologies enable modern marketplaces. The digital market links independent actors on the demand and supply sides (organizations or individuals)

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through a digital platform. These actors interact directly to initiate and complete commercial transactions. For the transactions market, the platform establishes a legal and institutional framework. The platform does not trade or produce goods or services in significant quantities, although it enables producers or retailers to provide goods through its digital platform. Empirical evidence suggests that digital markets are significantly more disruptive to their sectors than the first generation of internet-enabled marketplaces, mainly focusing on improving B2B transaction efficiency (see Footnote 22). Recent advancements, like novel search & matching algorithms and the widespread adoption of mobile devices, have enabled the expansion of novel market business models that cater to a variety of consumer sectors, such as transportation (Uber), lodging (Airbnb), and finance (Lending Club).22 These markets frequently offer completely new value propositions, employ innovative income models, or generate value by leveraging the assets of private individuals (Parker et al., 2016a, 2016b). Their allure is demonstrated, among other things, by the fact that over 50 private marketplace companies are now valued at more than a billion dollars (Unicorns). Most platforms are multi-sided, which means any entity that enables interaction between two (or more) sets of agents. Network effects can grow user engagement which is a common premise in platform business models. Once critical mass is reached, this activity can be converted to profit—“users first, monetization later,” as the Silicon Valley adage goes (Parker et al., 2016b) (see Footnote 1). With only a few years of experience and hundreds of millions of dollars in net losses, Snapchat, Lyft, and Spotify all priced their initial public offerings at over $20 billion on the day of the public offering (Russell & Grocer, 2019). Profiting from a platform business model entails gaining from a platform that enables interaction between two or more consumers (Fig. 4.6). Certain businesses, for instance, born social startups, are devoted to the platform business model. Other businesses can operate their platform(s) while conducting most of their business using more conventional models. The third group of companies cannot operate its platform but through third-party platforms. Eighty-four percent of conventional businesses either had their platform or used one operated by a 3rd party, whereas only 5% of born-digital businesses did not have a platform strategy. Companies with a platform existence—whether their own or through a third party—saw an average increase in annual EBIT growth of nearly 1.4% (Bughin et al., 2019). Certain rules that govern the operation of matchmaking platforms are markedly different from those governing traditional business models. While most traditional businesses are focused on selling products or services, transaction platforms are focused on connecting disparate groups of users. For instance, a traditional taxi company may sell cab services, while a platform firm may link drivers and customers. Another defining characteristic is the platform business model’s focus on

22

Understanding Platform Business Models: A Mixed Methods Study of Marketplaces, Karl Täuscher and Sven M. Laudien.

4.2 The Platform Model

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Fig. 4.6 The Platform business model. Source Applico https://www.applic oinc.com/blog/evolve-pro duct-company-platform/

network effects (discussed later) and demand dependency across different user groups. Thus, it frequently makes sense for a platform business to offer services for free to one side of the platform, for instance, members of a social media platform such as Facebook. The increased cost of this support more than compensates this expense by the resulting rise in demand for the advertisers who are the revenue source for Facebook. The winner takes it all: The platform economy has grown rapidly in recent years. The five most valued public businesses are American technology firms: Facebook, Alphabet (Google), Apple, Amazon, and Microsoft. These firms are closely followed by Chinese technology giants like Xiaomi, Baidu, Tencent, and Alibaba, and a slew of other internet companies headquartered in the United States, including Airbnb, Salesforce, Uber, eBay, and Netflix. Most of these companies are young (Microsoft and Apple are adolescents) and have grown extremely quickly due to their digital platforms. These platforms exist in a wide variety of domains, from education (like Future Learn, Udacity, EdX, and Coursera) to smart homes (such as Samsung SmartThings, Philips Hue, Google Assistant, Apple Homekit, and Amazon Alexa) (van der Aalst et al., 2019). The most prevalent platforms facilitate matching supply and demand (such as Baidu, Uber, Airbnb, Alibaba, and Amazon). These digital platforms have fundamentally altered how we work, conduct business, produce, move, learn, and socialize. Without a doubt, big-scale digital platforms simplify our lives. Products and services are delivered more quickly and at a lower cost. Additionally, these platforms facilitated the connection between individuals and businesses. Uber serves as a bridge to bring together drivers and passengers who would never meet otherwise. We discover data that we would not have discovered without Google. Through LinkedIn, we can make valuable connections. Amazon allows us to purchase almost everything at a cheaper cost and more ease. Amazon Market allows 3rd party retailers to sell products alongside those offered by Amazon (de Reuver et al., 2018). Successful platforms are characterized by rapid growth, and, in the end, only one winner often remains.

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Why do successful platforms morph into monopolistic systems where the victor takes everything? This is for a variety of reasons. To begin, the conventional economy of scale is applicable. Digital products and services have a high level of fixed costs but a low level of marginal costs. Take note that Airbnb and Uber have near-zero marginal transaction costs. Second, they are often referred to as “network effects.” The more organizations or people that use the platform, the more valuable it becomes. As platform usage increases, the platform’s quality improves (de Reuver et al., 2018). Four potential consequences of successful digital platforms are the subject of intense debate. To begin with, competition becomes more difficult when an evident market leader emerges (‘the winner takes it all”), and dominance has been shown to stifle innovation. Secondly, the platform could amass a large amount of sensitive data. For instance, in 2018, the Facebook—Cambridge Analytica data scandal exposed millions of people’s Facebook accounts and used their personal information for political advertising purposes. Additionally, the platform makes more subtle utilizes of user data, such as recommending items that your friends purchase. Often, it is uncertain where legal and ethical boundaries exist. The third issue is the possibility of platform-generated rankings being skewed. This can range from excluding certain viewpoints (for political reasons, for example) to unfairly ranking products. In such instances, algorithms are modified to produce a distinct result, benefiting a 3rd party (possibly the platform itself). For instance, Google has been accused of using search results to promote its shopping service. Amazon is a digital platform and a products supplier (speakers, televisions, smartphones, television series, and diapers, to name a few), which inevitably creates conflicts of interest. The fourth issue is that big digital platforms tend to integrate horizontally and occasionally vertically by leveraging their user base. Additionally, a dominant platform’s revenue can subsidize growth in other sectors. For instance, Google invests its search engine marketing profits in various products and services. As a result, competition is difficult in emerging markets (van der Aalst et al., 2019).

4.3

Network Effects

The Network effects—the power of Platform: A vital characteristic of digital platforms is their ability to generate network effects, also referred to as network externalities. Network effects are predominant in platforms when more users draw additional users, a strong dynamic that sparks a self-reinforcing cycle of so-called convex growth. More and more people using digital platforms means that platforms may gather exponentially more data, improving the accuracy and value of their conclusions about the behavior and requirements of their users (see Footnote

4.3 Network Effects

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Fig. 4.7 Self-reinforcing platforms (Evans & Gawer, 2016a, 2016b, 2016c)

22). Because of this, platforms can scale more quickly than pipeline companies because of a virtuous growth cycle.23 Additionally, platforms may generate value by utilizing resources they do not control, increasing the value rapidly while keeping expenses constant (Daugherty et al., 2016). This describes how established industries (such as retail, music, hotel, and taxi) were impacted by platforms in a matter of years (Amazon, Spotify, Airbnb, and Uber). Amazon CEO Jeff Bezos signifies this self-reinforcing dynamic as the “Amazon flywheel.” (Evans & Gawer, 2016a, 2016b, 2016c) (Fig. 4.7) illustrates this growth “flywheel” for both Amazon and Uber (see Footnote 23). In the twenty-first century’s internet period, monopolies are shaped by demand economies of scale. In contrast to industrial companies, which benefit from economies of scale in terms of supply, platforms gain from demand-side economies of scale because of network effects provided by advancements in information technology and data analytics. Increased user numbers result in increased demand, resulting in richer data and innovation, creating additional value, and attracting additional users. In some cases, this positive feedback loop results in winner-takesall marketplaces and the emergence of monopolies like Facebook (the world’s most popular social media platform), Google (which controls 94% of mobile search and 82% of mobile operating systems), as well as Alibaba (over 75% of Chinese e-commerce transactions) (Canning & Kelly, 2015). Because double-sided platforms increase in value due to network effects, the primary challenge for startup platforms is attracting enough users on either side of the platform to generate revenue and remain profitable. From a business standpoint, critical mass is reached when the platform has a sufficient number of users on both sides, at which point it becomes a viable entity. Although it could result in the creation of monopolies, product differentiation is a significant reason for

23

Valuation of digital platforms, Kasper Tengel Hessellund and Klysner Sørensen, Copenhagen Business School, May 15, 2019.

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Fig. 4.8 Network value increases nonlinearly with the number of subscribers. Source What are Network Effects? Nicholas L. Johnson, https://www.applicoinc.com/blog/network-effects/

the platform economy’s continued competitiveness. For instance, LinkedIn specializes in matching individuals to highly skilled areas of the job market, whereas Mediabistro focuses exclusively on matching individuals to media-related jobs. Efficiency in social networks, aggregated demand, application growth, and other factors enhances the value of bigger networks to their users.24 Ethernet co-inventor and 3Com inventor Robert Metcalfe observed that the telephone network value increases non-linearly with the number of customers, allowing for more connections between subscribers (Fig. 4.8). It was known as Metcalfe’s Law. This is precisely the growth pattern observed at Microsoft, Apple, Facebook, and Uber platforms (see Footnote 23). This pattern has significant economic ramifications. New buyers join the market, attracted by the expanding network of friends and family members. Network effects and lower prices may combine to promote huge market adoption. This is often the case when technology develops, and manufacturing capacity rises (see Footnote 24). Two-sided Network effects: A two-sided market is an intermediary economic platform having two distinctive user groups that synergistically support each other. Two-sided platforms, such as Uber and Airbnb, rely on network effects to remain competitive and profitable. Platforms utilize user-provided data via techniques such as machine learning (ML). ML becomes more effective as more data are fed into its system, generating smarter algorithms. As a result, users can receive more precise messages (ads). In Metcalfe’s telephone scenario, phone consumers attract additional phone users. In the case of Uber, however, two market segments are involved: drivers and riders (Fig. 4.9). Numerous other platform businesses exhibit a similar dynamic. Application developers attract customers, and customers draw application developers to Google’s Android operating system. On the Upwork platform, freelancers attract job openings, and job postings attract freelancers. On PayPal, merchants

24

Understanding the basics of Network Effects—The Power of the Platform, Ravi Kumar, Products, Platforms, Business & Innovation in Industry 4.0/IIoT, Jun 29, 2018.

4.3 Network Effects Fig. 4.9 Two-sided network effects. Source Platform Revolution by Geoffrey Parker and Sangeet Paul Choudhary

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LOWER PRICES

LESS DRIVER DOWNTIME

MORE DEMAND

FASTER PICKUPS

MORE DRIVERS

MORE GEOGRAPHIC COVERAGE / SATURATION

attract customers, and buyers draw vendors. Hosts attract visitors, while visitors attract hosts on Airbnb. All such companies generate positive feedback in a two-way network (see Footnote 24). These effects are critical for network growth, and platform businesses frequently spend large amounts to attract users to one side of the marketplace. They are well aware that if they convince one side to join the platform, the other will follow suit. Uber’s ability to spend millions of dollars “giving away free rides worth $30 each” is explained by two-sided network effects with positive feedback. Uber’s discounts help the company grow by recruiting a virtuous circle of drivers and passengers who would ultimately pay a full charge to use the cabs connected to the network (see Footnote 24). A frequently cited example is a neighboring bar that hosts a weekly Ladies’ Night, during which female customers receive discounted drinks. When the women arrive, the men follow—and they are happy to pay full price for their drinks. Thus, it may occasionally make economic sense in a two-sided market to accept economic losses—not temporarily, but forever!—in Market A to grow a related Market B. The sole stipulation is that gains in Market B should exceed losses sustained in Market A (see Footnote 24). The magnitude of network effects is proportional to the network’s size. As a result, a critical corollary is that effective platforms can rapidly and easily expand in size, thereby scaling the value derived from the network effect. It’s difficult to recall today, but Yahoo used to be a more common Internet gateway than Google. Despite the latter’s four-year lead, the tale of how Google overtook Yahoo exemplifies the critical nature of scaling both sides of a network. Networks with frictionless entry have an almost unlimited potential for organic growth. Frictionless entry refers to a user’s capacity to join a platform and participate in the value generation that the platform enables speedily and effortlessly (see Footnote 24). A two-sided network has four distinct effects (i.e., one with consumers and producers). When creating and maintaining a platform, it is critical to understand and consider all four. • Same-side effects are “network effects created by the impact of users from one side of the market on other users from the same side of the market—the effects

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that consumers have on other consumers and those that producers have on other producers” (see Footnote 24). • Cross-side Effects: “Network effects created by the impact of users from one side of the market on users from the other side of the market—the effects that consumers have on producers and those that producers have on consumers. Both same-side effects and cross-side effects can be positive or negative, depending on the design of the system and the rules put in place” (see Footnote 24). The first type, positive same-side impacts, encompasses the advantages that consumers receive as the number of consumers of the same kind grows—for instance, the impact that occurred as the number of Bell Telephone users increased. The more friends and neighbors you had who could be reached via “the Bell,” the more value you got from your Bell subscription. Currently, a gaming platform such as the Xbox MMOG has a similarly beneficial impact on the user-to-user site: the more fellow players you encounter, the more fun you have while using the platform. On the producer side, positive same-side effects are also possible. Imagine a platform for creating and sharing almost universal images like Photoshop from Adobe: The more designers generate and share their images on the PDF platform, the better it is for one’s image creation and distribution. However, same-side effects can be negative. Occasionally, the increase in numbers across one side of a platform has a drawback. Consider Covisint’s IT platform, linking cloud-based networking software developers with service suppliers. Customers are attracted to the Covisint platform as the number of competing providers increases, benefitting the suppliers. However, as providers become too large, it becomes increasingly difficult for suppliers and consumers to connect. This phenomenon is referred to as a negative same-side impact. A positive cross-side effect happens when consumers gain from a rise in the number of market contributors on the opposite side. Consider a payment system such as Visa: as more producers (merchants) agree to allow Visa cards, the shopping experience becomes more flexible and convenient for consumers (shoppers), resulting in a positive cross-side impact. Naturally, the same influence can occur the other way also; for retailers, having more Visa cardholders means having more prospective consumers. Similarly, as the number of Windows app developers increases, users’ versatility and power of the operating system increase. As the number of Windows consumers increases, so do app developers’ potential advantages (financial and otherwise). Positive cross-sectoral effects result in win–win situations. Naturally, cross-side impacts are not always balanced. Females attract men more than men appeal to females on OkCupid. Many Twitter users read, whereas just a small percentage tweet. Most users ask questions on question and answer sites such as Quora, while a small minority respond (see Footnote 24). The cross-side effect can be negative which can happen, when, for example, the more ads a website puts out, the less appealing it is to the readers. It can put off readers so much that they may not want to visit the website at all. A variation of

4.3 Network Effects

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Fig. 4.10 Indirect networks effect. Source The network effects bible, https://guides.co/g/the-net work-effects-bible/121736

the cross-side effect is when the value of a network increases at one end due to actions at the other end but not directly benefiting its own side (Fig. 4.10) (see Footnote 24). The majority of internet-era behemoths depend on demand-side economies of scale. They owe their importance to the groups developed around their platforms. Instagram was not sold for $1billion because of its thirteen workers; WhatsApp was not sold for $19billion because of its fifty workers. The reasons were identical: both organizations had created network effects because of their sizable user bases. And while platform firms are frequently extremely profitable, the primary source of wealth generation is now external to the organization rather than internal. The giants of the twenty-first century are being shaped through network effects— Facebook and Google each touch nearly one-third global population. In a world of network effects, users’ ecosystems have emerged as a new source of economic benefit and market supremacy (see Footnote 24).

4.3.1

How Network Effects Create Value-Metcalfe’s Law

Why do network effects create so much value? Network effects are at the heart of some of the world’s most powerful & fastest-growing businesses. That is why this is an exciting subject—to learn about the app ecosystem at Apple, the social content at Facebook, and the community at Airbnb. There is a single (Fig. 4.11) that encapsulates the entire concept of network effects. The value grows non-linearly while costs increase linearly.25 Initially, the cost rises faster than revenue (a proxy for value) during the loss period; at the

25

The Power of Network Effects: Why they make such Valuable Companies, and how to Harness them, Eric Jorgensen, June 22, 2015.

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Fig. 4.11 How network effects create value-Metcalfe’s law. Source The Power of Network Effects: Why they make such Valuable Companies, and how to Harness them, Eric Jorgensen, June 22, 2015

break-even point, the revenue acceleration is faster than cost, and the company enters the profit period. The implication is a key notion that those working in a network effects-affected business should be aware of: A few players will continue to grow in size in the long term. Another reason network effects are so valuable is their low maintenance requirements. Once constructed, they tend to self-perpetuate, even if they are completely incompetently managed. To quote Warren Buffett, “it’s great to own a business that a monkey could run—because sooner or later, one will.” Metcalfe’s law: The network effects that underpin the platform’s business model are what propel platform growth. Metcalfe’s law was suggested by Robert Metcalfe, the creator of Ethernet, in the 1980s as a method for calculating network value in terms of network size (the network’s nodes). According to the law, the network’s value V is proportional to the square of the network’s size n, such as V ∝ n2 . Metcalfe’s law was important and embodied the concept of the network effect. It also sparked numerous debates. Other laws, such as Reed’s law (V ∝ 2n), Odlyzko’s law (V ∝ n log(n)), and Sarnoff’s law (V ∝ n), have been proposed. No empirical evidence supporting, or refuting Metcalfe’s law was available for 30 years till 2013 when Metcalfe fitted a curve using Facebook data that approximates his law very closely.26 Metcalfe’s law is further validated by utilizing Tencent’s (China’s biggest social network firm) data. The findings indicate that: 1. Of the four network effect laws, Metcalfe’s law matches the data the best. 2. Both Facebook and Tencent data match Metcalfe’s law quite well.

26

The network effects bible, https://guides.co/g/the-network-effects-bible/121736.

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3. And the value of Facebook and Tencent is proportional to the squares of their network sizes, not linear (Zhang et al., 2015). The network effect has become a powerful concept in the technology field, business and economics, social sciences, and worldwide public events (Bond et al., 2012; Ormerod, 2012). A network effect is when the value V is based on its size n. (the number of its nodes) (Swann, 2002). Four empirical laws have been defined and suggested to describe a more precise behavior or network effects. • • • •

Sarnoff’s law (Swann, 2002): V ∝ n, Odlyzko’s law (Briscoe et al., 2006): V ∝ n log(n), Metcalfe’s law (Gilder, 1993): V ∝ n2 , and Reed’s law (Reed, 1999): V ∝ 2n.

Metcalfe’s experiments contain four critical points (Metcalfe, 2013): (1) Metcalfe reiterated the 40-year-old hypotheses, namely that a network has a value of V ∝ n2 but a cost of C ∝ n. (2) The network size n of Facebook is described as the number of its MAUs (“Monthly Active Users”), whereas the network value V of Facebook is described by revenue (as a proxy for value); (3) The Facebook statistics do indeed follow Metcalfe’s law, i.e., Facebook’s revenue is proportional to the square of the MAUs number. (4) The growing trend of a network may be described using a function called the netoid function. Published data from the Facebook and Tencent networks were used; V (revenue) and network size n were used. Additionally, to prove Metcalfe’s linear-cost theory, empirical evidence for network cost C was computed as revenue less profit.27 ,28 The number of MAUs (average monthly users) represented Facebook’s and Tencent’s network size (number of nodes). (Fig. 4.12). The Metcalfe functions are derived as follows using empirical data from Tencent and Facebook: Tencentvalue = 7.39 × 10−9 × n2 Facebookvalue = 5.70 × 10−9 × n2 It is immediately obvious that Tencent’s marginal increase in value per unit of active user addition is greater than Facebook’s. Metcalfe’s netoid function (Metcalfe, 2013) represents the growth trend of the network’s size n over time t.

27 28

Tencent financial reports. http://www.tencent.com/en-us/ir/reports.shtml, Nov. 2014. Facebook financial reports. http://investor.fb.com/, Feb. 2015.

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Fig. 4.12 Value curves of Tencent, Facebook (Metcalfe, 2013)

“ ) ( Netoid = p/ 1 + e−v×(t−h) The following are the descriptions of the three parameters p, v, h: • p: the peak value indicating the highest value of the MAUs number; • v: the speed or virality with which adoption takes place; • h: the moment when the growth rate is highest, and the network size is half the peak. Tencent’s and Facebook’s MAU growth trends are depicted in the (Fig. 4.13). The following are the netoid predictive functions: )) ( ( NetoidTencent =2.61 × 109/ 1 + e−0.30 × t−2013.8 )) ( ( NetoidFacebook =1.45 × 109/ 1 + e−0.77 × t−2010.56 Another validation of the law was provided by Madureira et al. (2013), who utilized Eurostat data. However, approximate Metcalfe’s law is a predictor; it remains an important agenda-setter in platforms regardless of its precision (Metcalfe, 1996).

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Fig. 4.13 Netoid curves (Zhang et al., 2015)

The aftermath: Metcalfe law generally seems to hold till about 2015. After that, the value creation for each user addition gallops (and still galloping). The trendline equation y = 0.0659 x 2.6 has the power of 2.6, indicating that post-2015, Facebook does better than Metcalf law (Fig. 4.14). The moderating factors could be larger internet penetration, adoption of social media as an integral part of our lives, and rapid growth in user base (doubled since 2015).

4.4

Sharing Economy

From consumption to sharing: We will one day look back on the twentieth century and wonder why we accumulated so much stuff. In 2004, President George W. Bush was re-elected due to his proclamation of an “ownership society:” “The more ownership there is in America, the more vitality there is in America.” However, the ownership society was decaying from the inside out even as Bush announced its birth. Its demise started with the advent of Napster. The digitization of music and the ability to distribute it rendered CD ownership obsolete. Napsterization then expanded to almost all other forms of media. Subprime mortgages and credit-default swaps, which had been supposed to underpin all of this ownership,

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Fig. 4.14 Facebook does better than Metcalfe’s law (Metcalfe, 1996)

had fallen on top of us by 2008 (see Footnote 29). Ownership had not made the United States vital; it had nearly destroyed the country. This generation of consumers pioneered a new kind of collaborative consumption, in which things are rented, loaned, and even shared rather than purchased. You may observe it in the growth of big companies such as Netflix, whose more than 210 million users pay a subscription fee for access to a vast library of movies, or Zipcar, which offers part-time car-sharing to more than 500,000 members. Airbnb and Uber exemplify the new age of sharing economies. Those companies are essentially Internet-era souped-up versions of old car- and video-rental businesses. Airbnb’s real inventive spirit of collaborative consumption enables individuals to rent their homes to travelers (see Footnote 29). Naturally, there is a green component here: sharing and renting more things results in less production and waste, which is excellent for the environment and even good for one’s self-image. Additionally, renting a power drill through Snap Goods for a day is significantly less expensive than purchasing a new one. It is ideal for an urban lifestyle with a high density of neighbors and limited storage. But the collaborative consumption’s true advantage is social. In an age when families are dispersed, and we may not recognize our neighbors, sharing stuff- even with unfamiliar persons we have encountered online, enables us to form meaningful connections. That is the appeal of a sharing society—and maybe the reason it will last longer than an ownership-based society29 . The sharing economy has truly arrived. The numerous facets of Internet-based sharing have created conceptual and semantic confusion, resulting in debates about the sharing economy’s boundaries and scope and its definition (Hamari et al., 2016). In 2016, Arun Sundararajan

29

Today’s Smart Choice: Don’t Own. Share, Time, Mar. 17, 2011.

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stated that he was “unaware of any consensus on a description of the sharing economy” (Sundararajan, 2016). One possible definition of the sharing economy is as follows: “Sharing economy is an IT-facilitated peer-to-peer model for commercial or non-commercial sharing of underutilized goods and service capacity through an intermediary without transfer of ownership” (Schlagwein et al., 2019). A PwC study examined the sharing economy’s five components: streaming, staffing, finance, car-sharing, and travel. By 2025, global investment in these areas will reach $335 billion.30 The term sharing economy has been misused many times. There is a significant distinction between platforms like Deliveroo and Doordash, which operate on the basis of meeting immediate demand with a consistent pool of labor, and platforms (and consequently becoming a part of the gig economy) such as Airbnb or BlaBlaCar, which are founded on the sharing of underutilized assets. Thus, simple delivery does not constitute a sharing economy; it is a mobile-enabled version of point-to-point delivery (Schneider, 2017). However, because the term “sharing” has a positive connotation, numerous platforms that do not entail conventional sharing have preferred to describe themselves as part of the sharing economy (Frenken & Schor, 2017). Technological advancements have reduced transaction charges, making asset sharing more affordable and convenient than ever—and thus feasible on a far bigger scale. The significant change is the increased accessibility of data on people & things, enabling the disaggregation and consumption of physical assets as services. A power tool, renting a surfboard, or a parking spot from another person was possible before the internet but frequently proved to be more difficult than it was worth31 . The model applies to costly items to purchase and is generally owned by individuals who do not fully use them. While bedrooms and automobiles are the most apparent instances, fields in Australia, a camping site in Sweden, and washing machines in France are also available for rent. As for sharing economy, proponents like to say access trumps ownership. For instance, some individuals have purchased automobiles solely to rent them out. Historically, new approaches to doing things online have not completely displaced traditional methods. However, they have frequently morphed them. Just as online shopping forced Tesco and Walmart to adapt, online sharing will reshape transportation, equipment rental, and tourism, among other industries (see Footnote 31). According to New York Magazine, the sharing economy has thrived largely since the real economy is struggling. The sharing economy succeeds because of a depressed labor market, in which “lots of people are trying to fill holes in their income by monetizing their stuff and their labor in creative ways.” In many cases, people join the sharing economy after losing a full-time job, including a

30 31

PwC. The rise of the sharing economy, The Economist, Mar 9, 2013.

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few instances where its pricing structure benefits them.32 “Almost always, it is money, not trust, that motivates people to open their homes and cars to strangers. … Tools that increase people’s trust in strangers’ kindness may be catapulting hesitant sharing-economy participants over the adoption threshold. The sharing economy, particularly Uber, has significantly negatively impacted worker wages (Frey, 2017). However, what brought them to this point in the first place is a damaged economy and harmful public policy that has forced millions of people to seek employment in odd jobs”(Roose, 2014). Uber’s “audacious plan to replace human drivers” may result in job losses, as even freelance driving will be automated.33 While the introduction of Uber did not result in job losses, it did result in a nearly 10% decrease in the incomes of incumbent taxi drivers. According to some, the Great Recession accelerated the growth of the sharing economy by increasing the desire for temporary work. However, there are disadvantages for the worker; when businesses use contract-based employment, the “advantage for a business of using such non-regular workers is obvious: It can lower labor costs dramatically, often by 30%, since it is not responsible for health benefits, social security, unemployment, or injured workers’ compensation, paid sick or vacation leave and more. Contract workers, who are barred from forming unions and have no grievance procedure, can be dismissed without notice.”34 The most popular sharing services revolve around housing and automobiles (Uber). The most well-recognized example is Airbnb, with more than 200 million users. In 2020, 193 million bookings were made on Airbnb. Anyone seeking a place to stay can post their requirements on Airbnb’s seven million listings (run by four million hosts), with the company taking a 9–15 percent share of the rental charge. What appears to be a disruptive model will almost certainly be incorporated into current models and adopted by incumbents, as has frequently occurred. The concept of hiring from an individual instead of a faceless corporation will endure, even if the sharing economy’s initial idealism will not. The fact that authorities, tax collectors, and large corporations are sniffing about a model that millions of people have embraced demonstrates its value and growth potential.35 In 2013, 90% of people had never heard of the word “sharing economy,” 5% assumed it referred to a barter exchange, and 5 percent recognized that new technology and peer-to-peer networks enabled evolving business models. Few people had used Airbnb or BlaBlaCar. In 2021, the reality was markedly different. The sharing economy is constantly in the news, but it has also spawned an evergrowing—and at times bewildering—range of debates. The sharing economy will simply become a part of the economy, devoid of special terminology, but that time has not yet come.36

32

New York Magazine in The rise of the sharing economy, The Economist, Mar 9, 2013. “Uber’s audacious plan to replace human drivers”. CBS News. 34 “How the Sharing Economy Screws American Workers”. The Huffington Post. January 20, 2016. 35 All eyes on the sharing economy, The Economist, 3 Sept 2013. 36 What exactly is the sharing economy? April Renne, World Economic Forum, 13 Dec 2017. 33

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The sharing economy makes tycoon lifestyles more accessible. A tycoon’s life starts with a private plane. Owners of private planes are free to come and board anytime they like. They economize on time. Even first-class travelers must wait for their flights for nearly an hour. You won’t have to worry about other travelers overhearing your chats since the aircraft can function as flying offices. The journey is more pleasant (private aircraft travel at an average height of 45,000 feet), and you may even bring your pets. You no longer require to be super-rich to own one. After Southwest Airlines, NetJets is currently the fifth biggest airline in terms of aircraft and has access to hundreds of private airports. Applying fractional ownership or time-sharing to the ultimate executive device was its most significant innovation. Customers, for example, may buy a time-share subscription to a plane that allows them to fly for 200 h each year (see Footnote 37). The sharing economy was barely motivated by the wealthy’s requirements. However, it fits them perfectly in some ways. The entire concept is predicated on individuals possessing surplus properties to rent to strangers. Who possesses more idle assets than the ultra-wealthy? Uber and Airbnb are well-known in the luxury and general sectors. Uber now provides yacht tours in “Dubai” (UberYacht) and helicopter commutes in “Sa Paulo” (UberHelicopter) (UberCopter).37 Airbnb is a thriving business in the Caribbean, Hong Kong, and London, renting out luxury apartments. Once upon a time, the global elite could only be joined if one was born into money. A hundred million dollars were the next need, followed by a billion. The sharing economy has opened up formerly exclusive products and services to the rich or pretendmillionaire down the street. More individuals can join them now than ever before, even briefly. If elsewhere in the world, sharing economy is booming, and Japan’s sharing economy remains tiny. Japan is a notable exception. While hotel rooms are scarce, regulations stymie Airbnb and other sharing platforms. It is a classic case of being able to share but unwilling to share. Airbnb is barely concealing its annoyance. This demonstrates the country’s apprehension about the sharing economy. In Japan, a generous approximation of the sharing economy’s value is only $11 billion, contrasted to $229 billion in China (see Footnote 38). Regulation favors large companies and industries and impedes faster and more mainstream growth. Another stumbling block is the public opinion in Japan.38 Numerous people are simply unaware that sharing apps exist. Others believe they are prohibited. The primary impediment to the sharing economy’s growth is public anxiety. Social custom is another impediment. The Japanese are concerned that sharing platforms will fall short of the high standards they have grown accustomed

37

The sharing economy brings tycoon lifestyles within reach of some, The Economist, 26 Nov 2016. 38 Why Japan’s sharing economy is tiny, The Economist, 14 June 2018.

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to. As a result, Japan’s Sharing Economy Organization has established a "trust mark" to instill greater consumer confidence. The sharing economy is the result of several profound political, economic, and technological social transformations39 : • Technological: Enabling technology has facilitated direct transactions between huge networks of individuals and organizations.40 These comprise open data, mobile phone ubiquity and cheap price, and social media.41 • The concept of social commerce is that trade is helped by social networking. Social media participation fosters and helps the social commerce & sharing economy by encouraging people to purchase similar products, try similar activities, and look for group discounts like those provided by firms such as Groupon. • Economic: While a few pioneering businesses are paving the way, widespread adoption will require capabilities like data collection and sharing, disseminating best practices, and augmented collaboration. For instance, given car ownership’s significant inefficiencies in the United States, India’s growing middle class may leap-frog car ownership entirely and shift to ride-sharing (Botsman & Rogers, 2010). • The urban lifestyle trend: Congestion generates a new set of difficulties that the sharing economy can address. Ride-sharing firms recognized this and developed a business model to capitalize on this new urban environment. Airbnb capitalized on people who had space they were not using by renting it out at a discount to those needing a place to stay for a short period (O’Brien, 2015). Even optimistic market pundits have been taken aback by the sharing economy’s explosive development. On one side, hundreds of thousands of sharing economy platforms currently operate in nearly every area and activity worldwide. As mobile and digital technologies make it simpler to get products and services on-demand, the concept of “access over ownership” has gained traction. It is no longer a millennial choice but a defining characteristic of contemporary society.42 Early on, it wasn’t uncommon to discuss the sharing economy’s potential to responsibly reduce overconsumption while also fostering stronger ties between communities.

39

“The Gig Economy Is Just Part of the Unsettling New World of Work”. June 2, 2016—via www. bloomberg.com. 40 “Katz & Kruger-Princeton-The Rise and Nature of Alternative Work Arrangements in the United States 1995–2015-Retrieved June 2, 2016” (PDF). Archived from the original (PDF) on February 18, 2019. Retrieved March 23, 2019. 41 “GAO-Contingent Workforce: Size, Characteristics, Earnings, Benefits-April 2015” (PDF). 42 PwC-The Sharing Economy in 4 big trends for the sharing economy in 2019, World Economic Forum, 4 Jan 2019.

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The emphasis has shifted away from the community and toward convenience, cost, and transactional efficiency. The World Economic Forum has made several predictions about the sharing economy (see Footnote 43): Uneven growth: While Lyft and Uber went public, the year also saw large-scale bankruptcies. Uber is currently valued at $81 billion, while Lyft is valued at $21 billion, up from $15 billion in 2022. It remains to be seen if drivers would share in any upside. Changes in ownership structures that indicate the reality of the current workforce, notably the gig economy, are crucial instruments for tackling wealth inequality. On the other hand, some sharing economy celebrities, particularly in China, struggle. Ofo, the unicorn of bike-sharing, is reportedly on the verge of bankruptcy, whereas other platforms were flooded with customer requests for refunds of their deposits. The Chinese government’s urgency to build the sharing economy is unique in the world; by 2021, it expects to contribute 10 percent of the national GDP (see Footnote 43). Diverse demographics in the driver’s seat: The sharing economy would increasingly be driven by demographic groups that have historically played a supportive role: the elderly, women, and the emerging middle class. For the 1st time in human history, the middle class currently makes up most of the world’s population, which is predicted to grow 100% in the next decade to 5.2 billion people. Women are predicted to account for 23% of all disposable revenue growth over the next decade (see Footnote 43). Meanwhile, the US, Japan, Europe, and elsewhere are seeing an increase in elderly residents. Each of these demographics will become increasingly important in the sharing economy. Women already account for a sizable segment of the sharing economy’s clients, and the “she-conomy” development is probably a fillip to this trend. Additionally, the sharing economy has the potential to reshape retirement over time, as more individuals choose to age in place, require additional income, or wish to remain involved in their societies. Regulators are leaning in, particularly in cities: In comparison with how regulators reacted to the entrance of ride-hailing services years ago, we can observe a significant difference in how they have reacted to the arrival of e-scooters. Cities progressively realize that the sharing economy needs proactive governance, both in proper legislation and harnessing local economic growth. In 2018, Denmark became the first nation to enable Airbnb hosts to declare their earnings directly to tax authorities. Several communities are building transportation-as-a-service platforms to better serve all citizens, especially those with modest means. Numerous cities have issued warnings to e-scooter platforms—in effect, to “proceed with caution”—while others like Portland, Oregon, have conducted pilot programs to identify the proper regulatory goals. From the sharing economy to… the economy: There is an increasing risk of “sharewashing:” businesses adopting the term simply because it sounds appealing rather than because actual sharing occurs. Regrettably, this language remains as hazy

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as ever today. We conflate the gig economy and sharing economy to no one’s benefit.43 At the same time, there is some overlap—gig and sharing economy platforms enable people to earn money, for example—this mixing up frequently stymies discussions about important issues like the future of work. On the plus side, the sharing economy gradually becomes a component of “the economy.” This could be the definitive indicator of the sharing economy’s success. Do we reintroduce the sharing economy to its origins—resource efficiency, sustainability, and community? The Great Downturn that followed the financial crisis of 2007–09 contributed significantly to the conceptual motivation to utilize technology to create a more social, sustainable, and frugal economy. Instead of owning things, individuals must be able to share access to them via apps and other internet services, according to the theory. They prepared the path for an economy that profits from creating online markets that match supply and demand. Such companies have the potential to “blitz-scale” into massive worldwide corporations. Such scale implied enormous gains, attracting a plethora of capital. Bird, Uber, and Airbnb were the new sharing economy’s poster children. Together, the globe’s largest suppliers of vacation rentals, e-scooters, and taxi ride raised over $30 billion in financing and reached a peak valuation of over $200 billion (just the two giants of sharing economy, Uber, and Airbnb, are valued at $160 billion) (see Footnote 44). At one point, Uber and Airbnb were projected to stage some of the most valuable technology startup public offerings ever. However, long before the virus hit, the sharing economy’s brightest stars began to fade. Making money was revealed to be more difficult than anticipated. Uber’s rides were subsidized heavily. Sustaining an e-scooter fleet proved to be more costly than Bird anticipated. These companies, flush with venture financing, expanded into new markets. Uber sought to create self-driving vehicles and food delivery. Airbnb explored creating television shows in addition to operating hotels. When the epidemic brought enterprises to a standstill, there was already a focus on profitability and cost-cutting in the air. Airbnb experienced a million cancelations and a $1 billion refund. Compared to a year earlier, Uber trips fell by 80%. Airbnb laid off 1900 employees or roughly a quarter of its workforce. Additionally, Uber laid off a quarter of its employees or approximately 6700 employees. Lyft, the company’s primary competitor in the United States, made cuts that were only marginally less severe. Apart from layoffs, these businesses attempt to restructure their operations to regain customer confidence. The primary objective is to improve cleanliness. Airbnb guides host on proper room cleaning and has implemented a 24 h. nobooking period between bookings. (While this is not required, guests would be able to observe which hosts adhere to it online). Bird’s scooters receive a routine “bath.” Uber has a system to determine whether drivers are wearing masks (Its app could identify whether they have one on) (see Footnote 44).

43

4 big trends for the sharing economy in 2019, World Economic Forum, 4 Jan 2019.

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What happens after the pandemic? Airbnb predicts that individuals will remain nearer to home for longer periods. The average length of time spent on Airbnb has almost doubled to one week. The segment of domestic reservations has grown at a fast clip, to over 80%, and stays less than 200 miles from home now generate 56% of the bookings, up from 33% (see Footnote 44). Airbnb also anticipates profiting if work-from-home opportunities remain prevalent, enabling individuals to relocate temporarily. Bird and Uber anticipate shifting from public transportation toward cars and scooters. In many cities, people may fear taking buses and trains. There is already some evidence that this is the case. Rides on Bird scooters are now 50% longer on average than they were before the outbreak. The Covid-19 recession will exacerbate the requirement for low-cost rides. The epidemic may restore the sharing economy to its origins via companies such as Olio. The London-based business, which aims to minimize food waste, enables users to swap groceries and other products they no longer need with their neighbors.44 After switching to no-contact pickup, sharing rose by roughly 50% for food and 200% for other products. Firms built on pre-internet behavior, such as sharing food with neighbors, would thrive better after the crisis than online markets. If anything, customers will be even more motivated to preserve money or earn extra cash by renting out items following the pandemic. Expect more of yours to become mine and mine to become yours, even if it requires a thorough cleaning in the interim. How much is the sharing economy worth to GDP? The real scale of the sharing economy is tough to assess since many of these enterprises are private. Uber’s social value in the United States was equivalent to giving each resident $20 last year, regardless of whether they used the service or not. Airbnb built a 600,000room inventory in four years; Hilton took roughly 23 times as long—93 years (saving more than a lifetime).45 Investing in companies with a share-based model has increased by more than $23 billion since 2010, making the sharing economy among the fastest increasing business trends. Another reason for the spurt in sharing economy is that businesses have legitimized sharing economy expenses for business travel. The number of companies allowing their workers to utilize ride-hailing services, such as Uber and Lyft, has climbed by over 15%. Employers that enable their staff to use Airbnb or comparable services have raised their proportion of employees by 20% during the same period. Nevertheless, half of the corporate travel rules explicitly prohibit workers from using Uber taxis, while 70% prevent employees from using house rental services. The economics of sharing economy might make companies rethink their

44

The sharing economy will have to change, The Economist, June 6, 2020. World Economic Forum in Business travellers are keener on the sharing economy than their employers, The Economist, 13 Feb 2017.

45

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policies: The average expensed ride cost was $34.62 on taxis, $24.99 on Lyft, and $24.75 on Uber.46 Though, there are several indications that sharing economy has had a profound impact on our society. • Uber ($81 billion) and Airbnb ($75 billion) have a combined market capitalization of $156 billion, making them the most valuable pure-platform companies • In 2016, 44.8 million adults in the US used the sharing economy, which increased to 86.5 million by 2021. • McKinsey predicts that 162 million individuals, or 20–30% of the workers, are suppliers on sharing platforms in the United States and Europe alone. What is the Sharing Economy’s impact? The sharing economy has a history of upending well-established industries. Transportation: The rapid ascent of Uber in the transportation industry is one of the greatest examples of the sharing economy’s impact on a conventional industry. There are about 4.5 times as many Uber drivers as yellow taxis in New York City alone. This has resulted in a decrease in operating a taxicab in New York City, from $1million in 2015 to around $200,000 today (see Footnote 47). Professional & Personal services: The sharing economy’s benefits are most evident in the personal and professional services sectors. Personal and professional services include work that needs specialized knowledge, experience, certifications, training, or skills, such as copywriting, accounting, or plumbing. This is also referred to as gigs, freelancing, and other trendy terms referring to temporary labor in the sharing economy. Healthcare: Telemedicine and group consultations are only two examples of how the sharing economy will change the healthcare industry in the coming years. For example, it is estimated that medical equipment sits unused 58% of the time, resulting in storage and maintenance costs. As a result, share-based startups such as Cohealo are assisting hospitals in saving money and making their assets more valuable via the development of shared-use medical equipment technologies.47 The effects of the sharing economy’s prices, salaries, and employment are difficult to quantify, but they appear significant.48 ,49 ,50 A research study compared

46

Business travellers are keener on the sharing economy than their employers, The Economist, 13 Feb 2017. 47 How much is the sharing economy worth to GDP?, Derek Miller, The Balance Small Business, June 25, 2019. 48 “The Gig Economy: Implications of the Growth of Contingent Work”. Federal Reserve. 49 “The Gig Economy Is Just Part of the Unsettling New World of Work”. June 2, 2016 – via www. bloomberg.com. 50 Katz & Kruger-Princeton-The Rise and Nature of Alternative Work Arrangements in the United States 1995–2015-Retrieved June 2, 2016.

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the average hotel room pricing to the average price of Airbnb listings in 13 major cities in the US. Airbnb rates were, on average, $34.6 cheaper than hotel rates in nine of the thirteen cities studied.51 Airbnb rates were $72 less expensive than hotel rates in six of the eight cities of Europe (see Footnote 51). According to data from a separate study, hotels in Austin, Texas, were forced to reduce their prices by 6% to compete with lower prices of Airbnb (Zervas et al., 2017). However, not all benefit from sharing economy. For example, valued at $81 billion in 2022, up from $50 billion a decade ago,52 Uber deducts up to 30% of its drivers’ gross revenue (Huet, 2015) resulting in many drivers earning less than minimum wage.53

4.5

Airbnb—The Quintessential Platform Business

Airbnb was born out of an accident and not by design. In 2007, a cash-strapped Brian Chesky devised a cunning plan to pay his $1200 rent in San Francisco. At the Industrial Design Conference, he offered an “airbed and breakfast” package to anybody who needed a place to stay for the weekend. There were three airbeds, Wi-Fi, breakfast, and a work desk included in the deal. That was the birth of Airbnb. It was listed in 2020 and valued at $75 billion in 2022.54 While expanding in various major cities, Airbnb has run into controversy because of the perceived rise in the price of renting for residents. Several cities, including San Francisco, Venice, Paris, Amsterdam, and Barcelona, have enacted rules targeting the short-run rental market popularized by Airbnb. In 2016, Airbnb expanded its service to include experiences, allowing hosts to sell tours and tickets to events directly via Airbnb app. The firm intended to launch an airline, but those plans have been put on hold indefinitely due to the pandemic. As the short-term rental market collapsed in March, several Airbnb hosts in larger cities shifted to long-term rentals to keep a steady (if lower) income. Airbnb recently introduced monthly stays, the same as traditional rental services but did not require a yearly rental agreement to entice hosts to stay on the platform. More than half a billion visitors have stayed in an Airbnb home, generating $65 billion in revenue for the hosts. Airbnb operates in more than 200 countries and 81,000 cities worldwide.55 The most favored cities are London, New York City, Osaka, Paris, and Tokyo. There are more than 50,000 experiences available, including crafting DNA necklaces, learning to eat fire, and a neural improvement experience (see Footnote 55).

51

“Comparing Airbnb and Hotel Rates Around the Globe”. Busbud. February 18, 2016. “‘Sharing economy’ reshapes markets, as complaints rise”. Bloomberg News. 2015-02-03. 53 “A Philadelphia journalist went undercover as an Uber driver—here’s how much she made”. MSN. 2015-05-09. 54 “Airbnb CEO Brian Chesky could be worth over $11 billion after IPO”. Fortune. Retrieved December 10, 2020. 55 Business of Aps in Airbnb’s Road to IPO: Mounting Valuation and Costs, The Wall Street Journal, Dec 10, 2020. 52

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Fig. 4.15 US Airbnb reservations, change from a year. Source Airbnb in Airbnb Revenue Nearly Quadrupled in Second Quarter, The Wall Street Journal, August 12, 2021

A pandemic that paralyzed global travel could not halt Airbnb’s highly anticipated public debut. While business is still down overall and nowhere near pre-pandemic levels, Airbnb has gained ground over hotel industry rivals as people ventured into small towns and cities to work remotely or take a manageable break from a health crisis that has kept them mostly at home.56 Rural bookings were one bright spot for the company during the pandemic. Airbnb’s strength had been in large cities frequented by tourists, but the company redesigned its website and applications to emphasize local stays as people flocked to destinations within driving distance. According to the company, over half of August reservations were for stays within 300 miles of the visitor’s location (Fig. 4.15) (see Footnote 57). Airbnb spent heavily as it grew into a global behemoth. Between 2015 and 2019, costs increased fivefold. The pandemic compelled the company to lay off a quarter of its workforce, close non-core businesses, and significantly reduce sales and marketing expenses (Fig. 4.16). Airbnb’s ballooning costs have largely exceeded its revenue in the last five years. Airbnb has never made a full-year profit, like many other Silicon Valley businesses that go public while losing money. Last year’s loss exceeded the previous four years’ losses. It also lost more than twice as much income in the first nine months of this year compared to last year, due mostly to revenue decreases early in the pandemic (see Footnote 56). The pandemic fundamentally altered Airbnb’s business model. Local travel became a stronghold for the platform, and users began utilizing it for extended stays. Numerous large employers have stated that they will allow employees to

56

Airbnb’s Road to IPO: Mounting Valuation and Costs, The Wall Street Journal, Dec 10, 2020.

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Fig. 4.16 Airbnb expense profile, $bn. Source Airbnb in Airbnb Revenue Nearly Quadrupled in Second Quarter, The Wall Street Journal, August 12, 2021

live more nomadic lifestyles even after things return to normal, and Airbnb has positioned itself to profit from the trend. Airbnb redesigned its website and app to highlight nearby getaways while hotel chains in major cities suffered. Airbnb launched a flexible search feature earlier this year to assist travelers who are unsure of where they want to go or when. This feature enables Airbnb to direct prospective travelers to areas with inventory, which hotel operators cannot always match. Recently, the company announced that it had seen over 500 million such searches (see Footnote 57). Based on those searches, treehouses, beachfront properties, and houseboats were the most frequently booked accommodations. Airbnb and Expedia Group Inc.’s Vrbo compete for new hosts to meet soaring demand for local stays. Airbnb announced in May 2021 that it had simplified the sign-up process for new hosts, reducing it from dozens to ten steps. Additionally, it offers referral bonuses to hosts who successfully recruit others to list on Airbnb. The company ended the second quarter with the most active listings on its platform in its history. The platform model has ensured that Airbnb has no competitors nearby. Airbnb’s recent growth—and newfound success with local travel—has sparked outrage from various quarters. While some cities in the United States have relaxed restrictions on short-term rentals, others are tightening them. Homeowners from Arizona to Florida and Massachusetts advocate for it, citing concerns about noise, crime, and declining property values associated with living near short-term rentals.57 Notwithstanding these pinpricks, Airbnb is poised for steady and healthy growth.

57

Airbnb Revenue Nearly Quadrupled in Second Quarter, The Wall Street Journal, August 12, 2021.

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As travel resumes, so does Airbnb’s business. Airbnb adjusts to the postpandemic period. Following a significant revenue decline, job cuts, and other cost-cutting measures in 2020, the firm observed a 5% income increase in the first quarter of 2021. In May 2021, Airbnb introduced a new collection of features and regulations to appeal to post-pandemic travelers—those who travel domestically (since many borders remain closed), stay longer in each rental, and exhibit increased interest in midsize towns like Dallas or San Diego. The new features include displaying dates not included in the initial search criteria and displaying different kinds of accommodation (for example, treehouses).58 The firm aims to entice new hosts through various innovations, including additional support agents, a more simplified procedure for listing a house, and artificial intelligence technologies that propose more appropriate ways of describing properties. Rural, beach, mountain destinations, larger homes, and families seeking a getaway have contributed significantly to Airbnb’s strength. Additionally, the company sees growth in the urban business, including in low-density urban areas such as suburbs and small towns. Airbnb believes that the trend toward extended stays will continue. Individuals have greater freedom in terms of when and where they travel. And, as a result of their adaptability, they are staying longer. Likewise, it has been an enticing proposition for the hosts. When a new host joins Airbnb, they receive a booking 50% of the time within the first four days (see Footnote 58). There are clear indications that Airbnb’s sharing model is beginning to threaten budget hotels. Hoteliers downplay the threat residential sharing services pose to their industry, even as they urge authorities to stop it. The Marriott, Four Seasons, and Hilton hotel companies have all maintained that they do not compete with Airbnb for the high-end and business visitor market; lately, a vice president of The Ritz-Carlton group stated she had never heard of them Airbnb. Airbnb agrees, stating that it creates new demand rather than displacing current accommodation (see Footnote 60). According to new research, Airbnb is now nibbling rather than eating the hotel industry’s lunch. A Boston University research team investigated hotel revenue in Texas. They discovered no evidence of Airbnb having a significant impact on luxury and business hotels. However, in areas where it has set up an existence, it has reduced budget hotel revenues by 5% in two years.59 Airbnb has developed significantly faster in certain cities (quirky, a left-wing Austin bastion) than in others (such as Fort Worth, more of a cowboy town). If Airbnb continues to grow at its current rate of listing growth—it doubles its listings every year—the Texas study estimates that Airbnb’s impact on budget hotel revenue would be 10% (see Footnote 59). Due to their high fixed prices, most of them may end up in the red. Of course, Airbnb may run into demand or supply constraints before then. On the other hand, smaller hotels have already blamed the platform for their problems (see Footnote 60). Airbnb’s recent financing round,

58

Airbnb Adapts to the Post-Pandemic Traveler—and Host, The Wall Street Journal, June 11, 2021. 59 Boston University in Room for all, for now, The Economist, April 25, 2014.

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which valued the company higher than all but the four of the world’s top hotel chains, indicates that investors concur. Additionally, Airbnb is beginning to break into the corporate travel market. Employees are increasingly allowed to schedule their travel, motivating them to be thrifty. Google sets a budget for each trip, and workers who stick to it earn points to contribute to charity or use toward future benefits like flight upgrades. Business hotels might face unexpectedly serious competition if Airbnb effectively connects with internet travel agents like Expedia and improves the number of hosts who give quick booking confirmations.60 Airbnb still has a muted impact on hotels. It is a sign of the present hotel development in London. According to PwC, a consulting firm, hotel rooms have raised from 129,000 in 2013 to nearly 200,000 in 2021. Still, there is no evidence of overcapacity. Occupancy rates hit a decade high recently, while the average price hit an all-time high. The hotels’ resilience is remarkable in light of the assault of sharing-economy sites and applications that enable individuals to rent out their extra rooms to travelers. As per investigators at Boston University, Airbnb has pushed hotel revenues down by as much as 10% in some American cities. In contrast, the influence of room-booking applications in London was muted. Londoners advertise their properties on Airbnb at 0.5%, compared to 2.4% of Parisians. One cause is the shortage of affordable housing near London’s main tourist sites, surrounded by offices and mansions. In London and other major European cities, the rise of Airbnb listings has slowed considerably, implying that Londoners’ spare rooms are unlikely to absorb much additional demand. Unlike thrifty vacationers who are ready to stay in a stranger’s house on Airbnb to save a few pounds, most travelers on company expense accounts are willing to spend. Meanwhile, their employers continue to be suspicious of hiring empty rooms, claiming a responsibility to maintain safety since they believe they may hide dangerous staircases, faulty electrical wiring, and other risks. This is ideal for hoteliers. However, not all of them. Although many business visitors have yet to move to Airbnb, they save money. More than half of the new rooms in London this year will be run by two- or three-star budget businesses. Even the once-glitzy Trocadero has succumbed to the trend. It made its fame by providing nine-course banquets to the ambitious upper classes a century ago, and it reopened in 2017 as an Ibis budget pod hotel.61 The pandemic created a slew of issues for Airbnb, but returning demand is not one of them. Airbnb increased revenue by 5% year over year, whereas Booking Holdings, Expedia Group, and Marriott International reported income declines of more than 48% over the same period.

60 61

Room for all, for now, The Economist, April 25, 2014. Why the room-booking app has had so little impact in the capital, The Economist, Feb 18, 2016.

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However, the increased demand seems to be causing a supply constraint, especially severe for Airbnb. Airbnb’s biggest challenge is to acquire additional hosts to expand. Expedia and Booking can always propose a range of hotels if other options are unavailable while still capitalizing on demand, but Airbnb cannot do so. Airbnb’s connection with some hosts deteriorated last year after the company refunded guests for cancelations booked during the pandemic’s early stages. This resulted in the company offering hundreds of millions of dollars in compensation to hosts but only covering a fraction of their lost earnings. As demand improved, the company announced in February that it had started its 1st large-scale advertising campaign in 5 years, focusing on attracting hosts rather than guests (see Footnote 62). The recent quarterly outlook indicates that supply may not be the company’s only short-term issue. As cross-border limitations ease and individuals gain confidence in flying to and staying in highly crowded areas, the firm records that its average per day rates may decline, putting pressure on revenue growth and profits. Another issue is that the risk of Airbnb reopening may have already been factored in. Although the stock has fallen substantially, it still trades at 15 times forward sales. By comparison, Booking generates below eight times the revenue, and Expedia generates less than three times. Travel is making a comeback, and it does appear to be different. However, Airbnb does too.62 While the battle for hosts appears to be heating up between Expedia’s Vrbo and Airbnb, the reality is that Airbnb has bigger fish to fry. Vrbo has been luring Airbnb hosts with advertisements for months, implying that its platform is more lucrative, which Airbnb has denied. Vrbo launched a program to recruit Airbnb’s top hosts by increasing the visibility of new properties and transferring their review scores from the Airbnb site, allowing hosts to join the platform immediately. Only the United States grew in April compared to the same month last year, out of the ten largest countries for Airbnb short-term rentals. On that basis, global demand was still down 31%.63 However, in the grand scheme of things, Airbnb is far more important to Vrbo than Vrbo is to Airbnb. Vrbo claims to have more than two million listings, though not all are active. According to Airbnb, it currently has 5.4 million active listings.64 Airbnb also has problems with its neighbors. Airbnb has expanded into hundreds of cities across the United States in the dozen years since its founding, transforming many into vacation-rental meccas. As a result, residents across the country have stepped up grass-roots efforts to keep short-term rental authority in the hands of towns and cities. The popularity of short-term vacation rentals has sparked local campaigns and increased awareness of the disadvantages of living

62

Airbnb Has Mo Money, Mo Problems, The Wall Street Journal, May 13, 2021. AirDNA in Vrbo Isn’t Airbnb’s Problem, The Wall Street Journal, May 20, 2021. 64 Vrbo Isn’t Airbnb’s Problem, The Wall Street Journal, May 20, 2021. 63

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next to a constantly changing cast of visitors. Due to a barrage of neighbor complaints about loud house parties and crime at the short-term rentals, tensions have been rising. Cities have limited options because they have no say in who leases the properties.65

4.5.1

ML Optimizes the Airbnb Platform Business Model

Regardless of the publication, if the article’s title (or even a mention) includes the word “disruption,” it is probable that Airbnb will obtain 1st billing as a firm— and the business model—that is upsetting the hospitality landscape (and, for better or worse, even housing in general). The listings bear witness to this. An Airbnb host earns $7900 annually on average (see Footnote 66). Airbnb had grown to 4 million listings in 191 countries, and Airbnb had more listings than the combined inventory of the “top five major hotel brands.” Airbnb’s platform is reimagining short-term lodging. The simplicity of Airbnb’s business model is perhaps most interesting. Airbnb has a multi-faceted business strategy connecting tourists with hosts and experience providers. Airbnb, for example, created a software platform to link those in need of housing with others who had it. They used current technologies with an alternative value offer to free a massive, untapped resource, and produce 10X value without owning a single room (see Footnote 66). The company’s revenue comes through booking fees associated with stays and experiences. However, if you dig deeper, what truly distinguishes Airbnb’s economic model is exponential…in practically every aspect. This is particularly contrasted with the economic model of a hotel chain such as “Marriott,” the world’s biggest hotel chain. Indeed, when comparing the two, you will notice that Airbnb’s significant shifts in the hospitality business have allowed it to grow hospitality in ways Marriott can only imagine (i.e., exponentially). To begin, Airbnb solves an issue (and addresses the ambitions of several individuals). Airbnb’s business strategy is geared toward the mass market and even uniquely links mass markets (travelers, hosts, and experience providers) (see Footnote 66). Airbnb has built communities of fans across each of its consumer segments via its rating system and the ability to deliver curated experiences. Additionally, it utilizes a completely digital channel. You will not be able to contact any front desk receptionists or reservation agents. You can use an app or a website to search and book accommodation/manage listings & experiences. Airbnb does not own the premises; instead, its business strategy is founded on matching those who have something to offer (for a price) with those who require it. Airbnb generates income from various sources related to booking stays and experiences as a market.

65

Airbnb’s IPO Warning: Unhappy Neighbors Are Fighting Back, The Wall Street Journal, Dec 9, 2020.

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Airbnb has built scalability into every part of its business in terms of operations. Airbnb has created systems that allow it to enter new areas at a pace that brickand-mortar hotels could only dream of, whether it’s partnering with authorities or producing advertisements and applications. Airbnb’s algorithms tie it all together, churning through millions of stays, hosts, guests, and experiences in real-time to match the right value propositions with the right individuals. This virtuous loop feeds back into Airbnb’s client interactions, which feed data to the algorithm. The whole workplace has been built to encourage cooperation and transparency. At Airbnb, employees have the authority to make decisions on the fly, which benefit consumers. Whereas Airbnb is not a holacracy (completely decentralized organization), it does enable people to collaborate to resolve issues and offer better customer experiences (see Footnote 66). When all of these elements are considered, Airbnb represents a firm that has completely embraced the notion of an exponential business model and has also thoroughly implemented it. Airbnb recognizes its business model’s interconnectedness and always innovates to make it more linked and customer-centric.66 As well-known as Airbnb is today, it began in a small way. Airbnb, which grew rapidly from a niche service that provided lodgings for high-profile occasions, upended the travel and hospitality industries, generating significant press and brand recognition. Since its modest origins, Airbnb has made no secret of its significant use of data science to build new product offers, enhance its service, and capitalize on new marketing activities.67 Airbnb views data as the customer’s voice and data science as its interpretation: Airbnb leverages data to enhance its service, hiring practices, search, and consumer segments. They actively recruit women data scientists and take great care to guarantee that their hiring practices are free of unconscious bias. They examined at the top of the recruiting funnel, similar to how conversion optimization is done, and noticed that about 30% of their applications were traditionally female. As a result, the opportunity to diversify the workforce was ripe (see Footnote 67). The search function is at the heart of the Airbnb website. Every step of the way, its search engine was fine-tuned to inspire, surprise, and please consumers. It finally landed on a methodology that only provided the best entries within a certain radius of the user’s search. As more visitors visited the website and Airbnb accumulated more data, it developed a more user-data-driven basic search. The result-more satisfied customers (see Footnote 67). Airbnb views collective data like the customer’s “voice.” Data scientists act as the megaphone, amplifying the customer’s voice by extracting their wishes

66

How Airbnb’s exponential business model works, Business Model Inc. https://www.businessmodelsinc.com/exponential-business-model/airbnb/. 67 How Airbnb Uses Data Science to Improve Their Product and Marketing, Neil Patel. https://neilpatel.com/blog/how-airbnb-uses-data-science/.

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from client contact records and translating them into executable decisions for the product, marketing, and customer support teams. Airbnb’s head of data science eloquently puts it, “Data is the voice of your customer. Data is effectively a record of an action someone in your community performed, which represents a decision they made about what to do (or not) with your product. Data scientists can translate those decisions to stories that others can understand” (see Footnote 67). At first, Airbnb was unsure of how to guide customers. As a result, they began with a simple solution: returning “the highest quality set of listings within a certain radius from the center of wherever someone searched.” Then, as the site’s user base grew, Airbnb amassed additional data. They eventually discovered that by substituting a user-data-driven model for their initial one, they increased customer bookings and satisfaction. Using machine learning techniques, Airbnb connects those in need of lodging— guests—with those who want to rent out their space—hosts. Guests contact the hosts whose listings they want to book, but a match occurs only if they are also interested in accommodating the guest. Hosts advertise their accommodations with the primary objective of fitting as many booked nights into the duration specified. Hosts would reject or accept requests based on their ability to maximize their occupancy. What variables impact hosts’ choices to accept requests for lodging, and how can Airbnb boost platform acceptance and matches (and hence revenue)? Airbnb utilizes a machine learning algorithm to determine hosts’ preferences for lodging requests based on prior behavior. The model calculates the possibility that relevant hosts would wish to accommodate a guest’s request for each search query entered on Airbnb’s search engine. Then, in the search results, potential matches are highlighted more prominently. The model demonstrated a 3.75% increase in booking conversion during A/B testing, resulting in many more Airbnb matches. A/B testing is a method for evaluating two versions of a single variable, usually by comparing a subject’s reaction to variant A and variant B and deciding which is more successful.68 The process is summarized below (see Footnote 69). Each accommodation request occurs sequentially or within a calendar window of available days, like April 5 to 10. If a request is accepted and booked, the host may have a sub-window before check-in (check-in gap-April 5 to 7) and a sub-window after check-out (check-out gap-April 10). The host has blocked or reserved the days immediately surrounding the window (Fig. 4.17). A host who wishes to maintain a high occupancy level will attempt to avoid these gaps. Hosts are more inclined to accept requests that fit within their schedules and avoid scheduling gaps. However, do all hosts strive to increase availability and prefer short gaps between stays? Some hosts may be unconcerned with optimizing their occupancy and would prefer to host on an as-needed basis. Additionally, hosts in large markets may behave differently than hosts in smaller markets.

68

“The ABCs of A/B Testing—Pardot”. Pardot. Retrieved 2016-02-21.

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Fig. 4.17 Optimizing occupancy in Airbnb. Source Bar Ifrach, Airbnb Engineering, April 14, 2015 https://medium.com/airbnb-engineering/how-airbnb-uses-machine-learning-to-detect-hostpreferences-18ce07150fa3

The behavior of listings from large and small markets was quite different. In large markets, hosts place a premium on occupancy—a request with no gaps is nearly 6% more likely to be approved than one with seven gap nights. It was noticed that the reverse effect was in play in small markets: Hosts preferred to have a restricted number of nights between requests. Thus, while hosts in various marketplaces may have distinct tastes, hosts within a market are likely to have diverse preferences. A similar case demonstrated hosts’ propensity to agree depending on the lodging request’s other characteristics. For instance, bookings made at least a week in advance are preferred by Airbnb hosts over last-minute bookings. However, shorter notice could be preferred by certain hosts? All of the evidence led to one conclusion. Suppose there is a way to promote hosts who are more likely to approve a lodging request originating from a search query in the search results. In that case, we should anticipate happier visitors and hosts and a greater number of matches that result in enjoyable holidays (or productive business trips).

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Fig. 4.18 Personalizing requests at Airbnb. Source Bar Ifrach, Airbnb Engineering, April 14, 2015 https://medium.com/airbnb-engineering/how-airbnb-uses-machine-learning-to-detect-hostpreferences-18ce07150fa3

In other terms, this may result in some personalization of search results, but not in what one would anticipate. Usually, personalize search results prioritize results that match the searcher’s—the guest’s—unique preferences. In a bidirectional market such as Airbnb, it is also necessary to personalize search based on the hosts’ preferences whose listings show in the search results (Fig. 4.18). How to create a model of the host’s preferences? The idea is to link hosts’ earlier acceptance and reject choices with the trip’s check-in and check-out dates and the number of visitors. By incorporating host preferences into the current ranking model, Airbnb could provide more and better matches (Fig. 4.19). Personalization is effective on both the buyer and seller sides of a two-sided marketplace.69 Airbnb identified enormous growth and product improvement opportunities by delving into their data. Their unique combination of data intelligence and entrepreneurial acumen has propelled them to a $75 billion valuation and millions of satisfied users worldwide (see Footnote 67).

4.6

The Ride with Uber

Uber is a torchbearer for the gig economy. Uber goes beyond shared cabs. Uber’s services comprise freight transportation, couriers, package delivery, food delivery (Uber Eats), ride-hailing, and rental of electric bicycles and motorized scooters, which it offers in collaboration with Lime. The firm serves more than 900 cities throughout the globe.70 More than 78 million people use Uber every month.71 In the US, Uber has a 67% of the ride-sharing industry and a 24% share of the food delivery business.72 ,73 The term Uberization is used to denote changes in other

69 Bar Ifrach, Airbnb Engineering, April 14, 2015 https://medium.com/airbnb-engineering/how-air bnb-uses-machine-learning-to-detect-host-preferences-18ce07150fa3. 70 “Uber: Cities”. 71 “Monthly number of Uber’s active users worldwide”. 72 “Rideshare Industry Overview”. 73 “Which company is winning the restaurant food delivery war?”. Second Measure.

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Fig. 4.19 Guest requests 4% more likely to turn into booking with new model. Source Bar Ifrach, Airbnb Engineering, April 14, 2015 https://medium.com/airbnb-engineering/how-airbnb-uses-mac hine-learning-to-detect-host-preferences-18ce07150fa3

industrial sectors.74 Numerous startups have dubbed their offerings “Uber for X” (Madden, 2017). Uber has been a significant factor in the slow stuttering of the traditional taxi industry. In New York City, perhaps the birthplace of the world’s most iconic cabs, Uber surpassed cabs as the most prevalent mode of private hire transport in September 2017. Since then, except for a couple of minor dips, it has maintained a lead—and has continued to do so. Uber’s fleet is substantially bigger than its rivals’, so competitors get roundly beaten. Approximately, 79,000 Uber vehicles were accessible to New Yorkers in January 2019 (the peak month), compared to 50,000 Lyft vehicles and a meager 15,000 yellow taxis.75 Uber sparked the taxi industry’s evolution in the early 2010s when it introduced an app that linked drivers and passengers. Ordering a taxi in California, where the app was first released, was such a pain that co-founder Garrett Camp started his fleet of black cabs to take him to bars and parties. Camp understood the value of this service, which was more dependable than waiting for a taxi on the street or waiting more than an hour for someone to pick them up (see Footnote 55). Travis Kalanick joined UberCab shortly after being founded in 2009 and was appointed CEO in December 2010.

74

“Taking uberization to the Field – Disruption is coming for Field Marketing”. International Data Group. April 14, 2016. Archived from the original on June 12, 2018. Retrieved August 25, 2018. 75 BusinessOfApps in Airbnb and Uber are chalk and cheese, The Economist, 10 Oct 2019.

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Uber became the brand most people associate with ride-hailing during Kalanick’s tenure as CEO. It quickly became popular in the United States and rapidly expanded into Europe, Asia, and South America. Kalanick also oversaw the launch of Uber Eats, Uber Freight, and Uber’s autonomous vehicle division as he sought to expand Uber’s reach across all segments of the transportation industry. Kalanick’s tenure resulted in significant growth but was also riddled with controversies. Uber frequently entered countries and states without first reaching out to those in power, which resulted in penalties and bans in some parts of the world. Allegations of workplace sexual harassment and bullying forced Kalanick to resign in 2017 and were succeeded by Expedia Chief Executive Officer Dara Khosrowshahi. Uber has taken a step back since 2017, selling its stake in India and exiting several European countries. Although it has improved its image, numerous countries are presently investigating whether Uber drivers must be classified as workers. One of the first countries to acknowledge them was the United Kingdom. The coronavirus pandemic hit Uber’s ride-hailing business, although it rebounded in Q4 2020 to pre-pandemic levels. Uber Eats became the company’s primary business throughout this period, growing by more than 200 percent year over year (see Footnote 55). Uber generated $11.1 billion in revenue in 2020, despite a 24% decline in ridehailing revenue but a 200% increase in Uber Eats revenue. Uber “employed” over five million drivers worldwide and completed an average of 18.7 million trips per day. The median hourly rate for Uber drivers in the United States is as low as $8.55.76 Uber & Airbnb are the two most visible manifestations of the “sharing economy.” The similarity stops here; they are as distinct as chalk and cheese. In 2008–09, both Uber and Airbnb were the first asset-light platforms to connect service providers and customers of specific services—in the first instance, lodging, and in the second, transportation. Both companies have become synonymous with whole classifications: startups currently assert to be the “Airbnb of dogs” or the “Uber of doctors.” However, Uber’s May 2019 stock market debut was a failure. Since its IPO, its stock price has had a bumpy ride and is nearly at the same level as its IPO three years ago. Airbnb was founded in 2009, and since then, over 500 million stays have been reserved on its platform, which now features over 7 million properties in over 100,000 cities (including 4900 castles and 2,400 treehouses). Around 2 million people stay in an Airbnb each night worldwide (see Footnote 77). Airbnb refutes the idea that it is concerned about Marriott. This hotel conglomerate introduces a competitor service termed “Homes & Villas,” which Airbnb views to endorse its model. Airbnb is retaliating by enabling hotels to sell rooms on the marketplace and investing in buildings customized for Airbnb rentals.

76

The Guardian in Airbnb and Uber are chalk and cheese, The Economist, 10 Oct 2019.

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The company has lofty ambitions to expand beyond lodging and offer complete trip planning, including how to get there, what to do, and where to go. It intends to collaborate with airlines to “elevate” the air travel experience. The Airbnb Luxe service users (where those castles and other luxurious sites are advertised) have already been assigned a “trip designer” to help them arrange transportation, restaurants, and other amenities. Indeed, Airbnb’s primary growth strategy is to provide guests with an experience "designed and led by inspiring locals" rather than simply a bed. Airbnb Experiences, which debuted in 2016, link visitors with residents who can provide guided tours or cooking sessions. Airbnb Adventures, which organizes vacations for up to 12 people to exotic locations, were added last year. According to Airbnb, people travel not to sleep but for adventure (see Footnote 77). Now Uber. The Ride-hailing giant Uber now offers services like food delivery and road freight in addition to rides. However, the analogies stop there, beginning with money. While Uber has yet to earn a profit (and, some argue, will never do), Airbnb claims to be profitable (or, more precisely, EBITDA-positive) and has been since 2017, when it earned $93 million on $2.6 billion in revenue. This is not the only difference (see Footnote 77). For ride-hailing companies such as Lyft and Uber, supply and demand should be matched within a single city; a driver in “Manhattan” is useless to a rider in Mumbai. By contrast, the listings on Airbnb are from all around the world. Any property, regardless of location, may attract any consumer; a Mumbai resident may wish to remain in New York. A telling indicator of Airbnb’s superior “network effects” is that, while Uber drivers frequently drive for Lyft & vice versa, attempting to pit the platforms against one another, most of Airbnb’s listings are not found on any other platform. Airbnb is more compliant with regulations and chose to cooperate with regulators rather than fight them earlier than Uber. It has agreements in place in more than 500 major cities worldwide. It claims to have collected over $1 billion in hotel and tourism levies in the United States alone and is “on track to become the world’s largest single collector of these taxes” (see Footnote 77). A few concerns persist. One has to do with the company’s long-running battle with New York officials, who requested information on New Yorkers breaking local rules by advertising houses for short-term rental on the site. Another concern is demonstrations in areas like San Francisco, where locals claim that renting apartments to tourists reduces the number of units available for long-term tenants, raising already expensive costs. Additionally, Some Airbnb owners have been accused of being racist against their guests. Airbnb has a market cap of $75. Recently, Airbnb introduced Animal Activities, a subcategory of experiences covering anything from beekeeping to llama trekking to elephant spotting. It serves as a reminder, if one was required, that while Uber and Lyft are frequently grouped, Airbnb is not comparable to either of them— rather, it is an entirely different beast.77

77

Airbnb and Uber are chalk and cheese, The Economist, 10 Oct 2019.

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While Uber and Lyft carry the baton within metros, its worthy French cousin, BlaBlaCar, does only inter-city. French startups are seldom lavished with ninefigure amounts by venture capitalists. That alone makes BlaBlaCar, a Paris-based ride-sharing company, notable for raising $100 million. According to Preqin, a research firm, no other French company has attracted more in a single year in at least seven years (see Footnote 78). As a rising star of the “sharing economy,” BlaBlaCar is uncommon for its origins in Paris and its absence from San Francisco. San Francisco benefited from a fortunate confluence of vexing issues (expensive hotels, a shortage of taxis) and eager geeks. In contrast to Lyft and Uber, BlaBlaCar provides transportation between cities rather than inside them. A driver may post on social media that he is driving between Paris and Brussels and is searching for travelers. Typically, they should pay e20 ($27) for that trip—significantly less than the train fare (see Footnote 78). Cities should have sufficient public transit on both ends, allowing passengers to be picked up and dropped off at metro or bus terminals. Europe, rather than America, is a better match for this model: Lyft’s founders started with interstate rides before concentrating on city trips; BlaBlaCar competes with Carpooling.com, an earlier German startup. BlaBlaCar currently has over 90 million users in 22 nations (see Footnote 78). When it entered Russia, it accumulated 250,000 users in months. Weekend excursions outside of Moscow have become more popular. Large cities separated by “ideal distances,” urban buses (as well as certain metros), a youthful population with cellphones, and “astronomically high” petrol costs are all present. Another distinction between the French company and its San Francisco counterparts is that no regulatory roadblocks were erected in its path. As taxis operate inside cities instead of between them, taxi drivers have no reason to protest BlaBlaCar in the same way they have against Lyft and Uber. Furthermore, BlaBlaCar’s drivers do not need to fear the taxman since they drive to pay their expenditures instead of aiming to make profits.78 In a stunning reversal of policy, Uber has agreed to list all New York City taxis on its app, a move that could help alleviate the ride-hailing giant’s driver shortage and moderate fares while also directing more business to cab drivers whose livelihoods have been impacted by the rise of car-sharing apps and the pandemic. “It’s bigger and bolder than anything we’ve done,” said Uber (Macdonald, 2022). The alliance is a watershed moment for Uber. Having previously pledged to disrupt the United States’ taxi industry, it is now betting on traditional taxis to power its next wave of growth. Uber’s goal is to have every taxi listed on its app by 2025. “It’s certainly ambitious,” but “I certainly think it’s possible.”79

78

Sharing à la française, The Economist, July 5, 2014. Uber Reaches Deal to List All New York City Taxis on Its App, The Wall Street Journal, 25 March 2022.

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The Economics of Uber

Uber is the quintessential two-sided marketplace, but its losses are legendary in Silicon Valley. We examine how Uber earns money, where it spends it, and where it is investing next to achieve profitability.80 Uber has long defied expectations as one of the most rapidly growing and contentious firms to emerge from Silicon Valley. It is pioneering gig worker model, brazen expansion strategy, historic unprofitability, and high-profile controversies. Uber went public in May 2019 with a $75.5 billion valuation, a little below the $120 billion amount projected by bankers for the IPO. It closed down 6.7% on its first day of trading, implying a cumulative loss of $655 million for investors who paid the IPO price, the worst first-day dollar loss for a US IPO (see Footnote 80). Uber has improved to its pre-publication level a year and a half later. Its stock cost has recently increased to around $44/share (as of January 2022). In comparison, Uber Eats’ business has grown at a breakneck pace. In Q2' 20, its delivery business surpassed mobility to become the company’s largest source of net revenue, though it remains unprofitable (see Footnote 80) (Fig. 4.20). Uber utilizes machine learning and artificial intelligence to optimize its services, which provides many advantages in improved and exceptional consumer satisfaction and experience. Uber’s decision-making is entirely data-driven, thanks to machine learning. When a user taps a destination location, the application recommends alternatives based on the user’s ride history and a freshly traveled destination. The following are some of how Uber influences ML to streamline its business processes: Bridging the supply and demand gap: The Uber team may forecast the timing and demand location by analyzing historical data. The system uses these estimations to provide demand leads to drivers in a specific region. Uber guarantees sufficient cabs in the requested area and quickly fills the gap. Demand forecasting systems enable the application to increase tariffs during peak hours, increase profit marginally, and balance demand (Fig. 4.21). Customer retention is critical for several services; customers simply book a cab from another service when cabs are unavailable. Obtaining new customers requires a greater time and effort than maintaining current clients. The supply and demand imbalance may affect consumer retention, but it is mitigated by machine learning-based forecasting, preventing Uber from losing customers to competitors. Reduce the anticipated time of arrival (ETA): Expected time of arrival is a primary consideration when a rider books a ride and when a taxi takes longer than anticipated to arrive at a pickup location due to traffic congestion, particularly in urban areas. Uber forecasts demand and positions cabs in high-demand areas to reduce the expected time of arrival (ETA) (see Footnote 82).

80

How Uber Makes Money Now, CBInsights, 2020.

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Fig. 4.20 How Uber makes money. Source How Uber Makes Money Now, CBInsights, 2020

Route Optimization: While traditional ride-hailing systems rely on drivers to decide routes based on familiarity, unexpected obstacles such as traffic jams, inclement weather, and road construction activities may arise. However, Uber’s machine learning system augments the app with additional route options and recommends the most optimal route to drivers. Uber assists drivers in avoiding congested areas and enables quick rides through this process. This results in shorter ETAs, but it also provides drivers with additional time to undertake extra trips. AI-assisted single-click communication: After booking the ride, the rider can track the driver’s progress and send messages to the driver about how long it will take to reach him. Cab drivers find it difficult to write text messages while driving. Thus, Uber has developed a “one-click-chat” artificial intelligence-based service that uses ML and natural language processing (NLP) techniques to generate responses

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Fig. 4.21 Deploying Machine Learning at Uber. Source Analyticssteps.com in 5 ways ML helps in Uber Services Optimization, Neelam Tyagi, Analytic Steps, Jun 12, 2020

to typical messages. By just picking on one of the recommended solutions, cab drivers may reply quickly and easily (see Footnote 82). Uber Pool: It is difficult to make cabs available to everyone during rush hour, but Uber Pool makes it possible. Uber Pool aggregates riders traveling in the same direction, which reduces the cost per rider. The machine learning algorithms determine which rider to drop first and then drop the remaining riders sequentially.81 How does Uber optimize the drivers’ schedules?82 Platforms are essentially marketplaces. They connect service providers (in Uber’s case, cab drivers) and consumers (riders); in exchange for their matchmaking efforts, they receive a portion of the monetary transaction. However, platforms extend beyond matchmaking. Apart from connecting riders and drivers, Uber leverages artificial intelligence to accomplish the following: • It optimizes the wait time for riders while increasing the number of rides for drivers. • It automatically initiates “surge pricing” during peak hours based on the demand–supply situation. This helps keep demand in check while making driving more lucrative for drivers.

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5 ways ML helps in Uber Services Optimization, Neelam Tyagi, Analytic Steps, Jun 12, 2020. For a more rigorous explanation of this section, consult Uber Driver Schedule Optimization, Ivan Zhou available at https://towardsdatascience.com/uber-driver-schedule-optimization-62879e a41658. 82

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• Predicts driver usage patterns using machine learning and plots the optimal driver positioning accordingly. One of Uber’s primary value propositions is the scheduling flexibility of its driver-partners. According to the Beneson Strategy Group, 73% of drivers choose employment to work on their own time. Thanks to this flexibility, drivers may optimize their projected earnings throughout their available hours. For this purpose, Uber offers client demand heatmaps, enabling drivers to focus on regions with a high likelihood of trips and greater predicted income (map see Footnote 83). However, there is no simple way to determine if journeys that start at a certain site are valuable in terms of the time it takes to service the trip. A journey that takes longer than expected due to traffic but is in great demand, for example, may result in fewer overall trips and so be less valued. Less popular but regularly speedier trips might be more beneficial. To categorize the data and narrow the scope of the problem, it was necessary to sort the pickups into high-demand areas. Consequently, it is to the driver’s advantage to balance the demand for a certain place and the length of journeys taken from that site. “Mixed integer programming” (MIP) is used to create a scheduling optimization model (see Footnote 83). To begin with, the number of pickups at each site was counted. The counts were clustered using MATLAB’s K-means function (Fig. 4.22). The radius of the region was determined using the shortest “Euclidean” distance between it and the other four regions. Later, the top 100 sites with the highest pickup counts were chosen to describe the regions because they account for 30% of overall pickups. We are comparing intra-regional journeys. Only trips that started in one of the five areas and concluded in the same region as the origin were included in the pickup counts. The counts were then averaged and aggregated by the time of day, weekday, and area. The sourced dataset contains information about every origin– destination region pair’s maximum, minimum, and means duration of trips. After superimposing high-demand regions on Uber regions, the distribution shown in the (Fig. 4.23) is obtained. A MIP model was established using demand and trip duration data to determine the optimal driving schedule for drivers. In this case, we would like to increase the drivers’ anticipated income. The MIPs created are shown alongside. The model can generate a weekly schedule based on the parameters specified for a single driver. For instance: max: Revenue =

∑

Ri , j · x i . j

i, j

s.t. xi , j ≤ Ai , ∀i , j xi , j ≤ B j , ∀i , j ∑ xi , j ≤ Tmax , ∀i , j i. j

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Fig. 4.22 High-demand pickup regions in DC. Source Ivan Zhou, toward Data Science, Jan 21, 2018

∑

xi , j ≤ 1, ∀i

j

xi , j ∈ {0, 1}, Ai ∈ {0, 1}, Bi ∈ {0, 1}, i ∈ I , j ∈ J More availability of time blocks corresponds to increased scheduling flexibility for our designated time blocks for our drivers. This positive association implies that the more flexible a driver’s schedule is, the more money they can make. The optimal income ranged between $450 and $545 per week, depending on the number of available time blocks. Alternatively, one could earn more money simply by driving more frequently. The team plotted income as the highest weekly working hours increased to determine causality (Fig. 4.24). Increases in the highest working hours seemed to considerably raise the driver’s income, showing that the time blocks during which a driver drives have a much smaller effect on revenue than the frequency with which they drive. Additionally, the model’s validity was established by comparing expected revenue to actual revenue. According to crowdsourced data, an Uber driver working 30 h per week earns about $772. According to the model, the optimum worst-case income expectation is about $1900. This

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Fig. 4.23 The MIP model of Uber. Source Ivan Zhou, toward Data Science, Jan 21, 2018

is substantially more than current driver driving patterns, indicating a significant improvement in the model.83 Profits in the global taxi industry are dwindling four centuries after horse-drawn Hackney carriages made their London debut. The financial condition of regulated taxi businesses got the greatest attention until recently. Uber and Lyft in the US, Didi in China, and other ride-hailing companies have slashed rates and flooded major cities with vehicles, stifling licensed rivals’ revenues. However, their misfortunes are now in the spotlight. In a document issued in the run-up to its first public offering, Uber claims to have lost $7.9 billion since 2009. Lyft, which went public last month, has lost $2.9 billion over the last seven years. Uber aims for a $100 billion value, but it is uncertain if it can be profitable (see Footnote 84). When properly regulated, it is a lucrative business. When it is not, it is ruthless. To begin with, consider Uber’s most frequently lauded characteristics. Its name has become associated with ride-hailing due to its quick expansion and credits itself to “first-mover advantage” and network effects, or the assumption that its value will improve as more people use it. The firm has more than 65% in the US & Canada, New Zealand, Australia, Europe, and Latin America. However, it observes itself as more than a taxi firm, with plans to expand into car ownership

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Ivan Zhou, towards Data Science, Jan 21, 2018.

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Fig. 4.24 Optimal revenue earned per week. Source Ivan Zhou, toward Data Science, Jan 21, 2018

and public transportation. The proposed valuation suggests that Uber would need to monopolize a sizable market (see Footnote 84). Given this, can Uber ever earn a profit? A historical examination reveals that taxi monopolies are far from impregnable. Due to ride-hailing being a local business rather than a global one, it will remain Uber’s bread and butter for the foreseeable future. In addition, as long as competition is unrestrained, it is simple to enter local markets. As a new low-cost cab arose in the 1930s, Len Sherman of Columbia Business School compared the Uber business model to uncontrolled New York City cabs. During the Recession, many jobless employees resorted to cab driving as a source of income, undercutting one another mercilessly. Drivers’ and taxi businesses’ revenues dropped as the streets became more congested with cabs. Customers gained, but no one else did. As they fight for drivers and consumers in each location, Uber and Lyft are reenacting that situation. Uber’s brand identification may assist. Cab companies have historically profited from strong brands. Despite their high fares and relative scarcity, “New York’s yellow cabs” and “London’s black cabs” attract riders, defining characteristics of the cities. In a perfect world for Uber, brand alertness should result in consumers downloading its applications instead of a competitor’s, persuading more drivers to work for it due to the increased market access. This would result in the muchheralded network effect benefiting riders and drivers. Ride-hailing is being commoditized as competition grows. Customers don’t care whether they use Uber or Lyft to travel from point A to point B as long as they get there. Consequently, neither business will readily boost profits by raising tickets and may instead be compelled to provide discounts. Similarly, ride-hailing businesses do not own their cars; their drivers do, so they cannot stay loyal. This causes

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companies to provide incentives to keep drivers from abandoning their jobs, further depressing earnings. Regulation has been the antidote to such a race to the bottom throughout taxi history. In 1635, London’s congestion was alleviated by limiting the number of Hackney carriages. The medallion system was established in New York by the Haas Act of 1937, which set severe restrictions on the number of medallions and thereby increased their worth. The city’s officials have recently taken moves to curb ride-hailing by limiting vehicle numbers and establishing a minimum salary for drivers. That has the potential to become a trend (see Footnote 84). If that is the past, what is in store for Uber and the like? Uber’s attempt at food delivery, Uber Eats, may prove a more challenging commercial proposition than ride-hailing; it must compensate restaurateurs and drivers for each sale. The firm is growing into wider mobility options like scooters and electric bikes and establishing a platform that combines public transit, enabling users to navigate more smoothly within a city.84 However, competition will be fierce: municipal governments will be hesitant to bind public transit access to a single platform for various reasons, including safety, data privacy, and others. Compared to the first half of 2018, Uber Eats’ core revenue declined in the second half of 2018, which was uninspiring. Uber’s long-run goal is “autonomous vehicles” (AVs), eliminating the company’s reliance on human drivers for revenue sharing. This potential is subject to significant regulatory ambiguity. Toyota and other investors have invested $1 billion in Uber’s autonomous vehicle division (see Footnote 84). Tesla announced plans to begin selling robotaxis next year. However, numerous other firms are eager to join the fray. Expect brawls. Uber will undoubtedly play a role in future of transportation. Substituting monthly subscriptions for fares can boost rider and driver loyalty. It may dominate some cities while leaving others to competitors if it does not breach antitrust laws. Profitability, history suggests, will be difficult to come by.

4.6.2

Bumpy Road Ahead for Uber

Uber is still coping with the aftereffects of the pandemic. As ride volumes declined last year, ride-share drivers shifted their focus from Uber and Lyft to other gigs like grocery and meal delivery. However, as vaccination rates rise, ride-share platforms are now compensating drivers to welcome them back in time to service an anticipated increase in demand. The tables have turned on ride-share companies, which have been fighting tooth and nail over the last few years to keep driver costs from skyrocketing as legislative

84

Can Uber ever make money? The Economist, 27 April 2019.

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threats mount. Uber recently announced a one-time $250 million stimulus to entice new and existing drivers to join the platform. Meanwhile, Lyft reportedly compensates drivers with $800 bonuses and other incentives. Both companies claim that their drivers are earning significantly more now than they were pre-pandemic due to the shortage of drivers. Investors anticipate a full recovery in demand for ride-sharing services following the pandemic. Lyft’s stock has increased nearly 100% in the last year, while Uber’s stock has more than doubled (chart85 ). Last week’s news had little effect on those gains, indicating that investors are not overly concerned about the possibility of a passenger-driver imbalance. Uber announced last week that its drivers are now earning more than $31 an hour in Philadelphia and nearly $29 an hour in Chicago, before tips (see Footnote 87). Uber’s driver compensation is reportedly up to 75% higher in some areas than before the pandemic. Uber appeared to be hoping to incentivize drivers while also saving money by charging consumers for rides in California. Drivers in cities such as San Diego had been charging riders up to five times the standard fare, taking advantage of Uber’s “choose your fare” feature introduced last year for California drivers. This feature essentially allowed drivers to set their trip rates as multiple time and distance rates.86 However, putting the onus on consumers may have stifled demand. Uber announced last week that it was discontinuing that feature, citing a 117% increase in rider cancelations over the previous year. According to Uber, riders are not willing to pay any additional multiple for a ride at the moment (see Footnote 87). This indicates that consumer demand is fragile, even as it recovers—an unfavorable sign given riders’ reported frustration with lengthy wait times for rides. As rider recovery gains traction, the question becomes how much is too much when luring drivers back. Ride-hailing companies may want to reconsider their priorities, including their cherished profitability targets, lest they risk losing both sides of their business just as they reclaim control.87 Both companies continue to forecast profits this year on adjusted earnings before interest, taxes, depreciation, and amortization. Uber’s journey hitherto is dotted with stunning successes and spectacular failures. One such botched-up foray was into China. Why did China’s Didi prosper where Uber was disastrous? In 2016, Uber gave up on its Chinese operations and sold its operations to Didi, a competitor headquartered in Beijing. Uber suffered a two-year loss of almost $2 billion in China. As a result of its collapse, Didi has become China’s uncontested ride-hailing leader, handling more than four-fifths of domestic rides today. China’s giant is largely anticipated to

85

FactSet, Wall Street Journal in Uber and Lyft Need a Sharper Turn, The Wall Street Journal, April 13, 2021. 86 The Rideshare Guy in Uber and Lyft Need a Sharper Turn, The Wall Street Journal, April 13, 2021. 87 Uber and Lyft Need a Sharper Turn, The Wall Street Journal, April 13, 2021.

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Fig. 4.25 China, population selected big markets, m, 2020. Source Economist Intelligence unit in Why China’s Didi can succeed where Uber has struggled, The Economist, 15 Feb 2021

go public soon, eight years after it was first launched, and it might be valued at $60 billion (see Footnote 90). Uber was ready to invest heavily in China despite mounting losses. Uber’s willingness to spend so much money, at least temporarily, demonstrated the magnitude of the prize. China has the greatest ride-hailing market in the world. As per the country’s transport ministry, ride-hailing platforms booked an average of 21 million trips per day in October 2020. This number is more than twice before the epidemic when travel was safer. Until it sold its Chinese company, Uber got more orders in China than any other nation, including its own. Last year, the gross transaction value of China’s ride-hailing businesses surpassed $32 billion, more than triple of the previous year.88 America may have been credited with inventing ride-hailing, but the business thrives in China due to favorable conditions. The reasons go beyond the market’s size. Didi stands to gain the most. Ride-hailing companies rely disproportionately on customers in densely populated areas. In 2019, just five cities accounted for over a quarter of Uber’s gross reservations by value: London, San Francisco, New York, Los Angeles, and Chicago. More than any other country, China has more than a dozen metropolitan areas with populations exceeding ten million (Fig. 4.25) (see Footnote 90). To combat rage-inducing congestion, most of these cities discourage private car ownership by limiting the availability of license plates. 3.6 million applicants competed in Beijing’s most recent bimonthly license plate lottery for 6370 number plates. Shanghai, China’s most populated city, auctions a modest number of license plates (Fig. 4.26). The average winning offer in the January auction was 91,863 yuan, more than a decade’s worth of money and more than the cost of several

88

Frost and Sullivan in Why China’s Didi can succeed where Uber has struggled, The Economist, 15 Feb 2021.

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Fig. 4.26 Shanghai passenger-car licence plates. Source SICA in Why China’s Didi can succeed where Uber has struggled, The Economist, 15 Feb 2021

mid-range automobiles. This means that ride-hailing businesses will have to deal with millions of dissatisfied would-be motorists (see Footnote 90). China’s large high-speed rail network, the globe’s longest, reduces the longdistance travel profits of car ownership. Additionally, with less expensive labor, rides may be offered at a lower price, making them more available to a broader group of clients. In the first half of 2020, more than 340 million Chinese used a ride-hailing service at least once.89 Didi disclosed in 2019 that it lost an average of 2% of the total charge on every ride. The firm’s “core ride-hailing business in China is already profitable.” It is tight-lipped about specifics; meanwhile, Uber claims that it makes money through ride-hailing while disclosing significant operational losses of $4.9 billion in the previous year. Nonetheless, the vast majority of Chinese experts believe Didi’s claims. They say that the challenge for Didi is how well it can sustain earnings, retain a near-monopoly in China, and grow globally, rather than whether it can break even. The company has grown into other business sectors such as bike-sharing, food delivery, and financial services in recent years. The goal is to create a convenient “ecosystem” that makes switching to a competing platform more expensive. Meanwhile, Didi is diversifying its business. It formed an overseas branch in 2017. A portion of the $4.5 billion it raised a year later was set aside for international

89

Ministry of Industry and Information Technology in Why China’s Didi can succeed where Uber has struggled, The Economist, 15 Feb 2021.

References

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growth. It is a safe bet that ride-hailing in China still has room to grow.90 But Uber won’t be there to play the game. Uber has been battling with the question of whether its drivers are employees or self-employed contractors? When the Supreme Court in the UK ruled in February 2021 that Uber drivers were employees rather than self-employed contractors, no one knew what the company’s reaction was going to be. Many expected Uber in the United Kingdom to disregard the court’s ruling because it applied only to a small group of workers and to conditions that had ceased to exist. When confronted with a similar decision in California, the company fought tooth and nail and ultimately succeeded in having the judgment reversed via a ballot initiative. Rather than that, Uber made a U-turn, announcing that its 70,000 drivers would be paid at least the minimum wage, receive pension benefits, and receive holiday pay. Uber will contact current and former drivers to offer them cash instead of holiday pay for their time with the company. Self-employment has increased as a result of the gig economy. While many workers appreciate the flexibility, others prefer traditional employment benefits but cannot obtain them (see Footnote 91). Now, it appears as though a combination of the judiciary and the market will help to improve working conditions in the gig economy. Uber’s new driver package goes above and beyond what many campaigners anticipated.91 The firm hopes its all-encompassing retrospective decision will avert future litigation and make it a more desirable employer than its competitors. Additional legal skirmishes over the definition of what time should be counted when calculating minimum-wage payments are expected. However, Uber is attempting to turn a legal defeat into a strategic advantage. A company that takes pride in disrupting urban transportation may now disrupt the gig economy. The Supreme Court decision will embolden those in other sectors, from social care to construction, to argue that they are employees. That will take time, though others will likely follow Uber’s lead.

References Bond, R. M., Fariss, C. J., Jones, J. J., Kramer, A. D. I., Marlow, C., Settle, J. E., & Fowler, J. H. (2012). A 61-million-person experiment in social influence and political mobilization. Nature, 489(7415), 295–298. Botsman, R., & Rogers, R. (2010). What’s mine is yours. The rise of collaborative consumption. Harper Business. Briscoe, B., Odlyzko, A., & Tilly, B. (2006). Metcalfe’s law is wrong. IEEE Spectrum, 43(7), 34– 39. Bughin, J., Catlin, T., & Dietz, M. (2019). The right digital-platform strategy. McKinsey & Company. Retrieved May 3, 2020. Canning, M., & Kelly, E. (2015). Business ecosystems come of age. Deloitte.

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Why China’s Didi can succeed where Uber has struggled, The Economist, 15 Feb 2021. Uber’s workers benefit from a Supreme Court decision, The Economist, 18 March 2021.

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Cusumano, M. A., & Gawer, A. (2002). The elements of platform leadership. MIT Sloan Management Review, 43(3), 51–58. Daugherty, P., Carrel-Billiard, M., & Biltz, M. J. (2016). Platform economy: Technology-driven business model innovation from the outside in. Technology Vision, Accenture. de Reuver, M., Sørensen, C., & Basole, R. C. (2018). The digital platform: A research agenda. Journal of Information Technology, 33(2), 124–135. https://doi.org/10.1057/s41265-0160033-3 Evans, D. (2011). The Internet of Things: How the next evolution of the internet is changing everything. Cisco Internet Business Solutions Group (IBSG). Evans, P. C., & Gawer, A. (2016a). The rise of the platform enterprise. The Center for Global Enterprise. Retrieved 15 March 2018. Evans, P., & Gawer, A. (2016c). The rise of the platform enterprise—A global survey. The Center of Global Enterprise. Evans, P. C., & Gawer, A. (2016b). The rise of the platform enterprise: A global survey. http://www.thecge.net/wp-content/uploads/2016b/01/PDF-WEB-Platform-Survey_01_12. pdf. Accessed September 12, 2016b. Frenken, K., & Schor, J. (2017). Putting the sharing economy into perspective. Environmental Innovation and Societal Transitions, 23, 3–10. https://doi.org/10.1016/j.eist.2017.01.003 Frey, C. B. (2017). Drivers of disruption? Estimating the Uber effect. Gilder, G. (1993). Metcalf’s law and legacy. Forbes ASAP, 152(6), 158–159. Hagiu, A., & Wright, J. (2015). Marketplace or reseller? Management Science, 61, 184–203. Hamari, J., Sjöklint, M., & Ukkonen, A. (2016). The sharing economy: Why people participate in collaborative consumption. Journal of the Association for Information Science and Technology, 67(9), 2047–2059. https://doi.org/10.1002/asi.23552 Huet, E. (2015, May 18). Uber tests taking even more from its drivers with 30% commission. Forbes. Kenney, M., & Zysman, J. (2016). The rise of the platform economy. Issues in Science and Technology, 32, 61–69. Macdonald, A. (2022) Uber’s global mobility chief in Uber reaches deal to list all New York City Taxis on its app, The Wall Street Journal, 25 March 2022. Madden, S. (2017, August 17). Read this before you build Uber for X. Y Combinator. Archived from the original on January 4, 2019. Retrieved January 4, 2019. Madureira, A., den Hartog, F., Bouwman, H., & Baken, N. (2013). Empirical validation of Metcalfe’s law: How internet usage patterns have changed over time. Information Economics and Policy, 25(4), 246–256. McIntyre, D. P., & Srinivasan, A. (2016). Networks, platforms, and strategies: Emergent views and next steps. Strategic Management Journal. Metcalfe, B. (1996). There oughta be a law, The New York Times, 15 July 1996. Metcalfe, B. (2013). Metcalfe’s law after 40 years of Ethernet. IEEE Computer, 46(12), 26–31. Moazed, A. (2016). Modern monopolies (p. 30). Macmillan. O’Brien, S. A. (2015, June 22). The Uber effect: Instacart shifts away from contract workers. CNN. Ormerod, P. (2012). Social networks can spread the Olympic effect. Nature, 489(7416), 337–337. Parker, G. G., Alstyne, M. W., & Choudary, S. P. (2016b, April). Pipelines, Platforms, and the New Rules of Strategy. Retrieved from Havard Business Review: https://hbr.org/2016b/04/pipelinesplatforms-and-the-new-rules-of-strategy Parker, G. G., van Alstyne, M., & Choudary, S. P. (2016a). Platform revolution: How networked markets are transforming the economy—and how to make them work for you (1st edn). Reed, D. P. (1999). That Sneaky exponential—Beyond Metcalfe’s law to the power of community building. Context Magazine, 2(1), January 2015. http://www.reed.com/dpr/locus/-gfn/reedslaw. html. Rochet, J.-C., & Tirole, J. (2006). Two-sided markets: A progress report. The RAND Journal of Economics, 37(3), 645–667. Roose, K. (2014, April 24). The sharing economy isn’t about trust, it’s about desperation. New York Magazine.

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Russell, K., & Grocer, S. (2019, May 9). Uber is going public: how today’s tech I.P.O.s differ from the dot-com boom. Retrieved from NYTimes: https://www.nytimes.com/interactive/2019/ 05/09/business/dealbook/tech-ipos-uber.html Schlagwein, D., Schoder, D., Spindeldreher, K. (2019). Consolidated, systemic conceptualization, and definition of the “sharing economy”. Journal of the Association for Information Science and Technology. https://doi.org/10.1002/asi.24300 Schneider, H. (2017). Creative destruction and the sharing economy: Uber as disruptive innovation. ISBN 978-1-78643-342-8. OCLC 974012316. Sundararajan, A. (2016). The sharing economy: The end of employment and the rise of crowd-based capitalism. MIT Press. Swann, G. M. (2002). The functional form of network effects. Information Economics and Policy, 14(3), 417–429. Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. (2016). Pipelines, platforms, and the new rules of strategy. Harvard Business Review, 94(4), 54–62. van der Aalst, W., Hinz, O., & Weinhardt, C. (2019). Big digital platforms: Growth, impact, and challenges, ResearchGate. World Bank. (2019). World development report 2019: The changing nature of work. World Bank. https://doi.org/10.1596/978-1-4648-1328-3.License:CreativeCommonsAttributi onCCBY3.0IGO Zervas, G., Proserpio, D., & Byers, J. W. (2017). The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry. Journal of Marketing Research, 54(5), 687–705. CiteSeerX 10.1.1.645.4284. https://doi.org/10.1509/jmr.15.0204. Zhang, X. Z., Liu, J. J., & Xu, Z. W. (2015). Tencent and Facebook data validate Metcalfe’s law. Journal of Computer Science and Technology, 30(2), 246–251. https://doi.org/10.1007/s11390015-1518-1

5

The Promise of 5G

5.1

5G—A Game Changer

The new 5G mobile communication system is frequently dubbed the century’s greatest invention. The implications of 5G on IoT, high-frequency trading, ecommerce, and healthcare are extremely significant. The managerial and economic implications of any new technology are of interest to the entire world, particularly those who have invested in the technology. While 5G evolves, its financial, economic, and societal implications will be closely examined in the coming days and years. By 2035, a $13.2 trillion generation of economic value is estimated, which would be generated globally, resulting in 22.3 million jobs in just the 5G global value chain.1 5G’s blistering speeds and low latency will rewrite the digital engagement rules. With its ability to transmit massive amounts of data at breakneck speeds, 5G has the potential to be a great equalizer. It has the potential to commoditize intelligence. To be sure, 5G growth projections are “best guesses.” According to Ericsson, 5G by 2024 will reach 1.5 billion subscriptions, which would make it the fastest generation deployed globally.2 By 2024, 5G is also expected to reach 55% of subscriptions in North America. 5G’s rated speed is astounding: at 100 Gbps, a full-length HD movie can be downloaded in less than five seconds. E-commerce

1 2

IHS Markit, The 5G Economy: How 5G will contribute to the global economy, November 2019. Ericsson Mobility Report, June 2020.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 V. Kumar, The Economic Value of Digital Disruption, Management for Professionals, https://doi.org/10.1007/978-981-19-8148-7_5

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will expand at a breakneck pace. Fast speed 5G networks and HD screens of devices enabled with 5G will increase customer engagement in e-commerce activities (in conjunction with VR, AI, and AR, among other similar technologies), resulting in more online purchases. 5G networks will compete with wired internet providers by serving cell phones, homes, and businesses. 5G has the potential to eliminate the need for data cables.

5G’s low latency is particularly alluring. Driverless cars will make their way through. We may yet see a world where every human being has an IP address, and all 50 billion inert devices are connected in a single massive smart chain. The overused phrase “connected world” takes on a whole new meaning. Distance truly dies. For algorithmic and high-frequency traders (HFTs), low latency is critical. 90% of securities trading in the United States is automated. The fiber backbone is simply not fast enough for fintech players. For instance, the shortest latency between London and Frankfurt is 8.3 ms over fiber, while the speed of light in free air is 2.1 ms. By deploying 5G, high-frequency traders hope to reduce latency to the speed of light and reap windfall profits. The impact on global trading will be stunning and disruptive. With 5G, blockchains are expected to overcome the latency and power consumption issues that have hampered their widespread adoption. 5G’s game-changing claims have prompted the Financial Times to declare that technology could be one of the most significant developments in human history. What makes 5G so sensational? It is more than a generational evolution; 5G represents a sea change in the role of mobile technology in society. To begin, 5G’s searing speeds and low latency will reshape digital communication protocols (Fig. 5.1). 5G networks are expected to achieve a significantly higher data rate than earlier networks, employing 10 Gbps, faster than the cable internet. They would also be 100 times faster than 4G. Additionally, the response time (network latency) is reduced to less than 1 ms (millisecond) compared to 30–70 ms for 4G. Only 5G networks can address the potentially gargantuan bandwidth challenge posed by IoT and Blockchains.3 5G can catapult mobile into world-changing technologies. As with electricity or the automobile, 5G mobile technology will be advantageous to societies and economies. Due to its worldwide 5G standard (New Radio), it would transform mobile from a collection of technologies that connect people and information to a standard connecting fabric that connects people with everything.

3

Time, June 3, 2019.

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Fig. 5.1 Network evolution. Source Time, June 3, 2019

Accenture predicts an acceleration of 5G connectivity in Europe and the US between 2021 and 2025. 5G would positively affect industries, resulting in new products and revenue streams. Every industry would transform uniquely. 5G was developed with the following strategic objectives in mind: • Enabling a diverse range of industries: A growing trajectory of sales that can be enabled by 5G reaching $13.1 T by 2035, despite the pandemic’s long-term impact on the world economy’s growth trajectory (see Footnote 4). • Jobs that contribute to a thriving value chain: Job growth enabled by 5G is expected to be faster than anticipated previously, increasing from 22.3 to 22.8 million in the ensuing 15 years. • Driving global GDP growth: 5G R&D and CAPEX spending are forecasted at $265 billion annually for the next 15 years.4 5G delivers Sustainability benefits: • Reduces emissions: Efficiencies in 5G network equipment can contribute to a 50% reduction in carbon emissions from mobile networks over the next decade. • Reduces pollution: – Using a 5G drone equipped with AI/ML to perform targeted weed eradication can result in a 50% reduction in pesticide and herbicide use. – A 5G-enabled intelligent transportation system can reduce traffic by 15% and be commensurate with pollution emitted by vehicles. • Increases efficient energy use: 5G-enabled IoT devices are designed to have a longer battery and device life than the previous generations (see Footnote 4).

5.1.1

5G Will Transform into a GPT

A General Purpose Technology (GPT) achieves a tipping point in acceptance after an incubation period, resulting in transformative and sometimes disruptive changes to sectors and the whole economy. GPTs have several characteristics in common,

4

“The Impact of 5G on the European Economy” Accenture Strategy, February 2021.

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including broad adoption across various sectors, long-term progress, and the ability to generate new ideas. GPTs have widespread and long-lasting effects across various industries, frequently redefining economic competitiveness and transforming societies. Wireless communication would be inducted into the GPT pantheon with the advantages of 5G technology and is embedded in processes, machines, and devices. As 5G technology develops and becomes implanted within machines, processes, and devices, wireless communication will join other historical innovations to become a GPT. The previous GPTs have had a significant impact on industries and economies. Around 1440, Gutenberg invented the printing press. Previously, books had to be painstakingly copied one by one by hand. The printing press-enabled mass production of books, which aided in spreading new ideas all over Europe as they stepped into the “Renaissance” in the early sixteenth-century era. Before the steam engine inventions, large-size industries needed to be close to waterways, which in any case was not a dependable source of energy. The introduction of the steam engine ended this dependence, allowing industries to be built close to the required raw materials or transportation network. Electricity helped take technology to the next level; it enabled the design of machinery with an integrated power supply. New, more efficient machine designs, such as the assembly line, were made possible, reshaping global manufacturing practices and other competitive dynamic features. Before the popularity of the telegraph in the early 1860s, long-haul communication was limited by the speed with which a physical entity could transport the message between points A and B. The telegraph mitigated the time constraints of long-distance communications, opening up today’s instantaneous and sophisticated telecommunications infrastructure. We have seen radical transformations with similar GPTs such as automobiles, rail systems, and the internet. While the early mobile generations laid the groundwork for the omnipresence of mobile technology, 5G will become a platform that connects vehicles, homes, hospitals, cities, and individuals to everything near them meaningfully. 5G will also enable connected cars to communicate with every vehicle surrounding and infrastructure on the roadside like the traffic lights. Improvements in 5G technology are also expected to explicitly address the incredible set of IoT use cases. The standard’s diverse components are “purpose-built” to target mission-critical applications and massive IoT (MIoT) deployment in telehealth, industrial automation, and autonomous vehicles. With a unified design in mind, the 5G capability is expanded to support a wide range of applications (see Footnote 21). As new business models evolve, the 5G-related economy adds another layer of complexity to regulation and policymaking, and in the process, the traditional delivery methods are either significantly altered or abandoned entirely. Development, training, education, spectrum permitting and licensing, healthcare, public infrastructure, spectrum allocation, privacy, cybersecurity, and public safety require regulatory and policy modernization for a world ready for 5G. The issue for policymakers in 5G economies is to be prepared to deal with the pervasiveness of 5G in everyday life without hindering the ongoing innovation that is essential to the

5.1 5G—A Game Changer

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5G economy’s success. Policies that protect firms’ ability to take risks, invest and pursue innovation relentlessly—particularly protection for intellectual property are all optimal drivers for capturing and leveraging comprehensive value extraction from the 5G economy (see Footnote 21). One of the main drivers of global economic growth over the next two decades will be the widespread deployment of 5G technology over broad swathes of the global economy. By 2035, the widespread use of 5G will have far-reaching consequences that will outstrip the capabilities of current technologies, platforms, and sectors, and yet, the widespread adoption of 3G and 4G mobile technology offers a helpful parallel of how the 5G economy will develop (see Footnote 21). 5G is a 5th generation standard of technology for the cellular broadband network that the cellular phone operators started rolling out worldwide in 2019. The 4G technology connecting most current cell phones was expected to succeed (de Looper, 2020). By 2025, the GSM Association predicts that 5G networks will have exceeded the count of 1.7 billion global users.5 5G operates on cellular networks like its antecedents, dividing the service area into smaller footprints called cells. An antenna in the cell connects every 5G-enabled device to an Internet and Telephone network using radio waves. The primary benefit of this type of network is that it would increase bandwidth, allowing for fast speeds for downloading, eventually providing 10 Gbps (Hoffman, 2019). Smartphones now account for about 95% of mobile data traffic, which is projected to increase throughout the projection period. By 2025, 5G networks will be responsible for almost half of global mobile data traffic (Fig. 5.2). Because of the increased capacity, the networks are expected to serve mobile phones and function as ISPs, supporting devices such as desktops and laptops; it would compete with existing ISPs like cable internet and allow new usages in both IoT and machine-to-machine (M2M) sectors. It’s early days for 5G. The wireless standards of the next generation have just lately started to enter the market. The majority of people are yet to experience 5G technology in their daily lives. Meanwhile, 5G has been figuring more prominently in discussions about national security, geopolitics, and investing. What is 5G, and how does it differ from today’s 4G wireless technologies? The primary selling point of 5G is its speed. This speed is achieved by utilizing a more significant portion of the radio spectrum, the band of frequencies used by phones to transmit signals, than the majority of 4G services. 5G technology touts that one can download an entire movie in just 15 s, compared to about 6 min on 4G. New and advanced 5G devices are more than just higher bandwidth. They would have rapid reflexes too. New technologies reduce the time required to process data, or “latency,” that plagues wireless networks. This can significantly improve the efficiency and effectiveness of machines such as drones and virtual reality goggles and handle more real-time tasks. Specific 5G signals operate at high frequencies, which can carry higher amounts of data but cannot travel far, necessitating the

5

“Positive 5G Outlook Post Covid-19: What Does It Mean for Avid Gamers?”. Forest Interactive. Retrieved November 13, 2020.

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Fig. 5.2 Global mobile data traffic (EB per month). Source GlobalData, India Telecom Operators in Times of India, March 21, 2021

installation of thousands of antennas on telephone and streetlamp poles to connect with every user. Most carriers in the United States construct hybrid networks that utilize multiple frequency bands (see Footnote 9). 5G networks are currently accessible in dozens of countries, although with limited coverage (Fig. 5.3). In 2019, South Korea, one of the early entrants, established a national network, while China has 5G services in many key cities. AT&T, Verizon, and T-Mobile all have networks in place in the United States but are still expanding them outside urban areas. In 2019, Samsung and other Android phone makers started offering 5G-capable phones. In Nov 2020, Apple revealed its first 5G phone. Manufacturing companies have sold nearly 200 million gadgets capable of using 5G, the bulk in China, but many still use it as a 4G phone.6 People will require to purchase a 5G phone if they desire to utilize the full capabilities of 5G. However, it must be said that 4G phones would remain useful for many more years. Carriers will maintain upward compatibility (5G phones will support 4G and 2G services), and if history is any guide, AT&T did not decommission it’s early 1990s-era 2G network until 2017. What impact will 5G have on gaming, social media, and shopping? Over a 5G connection, online shopping, games, and social media apps will provide discernible superior performance. Using 4G, many applications struggle to analyze data in real-time, requiring early augmented reality and virtual reality apps to depend on hefty on-site electronics rather than on the network. That will not be an excuse for 5G. The rapid speeds of 5G, on the other hand, could enhance experiences for hitherto specialized technologies such as virtual reality headsets and AR glasses. Immersive augmented reality game worlds may develop beyond just playing the Pokémon game or measuring your living room wall with an AR ruler. Additionally,

6

New Street Research in Times of India, March 21, 2021.

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Fig. 5.3 Sparse coverage of 5G. Source Everything You Need to Know About 5G, The Wall Street Journal, Nov 10, 2020

as AR and VR devices gain the processing power of smartphones, they play a considerably more significant role in gaming. Why has 5G become a national security and political issue? 5G networks, according to telecom industry experts, will ultimately take over control of oil refineries, power grids, and industries that now depend on hardwired connections. 5G can run at rates equal to or faster than many wired installations since it is so fast, and the machines may be relocated or changed considerably (even “hot swaps”) more readily since no wires are required to connect them. The shift could increase the flexibility of countries’ industrial bases and increase their vulnerability to hacking. Then, there’s the competition to establish an early lead in 5G technology; America’s lead in 4G benefitted businesses like Apple and Qualcomm. Extensive 4G adoption also aided in successful startups such as Uber (see Footnote 9). The China lead: China has prioritized 5G development after falling behind in launching the previous generations of mobile networks. By providing telecom businesses all around the globe, Huawei, a Chinese giant, has outsold competitors like Nokia and Ericsson in Europe. Additionally, it has the most patents covering the 5G business standards. A committee in the United States classified the firm as a

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Fig. 5.4 Number of 5G patents, 2021. Source Times of India, March 21, 2021

national security concern in 2012, saying that its suspected state connections might allow the Chinese government to spy on worldwide networks using its technology. The United States has also been effective in convincing other nations to limit the use of the company’s technology. Chinese firms are vying to seize clout in the 5G era judging by the number of patents filed by Chinese companies (Fig. 5.4). To make its intentions clear, the country has laid out its “China Standards 2035” strategy for global supremacy in emerging fields such as artificial intelligence and 5G, and solid numbers back it up. Chinese companies, led by Huawei, hold the majority of 5G patents granted or applied for. Although the US administration attempted to mitigate China’s advantage by blocking certain Chinese firms, experts say Huawei and other Chinese firms could collect royalties from their American competitors if they maintain their patent advantage.7 Regarding the 5G rollout, China is in the lead even though its 5G services must serve a population four times that of the United States. China is expected to have built and operationalized 690,000 base stations by the end of 2021, compared to 50,000 in the United States.8 The network in China still only reaches around 8% of its population. The top three Carriers in the United States claim to reach more than 70% of the population. However, some did so by sharing the 4G channels, restricting the speed. For example, Verizon’s 5G service presently serves fewer than just 1% of the people of the United States (see Footnote 9).

7

Wall Street Journal, Council on Foreign Relations, Asia Policy, Harvard Business Review, The American Academy in Berlin, US studies center, Elcano Royal Institute in Everything You Need to Know About 5G, The Wall Street Journal, Nov 10, 2020. 8 International Business Strategies Inc in Everything You Need to Know About 5G, The Wall Street Journal, Nov 10, 2020.

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5G standards are not limited to telephone networks. Verizon utilizes the technology to beam broadband services to specific houses. However, such connections are available only within a limited range of a few hundred yards from a 5G-enabled phone tower. Before 5G can compete nationally with fiber to the house, carriers require a humongous wireless spectrum and thousands of transmitters. In terms of industrial deployment, owners of factories, oil rig operators, and commercial real estate developers are testing methods to operate their own 5G networks capable of linking swarms of linked gadgets. Rather than relying on fiber-optic cables, Wi-Fi, or specific radio signals, such companies can build smallarea 5G networks—a model which would allow companies to own a large portion of their wireless infrastructure. These tightly controlled connections have numerous applications, from refineries that use environmental sensors to universities that provide a more reliable option for campus Wi-Fi. Numerous pilot projects of 5G deployment have already begun; Japanese high-speed trains, German auto manufacturers, and Chinese surveillance systems are just a few examples (see Footnote 9). However, most 5G “smart” applications are still in the proof-of-concept stage. Is a 6G network on the horizon? Samsung, Nokia, and Ericsson are all working on technologies that may be used to build the 6G standard. The International Telecommunication Union (ITU), a U.N. agency responsible for the standardization of global wireless communications, established groundwork in 2018 to discover and study post-5G technologies, which are anticipated to appear ten years from today. United States, China, and other nations compete to include their preferences in the standards that are being developed. The intent is to create a 6G standard capable of up to 100 Gbps, ten times faster than 5G.9 Samsung, a South Korean technology giant, claimed to have achieved a 50-fold increase in speed with its 6G. Samsung announced that it had achieved 5.23 Gbps on the 5G network. “6G is going to open up a whole new world of opportunity combined with diverse emerging technologies which will completely shape the paradigm of emerging experiences and services,” opined Samsung. It expects the 6G standard to be fully developed and deployed in 2028, with widespread commercialization by 2030.10

5.1.2

5G Will Be Impactful

The 4G wireless technology ushered in a flood of the latest apps, catapulting the smartphone to the forefront of social networking, navigation, and e-commerce. The next generation of wireless communication-5G-would supercharge the performance of smartphones, but its true potential lies in the ability to power the “Internet of things,” a catchall term for every device that is not a smartphone.

9

Everything You Need to Know About 5G, The Wall Street Journal, Nov 10, 2020. Achieved 50 times faster speed than 5G in 6G technology: Samsung, PTI, 23 June 2021.

10

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This includes industrial manufacturing lines that get instructions wirelessly rather than through cables, as well as autonomous vehicles that receive exact real-time information regarding road conditions; Sports broadcasts that enable spectators to see the game from an endless variety of perspectives while also overlaying a plethora of additional data reflecting the action; and other wearable devices which monitors a person’s vital signs enabling remote medical management. 5G technology vows to make everything connected. Here’s a preview of what that could imply. Flexible factories: For more than a century, factories have relied on physical wires—and with reason. Equipment that runs slowly or misfires because of a bad wireless connection is expensive and hazardous. Next-generation wireless networks will reduce latency, defined as the time it takes for one machine to act in response to another. Robotic assembly lines can get instructions or obtain the latest product specifications “on the fly” to be on the job continuously. Additionally, mobile robots may always be on the move without plugging in. This is the Holy Grail of industrial automation. Up until now, German and Chinese telecommunications firms have demonstrated the most incredible enthusiasm for promoting 5G driven manufacturing. Vehicles will be data-driven: Vehicles are expected to be fitted with 5G modems in a few years. However, the next generation of linked vehicles’ design is often a controversial issue. Industry opinion-makers say 5G will hasten the development of self-driven vehicles; these vehicles can proactively react to traffic hazards, for example; all made possible by 5G networks’ capacity to handle swarms of concurrent connections, letting sensors in vehicles on streets to transmit accurate data constantly (see Footnote 11). A new perspective on sports: When South Korea demonstrated a version of its 5G technology at the Winter Olympics in 2019, the telecom giant allowed visitors to alter their perspective on an event—for example, an athlete’s eye view of the game. That was a glimpse into how significant sports leagues want to utilize 5G connections to reinvent their programming in future. Viewers can anticipate that normal sports will benefit from the same 5G boost as the Korean games. Fans will be able to watch athletic competitions from various vantage points thanks to a network of sensors and cameras throughout sporting stadiums, supported by a 5G backbone. During the 2019 NHL All-Star Game in January, Intel used sensors connected to players and pucks in an experiment. Using new mobile data, viewers could watch how quickly shots entered the goal and how rapidly skaters moved on a real-time basis. Immersive films and games: To provide spectators a far more immersive experience, Hollywood and gaming firms use 5G’s ultra-low latency and speed. A wave of changes leading to more customized treatment is less dramatic but is coming soon. A new doctor-patient association: New telemedicine developments like high-quality virtual reality and videoconferencing will be made possible by 5G,

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allowing physicians to improve the quality of engagement with their patients. Radical developments like a doctor operating remotely on a patient in another country using remote-controlled surgical equipment would be possible in future with improved 5G networks. To better observe the facial and body signals of an autistic kid who is being treated remotely, a therapist may utilize a VR headset to view the child’s face and body (see Footnote 11). Meanwhile, researchers at Columbia University are using 5G’s reduced latency to create virtual physiotherapy. It is possible to simulate conventional treatment sessions by having the patient wear a virtual reality headset and operate digital representations of real-world items such as a ball. 5G-connected sensors and wearable gadgets that produce data will assist in identifying irregularities and alter medicine or therapeutic activity doses, hopefully without the need for in-person visits. Patients may be equipped with sensors that could provide data to their doctors about their activity, stress, and blood sugar levels (see Footnote 11). 5G’s enhanced bandwidth and reduced latency may allow paramedics in an ambulance to get real-time instructions from a physician through high-definition cameras and virtual reality in future. This could revolutionize emergency medical care. Early experiments indicate that sensors and cameras could let police agencies scan public areas for suspects in their databases more rapidly with 5G capabilities. Businesses may be able to monitor the movements of their consumers better and target their marketing accordingly. Engineers may now analyze pictures closer to a cell tower using special software developed by the cellular carrier’s engineers. This requires exploiting two of the key 5G benefits. One, the high bandwidth of 5G networks allows highresolution pictures to be sent over the air. Reduced latency also enables computers to process images closer to the capture point (aka edge computing), allowing for rapid identification of people and objects. Verizon claims that image matching may be done twice as fast compared to the traditional modes by on-site processing.11 How’s a 5G network capable of achieving so much without a clinching App? 5G may not require a killer App. This may be moot with 5G’s anticipated increases in speed and network capacity. When a killer app comes along, it’s a game-changing piece of service or software that changes everything. Text messages propelled 2G, while mobile internet propelled 3G. The broad adoption of 4G has been helped by the streaming video and the growth of the mobile app ecosystem (see Footnote 16). 5G, on the other hand, is a whole new animal. Researchers and business leaders in the wireless sector claim that the dramatic increase in capacity offered by 5G could result in a new spurt of growth for mobile network operators. Fifthgeneration wireless promises to be up to 100 times faster than fourth-generation, capable of connecting 100 times as many devices and delivering far quicker reaction times among machines themselves. Upgrading networks to 5G also gives

11

How 5G Will Change So Much More Than Your Phone, The Wall Street Journal, Feb 26, 2019.

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cellular service providers the ability to solve a capacity issue on current 4G networks (see Footnote 16). The video alone can consume up to half of the bandwidth on some networks. The popular belief is that capacity can be doubled by upgrading the existing 4G infrastructure with 5G. “If I put 5G everywhere in the urban area that there’s 4G cells—without adding any extra real estate—I now can double, or triple or quadruple the amount of data that I can put down those pipes.” “So, do you actually need a killer app? No.”12 That is not to say that killer applications will not develop over time. Immersive gaming is the way forward in gaming, and 5G, coupled with AR/VR technologies, can further enhance the player’s immersive experience. According to some, promoting virtual and augmented reality and mobile gaming is a good use of 5G muscle. When using a virtual reality headset, they experience a delay or lag. Many people become extremely motion sick as a result of such an experience. 5G has the potential to eliminate these lags. Mobile gaming will become more fun with multiple players thanks to 5G, which will change it from being mainly a single-player experience. Many players may use augmented reality on smartphones to participate in new and interactive cloud-connected games and utilize 5G technology. With phone cameras, virtual creatures may be overlaid on the actual environment. Groups of players could pursue monsters hiding behind trees, and they would respond to a player’s movement by growing in size or leaping between the trees as they approach. With 5G and gaming, augmented reality will experience a positive explosion.13 Apple’s new iPhones, with built-in 5G and AR capabilities, are expected to increase 5G’s market share significantly. A whopping 40% of all smartphones sold in the United States will be 5G-enabled by 2021.14 At present, there are not too many Apps on the horizon. Previously, with every new launch of the network, users have been the first to adopt killer apps like texting, emailing, and streaming. This time, many observers believe that business apps will lead and pave the way for widespread adoption. “We believe that unlike prior generations of cellular technologies, 5G may actually be adopted first on the enterprise side”.15 Deere & Co., a heavy equipment and technology company, intends to utilize 5G to keep tabs on the safety of its employees and the efficiency of its manufacturing lines. Using cameras, pictures of employees standing or sitting in real-time may be captured and sent for immediate analysis for adopting safer working environments.

12

University of Illinois, Urbana Champaign in Why 5G May Not Need a Killer App—for Now, The Wall Street Journal, Nov 9, 2020. 13 Facebook in Why 5G May Not Need a Killer App—for Now, The Wall Street Journal, Nov 9, 2020. 14 Counterpoint in Why 5G May Not Need a Killer App—for Now, The Wall Street Journal, Nov 9, 2020. 15 PricewaterhouseCoopers in Why 5G May Not Need a Killer App—for Now, The Wall Street Journal, Nov 9, 2020.

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Existing networks hamper real-time remote health monitoring in telemedicine. When it comes to remote vitals monitoring, slower bandwidth and connection problems make getting granulated streaming data impossible. The data are instead taken in little chunks at regular intervals. Additionally, fast 5G networks have the potential to ease telemedicine’s current bottleneck. On the other hand, with 5G, healthcare providers can monitor critically ill patients in their homes.16 Business leaders, policymakers, and the media have all been drawn to the promise of 5G. However, how much of that promise is likely to be fulfilled soon? Realistic assessments of how and where connectivity may be implemented and what it can allow over the next decade are needed now that the first genuine 5G networks are up and running. The future of 5G may not be idyllic, despite the hoopla surrounding remote surgery and Star Trek-style holodecks in everyone’s living rooms. New standards improve network performance while needing considerably less capital than existing technologies. Such an improved backbone may be put to a plethora of different uses. Nevertheless, 5G holds enormous promise for society. By implementing the most promising use cases in identified sectors (manufacturing, mobility, healthcare, and retail), global GDP may rise by $1.2–$2.4 trillion by 2030, with advanced countries extracting much of the value (see Footnote 20). These four sectors account for approximately one-third of global GDP. Additionally, approximately two billion new users are expected to join the Internet globally; it is estimated that this will have a global economic effect of between $1.5 and $2 trillion. Even though most network traffic will continue to be driven by consumer demand for entertainment and internet applications, connectivity also offers new economic opportunities. In mobility, vehicles will interact and connect with infrastructure and networks to enhance traffic flow and safety. Remote patient monitoring, AI-powered diagnostic tools, and automation of many chores are all possible with connectivity-enabled advances in healthcare. Caregivers can now spend more time with their patients because of this. Low-latency commercial and private 5G networks allow manufacturers and other industrial firms to conduct highly accurate, high-output automated processes. While increasing the efficiency of their inventory management and warehouse operations, retailers can offer a smooth and customized shopping experience for their customers. Seventy to 80% of the $1.2–2 trillion potential in four domains can be realized by 5G using existing advanced connectivity technologies (see Footnote 20). Frontier connectivity can generate the remainder by enhancing the performance, efficiency, latency, and coverage of numerous existing use cases—and clearing the way for innovations we can’t even imagine yet. Many market-wide problems will need to be resolved across the four domains to fructify. For example, managing across value chains is a significant problem to be solved. It’s difficult to grow since

16

Why 5G May Not Need a Killer App—for Now, The Wall Street Journal, Nov 9, 2020.

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the value is scattered across various use cases with no obvious aggregator. In addition, incentives are often skewed. When it comes to financial gain, it’s not always the company doing the hard work of investment and execution that will reap the benefits. Additionally, many 5G applications introduce data privacy, security, and interoperability challenges. An added dimension for the 5G rollout is that network expansion lower device and service costs may bring an extra 2 billion people online by 2030. This means that by 2030, just 20% of the world’s population will be without the internet. The cost of 5G deployment could be an impediment. Upgrading existing connectivity will come at a cost. Connectivity providers could face an uphill fight due to the large investment needed. While contemplating capital expenditures to extend their networks, many of these companies are already straining to satisfy shareholder expectations (see Footnote 20). As the globe becomes more connected and inclusive, inequalities may continue. Countries are at different stages of capturing value from the 5G economy. Several leading nations have already implemented high-band 5G networks in some of the world’s most populous cities in South Korea, Japan, and the United States. Canada and France will be behind the United States. While Poland and Brazil, for example, are still a few years behind, they are more likely to concentrate on fiber and midband 5G in the near to mid-term future. Frontier connection is expected to be confined to India’s main metropolitan areas despite rapid advancements in the country’s digital backbone. The urban–rural divide may worsen within nations. They will impact how domain use cases are allocated, benefiting nations like China that are pioneers in the field. Mobility and 5G: As transportation systems become more sophisticated, connectivity will serve as the foundation.17 Despite the importance of the automobile sector, mobility includes many other players, such as carsharing services, mass transit, infrastructure, software, and hardware. In other words, it encompasses everyone who is engaged in moving people (and things). Preventive maintenance, improved navigation, carpooling services, and customized “infotainment” may be possible via connectivity. Communicating between vehicles and infrastructure may help avoid accidents, give vehicles more autonomy, and enhance traffic flow. According to current estimates, connection in transportation would boost GDP from $170 to $280 billion by 2030 (see Footnote 20). Healthcare and 5G: Connected devices and advanced networks have the potential to revolutionize healthcare.18 Low-latency networks and densely packed connected devices and sensors enable real-time monitoring of patients at home, which could be a game-changer in treating chronic diseases. Data can flow seamlessly throughout medical systems to ensure smooth operations and care coordination. Diagnoses can be made more quickly and accurately with AI-powered decision support tools,

17 18

“The trends transforming mobility’s future,” McKinsey Quarterly, March 2019. “The era of exponential improvement in healthcare?,” McKinsey.com, May 2019.

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Fig. 5.5 World’s mobile technology mix in 2025. Source Connected world: An evolution in connectivity beyond the 5G revolution, McKinsey, Feb 2020

and many tasks can be automated to allow caregivers to spend more time with patients. The ability to aggregate and analyze massive datasets may result in novel treatments. Aggregating these use cases will release further investment capacity in healthcare and could impact the global GDP by $250–$420 billion by 2030. Manufacturing and 5G: With low-latency and private 5G networks, manufacturing and other allied sectors can function with extraordinary accurate operations.19 Intelligent factories use analytics, AI, and sophisticated robots to operate at maximum efficiency, optimizing and adapting operations in real-time—not just on a few assembly lines but across many facilities. An increasing number of industries will use computer vision-enhanced bin picking and quality control in conjunction with autonomous guided trucks, which require 5G networks’ ultrahigh speeds and ultra-low latency. Manufacturing connectivity with 5G may have a $400–$650 billion effect on GDP by the end of the decade (Fig. 5.5). Retail and 5G: Trackers, sensors, and computer vision may all be used by retailers to manage better inventory, warehouse operations, and across supply chains. Connectivity makes shopping in-store more enjoyable—for example, eliminating checkout and augmenting product information with augmented reality. Personalization and promotions in real time can help increase sales. Retailers with foresight are already experimenting and piloting some of these use cases; as technology improves and becomes more affordable, other businesses will follow suit. These scenarios for retail applications can increase GDP by $420–700 billion.20 Long-Term Evolution (LTE) 4G mobile networks are being phased out (4G technology will exist for at least another twenty years) to favor the next generation (5G) of mobile telecommunications technologies. Mobile network operators (MNOs) will offer new services using 5G technology, but it will do much more.

19

“Five ways that 5G will revolutionize manufacturing,” Operations blog, McKinsey.com, October 2019. 20 Connected world: An evolution in connectivity beyond the 5G revolution, McKinsey, Feb 2020.

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By improving the mobile broadband (eMBB-enhanced mobile broadband) experience and evolving to suit the dynamic needs of new massive Internet of things (MIoT) and mission critical services (MCS) applications, 5G will propel mobile networks to a different level. New business models will be enabled, and businesses and economies across the globe will be transformed due to the advent of 5G. First, there will be a strong emphasis on eMBB applications in 5G deployments to meet human-centric needs for access to multimedia content, services, and data. Use cases of eMBB will include new functionalities and a seamless user experience beyond what was feasible with previous generations. Since the launch of 5G in 2019, South Korean carriers have signed up 3 million 5G subscribers. MCS applications will need ultra-reliable and low-latency communication systems with stringent throughput and high uptime. MIOT applications, which are characterized by a vast number of connected devices sending relatively modest quantities of lowpriority data, will be implemented by many businesses and localities (see Footnote 20). Three potential economic benefits of 5G to the global economy could accrue by 2035, assuming a regulatory climate that encourages business development. 5G will spur sales of goods and services across various industries to optimize core functions. The growth of a flourishing 5G value chain will heighten to advance of the underlying 5G technological foundation via focused R&D, infrastructure expenditures, and application development. Last but not least, 5G-enabled mobile technology has the promise of contributing to global GDP growth that is both long-term and sustainable (see Footnote 20).

5.2

The Economic Impact of 5G

Mobile technology is expected to become the exclusive realm of GPTs due to the advent of 5G. Because of the “Internet of Things” and 5G, the global economy will be mobile-centric; it will be the primary source of communication. 5G mobile technology will become a critical medium for connecting devices, transmitting information, facilitating transactions, and enabling new connected activities. Given these characteristics, the economic literature on GPTs provides critical insight into the nature and magnitude of the anticipated impact of 5G deployment.21 Railroads’ impact on national income in England and Wales was estimated at 4% in 1859 but increased to 10% in 1890. In the 1990s, information and communication technologies (ICTs) had a more significant effect than earlier GPTs, and they happened faster. 5G will have a significant economic effect even if it isn’t as big a game-changer as railways in the nineteenth century or even ICTs in the 1990s. Yet, 5G will be a ubiquitous dominant global player. According to IHS Markit, real global GDP will expand at a 2.5% annual pace from 2020 to 35, with 5G accounting for nearly 0.2% of that growth. The annual net contribution of 5G is

21

The 5G Economy, IHS Markit, November 2019.

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Fig. 5.6 Annual net contribution of 5G to global growth. Source IHS Markit, The 5G Economy: How 5G will contribute to the global economy, November 2019

shown in Fig. 5.6. Between 2020 and 2035, 5G will contribute nearly $2.7 trillion to the global economy annually (see Footnote 21). • The projected worldwide economic effect of 5G technology has risen by $1 trillion by 2035, partly due to the first 5G standard being completed early and key operators launching commercial 5G services sooner than planned. • By 2035, 5G will be responsible for worldwide sales of $13.2 trillion. This is nearly equal to the retail spending of the United States ($13.9 trillion) and the combined consumer spending of China, Japan, Germany, the United Kingdom, and France in 2018 ($13.4 trillion) (see Footnote 21). • There will be 22.3 million additional employment generated by the worldwide 5G value chain by 2035, generating $3.6 trillion in economic output.22 The Fortune Global 1000’s total revenue in 2019 equals this amount—a list that includes Toyota, Walmart, Volkswagen, Sinopec Group, ExxonMobil, Royal Dutch Shell, BP, China National Petroleum, Saudi Aramco, and State Grid. Fortune estimates that these firms employ approximately 6.5 million people. The 5G value chain will support 3.4 times as many jobs for a similar output level. • To develop and enhance the 5G technological foundation in business and network application infrastructure, the 5G value chain will spend $235 billion each year. This is equivalent to nearly 80% of all 2017 federal, state, and municipal government logistics infrastructure expenditure.

22

$13.2 sales enablement is the cumulative sales enabled by 5G and includes intermediate sales occurring in the sales channel (and therefore has double accounting). $3.6 trillion is the value generated by the 5G value chain (sort of 5G GDP).

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• The long-term growth and accrual to absolute global GDP will be enabled by 5G investment and deployment. For 2020–2035, 5G’s yearly contributions to real GDP yield a net present value of $2.1 trillion, equal to Italy’s economic size, presently the eighth biggest in the world (see Footnote 21). Mobile technology has evolved from a personal communications revolution to a real GPT that can potentially change whole sectors and economies with the arrival of 5G. Mobile technology to date has progressed from a mainly people-to-people platform (3G) to a worldwide platform for connecting people to information (4G). 5G has the potential to utilize and extend the R&D and financial investments made in the previous mobile technologies, allowing mobile to advance to a platform that offers ubiquity, low latency, and flexibility, much needed for future applications. Using 5G could alleviate some of the challenges associated with 4G connectivity. There will be just five minutes of downtime per year with the complete 5G standard, ensuring a dependable rating of 99.9999% (six nines).23 Additionally, 5G features sub-millisecond latencies, enabling significantly faster reaction times than LTE’s 40–50 ms or Wi-Fi’s 100 ms. In a big factory or warehouse of 10,000 m2 , a 5G network can link 10,000 devices, while the 4G standard limits connectivity to 607 devices (see Footnote 23). 5G allows connection densities of up to one million per square kilometer, paving the way for firms to build their private networks (Yang & Wegner, 2018). The science of robotics will be the fulcrum on which business IoTs will be built. A recent headline shouted, “Cloud robots: The killer 5G application” (Yang & Wegner, 2018). Over the next five years, the 5G IoT sector is expected to grow by 55% yearly, from US $694 million in 2020 to US $6.3 billion in 2025.24 By 2024, 5G IoT connections are projected to rise from 1 billion in 2018 to a stunning 4.1 billion, representing a 27% annual compound growth rate. Private 5G network markets, many of which will connect robots, are expected to expand. Many private 5G networks in Germany were already in operation in 201925 for professional service robots on manufacturing lines and will exponentially expand with billions of dollars of investment by 2023 (Sims, 2017). 5G networks can process approximately 1000 times more data than the current systems handle (Afolabi et al., 2018). By 2025, it is estimated that the United States will lead 5G adoption, followed by Europe and the Asia Pacific. By 2025, the Republic of Korea expects 5G to account for 59% of its total connections, compared to only 8% in Latin America and 3% in Sub-Saharan Africa. The worldwide spread of different mobile technologies shows 4G still dominating in 2025. And yes, 2G will still be available in 2025!26

23

Gartner, “Gartner Says worldwide smartphone sales will decline 2.5% in 2019,” press release, August 1, 2019. 24 AnandTech, “Tech insights,” accessed October 9, 2019. 25 Strategy Analytics, “Q1 2018 smartphone apps processor market share: Chips with on-device artificial intelligence (AI) grew three fold,” press release, August 8, 2019. 26 UNCTAD, based on GSMA report, 2018.

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Across the board, people are genuinely optimistic that 5G mobile technology will usher in new eras of opportunity. For the most part, they think it will open the door to new goods and services and increase productivity and the development of new sectors.27 Additionally, the deployment of 5G may exacerbate the urban–rural digital divide, as establishing 5G networks in rural areas with lower demand could be commercially tricky.28 Industry giant Reliance Industries is optimistic that 5G would speed up India’s growth by increasing its current $3 trillion economy to $40 trillion by 2047. The combined objectives of accelerating growth and ensuring that everyone participates in development would be helped by the next generation of communication services. India’s growth would be accelerated, and the inclusive development aided by 5G would raise per-capita income to 20,000 dollars from 2000 dollars. “India may have started a little late, yet…will finish first by rolling out 5G services across the length and breadth of India.”29 5G would provide high-quality healthcare to remote areas by transforming hospitals into smart hospitals. By speeding digitization, the next wave of wireless networks can help close the divide between urban and rural India (see Footnote 29). 5G could “power India’s emergence as the world’s intelligence capital” by integrating artificial intelligence into every industry. As a result, India will become a significant exporter of high-value digital solutions and services.30

5.2.1

The Ubiquity of 5G

While 5G subscription growth has slowed in some markets due to the pandemic, it has accelerated in others, resulting in the projections of worldwide 5G subscribers. Although subscriptions are a good indicator of 5G’s performance, that’s not the only way to measure it. The success of new use cases and apps will decide the value of 5G to consumers and companies. Due to the importance of digital infrastructure being repeatedly proven in recent years, investments in 5G may play a significant role in revitalizing economies. 5G was intended for innovation.31 Despite the pandemic’s uncertainty, service providers continued to activate 5G connections, with over 75 now announcing commercial 5G service launches.32 Ericsson expects to see about 190 million subscribers. This is mainly owing to

27

Digital Economy Report, 2019, United Nations Conference on Trade and Development (UNCTAD), 2019. 28 Setting the Scene for 5G: Opportunities & Challenges. Geneva in Digital Economy report, 2019, UNCTAD. 29 Reliance Industries in 5G will help in accelerating India’s growth by making the country a $40trillion economy by 2047, Money Control, October 1, 2022. 30 5G will help in accelerating India’s growth by making the country a $40-trillion economy by 2047, Money Control, October 1, 2022. 31 Ericsson Mobility report-June 2020. 32 Ericsson and GSA (May 2020).

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Fig. 5.7 Mobile technology subscriptions. Source Ericsson Mobility report-June 2020

China’s higher-than-expected pace of adoption. Subscriptions to 5G are anticipated to increase at a far quicker rate than LTE did after its debut in 2009. Compared to 4G (LTE), China has been more active with 5G, and devices from various manufacturers have been available sooner. There will be 2.8 billion 5G subscribers worldwide by 2025, with Ericsson projecting that this would be around 30% of all mobile subscriptions (Fig. 5.7). LTE will continue to be the most popular mobile access technology for subscribers during the projection period. As customers move to 5G, 4G subscriptions are projected to reach a high of 5.1 billion subscriptions in 2022, then decrease to about 4.4 billion by the end of 2025 (see Footnote 31).

Till 2021, more than 75 commercial 5G networks have been launched across the globe, although global coverage remains below 10%. By the end of 2019, Switzerland’s 5G coverage had reached over 90% of the population, and it is projected to continue to expand through the 2020s (see Footnote 31). Commercialization of 5G is accelerating in North America. Service providers have already offered commercial 5G mobile broadband services. North America presently has the highest LTE penetration rate globally, at 92%. By 2025, the area will have over 325 million 5G subscribers, accounting for nearly 74% of all mobile subscriptions (see Footnote 31).

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Efforts to continually improve the infrastructure and technological basis will characterize the early years of the 5G economy, followed by an intensifying worldwide deployment of 5G use cases. Businesses across the globe will progressively use 5G technology to boost sales efficiency, engage current and new consumers, and constantly develop their business models. The economic effect of 5G predicted until 2035 is evaluated via three lenses. The first lens looked at the sales potential of 5G, beyond what 4G upgrades presently offer. The second lens examined how investment in 5G infrastructure and research and development could create extract value over and above the 5G value chain that continually deepens the 5G technological foundation will be aided by development. Investment in 5G infrastructure and R&D may create economic value outside the 5G supply chain. Consequently, the third lens look at the macroeconomic effect of these investments on the global GDP. Global output: The $13.2 trillion global opportunities: Virtually, every business area will profit from 5G installations. 5G’s role in converting mobile technology into a GPT will be bolstered by broad adoption and integration. In 2035, global sales activity facilitated by 5G is expected to exceed $13.2 trillion, covering a range of industries (Fig. 5.8). In 2035, this corresponds to roughly 5% of real-world production. The sectoral impact of 5G is shown in Fig. 5.9; the most impacted sector will be manufacturing. Manufacturing will bring in almost $4.7 trillion in sales enablement income, accounting for 36% of $13.2 trillion. This may seem excessive until one realizes that adopting any of the 5G use cases would at the very least drive supplementary expenditure on equipment, all of which will be made by the manufacturing units. Drones, for example, will allow sales in the transportation industry; but the transportation industry will need to purchase more drones from the manufacturing industry.

Fig. 5.8 Impact of 5G by industry in 2035, $bn. Source Ericsson Mobility report-June 2020

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Fig. 5.9 Torch bearers of 5G, 2020–2035. Source IHS Markit, The 5G Economy: How 5G will contribute to the global economy, November 2019

Complementary investment in 5G-ready manufacturing equipment will be required for medical use cases. The same argument holds good for the information and communications sector, accounting for nearly $1.6 trillion of 5G-enabled economic activity in the ICT sector. To implement any 5G use case in ICT, investment in communication and content services will be required. While 5G is projected to account for 5% of worldwide production by 2035, the proportion of sales enabled by 5G will vary by industry, ranging from 10.7% in the information and communications sector to 2% in the hotel sector. Because of the manufacturing sector’s size, accounting for over 31% of global output in 2035, and the fact that the majority of 5G-enabled manufacturing sales will be secondary (i.e., equipment sales in support of a use case), the percentage (5.4%) will be slightly lower than the overall average. Perhaps more importantly, smart city and agriculture deployments might facilitate 6.3% of public service (government) and 5.3% of agricultural production in 2035, respectively (see Footnote 21). In 2035, the 5G value chain will create $3.6 trillion in output and 22.3 million jobs. Seven nations will lead the 5G value chain’s economic activity: the United States, China, Japan, Germany, South Korea, the United Kingdom, and France. Between 2020 and 2035, companies engaged in the 5G value chain in these nations are expected to spend more than $235 billion in R&D and Capex (see Footnote 31). The US and China are projected to dominate 5G research and development and capital spending, investing a combined $1.3 trillion and $1.2 trillion, respectively. The United States is projected to contribute about 26.7% of worldwide 5G investment, with China coming in second, accounting for approximately 25.5% (Fig. 5.10). The 5G value chain will provide $3.6 trillion in economic production and 22.3 million jobs by 2035. Each of the 5G leaders’ contributions to the gross output and employment generation can be seen in the chart.

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Fig. 5.10 Economic contributions of the 5G value chain in 2035. Source IHS Markit in Ericsson Mobility report-June 2020

5.2.2

5G Will Go Where No Standard Has Gone Before

The three primary application areas for 5G’s enhanced capabilities are ultrareliable low latency communications, massive machine-type communications, and enhanced mobile broadband. The first two are years, perhaps decades, away in most locations.33 ,34 Enhanced Mobile Broadband (eMBB): Enhanced mobile broadband uses 5G to enhance 4G LTE mobile broadband services by allowing quicker connections, higher throughput, and more capacity. This is extremely beneficial in high-traffic stadiums, cities, and music venues (Yu et al., 2017). In the 5G economy, two critical features of eMBB will be essential in driving adoption and value generation. First, cellular coverage should encompass office buildings, industrial parks, retail malls, and significant events. The second is improved ability to handle a much higher number of devices that use vast quantities of data, especially important in densely populated regions. These network upgrades will make the data transfer more efficient, causing decreased cost per bit of data communication, a key factor in substantially increasing broadband applications on mobile networks. Massive Internet of Things (MIOT): Many devices would be connected via massive machine-type communications. A fraction of the 50 billion IoT smart devices will

33

“5G—It’s Not Here Yet, But Closer Than You Think”. October 31, 2017. Archived from the original on January 6, 2019. Retrieved January 6, 2019. 34 “Managing the Future of Cellular” (PDF). March 20, 2020. Retrieved September 24, 2020.

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be connected via 5G technology. Drones with 4G or 5G connections will help disaster recovery operations deliver real-time data to emergency personnel.35 Most vehicles will have a 4G or 5G cellular connectivity for various services. Because autonomous cars must function in regions with no network connection, 5G is not required.36 However, most autonomous vehicles incorporate teleoperations to complete missions, which will benefit significantly from 5G technologies.37 ,38 While 5G has been used for remote surgical operations, most remote surgeries currently occur in facilities with fiber connections, which are usually quicker and more dependable than wireless connections, though they suffer from distance limitations; 5G will largely remove this limitation. 5G will build on the legacy investments made in established IoT applications and machine-to-machine (M2M) connectivity to scale exponentially, which will see the deployment of 5G across all segments of the industry. 5G’s capability to function in licensed and unlicensed spectrum, its low power consumption, and its ability to provide flexible coverage will drive lower-cost points. This will enable the scale of massive IoT and drive much greater uptake of mobile technologies to address applications. Mission-Critical Services (MCS): The term used to characterize the usage of the network for mission-critical applications that need continuous and robust data transmission is ultra-reliable low-latency communications. This allows wireless technology to offer extremely dependable connectivity, indistinguishable from wireless, to assist applications such as driverless cars and remote control of sophisticated automation equipment when failure is not an option. MCS creates a new market for mobile devices. This primary 5G growth sector will serve applications requiring high availability, dependability, and ultra-low-latency connection. 5G’s enhanced capabilities enable wireless connectivity to reach previously unimaginable locations and use: • Previously reserved for fiber, connectivity rates of hundreds of megabits per second per application are now feasible. This is fast enough, for example, to handle hundreds of megabits per second of ultra-high-definition (UHD) video streams, allowing for remote visual inspection. • A 99.9999% dependability rate: This rate, often known as “six nines” dependability, indicates yearly downtime of fewer than five minutes (Wei, 2019), similar to fixed Ethernet network performance. • For mission-critical processes, greater reliability: Users may selectively divide a 5G network, enabling them to choose the service quality provided by different

35

“Intel Accelerates the Future with World’s First Global 5G Modem”. Intel Newsroom. Archived from the original on September 6, 2018. Retrieved November 21, 2019. 36 “Ford: Self-driving cars “will be fully capable of operating without C-V2X””. wirelessone.news. Retrieved December 1, 2019. 37 “Smooth teleoperator: The rise of the remote controller”. VentureBeat. August 17, 2020. Retrieved February 8, 2021. 38 “5GAA Tele-Operated Driving (ToD): Use Cases and Technical Requirements Technical Requirements” (PDF). 5G Automotive Association. Retrieved February 8, 2021.

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network parts. This may further assist in minimizing the anticipated downtime for high-priority applications. • Working in metal impediments: This is a must for industrial applications. If a metal item, such as a crane or a conveyor belt, blocks the route of a 5G signal, the data may be sent through a different channel. Redundant routes to the receiver are established using several transmitters, guaranteeing packet delivery (see Footnote 40). • High density: 4G networks can link up to 100,000 devices in a square kilometer, whereas 5G networks can connect up to a million. A 100,000 m2 facility equates to a capacity to connect 100,000 devices, compared to 10,000 on a 4G network, enabling companies to link up all the sensors and devices of a facility. Densification is becoming a more critical industrial requirement: BASF’s main production plant in Germany, Ludwigshafen, for example, already has 600,000 networked sensors and other devices, but the firm wants ten times that number.39 • Latency in milliseconds: The reaction time of a 5G network will be a thousandth of a second. Certain kinds of process automation and remote device control need this very low latency. On a private 5G network, latency may be even lower than on a public network: everything can be processed locally if the private 5G network’s core is on-premises; off-site processing, on the other hand, adds an extra latency as the data travels to and from the external site—perhaps a few milliseconds if done through edge computing, or tens of milliseconds if done via a more distant data center.40

5.3

Harnessing 5G

Enterprises are expected to roll out 5G in phases over several years, with early installations focusing on cost reduction. Specific installations may start on public 5G networks and later move to private networks or vice versa. Below are some industrial applications of 5G: 5G as a cable alternative: In some instances, a company may choose 5G rather than installing more fixed connections. This is why Rush University Medical Center in Chicago has decided to install 5G in one of its older buildings. At 100 years old, the building’s architecture was simply not built for the computer age (Dano, 2019): The false ceilings were already filled, and there was no extra room for cables. Bringing 5G connectivity to the building provides the requisite connectivity flexibility at a lower-cost than cable connectivity (see Footnote 40).

39 40

Reuters, “Factbox: German industrial giants eye regional 5G licences,” January 24, 2019. Technology, Media, and Telecommunications predictions 2020, Deloitt Insights.

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5G for remote management: A tiny farm in the United Kingdom, for example, plans to utilize 5G to build a “hands-free hectare”—an entirely automated farm.41 Crops will be planted, managed, and harvested with the help of remote-control equipment like tractors and drones. Additional sensors located at ground level provide additional data. Similarly, a Japanese firm uses 5G to link drivers in a Tokyo office building to a mechanized digger at a construction site tens of kilometers distant.42 Video feeds from numerous 4 K cameras transmit the digger’s surroundings at 5G speeds. As a result, the digger may be operated without the driver hemmed inside a cab or commuting to a remote site. Apart from the apparent comfort and convenience advantages, remote-controlled equipment allows old or disabled people to continue working, especially in countries like Japan, where the population is aging. Additionally, some ports use cellular mobile devices to remotely monitor autonomous guided vehicles, cranes, and video surveillance. 5G connection in Rotterdam in the Netherlands allows visual examination of a 160,000-km pipeline network.43 In Tianjin, China, drones linked to 5G are deployed to check electric power cables.44 5G supports new generation smart devices: When 5G standards are fully implemented, it may support some promising niche products; Virtual reality (VR) and augmented reality (AR) goggles are two examples. These devices may process pictures in the cloud rather than onboard, thanks to 5G’s high-speed, reliable connection, greatly enhancing the user experience. During testing, 5G was able to transmit pictures to VR goggles with a display resolution of 2880 by 1600 pixels (equal to between HD and 4 K quality) and a refresh rate of 75 frames per second. A high frame rate is needed to avoid motion sickness induced by goggles (Horwitz, 2019). Maintenance may be an excellent use for AR and VR eyewear in the workplace. Maintenance personnel, for example, might use high-resolution augmented reality spectacles to get automated help in the field, with AR overlays directing them around the equipment. Like 360-degree spherical cameras, VR could also be used for remote maintenance.45 5G for productivity enhancements: Optimizing existing processes, 5G can generate massive productivity gains. Private 5G provided a 2% boost in productivity for specific applications in a study performed by Worcester Bosch in the United

41

Harper Adams University, “Agricultural Engineering Precision Innovation (Agri-EPI) Centre,” accessed October 3, 2019. 42 NTT Docomo, “Smart construction powered by 5G & IoT,” accessed October 3, 2019. 43 Huawei, “KPN, Shell and partners test industrial 5G applications in the port of Rotterdam,” November 6, 2018. 44 Xinhua, “China completes first 5G inspection of power lines,” May 16, 2019. 45 Ericsson, “Troubleshooting made easier with augmented reality,” January 12, 2018.

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Kingdom, which was more than twice the anticipated gain. To put this number into perspective, a 2% rise equals the UK’s average productivity growth over the past decade (Brooks, 2019). The extent to which 5G can aid in process improvement is limited only by human ingenuity. For example, at one production facility in Helsinki, a 5Gconnected camera gives real-time feedback to workers assembling low-voltage drives. Machine vision is utilized to evaluate the video stream from the camera, and any assembly mistakes are immediately detected. Workers are guaranteed that the assembly is faultless if there are no alerts. In addition, the machine vision program advises employees on how to position their bodies and hands for proper assembly (Tomás, 2019). Ericsson uses 5G to automate the maintenance of 1000 high-precision screwdrivers depending on their usage levels. Previously, employees had to manually calibrate and lube the screwdrivers, using a paper-based system to monitor when needed servicing. Ericsson could automate the process by incorporating motion sensors to track screwdriver usage, resulting in a 50% reduction in annual workload.46 5G for reengineering processes: Perhaps the most intriguing element of 5G is its ability to rethink process design, especially in manufacturing radically. 5G technology is introduced when manufacturing is looking to reinvent itself in many markets. For many businesses, the timing is ideal. Consider the automobile industry. Personalization is something that today’s automobile customers want and are prepared to pay for. While automakers react to this demand by providing an ever-increasing number of automobile models and subcategories, assembly lines must be more flexible to handle their production. Mercedes-Benz has created “TecLine,” a new factory template based on a flexible manufacturing line to answer this requirement. Mercedes-5G-enabled TecLine facility at Mercedes-Benz contains a flexible assembly line with 300 autonomous devices. Rather than a cascading production flow, builds in progress are moved to different factory sections through autonomous transport systems. The necessary components are delivered to each station via intelligent picking systems rather than sequentially along a linear assembly line (Davies, 2018). This idea is being developed further by Bosch Rexroth. It is constructing manufacturing works in Xi’an, China, with only floors, walls, and ceilings as permanent fixtures; everything else is movable. Assembly lines are modular, with individual machines relocating and reorganizing into new manufacturing lines on their own through 5G connectivity (Rexroth, 2019). Other industries are also using 5G to reinvent processes. For example, a hospital with 5G would connect a lot more equipment than before, and the gadgets would stay linked even if relocated. The requirement for scales and blood pressure cuffs to be linked to a fixed place would

46

Ericsson, “The world’s first cellular IoT-based smart factory,” accessed October 3, 2019.

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be eliminated. These gadgets would provide doctors with more advanced remote imaging and diagnostic capabilities.47 5G will play a key role in transportation, manufacturing, utilities, and agriculture. The introduction of 5G technology is expected to affect the transportation and logistics, utilities, and agriculture sectors. Some or all of the capabilities of eMBB, MIOT, and MCS, such as extensive coverage, extremely high availability, extremely low latency, extremely high bandwidth, reduced network energy consumption, increased cell density—the capacity to link 1 million nodes per square kilometer—and 10-year battery life for low-power IoT devices will benefit these industries immensely in future. Increased operational efficiency, more flexible production systems, improved customer experience, and new income possibilities are among the main advantages offered by 5G (see Footnote 40). Commercial freight transportation, public transit, and equipment leasing are part of the transportation and storage sector. Cost management and maximizing dependability are two top priorities: delivering products from point A to point B on schedule and in excellent shape. These customers have already incorporated cellular and other kinds of connection into their vehicles to comply with the laws (such as those governing driver hours), provide information to drivers, and monitor driver behavior, engine performance, and the condition of cargo in transit. By shifting to autonomous vehicles, 5G improvements can fulfill these needs while providing cost savings and improved dependability. Both major freight carriers and big online and brick-and-mortar merchants are undertaking massive autonomous (electric) vehicle pilots that, if successful and allowed by law, may lead to large-scale deployments and the long-term restructuring of the transportation sector. The public transportation sector will be transformed by a reliable, robust 5G connection, which will improve passengers’ online experience and provide an onboard preview of external threats that may cause dislocation or damage. 5G will have several effects on manufacturing. First, it will benefit from the demand for 5G components, infrastructure, and devices on a mass scale. Second, 5G connectivity for intrinsically moving devices such as automated guided vehicles (AGV), portable gadgets, and robotic arms can enhance collaborative communication. 5G may also allow more flexible production methods, a faster time to market for new goods , and more product customization. Applications such as real-time closed-loop communication and hands-free remote monitoring and control may be enabled by 5G wireless retrofitting. Third, OEMs will directly provide (and monetize) after-sale services like remote maintenance and monitoring to consumers by integrating 5G connections into produced items such as white goods (see Footnote 40).

47

Dano, “This hospital is installing 5G for one big reason.”

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Daimler, the German automaker, announced in June 2019 its intention to build the world’s first 5G mobile network dedicated to automobile production. The Mercedes-Benz “Factory 56” is being deployed in collaboration with Telefónica Deutschland and Ericsson to provide direct experience with 5G capabilities. Daimler intends to dovetail the project’s findings into future plant development plans. Utilities can automate smart metering and the smart grid using 5G’s MCS and MIOT capabilities. Innovative meter installations are now enabled via cellular, mesh, and wired technology. Because of its flexibility, 5G is an excellent choice for both new and replacement deployments. Utility companies will benefit from automated meter reading (replacing inspector visits or human readings), more accurate consumer invoicing, and fraud prevention because of 5G’s comprehensive coverage and low power usage. Renewable energy sources like solar and wind are rapidly being incorporated into the grid; nevertheless, integration is complicated by the supply’s fragmented and irregular character. 5G may allow automatic real-time grid switching when combined with analytics to identify the best time for different energy sources to connect to the grid (managing supply and demand). 5G will help agriculture in many ways. Soil moisture content, tank levels, and chemical content may all be monitored using 5G sensors with extended battery life and the capacity to connect to distant places. As a result, truck roll expenses associated with replenishment may be reduced and optimized for watering and fertilizer application. Similarly, livestock monitoring devices may geofence their position (cutting the risk of loss) and monitor their movement and vital signs, helping early identification of sickness that might otherwise have a detrimental impact on farm production if left unnoticed. 5G capabilities can also be used to remotely operate drones (equipped with cameras and sensors) for real-time monitoring of crops and herds.

5.3.1

5G in Health Sector

1. 5G significantly affects the healthcare industry, suppliers, and industries that depend on it. 5G is expected to generate revenues of more than $1.1 trillion. 5G will significantly affect the quality of health care provided to hundreds of millions of people and result in substantial changes in healthcare delivery. 5G will allow a slew of new business models while also disrupting old ones, ushering in a new age of “personalized health care.” 2. Patients will be better able to control their illnesses because of the substantially enhanced capacity to constantly gather patient-specific data, process, analyze, and rapidly provide processed information and suggested courses of action. When it comes to administering care, personalization of health care implies that doctors and other health care professionals will be able to make the first time right diagnoses and adapt treatments more accurately to a patient’s specific requirements. The economic results of personalized health

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care are significant, and the improved monitoring enables providers to be compensated based on outcomes rather than “volumes.” Additionally, improved monitoring moves the focus of treatment away from hospitals to homes and lower-cost places. These effects of improved monitoring will contribute to cost containment. 3. Here are some instances of 5G’s impact on health care: • Continuous monitoring: 5G will allow for real-time processing and monitoring of a broad range of sensory probes. This enables continuous patient monitoring. Due to 5G’s superior monitoring capability, the efficacy of preventive care considerably improves. Consequently, it is possible to alleviate the burden of chronic disease worldwide. • Predictive analytics: The ability of 5G to continuously monitor and the data gathered can be leveraged to improve patient care. While continuous monitoring enables new data streams, distributed (edge) computing—processing the data by the devices attached to the patient—will drive predictive analytics care based on those new data streams. • Effect on business models: The ability of 5G to allow better health informatics will help shift the business model from volume-based fee-for-service to outcome-based medical delivery models. • Remote imaging and diagnosis: 5G will aid in imaging and remote diagnostics. 5G’s support to VR can significantly help treat stroke attacks. • State-of-the-art: With predictive analytics and machine learning, 5G will play a significant role in data proliferation, allowing doctors and researchers to access aggregated data and collected knowledge on the most recent evidence, diagnosis, and treatment trends. 5G will be a game-changer in healthcare, which will benefit medical research and health outcomes. It will also help us learn more about ourselves and our world. 4. 5G and Critical Mission Interventions: Apart from enabling shifts in the point of care and the delivery and quality of remote services, 5G is critical for mission-critical intervention delivery. This is illustrated by a case involving the treatment of a stroke patient. In this case, from the moment the patient’s monitoring equipment sends the ambulance a distress signal, the system can stream high-resolution pictures and vital signs data before the arrival of the ambulance; ultra-reliable and low-latency networks are essential, which 5G networks can provide. Patients may be asked questions in real-time, simulating a “live” experience. This allows for faster treatment and diagnosis.48 5. IOMT, 5G, and Health Care Personalization: 5G is the foundation for the “Internet of medical things” in the health care sector (IOMT). IOMT is a network of connected devices facilitating communication and feedback between patients, medical devices, and monitoring equipment. In addition to continuous monitoring for patients with acute or critical illnesses, linked devices may also help control chronic ailments and manage medication by providing

48

Jeroen Tas, Philips Healthcare, comments at CES 2017.

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6.

7.

8.

9.

10.

49

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a continuous loop of diagnosis and feedback. More remote monitoring and more secure health surveillance options at home are powerful options. Cost-Cutting, Well-Being, and Sales Enablement: Health care tailored to the individual’s needs improves both quality and health of life. Even then, individualized health care reduces costs while increasing productivity, particularly when it comes to managing chronic and long-term illnesses. Moving the center of care away from low-cost institutions such as hospitals and nursing homes is another method to save money. Economic measures such as GDP do not often capture the value of such societal changes. According to estimates, 5G will have a “sales enablement” impact on the health care industry of $12.3 trillion. About $1.11 trillion would be dedicated to health care sales enablement, or about 9% of the total. 5G could be an important prime mover to encourage healthcare providers to move from a “volume-based” approach in which providers are paid for quantity rather than quality to a “value-based” one in which remuneration is linked to the value provided in substantial cost reductions. The ability to effectively shift from a volume-based to a value-based environment depends on having access to the correct information. Because 5G enables the collection, transmission, and analysis of large amounts of data, it’ll be a crucial part of the move to a “value-based” health care system when it happens.49 Personalization and Connectedness of Health Care: Advantages of the connected “ecosystem” are substantial. These devices will enable previously unimagined levels of telemedicine diagnosis and treatment. One observer notes that the point of care has shifted to wherever you are in this world, with sensors and devices constantly surrounding you (West, 2016). Devices learn about you, adapt to you, and provide actionable insights. We are better equipped to manage our health with the help of the data they gather (Sarda, undated). Chronic Disease Monitoring and Management: Significant amounts of money can be saved by using a 5G-enhanced mobile health care platform. Longterm self-management of chronic conditions may be improved by “connected health” and, more particularly, “mobile health.” Health care expenditures in Europe were reduced by 99 billion euros over three years, according to PWC, as more people adopted “M-Health.” This economic burden on health systems and society as a whole makes it apparent that the savings associated with better long-term care management via more significant usage of mobile health solutions are likely to be very significant. Increased Productivity Resulted in a Reduction in Health Insurance Risks: In the United Kingdom alone, over 130 million workdays were lost due to

See World Economic Forum and Boston Consulting Group Insight Report, “Value in Healthcare: Laying the Foundation for Health System Transformation”, April 2017, for a definition of “valuebased” healthcare.

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illness in 2013, 32 billion pounds annually (Ward, 2014). In addition to wearables, more advanced monitoring equipment for patients with chronic and life-threatening illnesses may also help resolve this problem by connecting them. In the case of self-management-responsive diseases like diabetes, 5Gfueled “connected health” also obviously provides the possibility of better health outcomes and the accompanying advantages of expanded years of good health, less hospitalization, and reduced need for expensive therapies. Value-Based Healthcare Transition 11. Current health care models require a shift toward “value-based health care” or, alternately, “outcome-based health care.” An essential part of this new strategy is ensuring customers get the best value for their money by focusing on what matters most to them. 5G can significantly contribute to the shift from a volume-based to an outcome-based paradigm of health care delivery. The availability and quality of health informatics would be a critical driver of such a transformation. Additionally, for the definition and monitoring of the desired set of results and the lowest possible cost, three features of 5G are critical (see Footnote 49). • 5G enables “edge” innovation. It is based on a “distributed computing model that derives insights from billions of devices’ data.” Distributed computing implies that computational activity can occur close to the source—for example, the patient—shortening the time required to collect data from the patient, process it, compute any possible courses of action or recommendations, and provide feedback to the patient. This aspect of 5G should be critical for developing the high-quality health informatics required for comprehensive outcome measurement. • Not only will 5G enable better tracking of outcomes, but it will also improve the outcomes themselves. The superior latency, reliability, and transmission speed of 5G will aid in the promotion of preventative care and the improvement of outcomes in situations requiring critical interventions. These aspects of 5G will improve outcomes and reduce costs associated with achieving the desired outcome level (i.e., 5G will improve productivity). • The 5G ecosystem’s superior security features will accelerate the informatics revolution and allay health systems’ and authorities’ concerns about managing sensitive patient data outside the hospital walls. The high reliability and security of 5G infrastructure should allay legitimate end-user and health care professional concerns about privacy and hacking concerning health data and services.

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According to Goldman Sachs estimates, moving to value-based care may save up to $650 billion by 2025 due to lower-cost settings, inflation control, and a reduction in the estimated $1.4 trillion in yearly waste in US health care. By 2035, the sales enablement impact is worth over $1.1 trillion in the worldwide health care industry (Teece, 2017a).50

5.3.2

5G in Farming

There is strong evidence to support the use of 5G in agriculture, even though the superfast networking technology is still in its infancy in the agricultural world. Using robots, drones, and potentially 5G, a farming experiment near a university in rural western England wants to show that a crop can be autonomously planted, grown, and harvested. 5G-enabled sensors may help farmers by providing them with vast data on their crops by determining whether the soil requires watering or if plants are receiving too much sunlight. With the ability to stream high-quality video via mobile networks, it may be possible for farmers to evaluate crops from a distance in ways that were not possible with earlier cellular technology generations. 5G could simplify communications into a single 5G connection technology on the farm instead of using a combination of Wi-Fi and additional radio transmission.51 Due to its high speed, 5G may enable farms to dispense with large computers mounted on tractors and harvesters in favor of cloud-based servers that automatically perform the number crunching required to steer machinery. These factors may depress the cost and increase the reliability of robotic farming. Halfway across the globe, in Washington state, a new 5G farming experiment is being conducted on a farm at the confluence of farming and 5G technology. Large technology companies and cellular carrier T-Mobile collaborate on a 5G field lab with a county government and farmers. Through 5G connectivity, it attempts to analyze sensor data more rapidly than 4G. According to one of the project’s farmers, his orchard now includes soil moisture and weather sensors monitoring microclimates. An app helps determine when to use pesticides or deploy sunshades to protect crops or when to water the plants. The objective is to increase agricultural efficiency. Banks and industry have gained substantial advantages from technological adoption, while farms have lagged far behind due to their far-off locations. Projects such as the 5G initiative aim to assist

50

Goldman Sachs Global Investment Research, “Healthcare’s Holy Grail: Better Outcomes at Lower Costs”, February 2017. 51 Harper Adams University in Farmers Join Push to Harvest the Benefits of 5G, The Wall Street Journal, May 25, 2021.

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agriculture in capturing some of those gains when demand for food is increasing while farmland is generally declining.52 ,53

5.3.3

5G in Automotive

The automotive sector exemplifies the role and effects of 5G, mainly how it can serve as a platform for additional innovation. The impact of 5G on the “automotive sector” includes consumers, manufacturers, and users. 5G will become an integral part of their operation (Teece, 2017b). For instance, with 5G’s high bit rate, vast quantities of 3D mapping and sensor data may be uploaded and downloaded to develop autonomous vehicle AI. Notably, low-latency, ultra-reliable communications, and massive machine-to-machine communication are critical ingredients in developing 5G standards (ITU, 2017). Due to 5G’s low latency and high bit rate may well be the superior protocol for various communications capabilities, including vehicle-to-vehicle, vehicle-to-pedestrian, vehicle-to-mass transit, and vehicle-to-network and vehicleto-infrastructure. Several advantages include the following: • Reduced collisions, for example, 5G protocols enhance a vehicle’s sensing capability beyond what is visible on maps or in line of sight communications. For example, high-bandwidth and low-latency communications could enable sharing video data between cars or sharing data between pedestrian smartphones and cars. • Automatic parking—when cars are aware of available parking spaces or identify alternatives to on-street parking, traffic flows are accelerated, and congestion is reduced. It saves time, frustration, and space: 14% of Los Angeles County’s incorporated land is parking (Chester et al., 2015). • Level 5 automation—5G may enable “level 5” automation—for example, the vehicle’s improved sensory capabilities will undoubtedly play a significant role in determining when and if full autonomy can be achieved. 5G will transform the automotive industry the most (Fig. 5.11). A more fundamental question is whether autonomous and connected vehicles and the 5G communications capability embedded within them will affect passenger car demand, or at the very least on conventional modes of passenger car ownership. Mobility-as-a-service (MaaS) illustrates the potential pitfalls. Even with current technology, MaaS trials (e.g., in Helsinki, Finland) enable travelers to specify their travel requirements and integrate across platforms to find the least expensive and

52

Moor Insights & Strategy in Farmers Join Push to Harvest the Benefits of 5G, The Wall Street Journal, May 25, 2021. 53 Farmers Join Push to Harvest the Benefits of 5G, The Wall Street Journal, May 25, 2021.

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Fig. 5.11 Share of industries strongly disrupted by 5G. Source Statista (2021)

most convenient route. Low-latency and ultra-reliable cellular communications, i.e., 5G, will accelerate the development and adoption of such services. One possible effect of such services on 5G platforms is to reduce travelers’ reliance on predictable and pre-planned modes of transportation. However, even in the carobsessed United States, 18-year-olds having driver’s licenses is considerably lower compared to two decades ago, indicating that younger generations are already less reliant on the automobile. This may also indicate that they are likely to be receptive to MaaS or similar offerings. The total sales enablement effect of 5G is estimated to be $2.410 trillion in the “vertical” segment (the automotive industry and its suppliers). In short, the automotive sector accounts for approximately 19.6% of the total calculated sales enablement of $12.3 trillion in 2035. This high percentage reflects the impact that 5G technology will have on the automotive industry, demonstrating the wisdom of using this sector to demonstrate the economic impact of 5G.54 Auto companies have big plans for 5G: Several auto companies have serious interest in 5G and its capabilities. For one, 5G will make autonomous vehicles a reality. Porsche has been testing its latest cars with 5G equipment to see if data transfers are happening at an acceptable rate. Porsche has partnered with telecom operators to build small 5G networks to validate the technology and bring out newer models. Because the technology is so new, automakers have to build, test, and deploy the required equipment. Auto manufacturers are looking at deploying 5G for remote software updates, releasing new versions, quicker map updates, and providing information on road

54

IHS Economics/HIS Technology in Car Companies—Including Porsche, GM, and Toyota— Have Big 5G Plans, The Wall Street Journal, Oct 11, 2021.

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conditions. Additionally, 5G-enabled cars could interact with smart city infrastructures such as traffic signals and smart buildings providing info to self-driving cabs about traffic congestion. Porsche believes the data collected from its 5G test rigs will help the automaker develop semiconductor chips for self-driving vehicles.55 Hitherto, software updates in cars with electronics and chips were arduous, with most updates in offline mode. However, when Tesla launched Model S in 2012, the software could be updated from the cloud, bringing about a paradigm shift in automobile design. Updating software on the fly lets drivers ask for on-demand features such as a heated steering wheel in winter or additional power for the electric motors when riding rough terrains. The car has evolved into an “iPhone on 4-wheels” like a smartphone. Experts opine that 100 million smart cars will be on the road by 2025. Software updates require fast, fail-safe, and lightning networks, all characteristics of 5G. No wonder automakers are investing heavily in 5G’s future.56

5.3.4

Early Adoption

Early adopters of 5G have been praising the new technology. For example, the capacity to rapidly download software upgrades and flight plans needed for piloting his seven-passenger aircraft, which must be done every few weeks, is the main advantage of 5G, as per David Thompson, chief technology officer at “American Express Global Business Travel.” He adds that before 5G, the process took about 20–30 min, but now he can complete these updates in less than five minutes (see Footnote 58). 5G speeds exceeding 600 Mbps have been achieved on the phone and hot spot. Additionally, 5G coverage has been excellent in Colorado and Los Angeles locations. With 5G, you can enjoy hi-fi music—or high-fidelity audio tracks with CD-level or better sound quality. With a possible peak speed of 20 Gbps, consumers will be able to access peak speeds up to 100 times faster than those accessible on 4G networks.57 In 2019, on average, the speed of download on a 4G device was 41 Mbps. On 4G, downloading a complete movie may take almost six minutes, but just around 15 s over 5G (see Footnote 58). While music streaming has become more prevalent in recent years, industry executives have stated that audio quality has suffered. Amazon.com Inc., which launched a high-resolution music streaming service in late 2019, and Spotify, which plans to do so later this year, are betting on hi-fi music becoming the next

55

Porsche CEO Oliver Blume in Car Companies—Including Porsche, GM, and Toyota—Have Big 5G Plans, The Wall Street Journal, Oct 11, 2021. 56 Car Companies—Including Porsche, GM, and Toyota—Have Big 5G Plans, The Wall Street Journal, Oct 11, 2021. 57 CTIA in A 5G Early Adopter Sings the Praises of the New Technology, The Wall Street Journal, March 23, 2021.

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big thing. This uncompressed CD-quality music is how musicians intended it to be enjoyed, and 5G enables this capability.58 There is considerable excitement about the potential impact of 5G on the emergence of edge computing, which enables data to be processed at the point of collection rather than traveling to central servers. It will accelerate the development of smart cities, where edge computing could enable the development of systems that maximize the efficiency of the vehicle and human movement within cities by reacting immediately to changing conditions. T-Mobile, a US telecommunications company, has ambitious plans for its 5G service, eventually connecting connected cars, factory machines, and farm sensors. The company introduced a new product called WFX Solutions, enabling businesses to provide employees with a dedicated Wi-Fi hotspot powered by 5G connectivity. The effort could help T-Mobile expand its relatively small business customer base by connecting homebound workers wirelessly rather than frequently congested cable networks. T-Mobile’s network is based on a large cache of wireless licenses spanning the radio spectrum, from low-frequency airwaves used in rural areas to ultra-highfrequency millimeter-wave signals used in cities. Sandwiched in the middle is the midrange spectrum, which provides a swath of frequencies that balances high data speeds with geographic coverage (see Footnote 58). 5G networks have significantly more data storage capacity than the previous technologies, enabling the transmission of multiple high-definition video streams and the simultaneous connection of many devices. A new 5G network may enable autonomous forklifts in warehouse environments. It could begin as the backbone of a walkie-talkie-like system in a sports arena but could eventually connect each concession stand’s cash register to a central database (see Footnote 58). 5G has been deployed to improve early warnings of severe weather. A group of scientists is investigating the possibility of using data from 5G wireless signals to quantify a critical factor in tornado early detection. The team has already demonstrated that humidity can be measured using changes in the signals emitted by 4G and 5G cell towers. It now wishes to expand testing of the technology to demonstrate that these same signals can help save lives by assisting meteorologists in forecasting severe weather much earlier than current methods allow.59

58

A 5G Early Adopter Sings the Praises of the New Technology, The Wall Street Journal, March 23, 2021. 59 How 5G May Improve Early Warnings of Severe Weather, The Wall Street Journal, May 25, 2021.

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Meteorologists typically measure humidity using weather stations or satellites. Both methods have drawbacks. Weather stations are few and spread across large areas, which results in less precise readings. A satellite’s ability to precisely measure humidity can be harmed by atmospheric conditions such as clouds and the satellite’s position.60 By contrast, cellular service is nearly ubiquitous—and with the rollout of 5G, even more infrastructure is being created. The signals used to calculate humidity are referred to as reference signals. Cell towers emit them approximately every millisecond to assist cell phones in determining the strength or weakness of their connections. These signals do not follow a straight path, and their paths are affected by refraction or the bending of waves, which occurs more frequently in the presence of water vapor. The shift in signal strength caused by refraction can be quantified and used to calculate humidity. The effect is most noticeable on weather fronts, where dry air mixes with humid air. If humidity data could be gathered on a large scale using 5G signals, it could aid meteorologists in forecasting tornadoes more accurately. In that case, they could warn the public much earlier of a tornado. “Taking that out to an hour would be a huge difference in terms of the public’s ability to take effective responses.” (see Footnote 60). Humidity levels can be gathered from existing cell signals without gaining private data or interfering with wireless carriers’ operations. The equipment can be placed away from cell towers without requiring cooperation from wireless carriers. Detecting moisture in the air is critical for storm prediction. 5G figures in E-sports. Esports is a video game contest platform in which talented players fight for financial rewards in front of online and live crowds—often in millions of numbers. To transmit the enormous quantities of data needed to enable participants to respond to one another’s moves, fast networks are required to maintain the realism of simulated environments. Intel and Ericsson have stated that Esports, they believe, is a perfect fit for superfast 5G networks. 5G may enhance the realism of gaming sceneries and action by providing considerably quicker speeds than 4G technology (see Footnote 61). Additionally, faster connections will enable players from various locations in a single esports event. Meanwhile, the faster speeds made possible by mobile devices will substantially enhance competitiveness in VR games, both in terms of how they are played and how viewers perceive them.61 VR games enable players to immerse themselves in simulated environments through companies like Facebook’s Oculus division headsets. For example, when players pull the triggers on their fake weapons to shoot at imaginary opponents, they see themselves moving through a virtual area and spurts of gunfire emerge. 5G enables competitors to move more freely, free of cables, and the weight of a large backpack stuffed with computer power. With the help of 5G connectivity

60

MIT in How 5G Will Take Esports to a Whole New Level for Gamers and Fans, The Wall Street Journal, May 26, 2021. 61 How 5G Will Take Esports to a Whole New Level for Gamers and Fans, The Wall Street Journal, May 26, 2021.

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and greater bandwidth, the industry is experiencing a transformation as cloudbased and mobile gaming take center stage. The current tendency is to transfer everything to the cloud so that players thousands of kilometers away may yet be in the same area for real-time fights via 5G networks.62 When VR is utilized in esports, the action resembles a conventional athletic event. Players maneuver about a level in a genuine arena, diving under and surfacing to fire opponents. Mobile sensors integrated into the play weapons, headsets, and gloves track the players’ motions and firing, and the resultant data are transported and processed into the virtual environment. Spectators can observe the contestants at the actual event as they walk about the stage, watching the fight develop on huge displays in a virtual world. The contestants see that world in their headsets, and likewise, the audience does. Additionally, online viewers could also view the actions virtually (see Footnote 61). It is the closest thing the nation has to Silicon Valley, and it is home to many of the country’s best institutions. Arenas for esports are even included in Beijing’s Haidian district’s economic development plan. According to the district government’s proposal, companies who organize local esports events that use virtual reality, 5G, or other technology would get about $1.55 million in subsidies. 5G technology forays beyond smartphones. The launch of super-fast 5G services is expected to open doors for smartphones and ultra-critical applications such as remote heart surgeries and autonomous cars. Though this vision takes time to become a reality, the first rush of 5G applications is emerging. Samsung, for example, has partnered with Verizon to offer wireless 5G routers that promise to bring broadband to the home. The router, like a smartphone, detects 5G signals. Among the first applications of 5G to reach the consumer market are the provision of home broadband internet service for the ultimate cord-cutters: Those seeking to eliminate their cable-TV bills and Internet access via wires (see Footnote 63). Other consumer devices that appear on the market include 5G-compatible laptops from various manufacturers. When connected to a 5G network, these laptops are faster than traditional laptops and offer higher-quality video viewing. (To make that connection, laptops must have a 5G chip.) Meridian 5G, an internet service provider for luxury yachts, provides connectivity to 5G to any subscribing yacht within 60 miles of the coast. Of course, these devices are only useful in areas with 5G networks, which still do not include many locations, onshore, or offshore. That is also true for Qualcomm’s new drone technology, which includes 5G and AI capabilities and enables higher-quality photo and video collection.63 Bullish proponents of 5G will indelibly morph much of everyday life by evolving the Internet of things to such an extent that practically any active device on the planet-industrial equipment, office, and home appliances, medical equipment,

62

Ericsson in 5G Technology Begins to Expand Beyond Smartphones, The Wall Street Journal, October 11, 2021. 63 5G Technology Begins to Expand Beyond Smartphones, The Wall Street Journal, October 11, 2021.

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Fig. 5.12 Market capitalization, $ trn. Source Datastream from Refinitiv in America does not want China to dominate 5G mobile networks, The Economist, August 4, 2020

and smart vehicles will be interconnected with the cloud and exchanging data at super speeds enabling radically new capabilities. However, the more somber analysts point out that it will take years to develop the full capabilities of 5G since the networks have to expand commensurately and markets for the IoT products have developed.

5.4

The Fight for 5G Dominance

Earlier mobile technologies all released their winners (Fig. 5.12): Mobile handset and carriers’ designers like Ericsson and Nokia (2G), smartphone makers like Apple, and the internet behemoths like Google and Amazon reached consumers via such devices. 5G will be no different. It’s too early to say who will benefit the most from the $2 trillion annual connection accrual to global GDP projected by McKinsey by 2030.64 However, one thing is sure: the United States does not want China to triumph. The 5G debate is becoming a geopolitical issue. On the surface, Western fears about Huawei seem to be overblown. Numerous telecommunications experts view 5G as a marketing gimmick created by networking and device equipment makers to boost sales. A pessimistic view is that 5G will have little impact on consumers’ lives. It promises faster connections, but this may be possible only under ideal conditions (with an in-line of sight base-station antenna). 5G adoption may be half as fast as 4G outside of China, South Korea, and a few other Asian nations; within five years of 4G’s debut in 2009, it reached 30% of mobile users.65

64

Discussion paper on Connected World, McKinsey Global Institute, Feb 2020-pdf in Articles. UBS Bank in America does not want China to dominate 5G mobile networks, The Economist, August 4, 2020.

65

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However, it’s more than just a quicker way to stream Netflix on the road with 5G. It allows networks to accommodate “Internet of things” (IoT) applications: a connected network of devices ranging from tooling machines to toothbrushes. Instead of making computing a utility like energy, 5G networks will allow more number crunching to be moved to where it is required. Base stations near the network’s “edge” might use the extra computing to assist self-driving vehicles or manufacturing floor robots (see Footnote 68). The technology may be compared to the weave of a thick carpet of wireless connection that encompasses next-generation Wi-Fi, new short-range networks, lower-orbit satellite constellations, and, yes, 6G. 5G will power telecommunications and most business activity, transforming mobile networks into essential infrastructure.66 Many Western security hawks are alarmed by China’s dominance of this global wireless play. One theory that is doing the rounds is allowing Huawei, suspected of having ties to the Chinese state, to build even portions of these networks that jeopardize US security.67 The concern is that, in the event of a war between the West and China, the company might disrupt the adversary’s network and turn IoT devices like self-driving cars into weapons. Huawei reported annual revenue of $123 billion, an increase of 19% from 2018. It spent $19 billion with American suppliers in 2019, increasing $8 billion over the previous year. The US was considering rallying behind Huawei’s beleaguered European rivals like Nokia and Ericsson and bolstering them against Huawei.68 Despite warnings from the US government to sever ties with Huawei, only three—New Zealand, Japan, and Australia have complied. Even Britain, the closest security ally of America allowed its carriers to integrate Huawei modules into their network. American carriers, left to their own devices, have deployed 10,000 base stations of the 5G network. Chinese carriers, which currently operate 150,000 base stations, aim to expand to more than 1 million by 2020 across 330 cities (see Footnote 68). The US is trying to co-opt other countries not to use Huawei equipment. It organizes workshops and handbooks to assist governments in using Huawei and ZTE equipment. In addition, countries that refuse to use Chinese-made telecom equipment would get financial incentives and other benefits from the US government, putting pressure on Beijing’s overseas 5G plans. As a result, US agencies in charge of international relations are putting together seminars and a guide to help policymakers in Eastern and Central Europe and elsewhere in the developing world build 5G networks that don’t depend on Huawei or ZTE (see Footnote 69).

66

Qualcomm in America does not want China to dominate 5G mobile networks, The Economist, August 4, 2020. 67 Centre for a New American Security in America does not want China to dominate 5G mobile networks, The Economist, August 4, 2020. 68 America does not want China to dominate 5G mobile networks, The Economist, August 4, 2020.

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US views 5G security as a top priority. Foreign lawmakers, regulators, and academics who will supervise the deployment of 5G networks in their countries in the following months and years will be trained by US authorities. A reference book is being compiled to aid in training that will contain examples of how US allies, such as the United Kingdom, have limited access to Chinese telecom equipment in their country. To discourage nations from adopting Huawei and other Chinese technology, US specialists would advise on the price, regulations, and cybersecurity needs of building non-Chinese 5G networks. The campaign to dissuade US allies from adopting Chinese telecom equipment has been ongoing. After the initial use of covert threats to warn its allies against using Chinese 5G equipment, the United States has started giving inducements to wean away from its allies from Chinese hardware. Nevertheless, a significant bipartisan group in Congress has supported a measure presented last month to enable US foreign assistance to be used to purchase non-Chinese telecom devices in Eastern and Central European nations. So far, the results are mixed: Germany, for example, has not banned Huawei’s equipment yet, and other allies, including the United Kingdom, have restricted China’s equipment. Last month, a US-backed consortium beat a Beijing-backed competitor in Ethiopia to construct a new national wireless network. A loan of up to $500 million was on the table from the United States of America (see Footnote 69). The United States is now enticing nations to avoid using Huawei and other Chinese suppliers by giving them carrots like financing and training.69 According to telecom executives in the US and its allies, Chinese equipment is often less costly than similar equipment produced by Huawei competitors Ericsson and Nokia. The US argues that cybersecurity is essential for 5G since the technology is anticipated to be integrated into a broad range of sensitive sectors and equipment, such as automated factories and internet-connected heart monitors. In terms of 5G, China is no longer merely ahead of the US by most accounts. It’s running away with the game. China has more 5G subscribers than the United States, both overall and per capita. It has a broader range of 5G smartphones at a lower price and more widespread 5G coverage. On average, China’s connections are quicker than those in the United States.70 China’s advantage is less solid in the characteristics intended to make 5G revolutionary, not evolutionary—the applications made viable by the incredible speeds and capacity. Both nations are still years away from the broad adoption of lifechanging 5G technologies like self-driving vehicles, remote surgery, and industrial automation. On the other hand, China’s lead in 5G network installations may also

69

U.S. Fight Against Chinese 5G Efforts Shifts From Threats to Incentives, The Wall Street Journal, June 14, 2021. 70 U.S. vs. China in 5G: The Battle Isn’t Even Close, The Wall Street Journal, Nov 9, 2020.

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take the lead in this field. There is little difference between the two countries in delivering benefits to industry and consumers. However, China is way ahead if progress is measured in network build-up.71 China has a leg up on the competition when it comes to the building blocks of 5G. China will have built and operationalized 690,000 5G base station boxes by 2021 instead of 50,000 in the United States.72 This advantage has aided Chinese smartphone manufacturers in launching 5G-enabled devices ahead of schedule. Apple launched its 5G phones in the fall of 2021 (which is expected to catapult its market value beyond $3 trn). The US consumer has very few options in 5G outside Apple. Chinese users accounted for eighty-six. 5G phones are also less costly in China: $458 in the second quarter of this year, compared to $1079 in the US.73 China has a far greater level of central planning than the United States.74 Analysts credit China’s leadership in 5G deployment and adoption to Beijing’s strong hand, which has set ambitious 5G connection goals for the country’s three stateowned telecom carriers. Huawei and ZTE, China’s two most prominent telecom equipment vendors, have been given the lion’s share of the country’s 5G development. However, Ericsson’s Swedish competitor attributed its seven percent rise in third-quarter adjusted revenue last month to 5G contracts in China. In contrast to the United States, the top-down strategy of China has resulted in a highly uniform version of 5G and more stable speeds (see Footnote 70). 5G coverage is more scattered in the US, with uneven speeds. For instance, while the superfast 5G, dubbed “millimeter wave,” is available in a few densely populated hotspots such as stadiums-this is not yet accessible to Chinese customers-5G is slower elsewhere in the United States. China undertakes different applications and encourages various sectors to explore adopting 5G to promote services that use its capabilities. Huawei, for example, has cited 5G-enabled remote Covid-19 diagnostics as an example. Shandong Energy Group Co., a state-owned mining company, announced the deployment of a 5G network that can emit signals deep into coal mines below. However, these apps are currently in their early stages of development, and analysts question whether they are economically viable for widespread adoption (see Footnote 70). Meanwhile, China’s 5G network deployment is not without problems. According to a Chinese industry event claim, China’s 5G network barely reaches 8% of the population.75 In contrast, South Korea’s 5G network covers 25% of the population, and in addition, China’s 5G network is slower than that of Switzerland, South Korea, and Japan. Chinese devices have been reported to show a 5G logo while only getting a 4G connection. Nevertheless, China now boasts the most extensive

71

Jefferies in China’s 5G Soars Over America’s, The Wall Street Journal, Feb 16, 2022. International Business Strategies Inc. in China’s 5G Soars Over America’s, The Wall Street Journal, Feb 16, 2022. 73 Canalys in China’s 5G Soars Over America’s, The Wall Street Journal, Feb 16, 2022. 74 CCS Insight in China’s 5G Soars Over America’s, The Wall Street Journal, Feb 16, 2022. 75 Huawei in China’s 5G Soars Over America’s, The Wall Street Journal, Feb 16, 2022. 72

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5G network globally, though it still has to catch up with Switzerland, South Korea, and a few other cutting-edge 5G countries (see Footnote 75). The popular belief is that China has succeeded in building the foundation for an extensive, fast, and reliable 5G network compared to the United States and is somewhat ahead of the curve in coverage and advancement. America lags behind other nations—including China—in almost every aspect of 5G. The new 5G networks from AT&T and Verizon are frequently significantly slower than the 4G networks they are replacing. China is way ahead of the US in the 5G game. Mobile internet speed is a critical component of 5G, as it enables a new domain of game-changing applications with significant economic and national security implications. The average 5G mobile internet speed in America is pitiful, approximately 75 Mbps. 5G phones in China’s urban areas average 300 Mbps. Though that is not the fastest 5G globally, South Korea claims that title with over 400 Mbps is fast enough to download a high-definition movie in less than two minutes. The upload speeds of 5G in the United States are slower than in several developed countries, including Israel, Singapore, and Canada. In many US cities, such as Boston and Los Angeles, 5G speeds are 15–20% slower than 4G (see Footnote 76). Additionally, the United States lags behind China in the global market for 5G-related services. Although American sanctions have harmed Huawei, China’s national champion remains the global leader in 5G infrastructure supply, accounting for 30% of the market, while no US companies sell 5G infrastructure abroad. Russia, Saudi Arabia, South Africa, and Turkey have installed Huawei infrastructure and are already utilizing it to deliver 5G services.76 China, for its part, is rapidly allocating the most efficient portion of the wireless spectrum, known as mid-band, to 5G service providers. China has deployed more than three times the amount of mid-band to 5G providers than the US. AT&T and Verizon share spectrum bands for their 4G and 5G networks, respectively. As a result, as one industry analyst put it succinctly, their 5G networks are “merely 4G sprinkled with 5G” (see Footnote 76). America has fallen far behind China in the race to build 5G infrastructure due to Washington’s dithering. Due to the short wavelengths of 5G signals, reliable service requires proximity to many wireless base stations. China has deployed over one million 5G base stations, compared to the US’s 100,000. China’s investment in 5G also dwarfs that of the United States. America has authorized spending on 5G mobile networks totaling $1.5 billion through 2026. China has already invested $50 billion in developing its 5G network and plans to spend an additional $100 billion over the next five years (see Footnote 76). The United States’ pitiful performance in the 5G race indicates America’s broader inability to keep pace with China on strategically critical technologies. The transition to true 5G speeds will result in parallel breakthroughs in autonomous

76

China’s 5G Soars Over America’s, The Wall Street Journal, Feb 16, 2022.

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vehicles, virtual reality applications such as the metaverse, and other yet-tobe-invented areas. Numerous applications could benefit a country’s intelligence agencies and strengthen its military capabilities. If America does not join the 5G party soon, China will essentially own the future of 5G. The US is back in the 5G game. The US government has turned the $35 billiona-year cellular equipment business upside down, ushering in a new age of competition and returning American firms to a field they had abandoned years ago. The U.S. battle against Huawei has opened the 5G market to many new operators that previously didn’t have a chance. Only Huawei of China, Ericsson of Sweden, and Nokia of Finland have surpassed a 20% revenue share in the wireless equipment market over the last five years. No other competitor has ever consistently exceeded 10%.77 This landscape is changing at the moment. Countries accounting for higher than 60% of the worldwide market for cellular equipment are contemplating or have already imposed restrictions against Huawei, prompted by Washington’s effort to hobble the company over cybersecurity fears. And to capitalize on this opportunity, the US government, along with the UK and European Union, is looking at the possibility of financial support to boost local cellular equipment makers struggling to break the incumbents’ grip. It will open the door for a slew of competitors to win business that seemed unattainable just a few years ago. And the renewed competitive spirit should spur innovation and cost reductions for wireless carriers, which can then pass those savings and the benefits of those innovations to customers. Additionally, American officials assert that the new competitive landscape is critical to the United States’ efforts to counter China’s influence in developing 5G technology. The country that dominates 5G will be well-positioned to lead the technology industry in the coming years, both in profits and talent. Outside of China, Huawei lost market share to Ericsson and Nokia last year as governments enacted or considered restrictions on Huawei’s equipment. “Even in countries where there is no formal ban, you will be thinking twice about using equipment from the Chinese company.”78 However, the possibility of purchasing 5G equipment that runs on openstandards software has the most significant potential to upend the competitive order. Enter Open RAN, or radio access network, a new technology built on open standards. Companies that manufacture equipment that conform to these standards enable wireless carriers to mix and match antennas with sub-antenna hardware and centralized electronics. This provides carriers with more price and quality options (see Footnote 79). The United States government is a significant supporter of open-source software initiatives, which officials believe will benefit both national security and business in the United States. It can benefit US businesses by creating opportunities for new

77 78

Dell’Oro Group in The U.S. Is Back in the 5G Game, The Wall Street Journal, May 26, 2021. Enders Analysis in The U.S. Is Back in the 5G Game, The Wall Street Journal, May 26, 2021.

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players and focusing on software rather than hardware (where the US has lagged) (where companies such as Microsoft and IBM can potentially play a role). If American companies become significant players in 5G equipment, they will also have a more significant role in establishing global standards for telecom equipment. China has made significant strides in this area. Officials in the United States prefer that companies in the United States and its allies set wireless standards, believing that this will result in increased, less hackable networks (see Footnote 79). Numerous smaller companies in the United States are concentrating their efforts on developing 5G equipment based on open-source software. Additionally, Ericsson and Nokia are migrating to open-standard software. According to industry analysts, equipment that adheres to open standards will capture 10% of the market by 2025 (see Footnote 77). Nonetheless, open-standards equipment is still in its infancy, and it is too early to predict whether it will become a significant player.79 Wireless carriers assert that their testing of open-standards equipment uncovered several disadvantages. The new technology may be less efficient than today’s conventional systems in energy consumption. While open-standards equipment can be used in rural areas, its performance in densely populated urban areas is inadequate. However, wireless carriers anticipate that open-standard equipment will measure up with Huawei, Ericsson, and Nokia in three to four years. US and China compete intensely over 5G in automobiles. It has been more than two years since people began communicating via 5G networks. Cars can now communicate with one another via 5G technology. Chinese companies, intending to lead global markets, have been working on such vehicle communications for a longer time, utilizing advanced cellular technology and a standard that the US only adopted last year. However, the business could develop into another source of friction between the two countries. The application of 5G to vehicle-to-vehicle communication is still in its infancy. However, it can make driving safer, more convenient, and possibly even autonomous in future. Planners envision a world in which intelligent cars communicate with one another to determine their location and direction, thereby preventing accidents. Pedestrians could also be protected via signals transmitted via their phones. Additionally, traffic lights and road signs could transmit real-time data to help avoid congestion. Industry players and local governments will likely take some time to develop systems supporting car-to-car 5G communication and address security concerns such as the risk of hackers disrupting car communications. Customers already use the technology in a few Chinese cities to receive red-light warnings and

79

The U.S. Is Back in the 5G Game, The Wall Street Journal, May 26, 2021.

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notifications.80 The ultimate application—a network of entirely autonomous cars communicating with one another—remains a distant vision (see Footnote 82). In November, the Federal Communications Commission (FCC) voted to allocate a portion of the spectrum to a new standard called “cellular vehicle-toeverything,” or C-V2X, which Qualcomm backs. C-V2X can use high data speeds and work with various devices by piggybacking on existing networks for regular smartphones. For years, China has been developing C-V2X services.81 China has been at the forefront of C-V2X development in recent years and has firmly consolidated it in its industrial transport policy. Despite the widespread adoption of C-V2X in the world’s leading automotive markets, the head start enjoyed by some Chinese suppliers in developing the technology’s backbone may create friction, as it did with 5G.82 China is the only country with commercially available vehicles that support 5G with C-V2X. Ford followed them this year by introducing two C-V2X models in China. According to the carmaker, drivers of those Ford models in some regions of the cities of Wuxi and Changsha can obtain information such as the optimal cruising speed for hitting green lights. Ford plans to begin deploying C-V2X models in the United States in 2022. At a Subaru test track in Japan, an autonomously driven car attempting to merge onto a highway was granted permission by another vehicle already on the highway, allowing it to pass safely (see Footnote 82).

5.4.1

The Global 5G Rollout Challenges

The US deployment of 5G has been sluggish. The term “fast” or a variant thereof is frequently used to refer to the speeds offered by 5G. The same thing cannot be said about 5G deployment in the US. Fifth-generation wireless networks have made news for at least three years because of their potential, but most Americans are yet to experience 5G that lives up to the hype (Fig. 5.13). Even though all of the country’s leading cellular providers claim to have countrywide 5G coverage, industry experts say that the service is almost identical to 4G LTE. Faster wireless connections may not be accessible to most Americans until early 2022.83 The relatively slow rollout of 5G is due to many factors. Several issues are related to network infrastructure: There is a finite amount of space available in the airwaves that balances long signal ranges and high transmission speeds. Additionally, installing new network equipment for 5G is a time-consuming procedure. New equipment purchases may also take longer than made locally since most are not made in the United States (see Footnote 86).

80

Ford Motor Co in The Coming U.S.-China Race Over 5G in Cars, The Wall Street Journal, May 26, 2021. 81 5GAA in The Coming U.S.-China Race Over 5G in Cars, The Wall Street Journal, May 26, 2021. 82 The Coming U.S.-China Race Over 5G in Cars, The Wall Street Journal, May 26, 2021. 83 Evercore ISI in Why the U.S. Rollout of 5G Is So Slow, The Wall Street Journal, May 25, 2021.

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Fig. 5.13 5G average download speed, May–Aug 2020, Mbps. Source Opensignal in Why American telecoms firms are splurging on 5G spectrum, The Economist, Jan 2, 2021

Additionally, industry observers point to a shortage of killer apps that generate demand and accelerate adoption, like streaming video on 4G. 5G signals are transmitted across three broad-spectrum bands: low-, mid-, and high-band. The spectrum of high-bandwidth (also known as millimeter wave) has the smallest range with the quickest and the best bandwidth. The range of low-band transmissions is higher, but the transmission speed is slower. The mid-band is regarded as the sweet spot in range and speed (see Footnote 86). A recent government spectrum auction saw carriers place giant bids for the midband spectrum, which is where they want to focus their attention in future. This presents a problem for carriers since the mid-band part of the wireless spectrum is already extensively used by US agencies and other organizations for different reasons, such as military communications and meteorological services. Until now, telecom firms have only had access to a limited part of the spectrum. A decade ago, when telecom operators began planning for 5G, the prevalent belief was that the technology would utilize high-band, or millimeter-wave spectrum, largely unoccupied. However, he notes that millimeter-wave 5G requires the highest cell tower density to be effective, and it takes time to add density. It was only recently that attention in the United States shifted to the mid-band spectrum to accelerate the commercialization of 5G, he says (see Footnote 86). Another significant impediment to deployment is a lack of killer 5G applications. That is the single most important factor dictating the rate of development at the highest level.84 5G has three main advantages: It offers far faster speeds than 4G (up to 100 times faster), can support many concurrent connections, and enables

84

University of Texas in Why the U.S. Rollout of 5G Is So Slow, The Wall Street Journal, May 25, 2021.

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significantly faster response times between machines. “There aren’t revenue models associated with those three things yet, and it’s not clear that consumers would be willing to pay anything extra just to download videos faster.”85 To link sensors and other Internet of things devices smoothly, businesses will likely be the most aggressive early users of 5G. As with next-generation Wi-Fi, their implementation will most likely take the shape of private 5G networks, which provide improved speed and security, as well as the capacity to handle more connections (see Footnote 85). It’s no secret that sending data across a higher-frequency band makes 5G a fundamentally different network from 4G.86 It necessitates installing new technology and equipment—not a simple task. The global provider market is currently dominated by five companies: Huawei, Nokia, ZTE, Samsung, and Ericsson. Two out of which are located in China, each in Korea, Sweden, and Finland, resulting in additional regulatory hurdles when purchasing telecommunications equipment from other countries. Ericsson is positioning itself as a significant rival to Huawei, especially with enormous massive multiple-input multiple-output (MIMO) 5G technology. However, the transmitters that make it simpler to deploy 5G on present cell towers need computer chips that have been in limited supply in recent years. America’s sleepy telecom behemoths will receive a 5G wake-up call. Verizon and AT&T’s recent bids for superfast 5G spectrum ($52.9 billion for Verizon and $27.4 billion for AT&T) have generated considerable interest. They purchased C-Band radio frequencies clustered between 3 and 4 GHz, which provide connectivity to mobile networks roughly ten times faster than 4G. Auctions also elevated America’s “race for 5G” from rhetoric to reality. Despite their financial muscle, neither firm appears capable of halting T-Mobile’s advance. Furthermore, they continue to face more significant disruption, both big tech and new competitors. Because of the 2.5 GHz spectrum gained as part of T-Mobile’s merger with Sprint, a small portion was acquired in the C-Band auction; the company would have significantly more coverage of the 5G network than AT&T and Verizon. It might be two years ahead of them for large-scale deployment to consumers (see Footnote 87). As one of the most remarkable success stories in the American industry, TMobile has increased its financial projections. Sprint was acquired with debt, but T-Mobile says the savings from the merger would allow it to finance its 5G growth ambitions while also returning as much as $60 billion to shareholders by 2023– 25. AT&T and Verizon are less adaptable. As a result of the C-Band auction, both companies’ balance sheets are now much more stressed, making them the country’s two biggest corporate bond debtors. To put the spectrum they won at auction to use, they’ll need to invest an extra $16–18 billion dollars. Except for

85

MoffettNathanson LLC in Why the U.S. Rollout of 5G Is So Slow, The Wall Street Journal, May 25, 2021. 86 Why the U.S. Rollout of 5G Is So Slow, The Wall Street Journal, May 25, 2021.

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selling more Warner Media assets or reducing the dividend, AT&T seems limited in its 5G aspirations (see Footnote 87). Dish, a satellite provider, is also breathing down their necks, pledging to construct America’s 5G network from the ground up this year. A non-proprietary architecture known as “Openran” will be used, and this will enable users to build the system using standard telecom gear and a vast quantity of computer code. A minimum of $10 billion would be spent on this project, which Dish saved by declining to participate in the C-Band auction. Verizon and AT&T’s networks will be considerably more costly to run, enabling Dish to compete with them. There is still time, but it will come. Verizon and AT&T will be caught off guard. Firms have spoken about the seismic consequences of 5G for years as part of their marketing strategy to hide their decreasing growth rather than as an urgent action call. Some doubters still doubt if consumers want fast network speeds. The Covid-19 epidemic has shown how crucial connectivity has become in almost every area of life, from homeschooling to working from home, sharing, downloading movies, and buying online. Wireless communication is no exception to this rule (see Footnote 87). However, a tangible sense of anticipation exists in businesses, not consumers. The race for 5G could become supersonic if these digital behemoths expand into telecoms. Other uses of artificial intelligence, such as telesurgery, self-driving vehicles, and robots, are also possible; for example, facial recognition video surveillance requires rapid data processing. To accomplish this, businesses would require both local data centers connected by superfast 5G and remote cloud storage.87 Verizon and AT&T, whose corporate relationships continue to be critical to their businesses, are well aware of this. However, cloud providers such as Amazon, Microsoft, and Google oppose ceding control of their data-handling businesses. Whether Verizon and AT&T will enjoy the experience is a different story. Britain’s 5G deployment is facing numerous hurdles. British citizens have long grumbled about their slow coverage of 5G, while the United States and China compete for 5G dominance. In 2016, the National Infrastructure Commission published a report that made an unfavorable comparison between Britain’s 4G coverage and Albania. 5G, or fifth-generation networks, were expected to offer blazingly fast speeds and vastly expanded capacity. It was introduced last year, making the UK among the first nations to provide customers.88 There aren’t many reasons to be happy for the British people. A study from Opensignal, a network analytics company, compares the experience of introducing 5G in about a dozen countries where it is operational. Fewer than 5% of British users spend time on the 5G network compared to a fifth of American users; 5G download speeds are in the bottom third; total average download speeds rank lowest among the countries’ studies.89

87

America’s drowsy telecom giants face a 5G wake-up call, The Economist, 18 March 2021. Britain’s 5G rollout faces myriad obstacles, The Economist, Sept 3, 2020. 89 Opensignal in Why American telecoms firms are splurging on 5G spectrum, The Economist, Jan 2, 2021. 88

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Geographical location is one thing to think about. According to open signal, one- or two-nation states with high urbanization rates, such as Saudi Arabia and South Korea, take the honors of best-performing nations. There are densely crowded urban areas and numerous rural, poorly inhabited regions in the United Kingdom, making it difficult and costly to construct many cell towers. Other factors to consider are the terrain. Cellular transmissions are impeded by terrain features such as mountains and forests.90 Spectrum allocation also affects the service’s quality. The more spectrum an operator possesses, the better service it can offer, identical to how more water can flow through a larger conduit. According to the data, there are just three major networks worldwide, while there are four in the United Kingdom. This results in increased competition, lower prices, and a reduction in the spectrum available to each. Furthermore, more than half of the 5G spectrum is still up for bid. Networks may be left with a fragmented spectrum once the next block of spectrum is purchased. That may be rectifiable. The telecoms regulator, Ofcom, is open to facilitating network swaps. However, additional problems have emerged due to the prohibition on Huawei-manufactured equipment from 5G networks. This will delay its implementation and raise the cost. Massive capacity gains are what 5G promises. Compared to the 4G networks, with about 2000 connections per square kilometer, the new network can handle up to 1 million per km2 . But most of the hype is about fitting industries with sensors and making them intelligent (see Footnote 88). US telecom companies are splurging to acquire 5G spectrum. 5G may be the most touted technology since blockchain. However, even sophisticated telecoms behemoths are now betting heavily on 5G. In early December, American regulators began auctioning off radio frequency bands required to build superfast fifth-generation mobile networks. Industry analysts anticipated bids to total between $25 billion and $30 billion, less than the $45 billion realized in the previous big 4G spectrum sale in 2015 but still a sizable sum. Indeed, by the time the first phase of the auction concluded on December 23rd, bids had topped $70 billion. The winners will be responsible for an additional $13–15 bn in “clearing costs,” partly to compensate satellite companies for relinquishing some of their spectrum that is particularly well-suited for 5G. By the time the auction concludes, the total amount raised may exceed $90 billion (see Footnote 92). At first glance, this appears to be a textbook case of zealous telecom firms overbidding for a shiny new technology. It could saddle AT&T and Verizon, America’s mobile-telephony juggernauts, with massive debts. According to analysts at New Street Research, the industry’s total debt will be between $45 and $60 bn higher than previously forecast.91

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Enders Analysis in Why American telecoms firms are splurging on 5G spectrum, The Economist, Jan 2, 2021. 91 New Street Research in Why American telecoms firms are splurging on 5G spectrum, The Economist, Jan 2, 2021.

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However, there is a counter-argument. It is unthinkable for carriers to overpay for bandwidth. Three arguments support this case. First, the specific frequencies provide businesses with the best chance of obtaining large swaths of contiguous spectrum required for 5G to reach its full potential. These frequencies, clustered around 3 GHz, enable tenfold the speed of 4G. The current low-frequency souped-up 5G offerings are faster than 4G connections. Additionally, the new spectrum supports 20–25% more capacity than 2 GHz or lower bands (see Footnote 92). The second reason for overspending on the spectrum is to protect market share. T-Mobile, America’s third-largest carrier, has jumped ahead in 5G due to its recent acquisition of Sprint, a smaller competitor with a coveted spectrum. For AT&T and Verizon, the auction was a matter of life and death. T-Mobile, for its part, may enter bids to ensure that bigger rivals do not obtain large swaths of spectrum for a pittance. The question for service providers is “how do I prevent my competitor from gaining an advantage over me due to his spectrum position?” (see Footnote 92). Additionally, competition is not limited to wireless competitors. Comcast and Charter, two large cable television companies, have formed a joint venture to compete for the 5G spectrum.92 Dish Network, the nation’s largest satellite television provider, participates in the auction. Bids are surging due to earlier, fruitless attempts to use low frequencies, which have left America far behind China, its primary strategic rival, in the race for 5G. Finally, the bidding war is being fueled by cheap money. The additional $10 billion in bids requires only $500 million in annual financing at today’s rock-bottom interest rates, which telecoms behemoths can easily afford.

References Afolabi, et al. (2018). Evolution of wireless networks technologies, history and emerging technology of 5G wireless network: A review. Journal of Telecommunications System & Management, 7(3), 1–5. Brooks, J. (2019, June 18). UK’s first 5G industrial trial suggests new technology could increase UK productivity by 2%. Total Telecom. Chester, M., Fraser, A., Matute, J., Flower, C., & Pendyala, R. (2015). Parking infrastructure: A constraint on or opportunity for urban redevelopment? A study of Los Angeles County parking supply and growth. Journal of the American Planning Association, 81(4), 268–286. Dano, M. (2019, January 29). This hospital is installing 5G for one big reason: Getting rid of wires. Light Reading. Davies, C. (2018, November 16). Mercedes reveals the 5G robot-filled factory for its most hightech cars. SlashGear. de Looper, C. (2020, March 27). What is 5G? The next-generation network explained. Digital Trends. Retrieved April 25, 2020. Hoffman, C. (2019, January 7). What is 5G, and how fast will it be? How-To Geek website. How-To Geek LLC. Archived from the original on January 24, 2019. Retrieved January 23, 2019.

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Why American telecoms firms are splurging on 5G spectrum, The Economist, Jan 2, 2021.

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Horwitz, J. (2019, April 1). AT&T: Our 5G network is ready for 2880 × 1600 VR and 5 ms latency games. VentureBeat. ITU. (2017). DRAFT: Minimum requirements related to technical performance for IMT-2020 radio interface(s). https://www.itu.int/md/R15-SG05-C-0040/en Rexroth, B. (2019, May 8). Bosch Rexroth invests in the factory of the future. Press release. Sarda, B. (undated). Vision from orange healthcare on 5G. Sims, G. (2017). What is the Kirin 970’s NPU?—Gary explains. Android Authority. Statista. (2021, October 11). BPI in car companies—Including Porsche, GM, and Toyota—Have big 5G plans. The Wall Street Journal. Teece, D. J. (2017a, October 26). Research report: 5G mobile: impact on the health sector. Tusher Center for Intellectual Capital Institute for Business Innovation, Haas School of Business U.C. Berkeley. Teece, D. J. (2017b, May). Research report: 5G mobile: Disrupting the automotive sector. Tusher Center for Intellectual Capital Institute for Business Innovation, Haas School of Business U.C. Berkeley. Tomás, J. P. (2019, June 7). ABB pilots industrial AI application using 5G. Enterprise IoT Insights. Ward, A. (2014, October 14). Companies wake up to cost of ill employees. Financial Times. Wei, Y. (2019, May 31). A new era in industrial production? New Electronics. West, D. M. (2016). How 5G technology enables the health internet of things (p. 6). Brookings Center for Technology Innovation, Report. Yang, D., & Wegner, S. (2018, September 17). Deloitte global estimates. In Apple iPhone Xs Max teardown. Tech Insights. Yu, H., Lee, H., & Jeon, H. (2017). What is 5G? Emerging 5G mobile services and network requirements. Sustainability., 9(10), 1848. https://doi.org/10.3390/su9101848

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6.1

Online Education

Before we examine the merits of online education, here’s a basic question: Why should our children be educated? Leaving aside the societal payoffs, should we invest in education? Which sector of the American economy has generated a higher rate of return in recent decades: the stock market or education? The short answer is that returns on education have consistently outperformed the American stock market over the last half-century. According to some researchers, technological advancements displaced some skilled workers, who in turn displaced less-skilled workers, leaving their relative positions in the pecking order—and thus their return to their additional education—unchanged. The World Bank, on the other hand, is more optimistic. According to them, the world is undergoing a “race between education and technology.” While an increase in the number of degree holders has tended to reduce returns, the increasing demand for higher-level skills, fueled by the rapid pace of technological change, has acted in the opposite direction. Technology appears to have prevailed.1 The World Bank examined an annual average “rate of return” of 8.8%—the salary increase in hourly earnings associated with an additional year of schooling (see Footnote 1). Over the last 50 years, the stock market in America has returned an annual rate of 5.6%. Additionally, social benefits are associated with increased education, such as lower mortality rates and higher quality of life. Girls and primary education receive a higher premium. Additionally, it is higher in impoverished countries. The same logic implies that the rate of return should have decreased as educational attainment increased. Rather than that, it has remained robust, particularly in higher education (Fig. 6.1).

1

Even though more people are doing it, studying is still worthwhile, The Economist, 3 May 2018.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 V. Kumar, The Economic Value of Digital Disruption, Management for Professionals, https://doi.org/10.1007/978-981-19-8148-7_6

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Fig. 6.1 ROI of global higher education. Source World Bank in even though more people are doing it, studying is still worthwhile, The Economist, 3 May 2018

Increased returns provide an additional incentive to invest in education. Individuals and governments appear to be responding. Public education spending has increased as a percentage of GDP; private education is booming at the secondary and tertiary levels. The beneficiaries have access to education, either because they are citizens of wealthy, well-governed countries, or through their ability to pay for it privately. Individuals are encouraged to invest more when returns increase. However, they also imply that those who do not will fall further behind (see Footnote 1). The net positive accrual of education raises some pertinent questions. How do we maintain educational continuity in a world ravaged by a pandemic? How are the most disadvantaged students able to obtain high-quality education? Is the digital divide putting an end to online education? Should internet access be made a fundamental right, particularly in developing countries? Is online education capable of bending the cost curve? MOOCs (online learning in general) may ultimately replace (or even obliterate) local academic institutions, educational traditions, and cultural norms, yet another example of Schumpeterian creative destruction. While Massive Open Online Courses (MOOCs) were touted as a weapon to bend the cost curve, it has remained a mere topic of discussion about technology-enabled education in affluent nations (especially in the United States); unfortunately, they are not a significant issue in the majority of emerging and low-income nations (though India has the second-largest MOOC sign-ups in the world). MOOCs’ declared objectives are to offer free access to Ivy League courses worldwide. Studies show that just 3% of registrations are from low-income nations. MOOCs, however, suffer from low completion rates only (Trucano, 2013). Notwithstanding, MOOCs also indicate that particular curricula and teaching techniques are better in specific contexts. MOOC is a form of online course that allows for open enrollment and open access via the web (Kaplan & Haenlein, 2016). According to The New York Times, several well-funded providers affiliated with prestigious institutions, such as Udacity, Coursera, and edX, emerged in 2012, making it “the year of the MOOC” (Pappano, 2012). During the 2011 fall semester, Stanford University introduced three new courseworks (Pérez-Peña (2012)). Introduction to AI, the first of these

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courses, quickly attracted 160,000 students. EdX, one of the most popular MOOC platforms, partnered with Stanford University in April 2013 to develop an opensource platform. According to John Mitchell, Stanford Vice Provost, the aim was to create “the Linux of online learning (Young, 2013).” EdX launched 94 courses from 29 institutions worldwide. Coursera, another popular MOOC platform, offered approximately 325 courses during its first 13 months (Waldrop, 2013). Since then, there has been a significant rise in the number of courses available: 820 courses provided by Edx, 1580 by Coursera, and over 120 by Udacity. FutureLearn reports that the British Council’s IELTS (The International English Language Testing System, one of the key requirements for admissions at US/European universities) aspirants have over 440,000 students enrolled for Techniques for English Language Tests.2 Stanford University’s Learning Analytics group performed research that found four different kinds of students: auditors, the participants who just saw the video lectures and participated in a few exams or quizzes during the program; completers, who watched the majority of lectures and assignments; disengaged learners, students who were disinterested and left the course; and sampling learners, who would occasionally watch the lectures (MacKay, 2013). Despite its promise to improve education and learning, MOOCs suffer from high attrition. Thousands of students enroll in these courses each year, yet only a tiny proportion complete them. Usually, the average enrollment is 25,000 students, although enrollment has risen to 230,000 for some courses (ex: AI/ML) with a completion rate of around 15%. Coursera’s preliminary data indicate a 7% and 9% completion rate.3 There is a 70 percent completion rate among students who pay $50 for an add-on (meant to eliminate cheating). Besides, they would also get a certificate for completing the course (Kolowich, 2013). Numerous studies have been conducted to determine why students drop out of MOOC courses. Rosé et al. examined the relationship between social factors and the attrition of students. According to the study, active community opinion leaders are less likely to leave the course. Those who stuck around for the first week had a 35% lower dropout (Rosé et al., 2014). Lower attrition was also found among students who interacted with each other. Students who enroll in MOOCs create virtual cohorts and advance and stick together; completion rates are lower. MOOCs’ efficacy is therefore questionable since completion rates are lower than conventional online courses.4

2

“FutureLearn delivers the largest MOOC ever as more than 440,000 learners convene for English language learning”. Future Learn. 14 May 2015. 3 “MOOCs on the Move: How Coursera Is Disrupting the Traditional Classroom” (text and video). Knowledge @ Wharton. University of Pennsylvania. 7 November 2012. 4 MOOCs – A Review of the State-of-the-Art. CSEDU International Conference on Computer Supported Education 2014. Barcelona, Spain: Yousef, A. M. F., Chatti, M. A., Schroeder, U., Wosnitza, M., Jakobs, H. April 2014. pp. 9–20.

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The Business of EdTech

Technology-induced education is big business. Educational technology (EdTech) is the interdisciplinary application of computer software, hardware, and educational practice to facilitate learning (Robinson et al., 2015). An online school educates students via the Internet. Online education is most frequently used in high school or college for skill upgrading, and more recently, with the pandemic outbreak, at schools as well. Before the pandemic, students aged 30 or older were the largest enrolled in online programs, particularly executive education programs. This demographic accounted for 41% of the population in the US, while 35 percent of students aged 24–29 and 25% of 15–23 were enrolled in an online course.5 With the pandemic raging unabatedly and blended (online + in-class) education has become a norm, questions are being raised about the efficacy of blended learning. Online education is becoming increasingly prevalent and perhaps inevitable, given the prolonged closure of schools/colleges. Over 4700 colleges and universities in the US now offer online courses to their students (Friedman, 2018). It’s estimated that more than 6 million students are now enrolled in an online course. Educational digitalization has resulted in a reduction of close to one million students studying fully on campus between 2012 and 2015 (Allen, 2017). And this was well before the pandemic. Public universities offer distance learning more often than private ones (Tabs, 2003). Because of the worldwide coronavirus epidemic in 2020, almost all educational institutions have rapidly switched from conventional classroom teaching to a mix of online and offline education (Aristovnik et al., 2020). Online programs provide greater flexibility, facility for two-way communication between the teacher and students, and quick feedback on lectures and assignments are touted as the causes for the increase in K-12 students in the US enrolling in distance education programs6 (Jaggars et al., 2013; Major, 2015). Nearly sixty percent of universities provide online learning opportunities. Around two-thirds of the largest institutions offer only online programs (Allen & Seaman, 2006). Even though this data is limited, a greater attrition rate (between 20% and 50%) has been found with online studies than with conventional classroom studies (Jazzar, 2012). Certain course materials have been made freely available online by schools such as MIT (Theen, 2012). While these materials lack some of the rigor of a traditional classroom, they provide valuable resources for students outside of school. Commuting expenses to school/college is eliminated. Students like online learning because of its flexibility but prefer face-to-face learning because of the higher levels of involvement (Kemp & Grieve, 2014). Some institutions and colleges adopt interactive WEB 2.0 technologies and increase mentorship opportunities between students and faculty members to resolve such constraints (Kemp & Grieve, 2014).

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“25 Surprising Or Little Known Facts About Online Education”. Online Schools Center. 2017. The National Center for Education Statistics.

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A key factor in online education is that employers have readily accepted online education.7 About 79% of surveyed employers said they’d employ someone with an online degree. However, many polled said that applicants with online degrees were not treated favorably as conventional ones (see Footnote 7). Most human resource managers said that if two applicants with the same years of experience apply for a position, it would not matter whether one received their degree from an online or conventional institution. The utilization of educational apps has been shown to improve learning outcomes. Utilizing educational apps on mobile devices helps close the performance gaps between average and struggling learners.8 Specific educational apps make it easier for students to work in groups since they provide feedback on their responses and encourage them to solve problems together. App-assisted learning has been shown to benefit students of all ages. The literacy rates of iPad-using kindergarten children are substantially higher than those of non-users. Using iPads in the academic curriculum increased national test scores for medical students by 23% compared to those who did not use iPads in introductory courses at the University of California, Irvine. To be sure, the university has been MOOC-ified. Higher education is poised to undergo a much-needed profound transformation. The digital degree is very much in vogue. From Oxford’s quads to Harvard Yard, exams have given way to holidays nationwide. As students consider their post-graduation lives, universities must consider their futures. For centuries, the model of higher education has remained essentially unchanged: lectures, cramming, and examination. Disruptive waves are already threatening to destabilize long-established modes of learning and education. The business model of higher education is under threat from a technological revolution. Because of the growth in online learning, previously exclusive elitist lessons imparted to the chosen few are now accessible to everyone with a laptop or smartphone. Universities are now up against a competitor: MOOC. These online courses have considerable benefits, which teach students through the web or tablet applications. Compared to traditional classrooms, online courses have lower costs, and with significant economies of scale, the online mode becomes more affordable and more accessible to more people anywhere, anytime. Because courses are so inexpensive to produce—approximately $70,000—they may be offered at a discount or even given free. According to the Harvard Business School professor Clayton Christensen, MOOCs are a powerful “disruptive technology” that may eliminate several ineffective universities. “In fifteen years, more than half of American universities will be bankrupt,” he predicted in 2014 (a prophecy that has become partially true, also accentuated by the pandemic) (see Footnote 12).

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“Hiring Practices and Attitudes: Traditional vs. Online Degree Credentials SHRM Poll”. 201008-19. 8 “Study: iPads improve Kindergarten literacy scores”. Engadget.

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The first MOOC in the world was born in Canada in 2008. Four years later, 2012 was dubbed the “year of the MOOC” and sparked widespread enthusiasm for the concept. Three major MOOC providers are in play: edX, a non-profit managed by Harvard and MIT; Coursera with a partnership with Stanford; and Udacity was founded by a Stanford professor. To date, the primary three have educated nearly 12 million pupils. While just around a third of edX’s students are from the United States, almost half are from developing nations.9 Asia will experience the highest growth for all three platforms. Despite their enormous potential, MOOCs have yet to cause a Schumpeterian storm of destruction. Numerous eminent universities, such as Cambridge and Oxford, have reservations about the new platforms. Most institutions and employers continue to view online education as an addition to conventional degree programs rather than a replacement. Traditional universities do possess a few advantages. Along with teaching, examining, and certifying, a college education fosters the development of social capital. Students gain experience debating, presenting themselves, initiating contacts, and rolling joints. Some universities have already begun to incorporate digital classes into their curricula (in India, it was hastened by the New Education Policy that encourages online courses). Brazil’s Unopar University uses online materials and weekly satellite lectures to provide degree programs at a reduced price. The entry criteria for Minerva University, which blends online classes in its curriculum, are comparable to those of the top Ivy League institutions. Still, the tuition is considerably inexpensive (about $10,000 per year compared to $60,000). Online education is not without its drawbacks. After an experimental course in math and statistics taught by Udacity was terminated at San Jose State University in California last year, the university decided not to pursue it further. Only 18% of online students completed an introductory algebra course, compared to 30% of campus students—a disparity widened as the subject became more challenging to understand (see Footnote 12). MOOCs’ pedagogy must be rapidly enhanced. Students require more individualized assistance to complete a university-level online degree program successfully.10 According to the study, seventy percent of MOOC students in the United States had previously received a degree. If MOOC providers are to be competitive with traditional institutions, they should improve their ability to teach newcomers to academia. Detractors point to a higher rate of dropout: approximately 10% of new MOOC registrants complete their degree. That does not necessarily impact poorly on the course content: Due to the cheap registration cost, many individuals join even if they have no intention of finishing the course for any reason. Maintaining an acceptable completion rate is essential for providers who get most of their revenue from the certifications they give to successful applicants.

9

edX in The digital degree, The Economist, June 20, 2014. Udacity in The digital degree, The Economist, June 20, 2014.

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Another issue is that students may use someone else to complete their online assessments. The Iversity, a new German online institution, is trying to get around this by having students take examinations in person in the presence of an invigilator. Students’ typing patterns are recorded and used by Coursera to verify their identities. The worry among academics is that online courses may hasten university staff reductions. Others are concerned that star Professors would be the primary beneficiaries, increasing the salary and status gap between them and their colleagues. They could be right: Students’ attention has always been aroused more by active instructors than by boring ones (during boisterous Athenian drinking parties, Socrates gave sessions). Many prospective students are put off because their online labors cannot be guaranteed to be acknowledged as credit toward a course. Until now, MOOC providers have enticed new students by utilizing graduate testimonials attesting that completing a course assisted them in obtaining employment. With the increasing integration of online courses into the traditional curriculum, this is beginning to shift. More than half of MIT’s 4500 students must complete a MOOC as part of their education (see Footnote 12). The John F. Kennedy University in California, which serves mainly older students, will accept edX MOOC credits toward degree requirements for the first time. However, the majority of universities do not recognize online courses and degrees. Europe may hold the key to resolving this impasse. Regardless of whether knowledge, skills, and competencies were gained via formal, informal, or nonformal learning pathways, students may transfer course credits earned in any of the 53 nations that have accepted the Lisbon Recognition Convention at institutions’ discretion. Meanwhile, the second generation of MOOCs is attempting to replicate traditional university courses. AT&T, the telecommunications company, has partnered with the Georgia Institute of Technology and Udacity to provide a $7000 online master’s degree in computing that will run concurrently with a comparable cost of a $25,000 campus-based degree. “If employers accept this on equal terms, the MOOC master’s degree will have taken off” (see Footnote 11). Others are sure to follow. While some businesses have created online courses (Google, for example, has developed a MOOC on data interpretation), traditional academic institutions continue to develop most of these programs in-house.11 Universities having good rankings, and low student-to-tutor ratios are less vulnerable to competition from online universities. That’s an excellent news for Oxbridge and other Ivy League institutions that provide networking opportunities in addition to degrees. Students attending universities that are not Ivy League are more sensitive to rising tuition costs, as their return on investment is lower. These universities may profit from increasing the percentage of online courses to classroom instruction, reducing their expenses while retaining the reward of a partially

11

McKinsey in The digital degree, The Economist, June 20, 2014.

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on-campus degree. The middle tier is the most vulnerable institution, producing most American teachers, administrators, and middle managers; online education may essentially replace them.12 Since the first wave of large online classes began in 2012, skeptics have harped on their shortcomings and commercial uncertainties. If opponents think they’re resistant to the MOOC’s approach, they’re likely to be proven wrong quickly. While colleges confront high cost and efficiency problems, online courses can quickly modify their content and delivery methods with little prospect of increasing public funding. During the post-Enlightenment era, an English Catholic cardinal named John Henry Newman described the university in 1858 as “a place for the communication and circulation of thought, using personal intercourse, through a wide extent of country.” This concept still inspires people in an age when the possibilities for intimate contact via the internet are almost endless. However, the Cardinal cautioned: without human interaction, higher education risks devolving into “an icebound, petrified, cast-iron university.” The danger is that the new wave of hightech online courses could follow this path. Nevertheless, they are more likely to succeed than fail if used as an alternative to the current overloaded and expensive higher education model. Most revenue from web degrees goes to the intermediaries in the evolving EdTech business. Universities have survived MOOCs but now face the threat of being outwitted by online program managers (OPM). Most revenue generated by online degrees goes to these middlemen rather than providers. Higher education has been disrupted for over a decade. Many thought the internet-enabled MOOCs would destabilize institutions much as digital media had done to newspapers and record companies. But MOOC providers have battled to survive. By contrast, what has proven to be a viable business brings incumbents online. A sector of “online program managers” (OPMs) has risen, who also help in bringing in new students. Pioneers, including Arizona State University, have benefited from their support, as have academic heavyweights like Berkeley, Yale, and Harvard, all of which specialize in graduate study (see Footnote 14). Because of the internet, universities now have access to a vast new market: working professionals. A master’s, a professional degree, or executive education may help professionals who can’t quit their professions and families but still want to excel in their careers. A professional degree and a master’s degree can earn 57% and 19% more than a bachelor’s degree. Additionally, technological advancements mean that knowledge acquired years ago may be obsolete. Working professionals enroll in online courses such as analytics programming to improve their job prospects in the future and to stay current with their industry and clients. For many, attending an on-campus course is out of the question.

12

The digital degree, The Economist, June 20, 2014.

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On the flip side, going digital liberates universities from physical campus constraints—There are now 99 MBA students enrolled on-campus and an additional 1750 online at the UoI. At just $22,000, the MBA from the UoI is surprisingly affordable: As with on-campus programs, most online degrees are in the $50,000 to $100,000 price range. About one-third of graduate education in the United States is now delivered online.13 Many colleges handle everything independently, while the more prestigious ones work with OPMs. Among others, Pearson, an educational publisher, and Coursera have joined 2U, a ten-year-old company in the industry (which began as a MOOCs provider). Coursera partnered with the University of Iowa to launch its online MBA program.14 OPMs seem to be a feasible business prospect, according to investors. The initial expenses of bringing a program online are substantial, but 2U’s ten-year contracts, under which the company gets almost two-thirds of tuition income, are highly lucrative over time. For the past three years, revenues have grown by over 30% yearly and are expected to continue doing so in the foreseeable future. Despite deficits of $29 million on sales of $287 million in 2017, 2U has a market value of $5 billion (see Footnote 14). Outside of America, additional opportunities beckon. In 2019, the University College of London began offering online MBAs in partnership with 2U, while Imperial College London launched an online global public health master’s degree. Since the course was announced, Imperial has received 10,000 inquiries from people in 170 countries vying for the 75 seats. Full-service OPMs were initially prohibitively expensive, but the cost of putting up a show online has dropped from $10 m–15 m to $2 m–3 m due to technological improvements (see Footnote 14). Student acquisition costs have been increasing due to the premiums charged by Google and Facebook. These are the primary marketing channels, along with LinkedIn. Universities will undoubtedly try to take a bigger share of revenue in the future. It does not require a master’s degree to deduce what these developments will mean for the margins of OPMs. Covid has pounded academic institutions, robbing them of a centuries-old method of instruction. It’s possible that students are being taught less efficiently than they should be while simultaneously being denied access to college life’s social and cultural advantages. Some students worry—or hope—that they will never be able to return to university after the epidemic. This prediction is based on the belief that online schooling will become the norm even after eradicating the novel coronavirus.

13

Eduventures in Universities withstood MOOCs but risk being outwitted by OPMs, The Economist, 19 July 2018. 14 Universities withstood MOOCs but risk being outwitted by OPMs, The Economist, 19 July 2018.

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Zvi Galil, a pioneer in establishing online degree programs, challenges the premise that online instruction should be feared and that teaching in person is inherently superior. Being the dean of Georgia Tech’s College of Computing from 2010 to 2019, he pioneered an online degree program. Zvi Galil made online college work. In January 2014, Galil established the world’s first online college degree program, the Online Master of Science in Computer Science. “Online begins in the third row,” Galil says, referring to a typical cavernous pre-Covid college lecture theater with 300 students seated in front of a microphoned professor. He refers to the “disconnect” between teacher and students, which begins just a few feet away from the podium. Why should online education be more emotionally connected or detached than a big classroom setting? According to experts, studies show that face-to-face teaching is better in classes under 30 students, even with the social distance. They talk, communicate, ask some questions, and are more adaptable. Classes of 30 students, on the other hand, are unsustainable for universities. Hundreds enroll in the most sought-after courses (see Footnote 15). Around 2008, MOOCs made their way into higher education. They were uninhibited, novel, as well as possibly destabilizing. One hundred seventy thousand students worldwide registered in a Stanford MOOC on AI in 2011. However, MOOCs had a staggering attrition rate of approximately 93%. People began but did not complete them because the critical component was missing: a credential at the conclusion. Then, Mr. Galil had the idea of creating a master’s degree based on MOOCs: “The degree provided students with an incentive to persist” (see Footnote 15). He states proudly that Georgia Tech’s MOOC-based degree was “unheard of,” he states. He refers to it as a “fundamental, revolutionary shift away from higher education’s dominant paradigm.” To better reflect the actual expenses of providing a college education, the College of Computing has set the tuition at $6600 for in-state and out-of-state students. Georgia Tech charges in-state students $25,000 and out-of-state students $40,000 for an on-campus master’s degree, while private universities charge up to $70,000 for comparable degrees. “With our price tag, we triggered an earthquake,” he explains, “and that drew everyone’s attention.” The cost of Georgia Tech’s online MS in computer science has increased to $7000, which includes ten courses that can be completed at the student’s own pace over a flexible time. Students are charged per course, and it attracts a diverse student population. On average, students start their MS degree when they are 32 years old, compared to 22 for those who attend classes on campus for their MS. In contrast to on-campus learners, who usually take 18–24 months to get their degree, most online learners, who work full-time as data analysts or similar positions, require 30–36 months to finish their degree. More than one-fifth of online graduates—50—have gone on to earn doctorates. Georgia Tech will earn $13 million in the online M.S. 2020–21 academic year (see Footnote 15).

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Galil notes that each year, online degree holders “increase the number of computer scientists with new master’s degrees in the United States by at least 10%.” According to him, the market for computer scientists is “hot, very hot.” “They are required in every location.” Computer engineering is the only area in which employment opportunities outweigh the demand; the demand outnumbers “the total number of bachelor’s degrees, master’s degrees, and doctoral degrees awarded each year.” Georgia Tech began offering online degrees in January 2014 with 380 students. It now has a “standing army of 11,084 enrolled students” from 124 nations. In May, the 5000th graduate will get his diploma. Harvard researchers found that most would not have signed up for the Georgia Tech online master’s without the online option. The program trains and prepares students for high-tech careers. Galil estimates that approximately 62% of online master’s students are Americans. In the on-campus Master’s program in Computer Science at Georgia Tech, 55% are international students. Galil describes the distinction: “On-campus study provides an entry into the United States; a visa is not required for an online degree.” Mr. Galil points out that the online master’s program’s admissions policy “also caused a tremor in the college world.” There is no need for candidates to pass the GRE, the master’s standardized test (but international students must clear an English proficiency exam), and the acceptance rate is 74%. “Because we have no space constraints, we accept anyone we believe is capable and meets certain requirements, such as a bachelor’s degree and familiarity with computer science.” The master’s degree at Georgia Tech’s College of Computing accepts just 10% of the applicants. Ivy League colleges have even stricter admission requirements. Galil snorts angrily, “Harvard is 4-point-something percent, and Stanford is 3point-something.” “They reject 30–40% of the talented applicants” (see Footnote 15). Such universities, he asserts, are “proud of their 4% acceptance rate (see Footnote 15). It establishes their brand, and it’s absurd, yet they still boast about it. In fact, we’re proud to be doing the exact opposite.” The online master’s program in computer science at Georgia Tech is the biggest in the United States and the largest master’s program ever to be launched globally. That is not due to a scarcity of competition: This online master’s at Georgia Tech has more than 30 imitators at other institutions, most of them from science streams. However, being the first imitator goes to the Business Administration program from Illinois University, which was launched in 2016. Galil explains, “The business school dean came to us and learned everything from us.” “He addressed us as ‘big brother,’ and we addressed him as ‘little brother.’.” Forty percent of the teaching assistants in the Georgia Tech online program are graduates: “These are people with families and jobs who are paid peanuts but want to give back as TAs.” Because Galil’s initial idea was so radical, it was not unexpected that he ran into resistance within the faculty. “Universities are conservative institutions second only to the Catholic church,” he asserts. Tenured faculty “generally oppose

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any change.” Laughing, Galil, while describing that the “most significant accomplishment” was not creating the new degree but “getting the faculty to agree to do it.” Their main concern was that standards would be lowered, undermining the value of the Georgia Tech name. Galil clarified that the online master’s degree curriculum would be the same as the on-campus ones. He set up a special team to examine his plan and approved the idea. With 75% voting in favor of establishing the degree and 25% voting against it, Galil claims he “cannot find anyone today who admits to voting against. They have vanished!” (see Footnote 15). The pandemic-induced sweeping adoption of online education has brought attention to Galil’s master’s program. A more significant proportion of college teaching will need to include online education, he says, almost apologetically, as if pointing out the obvious: “Higher education shutdowns have highlighted and emphasized the value of online instruction.” In his opinion, MOOCs are preferable to “Zoom” because they are “asynchronous,” implying students listen to recorded lectures at their own pace. On the other hand, he does not believe that the epidemic would destroy higher learning as we know it. Universities have “survived since Bologna was founded in 1088, and they will survive Covid,” says Galil. He anticipates more subdued changes: “Can they continue to increase tuition year after year, as they used to do? They are unable to. The ascent has been brought to a halt, and several will be forced to reduce or even close.” (see Footnote 15). Galil asserts that the Georgia Tech “experiment” has demonstrated is that there is “a very high, perhaps even enormous, unmet demand for higher education right now” from individuals who have not been recruited through the standard campus process. “These are working people who are frequently unable to pay high tuition and live some distance from any college.” Most importantly, universities will develop new and creative methods to fulfill their students’ requirements via online teaching. However, Galil thinks that campus-based colleges will always have a place: “Many young adults graduate from high school and want to continue to live a little more freely before entering the job market.” While living with your parents, you miss out on socializing and networking opportunities.15 They’re not interested in the subject matter or methodology of the study.

6.1.2

Successful EdTechs

EdTech is coming of age in India: EdTech has never quite lived up to its promise of galvanizing failing school systems. Poorly configured hardware and clumsy software have historically caused educational technology investments to fail by turning

15

The Man Who Made Online College Work, The Wall Street Journal, April 2, 2021.

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away prospective users. Although the Covid-19 epidemic has forced schools, parents, and students to embrace innovation, it has also made them more conservative in their approaches. Is EdTech coming of age? Inevitably, the picture is muddled. The digital gap has widened as a result of the Covid-19 outbreak. Students with the least access to digital infrastructures, such as those living in remote regions, have had the most difficulty benefiting from virtual education. However, what has been accomplished in numerous countries is remarkable. Nowhere is this more evident than in India, where over 4000 startups of EdTech have emerged in the last five years, attracting over $2 billion in venture capital funding. Historically, EdTech has faced two significant barriers: acceptance and accessibility. A complete lockdown gave an incentive to get beyond the former in India, which left 1.5 million schools and 250 million K-12 pupils (from kindergarten to grade 12) scrambling to keep up their grades. The availability of affordable tablets and smartphones, together with some of the world’s lowest data rates, has gone a long way toward addressing the access problem. At the start of 2020, before the arrival of Covid-19, India had already surpassed 500 million smartphone users, implying that 77 percent of the population had availability of mobile internet (see Footnote 16). Since then, this number has risen dramatically. Because of the closure of schools in India due to the epidemic, low-income families who previously viewed cell phones as an indulgence for entertainment began to see them as a need for their children’s educational pursuits. Jio’s low-cost network in 2015 aided India’s smartphone revolution. However, there is one caveat. Phones are shared in low-income households. Most students have approximately an hour each day to finish online courses and submit their assignments to instructors for review. Many students, particularly in rural areas, continue to have no access. Byju’s system is one such system that has made a difference in the lives of wealthy children. Unlike other learning platforms, it is currently India’s secondmost valuable organization, valued at almost $11 billion. These applications provide customized instruction from what the company touts as some of India’s finest instructors. Each month, parents get updates on their children’s academic progress. It has approximately 65 million subscribers. At the same time, while the majority of them without charges receive a limited service, approximately 4 million pay an average of $135 per year for individualized mentoring (see Footnote 16). Students rave about how engaging the videos are and visually appealing. Mentors give close attention to the student’s weak points and are meticulous in their explanations. After the epidemic is over, most students will stay at Byju’s instead of going back to regular classes, said one satisfied student. Teachers increasingly see educational technology as a tool to improve their lives rather than a risk to their position and livelihoods. Digital technology is also supported enthusiastically by the federal and state governments to monitor and improve education systems. The Bill and Melinda Gates Foundation thinks that hybrid schools are the future. Classroom instruction may be augmented with digital tools, particularly teacher-facing applications that “go with the grain of the system,” to increase student engagement and resilience.

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Even though educational technology saved the day during the Covid crisis, there are still doubts regarding its real significance. Unlike traditional teacher interventions, which are typically focused on raising the lowest performing students, EdTech raises the entire class’s standards. However, quality varies. Byju’s customers are largely more affluent and support the brand by spending money on it.16 Whether EdTech may affect a system-wide transformation remains an open question until tested on a large, statewide scale. To do this, many adjustments will be necessary: It is necessary to set high-quality standards; build a digital infrastructure; for learning systems to be successful, instructors must be well trained, and parents should have faith in their children’s prospects. “Covid has catalyzed frenetic activity. The effects will be completely transformative in the long run, but they will be non-linear and difficult to predict. However, states are now mindful of the scale at which edtech must be applied,” echoed EkStep, a pioneer in EdTech.17 Byju’s—the torchbearer of EdTech: Bangalore, Karnataka, is the headquarters of the multinational educational technology firm Byju’s. Established in 2011, Byju’s is the world’s most valued provider of educational technologies,18 and its market valuation is $21 billion after raising $1.5 billion in 2021.19 For education, Byju’s is a freemium tutoring software featuring a 15-day trial period after signing up. Initially, it provided instructional material for kids in grades 4–12, but in 2019, it expanded to include programs for children as young as grades 1–3. Additionally, the program aims to get pupils ready for Indian competitive exams like the Indian Institute of Technology and the Indian Administrative Service. Byju estimates that the company has 40 million total users, 3 million yearly paying customers, and an annual retention rate of around 85% (Balaji, 2018). WhiteHat Jr. will lead the new “Byju’s Future School” in April 2021. Future school has developed a multidisciplinary learning platform that integrates coding with other disciplines like math, science, English, music, and arts to close the learning gap between passive and active methods. Byju’s plans to open the future school in the United States of America, the United Kingdom, Brazil, Australia, Mexico, and Indonesia in May. This has contributed to Byju’s becoming the most valuable EdTech company in India, with 70 million registered subscribers and 4.5 million paid users. Given the nature of the business, it is unsurprising that Byju’s has raised just over $2 billion in equity funding in 2021 alone, despite the pandemic.20

16

Educational technology is coming of age during the pandemic, The Economist, November 11, 2020. 17 EkStep in Educational technology is coming of age during the pandemic, The Economist, November 11, 2020. 18 Raghunathan, Anu. “How Byju Raveendran Built A $5.5 Billion Business With His EdTech Startup”. Forbes. 19 “Byju’s valuation tops $15 billion after over $1-billion funding - The Economic Times”. m.economictimes.com. Retrieved 13 May 2021. 20 Fortune India, Nov 21 2020 in Indian teaching startups make work for idle thumbs, The Economist, 17 Feb 2018.

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Indian education startups employ idle thumbs. Many Indian companies have sprung up in the past few years focused on education technology (or “EdTech”). As of 2021, Byju’s had a staggering 6.5 million paying customers who downloaded its educational smartphone application 50 million times and is rated 4.5 out of 5. It is one of the top ten EdTech downloads in the world. More than 30 million graduates prepare to pass admission examinations for medical, engineering, and top management institutions that are part of Byju’s target demographic. By 2021, the industry has grown eightfold to attract over a $3 billion valuation.21 India’s appalling record in elementary education, where instructors are few, infrastructure is decaying, and the culture of rote learning prevails, is responsible for a large portion of the projected increase in the country. Nearly half of the fifth graders cannot read materials for the second grade. Private instructors are enlisted. On buses, cramming institutions advertise that they have taught exam “toppers,” a position similar to that of a cricketing superstar. (Toppr is a competitor of Byju’s.) A quarter of all Indian students, according to one estimate, attend private coaching classes. Byju Raveendran ought to be aware. It was not uncommon for him to bring 25,000 learners to one stadium in Delhi and then travel to nine other locations each week to instruct high school pupils in math.22 Standard Admission Test techniques and shortcuts would be taught to children to help them succeed on this notoriously tough test. Due to the impossibility of making the sessions interactive because of the enormous size of the classrooms, Raveendran had the brilliant idea of turning the courses into video blobs and uploading the content on the internet. Byju’s has successfully circumvented schools by marketing directly to parents and students. Byju’s 6.5 paying customers spend an average of over 50 min each day using the app, a statistic that most media firms would be jealous of. Almost ninety percent of Byju’s subscribers renew their memberships despite yearly subscriptions ranging from $550 (Grade 1–3) to $6000 for competitive exams, a good chunk of the average Indian annual income. A total of $8.5 billion has been invested in Byju’s by many major investors, such as China’s Tencent & Silicon Valley’s Sequoia Capital, which is currently valued at $18 billion (see Footnote 22). There are also other issues to deal with. Byju’s had to send memory cards to students who did not have access to a high-speed internet connection and couldn’t download documents from the company’s website (In poor weather, an earlier satellite-based approach had remained unavailable). Additionally, a network of hundreds of agents was needed to take payments from parents who weren’t acquainted with digital payment, which raises expenses. However, smartphones have become more prevalent, broadband speeds have improved, and online

21 22

KPMG in Indian teaching startups make work for idle thumbs, The Economist, 17 Feb 2018. Indian teaching startups make work for idle thumbs, The Economist, 17 Feb 2018.

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payments are widely popular in India. Parents’ willingness to allow their children to learn primarily through screens remains uncertain, although the pandemic has made online learning inevitable. Given the number of paying users and the stratospheric valuation, there is very little evidence of Byju’s not succeeding. Byju’s journey from being a startup to a multibillion business empire is fascinating. When Byju Raveendran was teaching 11th and 12th students who were desperate for assistance passing their examinations, he first recognized he could have a career in education. He was only an eighth-grade math whiz at the time, and he is now a billionaire. In 2006, Raveendran established Byju’s, the world’s most profitable EdTech company in education-related technologies. Byju’s has grown in popularity among students across India; Raveendran and his family hold 83% interest in the business, with nearly $400 million in revenue. India appears to be an ideal environment for EdTech startups: 260 million school-age youngsters in the nation must navigate a system plagued by underqualified instructors amidst an ever more demanding tech-savvy industry eager for competent employees. India has many cellphones, nearly unlimited bandwidth, allencompassing internet access, and simple digital payment methods. You also have parents willing to spend a significant amount of their spare cash on their children’s education.23 Byju’s has completed the acquisition of the tutorial chain Aakash Educational Services Ltd (AESL) in cash, and this was the company’s biggest purchase to date, with shares valued at $950 million. Byju’s acquisition of AESL is also one of the most significant acquisitions by an Indian startup. India’s most valuable EdTech startup acquired coding tutor WhiteHat Jr in a $300 million deal last year during the pandemic (see Footnote 23). The acquisition spree has catapulted the Bengaluru-based Byju’s to dominate the EdTech market in the world. Byju’s, an e-learning startup, understands how to push the envelope. As the company’s signature app’s user base nearly doubled during the Covid-19 pandemic, the company embarked on a spending spree financed by investors such as Tencent and BlackRock. Byju’s acquisition of WhiteHat Jr., an app that teaches children to code, in the summer of 2018 and its subsequent acquisition of Silicon Valley educational game maker Osmo in 2019 established the company as a player in the US e-learning market. In April 2021, the company announced plans to significantly expand outside of India, with one-on-one lessons added in the United States, the United Kingdom, Indonesia, Mexico, and Brazil. Additionally, Byju’s acquired a leading Indian test prep school for nearly $1 billion. Byju’s explosive growth has elevated the company to one of India’s most profitable startups, with the company’s expected value increasing to $15 billion, up from $5.5 billion in July 2019.24

23

How Byju Raveendran Built A $5.5 Billion Business With His EdTech Startup, Forbes, Sep 2, 2019. 24 Expanded E-Learning, Time, May 17, 2021.

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“We are building the online school of the future and aim to be far superior to anything that can be done offline,” says Byju’s Raveendran, the school’s founder. “The time has come for a paradigm shift, as teachers, students, schools, and parents are more receptive to online education.”

Future school employs over 11,000 teachers, all of whom are female, who guide students in developing and building websites, mobile apps, games, composing music, and creating art. Individualized, live, and interactive learning has the potential to eclipse Byju’s online K-12 self-learning app model. “Until now, we have concentrated on self-learning via the app, but the live classes, with their ideal oneto-one student–teacher ratio, will accelerate real-time learning. We aspire to be one of the world’s largest learning companies.” As a result, Byju’s has the distinction of India’s most valued unicorn.25 Byju’s, India’s most valuable startup, has been signing up users during the pandemic by millions. In 2022, Byju’s has enough heft to sponsor the Indian cricket team. Byju’s flourished when the schools were shut, and today seven million children have signed up with Byju’s. Valued at $48 billion, Byju’s may soon list in New York and raise $4 billion.26 The business of online learning is in a tearing hurry and has attracted stratospheric investments. VCs poured in $21 billion in 2021 on EdTech, forty times more than a decade ago, of which 17 became unicorns, and six of them went public27 (Fig. 6.2). Global online revenues could exceed $227 billion in 2022 and could top $400 billion in 2025, 20% higher than predicted before the pandemic (see Footnote 27). The pandemic has forced educators to experiment with online learning aids, especially in India and the US, where the effect of the pandemic on education has been savage. Till recently, EdTech did not appear on the VC’s radar; in 2029, hardly three percent of all education spending went toward online teaching. No more. Governments have chipped in with computers and better broadband connections; lawmakers in the US have provided a $200 billion fund to help students “catch up.” The war chest of EdTech firms has been used to expand globally and acquire related companies. Byju’s spent $2.8 billion on acquiring companies that would enable it to address a larger market, from tiny toddlers to professionals looking at enhancing their skills. The deep pockets of Byju’s are also helping it expand globally and started online classes in software coding and mathematics for children in Indonesia, the US, Brazil, and the UK. Byju’s is ready for a global listing answering all the online learning skeptics.28

25

Byju’s makes global push with one-on-one lessons, Bloomberg, 12 April 2021. Bloomberg in Byju’s makes global push with one-on-one lessons, Bloomberg, 12 April 2021. 27 Holon IQ in Can the ed-tech boom last? The Economist, 19 Feb 2022. 28 Can the ed-tech boom last? The Economist, 19 Feb 2022. 26

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Fig. 6.2 Venture-capital investments in edtech firms, $bn. Source Holon IQ in Can the EdTech boom last? The Economist, 19 Feb 2022

However, it’s not smooth sailing all the way. India’s education technology businesses, which have benefited greatly from the epidemic tech craze, are going through a difficult moment. Some won’t survive. The largest education technology startup in India, Byju’s, struggled to close up an $800 million fund-raising round (see Footnote 31). This isn’t the first time that Byju’s has recently made headlines for the wrong reasons. Byju’s, a company that provides services for K–12 and test preparation and coding training, has postponed the release of its financial records and, like its competitors, laid off staff. Unacademy, a smaller rival supported by Softbank, has scaled back on complimentary snacks and senior management compensation while reducing teacher incentives. Indian EdTech companies are unlikely to vanish, given the size of the prospective market and the enormous sums of money already invested. But for businesses like Byju’s to endure the winter of technology investment, they must adapt. This entails concentrating more on the established brick-and-mortar tutoring and test preparation industry, which is less scalable but also fragmented and susceptible to disruption, and on post-secondary professional online training, which is still expanding quickly. Only a small percentage of India’s more than 250 million primary and secondary schoolchildren pay for online educational programs, especially in the wake of the pandemic’s interruptions (see Footnote 31).

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The good news is that several EdTech businesses have already raised a tonne of money, which might help them weather rougher times. India has produced six EdTech unicorns since the year 2020 began. In the previous ten quarters, the sector raised $8.52 billion altogether.29 The bad news is that the surge in Indian online enrollments caused by the pandemic has finally peaked. The number of unique K–12 paying users dropped by 12 percent to 3.02 million in 2021.30 This contrasts with a growth rate of 123% in 2020. The post-K-12 sector, however, nonetheless experienced respectable growth of 21% to 1.78 million in 2021, compared to 70% a year earlier, suggesting that there may be some hope for the future (see Footnote 31). Byju’s may be able to continue expanding and broadening its portfolio due to its ambitious purchase binge during the last two years, which included the test preparation firm Aakash and the professional training company Great Learning. The hundreds of millions of aspirational young students in India aren’t going anywhere, and by the time the next wave of tech funding hits, they should be doing better and have more money to invest in education. After that, EdTech businesses will be well-positioned for rapid growth; however, they must get through the tough times.31 After the heady days of pandemic, India’s EdTech startups reorganize as pandemic windfall sputters. These pioneers are now seeking growth in real-world classrooms as online exhaustion and the end of cheap capital stop further growth. In India’s online education market, going offline is currently the biggest trend. After two years of explosive growth, prompted by one of the world’s longest Covid-19 school closures, India now has a crowded field of unicorns in the education technology sector. Since the nationwide lockdown in March 2020, six have reached the $1 billion valuation milestone. They joined Byju’s, which arrived there in 2017 and is currently the most valued EdTech firm in the world with a $22 billion price tag following a funding round in March.32 Byju’s and other top Indian EdTech companies are reducing staff and marketing expenses while investing in physical tutoring facilities to find new development sources. However, a change in strategy has been necessitated by the resurgence of in-person instruction as colleges and institutions across the globe reopen and the drying up of cheap funding as monetary authorities seek to control inflation. “Unless you crack that physical story, it’s difficult to grow in India in edtech.”33

29

Tracxn Technologies in India’s Education-Tech Bubble Goes Pop, The Wall Street Journal, July 19, 2022. 30 Redseer Consulting in India’s Education-Tech Bubble Goes Pop, The Wall Street Journal, July 19, 2022. 31 India’s Education-Tech Bubble Goes Pop, The Wall Street Journal, July 19, 2022. 32 PitchBook Data in India’s Edtech Startups Regroup as Pandemic Bonanza Fizzles, The Wall Street Journal, Sept 12, 2022. 33 Sreedhar Prasad, Internet consultant in India’s Edtech Startups Regroup as Pandemic Bonanza Fizzles, The Wall Street Journal, Sept 12, 2022.

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In recent months, Byju’s has opened over 200 tutoring facilities for students and intends to open up to 500. The $1 billion + companies Unacademy, Vedantu, and Physics Wallah, have also entered the offline instruction market. Thus, they conflict with India’s extensive and well-established network of cram schools and private tutors that assist students in preparing for extremely tough exams to get admission to prestigious colleges or secure lucrative government positions. In 2018, almost 1 million prospective engineering students registered for an exam with a 12,000-spot prize at the Indian Institutes of Technology (see Footnote 35). Analysts claim that what makes India so alluring for EdTech investors is the country’s sizable student population—more than 260 million students—and the failure of its institutions to match the demands of the growing ranks of middleclass parents. Employers claim that because of rote learning, millions of students graduate from high school each year unprepared for the demands of the nation’s fast-modernizing economy. Instead of depending on local private instructors and cramming centers, EdTech promised that students anywhere could access top teaching expertise at reasonable prices by offering courses online. Byju’s app had 900,000 paying customers in 2018, less than three years after its release, and the business has attracted investors like Sequoia Capital, Tencent Holdings, and the Chan Zuckerberg Initiative (see Footnote 35). The industry became a one-way bet in March 2020 as the government made a last-minute move to close schools. Over two years, investors flooded $4.86 billion into Indian EdTech businesses with cheap cash as interest rates remained near zero. This represents 15% of the industry’s then-rapidly growing worldwide venture capital financing pool. Byju’s claims to have 150 million active users worldwide and recently had seven million premium subscribers (see Footnote 32). Global EdTech funding fell to $2.1 billion by the second quarter of 2022 from $4.34 billion a year earlier (see Footnote 32). India’s contribution was under 1%(see Footnote 35). Byju’s recently let go 500 workers, claiming that doing so prevented redundancies. The company just finished a two-year acquisition spree in which it spent over $2 billion on over a dozen startups.34 Unacademy, the thirdmost valuable EdTech business in the world with a $6 billion valuation, has laid off employees and will no longer sponsor the Indian Premier League cricket. In June, it launched its first offline center, and more are planned. Although investors have become more selective, the financial faucet is still flowing for some. Physics Wallah earned $100 million in June, giving the test preparation business a $1 billion valuation. In the same month, it opened an offline center in Kota, which it claims can house 10,000 students at once, joining the hybrid trend (see Footnote 35). Other EdTech platforms concentrating on professional education, reskilling, educational support services, or providing trendy

34

Venture Intelligence in India’s Edtech Startups Regroup as Pandemic Bonanza Fizzles, The Wall Street Journal, Sept 12, 2022.

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Fig. 6.3 The scar of school closures. Source UNESCO (2020)

classes—like kid-friendly coding—are also in high demand. UpGrad, a platform for higher education, raised $210 million last month and intended to continue growing internationally. Investors view the shift offline in EdTech companies as a new growth driver. How much time will children spend watching math, coding, and music classes on a screen? Lessons are quieter and more structured when students are in the same room with the teacher as opposed to when they are logged on by themselves and unsupervised at home.35

6.1.3

The Compulsion of Studying from Home

The pandemic has wreaked havoc on children’s education. One billion students’ education has been disrupted worldwide due to Covid-19 (Fig. 6.3). Over 100 nations, such as South Korea, Italy, China, and 43 states in the United States, had closed their schools to contain Covid-19. Britain has adopted a similar strategy. With sticky-fingered children frequently sharing toys and sucking on pencils, schools are a disease-breeding environment. The UK’s Health Protection Agency investigated flu epidemics that overlapped with the closures of schools. It discovered that closing them down reduced viral propagation even, while it curtailed knowledge transfer to children.

35

India’s Edtech Startups Regroup as Pandemic Bonanza Fizzles, The Wall Street Journal, Sept 12, 2022.

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Some nations seem to be more equipped than others in terms of economic implications. It would cost between 0.1% and 0.3% of GDP to close all schools and daycare facilities in the United States for a month (see Footnote 36). Governmentmandated work-from-home rules and company rewards were implemented in China in conjunction with the nationwide shutdown, allowing workers to work from home. Some parents in Japan can work from home or take paid sick leave, but not all can. It’s estimated that one-fifth of Italian employees are self-employed and thus cannot get sick pay. Those in insecure employment who remain home to care for their children risk losing their jobs entirely. School meals may be the only healthy meal provided to underprivileged students each day. About half of all students in American schools are eligible for free or reduced-price meals. New York City’s municipal shelters are home to 22,000 students. Several New York City school districts have set up pickup stations to ensure that those in need don’t lose access to free food. British officials have announced that they would continue to offer free school food to students who usually do not have to pay for it. Britain will keep running schools for underprivileged students or whose parents hold critical work positions. These expenses must be considered at all times by officials. However, there is an additional consideration during a pandemic. Between 6% and 19% of critical healthcare, professionals would be forced to remain at home to take care of their wards if schools were remained closed for a month (see Footnote 36). Unified University Entrance Examination (gaokao) usually takes place in June in China but has been delayed. Most parents, however, are worried about the effect on their children’s education if schools remain closed for an extended period. Those who are preparing for or taking necessary examinations are particularly stressed. Around 245,000 students in the United Kingdom are preparing to sit their Alevel exams in May and June, which decide where they will get admission. The government announced the cancelation of these exams in March. Prime Minister Boris Johnson stated that the government would ensure children continued to receive “the qualifications they require and deserve for their academic careers.” There are fewer stakes for American kids, partly because their transcript is the most important element of their university application, based on their academic achievement throughout the year, and because they may take the college admissions tests, called SATS, throughout the year.36 Despite this, universities may need to become more accommodative. Covid-19 may “without a doubt” impact the admissions process at thousands of US universities. The uproar has provided ammunition for critics of high-stakes examinations, which certain education philosophers wish to abolish. SATS has already been made optional at several colleges and universities. Covid-19’s upheavals may hasten this process. In the meantime, the shortcomings of alternative methods of assessment

36

How Covid-19 is interrupting children’s education, The Economist, March 21, 2020.

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may be revealed in the coming months, which will strengthen the arguments of those who think that SATS and other high-stakes examinations, which provide a comparatively objective and systematic measure of potential, are the least unfair method of determining who gets into the universities (see Footnote 36). The catastrophic epidemic may demonstrate both the advantages and disadvantages of online education. Despite their growing popularity, many nations’ digital infrastructure is not developed enough to make online materials widely available to students. The researchers found that just 40% of state schoolteachers could teach a video lesson, compared to 69% of independent school tutors. Few states in the United States have adequate infrastructure for online education. “The majority of states are not prepared to deal with this. This is a window of opportunity that has been forced upon us.”37 Not everyone is equipped to access the internet (Fig. 6.4). Seven million schoolaged children in the US do not have internet access. Online education is an inadequate substitute for classroom instruction even when done correctly. Even if teachers successfully broadcast their lessons, students may have difficulty participating. Students, particularly those with weak academic backgrounds, perform worse on average when working online.38 While online courses can be beneficial for students who cannot attend school, the popular perception is that they are “suboptimal for the majority” and that prolonged absence from actual schools will almost certainly result in children’s education suffering (see Footnote 38). The potential for online education is undeniable. Education technology based on artificial intelligence may help children in impoverished countries with dubious educational systems as long as they have an internet connection. Using the Indian app Mindspark for four and a half months, which evaluates children’s fundamental language and arithmetic abilities, researchers found that children in the control group made a more remarkable improvement. However, the success of such initiatives is contingent upon planning and organization, not on last-minute scrambles to teach existing curricula to entire student populations amid a pandemic. Extended school closures have been particularly severe for India’s pupils. The pandemic has had a devastating effect on 320 million schoolchildren, nearly 10 million teachers, and millions of parents in India. Factors like poor pedagogy, poverty, and undernourishment are compounding the travails of the students in India. Schools were shut for an average of 69 weeks, the longest globally, coupled with unique factors for India. A survey in Kolkata revealed that 40% of students enrolled in government primary schools lacked access to the internet. A similar survey in Chennai found that 20% of children were in schools that did not offer

37

New America in India’s pupils have been hard hit by extended school closures, The Economist, 18 September 2021. 38 Brown University in India’s pupils have been hard hit by extended school closures, The Economist, 18 September 2021.

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Fig. 6.4 The digital divide. Source World Bank, OECD, National statistics in India’s pupils have been hard hit by extended school closures, The Economist, 18 September 2021

online classes, and 205 of the remaining students simply did not attend online classes.39 The impact in rural India has been crushing. Only twenty-four percent of the students in urban slums stated that they followed online classes regularly. It was a pathetic 8%; nearly 40% of rural children did not study during the pandemic. Lack of access to a computer, internet, or stable power or absence of study material in their local language were severe impediments to their education. Less than 20% of parents felt that their children’s overall skills had improved when schools were shut. In the southern state of Karnataka, the proportion of third graders who could read a second-grade level test had come down to 10% from 20% (see Footnote 39). Deprivation, malnutrition, and poor schooling have worsened India’s bad situation. The mid-day meal served to 100 million students aims to beat malnourishment. The meals also stopped in the absence of classes, depriving children of their sustenance diet. Online education and free meals are incompatible. Covid-19-related learning losses may add up to a staggering $10 trillion. Closures of schools due to Covid-19 are pushing countries further away from achieving their educational goals. Current students will lose $10 trillion in labor wages throughout their working lives. It’s worth noting that one-tenth of the global GDP, or half of the yearly economic production of the United States, is spent on elementary and secondary education each year.

39

India’s pupils have been hard hit by extended school closures, The Economist, 18 September 2021.

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In more than 180 nations, temporary closures have kept almost 1.6 billion children out of class, challenging global efforts to eradicate learning poverty. Learning losses continue to rise even though most nations have made significant attempts to implement remote and remedial learning methods.40 In contrast, responses vary by country and region; reaching even half of all students has proven difficult. Despite aggressive initiatives, remote learning adoption is still in the single digits in Bangladesh.41 Some studies directly measure learning losses, such as methodological work in Botswana and Pakistan on phone-based assessments. However, the worldwide community will have to wait for many months, if not years, before getting a complete picture of worldwide learning deficits. Meanwhile, numerous critical decisions regarding funding, school reopenings, and instructional strategies must be made. Individualization of instruction is a necessary component of reimagined educational systems. Policymakers will not only be ready to minimize disruptions to learning in the event of a pandemic in the future, but they will often be able to design future education systems today. School shutdowns in low-income nations have been devastating. Around 700 million of the 1.5 billion children globally who have been forced out of school due to lockdowns live in developing countries. Their education, like that of pupils in wealthy countries, is harmed. However, the ramifications will be far worse in impoverished areas. Before the pandemic, there were more children in school than at any point in history. After the disaster, almost 10 million students in 40 nations may never resume formal education. The pandemic’s economic impact has compelled many to forego further education in favor of work. Between 2000 and 2020, the global workforce of children decreased by 40%, owing primarily to increased enrollment in school. Covid-19 is reversing this advancement (see Footnote 42). The effect on girls is of particular concern to experts. Teachers report that girls are noticeably absent in the few places where schools have been reopened, such as Vietnam and the Ivory Coast. While schools are closed, girls are cut off from teachers who might assist them in these situations. Teenage pregnancy rates in Sierra Leone Covid-19 could increase by 25% due to school closures. Children dropping out of school will cause enormous economic damage. According to the World Bank, if schools are closed for five months, students will lose $10 trillion in future earnings in today’s money. This figure could increase if Covid-19 remains unchecked and schools remain closed for an extended period.

40

UNICEF-UNESCO-World Bank in Learning losses due to Covid-19 could add up to $10 trillion, Brookings Institution, 30 July 2020. 41 Learning losses due to Covid-19 could add up to $10 trillion, Brookings Institution, 30 July 2020.

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Numerous governments are struggling to reintroduce formal education to children. Lessons taught remotely have obvious disadvantages for poorer countries. Internet connectivity is spotty in some areas. While 87 percent of children in Jakarta, Indonesia’s capital, can access the internet, less than 30% in Papua, the country’s largest province (see Footnote 42). Thus, the pandemic exacerbates the already-existing divide between rich and poor children regarding educational attainment. While 74% of pupils in Brazil participate in some form of distance education, most frequently via WhatsApp, this figure drops to 52% in the impoverished Amazonian north. A similar divide exists between Nigeria’s (poverty-stricken) north and the (wealthier) south. Occasionally, families react to scarcity in ways that disadvantage girls. Frequently, parents give their son, not their daughter, and the family’s only phone (see Footnote 42). Numerous parents and students are being asked to perform feats beyond their financial capacity. Parents are encouraged to purchase computers for their children in Kenya. It would cost the family more than three times what they have saved.42 Even if the family can purchase a computer, a stable internet connection is not readily available. Furthermore, the family can only afford enough data to run WhatsApp on the phone; there is not enough money to buy data packs to download lessons for many families. Only a tiny proportion of Nigerian students own computers, and those cannot afford to buy data packs. In Bangladesh, remote learning is primarily accomplished through government-run television programs. However, only 44% of children have television access (see Footnote 42). Certain governments have utterly failed to assist children in learning at home (Fig. 6.5). Others have been more cautious in their approach. Ghana’s government only began offering distance learning via radio three months after schools closed. There are, however, some positives. Sierra Leone views the pandemic as an opportunity to ensure that everyone receives high-quality education via radio, television, and online education. Covid-19 has provided the government with the “oomph” it requires to make it happen. Despite the online education carnage, many parents still prefer distance learning even after the schools have reopened. Throughout the epidemic, parents’ choices for how their children went to school varied widely. Numerous polls and media reports have examined parent preferences for in-person versus online learning. There are substantial racial and ethnic differences in the recent data gathered from 1510K-12 parents, with 19% of white parents choosing completely remote teaching, compared to 43% of black and 42% of Hispanic families, revealing significant disparities.43 Likewise, there are large differences in the income of different families. Despite advances in vaccinations and dramatically declining case rates, there are still significant racial and socioeconomic disparities in the choice of remote vs. in-person attendance.

42

School closures in poor countries could be devastating, The Economist, 18 July, 2020. Why some parents are sticking with remote learning—even as schools reopen, Brookings Institution, 8 June 2021.

43

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Fig. 6.5 Remote learning offered at some point in 2020. Source Center for Global Development (2020)

School systems did not provide high-quality remote teaching, let alone simultaneous in-person and remote learning delivery. In-person education is better for most kids than online education because distance education stymies academic and mental health development. Educators worked longer and harder than ever during the epidemic to address their students’ emotional and other requirements; however, students will eventually have to return to school. Researchers and journalists have attempted to pin down the motivations for keeping students at home. Nearly half of the adult population in the US has got at least one dose of immunization, according to a study performed in early 2021. For the first time, the FDA has authorized vaccinations for youngsters aged 12– 16 years, keeping all indoor places, such as schools, safer. Nonetheless, 30% of a study sample respondents stated that their child attended school entirely remotely during this period. Despite the theory that the lack of in-person options at schools was a significant motivator for remote attendance, only 10% of parents reported that their child was currently remote due to a lack of in-person options at their child’s school at the time they responded (see Footnote 43). Figure 6.6 shows the most commonly chosen reasons for the kid to attend from a distance. Almost half of the respondents said they preferred remote learning because it was more secure, and one-third of those polled said that their child desired to remain remote. About 22% and 25% of parents said that their child’s academic performance was the same or better than it was the year before. Fewer concerns pertained to Covid-19 containment strategies, adults in schools not being immunized, or blended learning being the only choice (see Footnote 43). In addition, the extreme hesitation among specific populations to attend school necessitates urgent action. Compared to white families, almost 40% of black families and 25% of Hispanic families are reluctant to send their children back to

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Fig. 6.6 Reasons for not sending child to in-person schooling. Source USC Domsife Center for Economic and Social Research’s Understanding America Survey

school in the fall. Some black families do not want to send their children back, while others are uncertain. For the next academic year, what does this imply? People from lower socioeconomic backgrounds and less formal education are more likely to continue through distance learning (see Footnote 43). Some schools have a hard time getting students to return after months of remote learning. When the District of Columbia Public Schools’ doors swung open in February, not a single student returned for in-person learning. Nine children have returned to school four days a week following weeks of consistent phone calls, while 11 of their classmates continue to learn at home. Parents expressed concern about the timing and reluctance to send their children back, fearful of a child contracting Covid-19 or bringing the virus home to an elderly relative. Half of all school districts in the United States now offer school entirely online, but some classrooms remain primarily vacant. With billions of dollars in federal funding to support reopenings and vaccinations—which are now available to children 12 years and older—schools are stepping up efforts to entice families back in time for summer and fall classes.44 Fifty-one percent of school districts offer in-person instruction, while the remainder offers in-person and remote instruction. Community organizers are knocking on doors. They are making house calls and sending out frequent email

44

Some Schools Struggle to Get Students to Return After Months of Remote Learning, The Wall Street Journal, May 20, 2021.

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blasts. Certain schools offer outdoor sports such as soccer to all children, including remote learners, to nudge parents to enroll their children in in-person learning. Others collaborate with local community organizations or the YMCA to provide alternative transport or after-school programs to make returning to the classroom more feasible (see Footnote 44). The debate over school reopenings has been one of the pandemic’s most divisive battles. Parents have filed lawsuits, staged protests, and spoken out at school board meetings calling for the reopening of classrooms, while other families have opted to stay home. Many hesitant parents and guardians fear losing family or friends to Covid-19 or contracting the disease themselves. Fewer children in low-income areas or communities with a high prevalence of Covid-19 are returning to school. The issue becomes more pressing as the school year draws close and a new one begins, with many children continuing to learn remotely after more than a year. In Los Angeles, elementary schools in higher-income neighborhoods have more than twice the number of returning students as those in lower-income neighborhoods. Around 70% of children have returned to school in West Los Angeles, where the median income is over $115,000, compared to less than 20% in Bell, Calif., where the median income is $44,000 (see Footnote 44). The pandemic compressed schools’ ten-year digital transformation process into a month, with teachers also willing to participate in the digital venture. Some of the technical innovations put in place during the pandemic will stay as children go back to in-person lessons. Some of the transformations will remain even after the pandemic is quelled. There was a real fear among educationists that the digital transformation would replace them since they were no longer needed. That fear is now largely belied. There is a gradual realization that blended learning supplements traditional education. A good part of the $2.2 billion in VC funding and private equity raised in 2020 will be invested with the goal of EdTech complementing traditional learning. The parent-monitoring apps, classroom devices, and internet infrastructure will remain even after the pandemic is long gone.45 One of the beneficiaries of online learning is the private tutoring institutes. No country is not affected by pandemic-induced online learning. American schoolgoing children are five months behind where they should be in math and four months lagging in reading.46 The situation is worse in developing countries such as Mexico and India. To ensure continuity in learning, parents worldwide were ready to splurge on private tutoring, a trend that will gain speed further. Private tutoring outside the regular class is raging in many countries. Eighty percent of primary schoolchildren in South Korea, and 90% of Japanese children receive some tutoring (see Footnote 48). The majority of Greece’s schoolchildren report having taken private assistance, while in Egypt, one-third in the first years

45

Edtech that helps teachers beats edtech that replaces them, The Economist, 18 September 2021. McKinsey in The pandemic will spur the worldwide growth of private tutoring, The Economist, Oct 9, 2021.

46

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of school receive additional tutoring; by the time they come to secondary school, 80% would have had extracurricular academic augmentation. The scramble for private tuition may have to do with more children being enrolled in the school ever before. Between 2000 and 2018, the number of children who did not get a school education decreased by one-third.47 The resulting competition has become intense. Parents in countries such as India are also worried about the worsening quality of schooling due to increased competition and would like to compensate by way of additional coaching. Apart from increased enrollment, more children are completing their 12 years of education; admission into colleges has become highly competitive. Since the death of job-for-life, parents are keen for their wards to get a head start in their careers. There are other global factors influencing private tutoring. One, the global fertility rate has dipped to 50% of the level of 1950. Smaller families are keen to spend more money on their children. More than 50% of the households in the US have both parents working. Since the parents have full-time jobs, less time is available for coaching the kids. After-office coaching classes carry a strong appeal among the parents (see Footnote 48). The pandemic killed many tutors’ jobs but opened new avenues to become private tutors. Many teachers took up the lucrative private tutoring during the pandemic and continued to gig even after the schools opened. Additionally, there is government support in countries such as UK and Australia for tutors taking part in the “catch-up” programs which will help private tutoring expand. Also, there have been significant investments in technology to alleviate online learning, making private tutoring mass-based and affordable.48 Private tuition could also partially undo the havoc created by the pandemic. A study revealed that students who attended an after-school math program were about 7-months ahead of their classmates by the time they were eleven years old. Private tutoring can also provide a level playing field. Poorer students who attended high-quality test preparation coaching were better off than their wealthier counterparts.49 Private tutoring can also deepen inequity. In England and Wales, 34% of the rich parents paid for private classes for their children compared to 20% of the poorer parents.50 Often private tutoring can also backfire. Poorer parents in developing countries often opt for cheaper but shoddy operators whose efficacy is serious. Children subjected to such tutoring are likely to skip school and earn grades lower than their counterparts in the class.

47

University of Hong Kong in The pandemic will spur the worldwide growth of private tutoring, The Economist, Oct 9, 2021. 48 The pandemic will spur the worldwide growth of private tutoring, The Economist, Oct 9, 2021. 49 University of Potsdam in The Wall Street Journal, May 14, 2021. 50 Sutton Trust in The Wall Street Journal, May 14, 2021.

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There is a danger that private coaching could spread like wildfire and become the norm. Some schools in China insist that children attend coaching classes before they start attending their own.51 The Chinese government is convinced that parents have fewer children because of the high cost of after-school education. The government banned tutoring on holidays and weekends and prevented tutors from fleecing the parents, but partially succeeded. Japan and South Korea have provided state assistance for private tutoring to alleviate the stress on poorer parents.

6.2

Efficacy of Online Learning

6.2.1

What Didn’t Work

Remote learning had more misses than hits. In the spring of 2020, the United States had to take a crash course in distance learning. As the new school year approaches, teachers, students, administrators, and parents have already voiced their opinions: Failure! Schools were forced to shut down in March because of the coronavirus epidemic. Over 50 million kids in kindergarten through 12th grade were educated utilizing technology without prior planning or preparation. The issues started stacking up almost immediately. Some students did not have access to computers or the internet, and teachers lacked experience with distance education. And many parents were unable to assist. Administrators had no idea why so many students were absent from class in many locations across the country. Many school districts soon dropped all work demands, putting millions of children in danger of falling behind in their education. In preparation for uncertain autumn, several school administrators are experimenting with the idea of reopening classrooms through a hybrid of in-person and virtual learning. Some believe that to prevent a recurrence of the spring disaster, more pupils will need suitable technological gadgets and internet connections. Also, teachers will require significantly improved training on how to instruct remotely (see Footnote 56). Preliminary data suggest that learners across the country will eventually return to school with reading improvements of about 70% and math advances of less than 50% compared to an average school year’s learnings.52 As a result, children from minority and low-income households who don’t have access to technology would lose out on more learning opportunities. While many students are technologically savvy, this does not guarantee they will succeed with distance learning. While many students can use their cell phones and gaming systems for entertainment, education experts say there is a significant gap between what students can do on them and their ability to use a device for educational tasks, including reading documents or solving problems. Educators believe that digital learning would be

51 52

East China Normal University in The Wall Street Journal, May 14, 2021. NWEA in The Wall Street Journal, May 14, 2021.

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Fig. 6.7 Assignment work completion rates. Source The Wall Street Journal, May 14, 2021

easier for them because they spend so much time on their devices; however, there is a difference between being a digital consumer and a digital learner. The high school students fared the worst in turning in their assignments as the pandemic wore on. Their younger schoolmates did much better (Fig. 6.753 ). Parents are a harried lot after juggling jobs and other obligations while monitoring their children’s at home learning for many months. Teachers and school districts that had previously utilized online education found the transition less complicated. Despite this, many educators, even those familiar with the technique, say remote learning cannot be compared to in-person teaching. Schools are currently discussing when to reopen for the new academic year and whether to restart from where students left off just before closures or continue with the typical curriculum and enable instructors to fill in pupils’ skills gaps. Some teachers want to provide examinations to pupils at the beginning of the year to see where their knowledge is lacking (see Footnote 56). School districts had no idea how many kids lacked gadgets and internet connectivity until they polled parents. Districts that could afford it rushed to acquire the technology necessary to connect students to the internet. A few schools have set up wireless hotspots in parking lots so that kids may connect from their parents’ vehicles when they travel. Several school districts created printed work packets for students without an internet connection at the school food drive-thru. One of the major problems has been how to evaluate pupils accurately who are studying remotely. Many school systems are reluctant to provide grades to students who do their homework from home. Some have told teachers not to give failing

53

The Wall Street Journal, May 14, 2021.

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marks because of equality concerns. Others are concerned that distance education facilitates cheating. Several of the nation’s popular school systems, including Los Angeles and Chicago, have ordered instructors not to give pupils failing final grades or anything less than before the shutdown because they are worried about imbalances in internet access and parental participation. In all of Washington’s school districts, the state has outlawed the usage of “F” grades (see Footnote 56). Covid-induced forced online learning has had a terrible impact. Only 20% of the decline in English pass rates has been recovered in America, where school test scores are still below pre-Covid levels. Comparing results from 2019 to 2021, the pass percentages on standardized tests in arithmetic and English fell by six and twelve percentage points, respectively, reflecting declines of 12 and twenty-five percent. A new working paper by a group of researchers led by Emily Oster, of Brown University, and the National Bureau of Economic Research finds that the pandemic’s effects on lost knowledge are still felt today. In the most recent round of exams, administered in the spring of 2022, pass rates increased by little over a percentage point for English and by over five percentage points for math54 (Fig. 6.8). If exam scores continue to rise at this rate, it will take students another four years to reach the same English and nearly two years to achieve the same math outcomes as before the pandemic.55 Attendance monitoring has become more difficult due to the widespread use of remote learning. Many institutions count students as present if they use online classroom management like Google Classroom to do their tasks. Some schools give attendance points depending on how much work they complete each week.56 There are a few students who have just disappeared. Children in foster care or living in extreme poverty, pupils with impairments, and individuals who frequently skipped school during regular hours are among those who have gone missing. Some schools performed better than others, especially those with enough resources and prior distant learning experience. Educators hope that the most challenging days of distance education are behind them. Who benefitted and who didn’t because of online learning? The use of online education can substantially enhance teaching at all academic levels. The content in adaptive online courses is designed to suit the requirements of both remedial and advanced learners so that students may study at their own pace. Online classes may also help schools in remote regions lacking experts extend their curricular options.57

54

National Bureau of Economic Research in In America, school test results are still lagging behind pre-Covid levels, Economist, 20 April 2023. 55 In America, school test results are still lagging behind pre-Covid levels, Economist, 20 April 2023. 56 The results are in for remote learning: it didn’t work, The Wall Street Journal, June 5, 2020. 57 Online schooling: Who is harmed and who is helped? Susan M. Dynarski, Brookings, Oct 2017.

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Fig. 6.8 A lot to learn. Source National Bureau of Economic Research. In America, school test results are still lagging behind pre-Covid levels, Economist, 20 April 2023

School and district officials searching for ways to reduce costs may find online courses particularly attractive. Any technology that makes it possible for a teacher to educate more pupils while using less money may free up funds for other purposes at every level of education. Cost savings are contingent upon the cost of production, which can be pretty high for universities launching their digital content.58 Does online education live up to its pledge? Online courses have grown in popularity and can expand many students’ educational opportunities, particularly those that do not serve their potential. On the other hand, given the present design, online courses may be challenging for poorly prepared students. One report concludes that students who attend online classes do worse than those who take in-person courses learning. Online courses are an inadequate alternative to face-to-face instruction for academically ailing students.59 Students who took the test online did substantially worse than those who took it in person; these students had a reduced chance of succeeding in their following courses and were more likely to discontinue their studies (see Footnote 59). Taking online courses may be particularly challenging because of the higher barriers students (especially those taking executive programs) encounter than faced by their in-person counterparts. In addition to being older, they are more likely to

58

https://wcetfrontiers.org/2017/02/16/distance-ed-price-and-cost/ Promises and pitfalls of online education, Eric Bettinger and Susanna Loeb, Evidence Speaks Reports, Vol 2, #15 June 9, 2017, Economics studies at Brookings. https://www.brookings.edu/research/promises-and-pitfalls-of-online-education/

59

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be full-time workers and single parents (Deming et al., 2015). While online classes may be more convenient for such non-traditional learners, the data suggest that they are an inadequate match for individuals who are intellectually behind their classmates.60 Essentially, there are two types of online education: completely online courses and “blended courses,” students spend time in a real classroom with the teacher and online with educational videos and digital material. In general, research shows that learning worsens without face-to-face teaching. Students who take blended courses do as well academically as traditional classroom-based courses. The time they save from teaching a blended course may be utilized to teach other subjects or help students who need it (see Footnote 60). Two recent studies have looked at the impact of online education on middle and high school pupils, and these study results matched those seen with post-secondary students. The first study evaluated a program designed to increase middle-school students’ access to algebra courses.61 Students with above-average grades have limited options for specialist courses in small rural schools. Large urban middle schools can afford to hire a wide variety of specialist instructors, while small schools cannot. Because of the online option, students now have access to curricular choices, they otherwise would not have had in the absence of the online format. Students in the eighth grade who met the prerequisites for Algebra I but whose schools did not offer an eighth-grade algebra course were randomly chosen and offered the course online (the treatment group). The eighth-grade students from other schools were chosen randomly to be in the control group to take a traditional, face-to-face algebra course. Students who completed the course online outperformed those in the control group by 0.4 standard deviations on algebra knowledge tests at the end of eighth grade. Treated children were also twice as likely to finish high school math courses with at least Algebra II competence by the tenth grade (26% in the control group versus 51% in the treatment group) (see Footnote 61). It is a sizable impact, particularly considering the intervention lasted only one year. However, the results are optimistic from a policy perspective: Students in the eighth grade who are academically competent but lack access to online math courses benefit from taking them online.

60

https://www.nber.org/papers/w23744. The paper also reviews evidence on the effects of access to computers, adaptive learning, and behavioral nudges that make use of technology. 61 https://ies.ed.gov/ncee/edlabs/regions/northeast/pdf/REL_20124021.pdf. This paper is not discussed in the review. A What Work’s Clearinghouse review of this study is available at https:/ /ies.ed.gov/ncee/wwc/Docs/QuickReview/algebra_032712.pdf. The study meets WWC standards without reservations.

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An entirely new group of people was studied in the second research to see how online algebra affected them: Students from a Chicago high school who had previously failed this math subject in the in-person mode of education. Using online platforms for “credit recovery” is rising as students repeat failing courses.62 Seventeen Chicago high schools offered a summer rehabilitation course for students who had failed algebra. After a few courses, they were given the option of online or in-person at random. End-of-course examinations showed that students taking online courses did substantially worse than those doing face-to-face sessions, with a 0.2 standard deviation difference. Students who took the course entirely online had a substantially lower success rate—66% versus 78% of the participants (see Footnote 57). There isn’t enough data from the two randomized controlled trials to make policy recommendations. According to the data, online coursework should emphasize increasing the number of course choices and speeding up academically competent students rather than catching up with those falling behind (see Footnote 57). However, a clear pattern emerges when post-secondary studies are combined: It is common for intellectually challenged students to fare poorly in online courses than in traditional ones. Parents and educators realize that children need help catching up on the lost school time. Covid-19 rarely causes severe illness in children. Nonetheless, schools worldwide have been closed entirely for approximately two-thirds of an academic year due to the pandemic. In the year to April, the likelihood of an American aged 5–14 contracting and dying from the virus was approximately one in 500,000— roughly a tenth of a child dying in a traffic accident in standard times (see Footnote 64). The enormous harm done to children’s prospects may be justified if classroom closures were one of the most effective ways to prevent lethal infections in adults. However, few governments have carefully weighed the costs and risks. Numerous districts have kept schools closed, while bars and restaurants remained open, either to placate teachers’ unions, whose members are compensated regardless of whether they teach in person, or to pacify nervous parents. Even before the pandemic, conditions were dire. As a result, developing brains are deficient in stimulation. Pupils in England’s primary schools are approximately three months behind where they should be; children in Ethiopia learned 60–70 percent less than they should have in 2020. More than half of ten-year-olds in low- and middle-income nations cannot read a paragraph. According to the World Bank, this figure could rise to nearly two-thirds. In all countries, school closures will exacerbate the divide between better-off students (who often have iPads and quiet bedrooms for remote learning) and less-privileged students (who frequently do not). However, the disruption caused by Covid-19 provides an opportunity to improve schools. Since so many students have so much ground to make up, educators consider the most effective ways to assist them. Several wealthy countries increase

62

http://www.tandfonline.com/doi/abs/10.1080/19345747.2016.1168500?journalCode=uree20.

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their tutoring availability for struggling students, either individually or in small groups. Certain impoverished countries are streamlining their overburdened curricula, allowing teachers to deviate from prescribed textbooks and devote more time to teaching essential reading and math. Such reforms appear to be effective (see Footnote 64). Teachers have received a crash course in educational technology due to their experience with remote schooling. If teachers were adequately trained and allowed to experiment, in-person lessons could improve. The software can assist in personalizing classrooms, ensuring that children receive instruction closely aligned with their abilities. And if teachers were relieved of routine tasks, including much of their marking, they would have more time to work with the most vulnerable students. The pandemic has highlighted the importance of family background in academic success. A full stomach, supportive parents, and a house with books have always been a plus. Conditions at home are even more critical when lessons take place there. The last year has demonstrated the importance of social workers assisting deprived pupils: ensuring they receive glasses for reading what is on the screen, for example, or assisting their parents with paperwork to avoid eviction. Schools can also provide mental health counseling and connect students with charities or agencies that assist with resolving distracting domestic issues. Regrettably, far too few governments are doing even the bare minimum to compensate for lost time. Education received less than 2% of the money invested in Covid-19 relief packages last year. According to the UN, only a quarter of children had access to some remedial program last autumn. Children who did not grasp critical lessons during lockdowns may fall further behind. According to one estimate, a child in a developing country who misses a year of school and does not receive the necessary assistance to catch up will eventually fall behind by nearly three years (see Footnote 64). England plans to spend only slightly more next year to assist pupils in catching up than it did last summer. America’s legislators have been more generous, even though children have missed more in-person schooling than almost anywhere else in the developed world. However, only 20% of the additional funds they provide to schools must be spent on catch-up learning. Much time and money will be spent on excessive “sanitation theater,” including plastic dividers between desks that may make it more challenging to see the blackboard or hear the teacher. Two-thirds of developing countries have reduced their expenditure on education. While money is not everything, even in prosperous times, the poorest families spend only $48 per year on each schoolchild, which is insufficient. (Wealthy nations spend $8500.) It is projected that foreign aid to education will decline by 12% between 2018 and 2022.63

63

United Nations in Closing the world’s schools caused children great harm, The Economist, 24 June 2021.

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Governments frequently succumb to the temptation to neglect education. It costs money to improve schools and may require confronting powerful interest groups such as teachers’ unions. The benefits may not manifest themselves until today’s politicians have stepped down. However, almost nothing is more critical for a prosperous future than today’s sound education.64 Bending the cost curve: Legislators, governors, and other leaders have long believed that distance education should be less expensive to produce and deliver. As a result, they assume that students enrolled in these courses will pay less than students enrolled in courses taught on campus. However, the reality is that distance education tuition is typically the same as on-campus tuition, but other supplementary fees result in a higher student price.65 Online learning technologies provide the most excellent chance for innovative cost-cutting measures in higher education. Most experts say online education can help traditional higher education “bend the cost curve.66 ” Larger class sizes and fewer face-to-face interactions result in lower labor expenses as a primary channel. The fact that schools are charging less for online courses suggests that advances in online learning technologies may “bend the cost curve” of higher education (see Footnote 66). The challenge is persuading the demand side of online education’s virtues: The industry employs college graduates. Employers are less likely to reach out to job aspirants with online degrees. It will be interesting to see how the labor market views online degrees from prestigious public universities, especially if the online campus degree and transcript are identical to the in-person counterparts (see Footnote 66). Research has established that online learning impacts students in higher education. As a result of the pandemic, millions of college students worldwide will be forced to pursue virtual education. Many schools around the country are getting ready to welcome students back to campus as the new academic year gets underway, but there is still a lot of uncertainty. However, a few colleges and universities will continue to provide online and hybrid course options. The public’s attention has been mainly drawn to the educational setbacks experienced by K-12 pupils who went online during the outbreak. Nonetheless, we have reason to worry regarding post-secondary students as well. What can we anticipate as a result of the shift to virtual learning? What are the effects of online learning on student performance? Which is better for post-secondary students: online education or conventional classroom instruction?

64

Closing the world’s schools caused children great harm, The Economist, 24 June 2021. Distance Ed Costs and Price: Not as Closely Correlated as You’d Think, WCET Frontiers. https://wcetfrontiers.org/2017/02/16/distance-ed-price-and-cost/ 66 Issues in higher education Can Online Learning Bend the Higher Education Cost Curve? David J. Deming, Claudia Goldin, Lawrence F. Katz, and Noam Yuchtman, American Economic Review: Papers & Proceedings 2015, 105(5): 496–501 http://dx.doi.org/10.1257/aer.p20151024. 65

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On the back of previous studies, new articles have shed light on these problems, assessing the effectiveness of online education in new settings. The results mostly confirm previous studies. Students perform worse in online coursework than in in-person coursework. Students who are less intellectually prepared or seeking a bachelor’s degree may find it more challenging to succeed in online courses. According to newly released data, the transition to online course-taking in 2020 decreased completion rates (see Footnote 67). A randomized control trial (RCT) is the most effective study method for determining the causal impact of online vs. in-person learning. These studies found that online education harmed student achievement compared to traditional classroom instruction. On the other hand, one research found that hybrid-instructed students fared on par with their in-person counterparts. The greatest negative impact of online learning was on males and students with less academic preparedness (Alpert et al., 2016; Kofoed et al., 2021). When asked about their experiences, online students reported difficulty focusing on their studies and feeling more disconnected from their classmates and instructors than their in-person counterparts. Most exam metrics, such as math, writing, and reading, show that online bachelor’s degree students exceed their peers on campus.67 Online learning efficacy is debatable. Perhaps, the experience is too new. After all, online education is creatively destroying the traditional education system with more than 3000 years of legacy. There is also evidence to show that students’ grades are impacted because of virtual learning. Online courses have grown in popularity and can expand many students’ educational opportunities, particularly those traditional educational institutions currently underserve. Online platforms also claim to give students the best educational experience possible by tailoring the speed and content of each course to their requirements. Advanced “intelligent” teaching systems, for example, analyze pupils’ present strengths and weaknesses to determine why they make particular errors. These systems then modify the lessons’ content to suit the students’ requirements better (Graesser et al., 2012; Bettinger et al., Forthcoming). The popularity of online college courses is rapidly rising. This number has tripled in the past decade, as do a third of all college students who enroll in at least one online course throughout their time in school (Allen et al., 2013). Online education has grown in popularity in the K-12 sector as well. Public and private institutions are encouraged to keep investing in online education because of the potential savings and ease of scaling (Deming et al., 2015).

67

How does virtual learning impact students in higher education?, Brookings Institution, August 13, 2021.

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Fig. 6.9 Online consequence. Source Promises and pitfalls of online education, Bettinger and Loeb (2017)

The number of online courses offered by non-selective and for-profit universities has increased rapidly. Despite the increasing popularity of online courses, especially at non-selective universities, little study has been done on how taking an online course instead of an in-person one impacts students’ college performance. A research study finds that student grades are lowered by 0.44 points when taking an online course (Fig. 6.9). Also, a student’s choice of online mode reduces the following term’s GPA by 0.15. Analysis of all related and prerequisite courses reveal larger drops of 0.42 and 0.32 points, respectively, in the following term, strengthening the postulate that students learned less in the online setting.68 According to the findings, students are more likely to drop out of school if they take a course online rather than in person. After enrolling, students have a nine percent chance of remaining in an online course for the remainder of the semester (see Footnote 68). Because of the present detrimental impact of online courses on in-person courses, it is not necessary to prohibit online courses altogether. The opposite is true: Students who would not otherwise be able or willing to attend classes in person now have the option to do so via online learning.69 2.85 million of the 5.8 million students who started classes in the autumn of 2014 finished them over the

68

Promises and pitfalls of online education, Eric Bettinger and Susanna Loeb, Economic Studies at Brookings, June 2017. 69 See, for example, Joshua Goodman, Julia Melkers, and Amanda Pallais, “Can Online Delivery Increase Access to Education?” National Bureau of Economic Research working paper 22754, October 2016.

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internet.70 Because of artificial intelligence progress, future online courses may better serve students’ scholastic progress.71 Kindergarten parents have expressed dissatisfaction with remote learning, and not all of them have persisted. Some parents want their children to repeat kindergarten when in-person courses begin. Their children may be joining the ranks of those who skipped virtual kindergarten entirely this year. Kindergarten enrollment suffered a severe decline across the country during the outbreak. The number of students enrolled has dropped by 16% across 60 school districts in 20 states.72 The number of pupils enrolled in the Los Angeles Unified School District, for example, dropped by 14 percent, or about 6000 children. Education experts worry about how schools will react when all absentees return (see Footnote 73). They expect many parents to “redshirt” their children this autumn, postponing their entrance into kindergarten by a year. Upper-middle-class families often use this technique to offer their children an academic edge. Researchers in Virginia, whose school attendance dropped by 13%, found that the decreases were evenly distributed across families of different socioeconomic levels (see Footnote 73). However, white households had the most significant drops when racial differences were considered. However, educators are attempting to assuage parents’ fears about their children missing a year of school. Even though remote learning has been a dismal failure for many families, proponents say children should not be held back. School districts consider several options, such as summer school, extending the school day or year, and employing more paraprofessionals and teachers at the prekindergarten and early-grade levels. Additionally, some states may allow parents to decide. A measure proposed in the California Legislature would compel districts to conduct a hearing on a family’s petition to keep their child back. As a result, some 5-year-olds who would otherwise enroll in kindergarten may instead attend prekindergarten, which could be a better match. Finally, parents’ confidence may be contingent on assessing their children’s resilience.73 One of the undesirable side-effects of online learning has been the increase in rampant cheating. Cheating has increased dramatically among students at all levels, from elementary to college, in the first year of remote education. Academic dishonesty is now more effortless than ever before, thanks to the increasing number

70

Online Report Card—Tracking Online Education in the United States, the 2015 Survey of Online Learning conducted by the Babson Survey Research Group and co-sponsored by the Online Learning Consortium (OLC), Pearson, StudyPortals, WCET and Tyton Partners. 71 3See, for example, the Open Learning Initiative at Carnegie Mellon University. In Remote learning a bust? Some families consider having their child repeat kindergarten, NBC News, June 20, 2021. 72 NPR Survey in Remote learning a bust? Some families consider having their child repeat kindergarten, NBC News, June 20, 2021. 73 Remote learning a bust? Some families consider having their child repeat kindergarten, NBC News, June 20, 2021.

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of students who are isolated at home and to the plethora of internet resources that are available to them. Millions of new people have signed up for websites that let students ask questions and get expert answers in the past year. Students can now auction their classwork on new sites that have been created for this purpose. “Think about hiring me to do your assignment,” says one offer on an auction website. “I work quickly, carefully follow the instructions, and always deliver a plagiarism-free paper.” Some instructors worry that even when the epidemic is over, the next generation of cheats will be unable to quit. There are thousands of cheating websites, ranging from enterprising freelancers to large-scale operations. Compared to the previous year, cheating accusations at Texas A&M University increased by 50% last autumn. According to one instance, one hundred and ninetythree students self-reported academic misbehavior and received a lenient penalty when faculty members noticed them cheating. Cheating case investigations at the University of Pennsylvania increased by 71% in the 2019–20 academic year (see Footnote 74). In an online mathematics test last year, scores of cadets at West Point’s United States Military Academy were cheating by exchanging answers from their homes. As of April, cadets who confessed to violating the honor code would no longer be protected from expulsion. According to educators, students who cheat because of the pandemic’s pressure and stress are more likely to engage in dishonest behavior and, more importantly, make poor choices during times of stress. There is a distinction between students using homework assistance websites that provide learning material and tutorials to help them better grasp a topic and replicating solutions from such sites onto assignments and exams or paying people to do their work. Students are dissatisfied with virtual learning because it lacks instructor interaction and is less structured. When it comes to homework assistance websites, some K-12 schools restrict student access from district computers to avoid cheating—but this does not stop a pupil from accessing the site on another device. Online cheating has given rise to a new industry. Students taking exams at home are being monitored by companies that employ internet proctors. The proctors identify students who disappear from the camera’s view or provide wrong replies. Facial recognition software is used by certain businesses to keep an eye out for people with wandering eyes or gestures that are out of the ordinary. Homework auction sites, which let students bid on who would do their tasks and at what price, are more modern cheating techniques. There is a marketplace for bidders who offer to finish student assignments once posted on a website and within a deadline. Many identify as instructors; the bidders often display their academic achievements. Some websites allow students to give ratings and evaluations of their work. Educators may employ plagiarism detection technologies; however, these techniques are useless when used against services that create unique content for their students. In February, students at York College in Queens, New York, advertised on the auction website homeworkforyou.com for someone to finish their school assignments, weekly examinations, and a project for their business class. In addition, the successful bidder would have to pretend to be a student and answer questions

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from other students as part of a group project. A grade of “A” was indicated as the desired result, and the student was “willing to pay” $465 as a fee. There were 29 offers received the next day. The average bid was $479.41 (see Footnote 74). Other popular websites where students may get help are either by asking a question and waiting for an expert to respond promptly or by browsing a database of past answers such as Brainly and Chegg, both of which reported a significant increase in user traffic during the pandemic. Representatives of the services say that most subscribers are not cheating but instead are trying to fill in the gaps left by remote learning, with parents also utilizing the sites to help their children study. For example, duplicating material for essays or other schoolwork or soliciting solutions to current test questions is prohibited under the site’s guidelines.74 The last word has not been said about newer ways to cheat the online education system. Schools are back in session and dealing with serious learning losses. Schools and researchers have been battling pandemic-era learning challenges over the past two years, primarily due to a lack of in-person instruction. They are having difficulty measuring how severe the learning loss is as well as addressing it. The second question is starting to have some obvious solutions. Children who began learning to read before the pandemic have the lowest reading proficiency rates in nearly 20 years, according to national data (see Footnote 78). The average reading score for 9-year-olds dropped 5 points, to 215 out of 500, from 2020 to 2022, the biggest drop since 1990.75 Average math scores dropped by 7 points to 234; this was the subject’s first statistically significant drop since long-term trend evaluations started in the 1970s (Figs. 6.10 and 6.1176 ). According to studies, learning loss is often worse in districts that have kept remote courses away for longer, with the effects being most noticeable in highpoverty districts. Even in other states that rapidly reverted to in-person instruction, like Florida, reading scores for some grades remain below 2019 levels (see Footnote 78). Some kids continued to use technology when in-person courses started, Covid-19 breakouts necessitated extra quarantining, and social distancing tactics disrupted class routines. Since research indicates that reading proficiency by the end of the third grade can predict academic performance, career earnings, and the likelihood of incarceration, educators pay particular attention to the literacy rates of 9-year-olds. Even though some pupils have started to catch up, researchers estimate that unless the pace picks up, it could take today’s fourth graders five years or longer to read effectively. This is a crucial time for these students. Four times as many pupils

74

Cheating at School Is Easier Than Ever—and It’s Rampant, The Wall Street Journal, May 12, 2021. 75 U.S. Department of Education. 76 Source: National Center for Education Statistics in Schools Are Back and Confronting Severe Learning Losses, The Wall Street Journal, Sept 6, 2022.

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Fig. 6.10 Reading scores for US students, age 9. Source National Center for Education Statistics (2022)

Fig. 6.11 Mathematics scores for US students. Source National Center for Education Statistics (2022)

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who are not proficient readers in third grade—16% of them—fail to graduate from high school on time.77 Texas is a unique illustration of a state where reading proficiency among young pupils has more than recovered to prepandemic levels. According to official data, half of Texas third graders met or exceeded objectives in 2022, up from 37% in 2021 and 43% in 2019. A law adopted by the Texas legislature in 2021 that offers pupils 30 h of tutoring on the subject matter of each exam on which they failed to reach grade level is a crucial component of the state’s strategy to recoup from learning losses (see Footnote 78). Tennessee is one of a select few states that has taken an active effort and raised statewide results above 2021 levels, though scores for specific subjects or grade levels are still not back to levels before the epidemic. Thirty-six percent of third graders in Tennessee demonstrated proficiency in English language arts in the spring of 2022, up from 32 percent in 2021 but still lagging below the 37% in 2019 (see Footnote 78). Many students continued to be remote even after they were allowed to attend in person, and others are still getting used to being back in class. The path to normalization will be agonizingly slow.78 The largest Education Department analysis of test scores since the Covid-19 pandemic began reveals sweeping declines. In virtually every state, the US fourthand eighth-grade children saw significant drops in their math scores in 2022 during the pandemic, the worst drop in math scores ever recorded in the US schools.79 Research indicated a statewide decline in reading that reversed three decades of advances in the most comprehensive review of test results since the pandemic outbreak80 (Fig. 6.12; see Footnotes 80 and 82). Nationwide scholastic achievement reductions before the pandemic accelerated, and many significant achievement gaps between students widened. When compared to the fourth-grade students who performed well, low-performing students had greater drops in both math and reading scores. In the fourth grade, math scores dropped more for black and Hispanic kids than for white pupils. The information was released after federal test results showed the first-ever dip in math scores and the greatest reduction in the fourthgrade reading scores since 1990. “We have lost a huge amount of the progress we have been making over decades, and it’s going to take years to catch up.”81

77

Annie E. Casey Foundation in Schools Are Back and Confronting Severe Learning Losses, The Wall Street Journal, Sept 6, 2022. 78 Schools Are Back and Confronting Severe Learning Losses, The Wall Street Journal, September 6, 2022. 79 US Education Department in Math Scores Dropped in Every State During Pandemic, Report Card Shows, The Wall Street Journal, October 24, 2022. 80 National Assessment of Educational Progress in Math Scores Dropped in Every State During Pandemic, Report Card Shows, The Wall Street Journal, October 24, 2022. 81 Fordham Institute in Math Scores Dropped in Every State During Pandemic, Report Card Shows, The Wall Street Journal, October 24, 2022.

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Fig. 6.12 Change in fourth-grade reading and math scores, 2019 to 2022. Source National Assessment of Educational Progress (2022), Math Scores Dropped in Every State During Pandemic, Report Card Shows, The Wall Street Journal, October 24, 2022

Math and reading scores for both fourth- and eighth-grade children had dropped significantly since 2019 when the examinations were last given. Eighth graders’ typical math scores declined by 8 points from 2019 to 274 out of 500 in 2022. Scores in reading dropped 3 points to 260. The lowest average score was in reading for the fourth grade. The overall percentage of students scoring below the basic level in reading and arithmetic increased. The examinations given to American adolescents between 9 and 13 are important predictors of academic achievement and future trajectory. By the fourth grade, pupils must be proficient readers because they must use reading to master other topics. According to instructors, one of the most important indicators of success in high school is math proficiency in the eighth grade (see Footnote 82). The exam findings come after school districts debated when to start teaching in person again following the Covid-19 pandemic. Across jurisdictions with various pandemic-related strategies for education, scores declined. Arithmetic drops were greater than reading because students often pick up reading outside of school, while math learning is more dependent on classroom instruction.

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Despite overall uniform score declines, national performance inequalities between student subgroups primarily expanded during the pandemic. Only white children experienced reductions in the eighth-grade reading. Between fourth-grade kids who qualify for free and reduced-price lunches and those who do not, math achievement gaps worsened. The pandemic widened already-existing gaps in educational opportunities and experiences between white children and students of color and between schools with adequate funding and those with inadequate funding.82 The learning loss has been global and significant. Educators have reacted differently to the Covid-19 epidemic, but they all agree that remote learning comes at a high cost, especially for children who are already vulnerable. While teachers worldwide have varying styles and standards for learning, they agree that a computer cannot replace a classroom as a place for children to learn. The feedback is near-unanimous: The remote learning experiences of the last year are an inadequate substitute for being back in the classroom.83 However, due to the Covid-19 epidemic, many instructors are still teaching students online—and maybe understandably hesitant to return to in-person instruction until they feel safe. When remote learning was first implemented in response to school closures between March and July 2020, a Mckinsey survey asked teachers in eight countries to rate its effectiveness, and they assigned it a five-star rating on a ten-point scale. Teachers in Japan and the United States were particularly critical, with nearly 60% rating remote learning’s effectiveness as one to three out of ten. That is barely better than not attending school at all. This is a damning indictment. Covid-19 has triggered the world’s largest remote learning experiment. Faced with a lethal threat, politicians were compelled to make difficult choices even with a high degree of scientific ambiguity. Despite genuine public health concerns, a study shows pupils suffered from closures. New research suggests that the isolation and stress associated with online learning may also contribute to young people’s mental health issues. Students with learning disabilities, loneliness, or a lack of resources may find remote courses hard, even when institutions embrace best practices (see Footnote 83). School systems worldwide responded swiftly after Covid-19 was declared a worldwide pandemic in March 2020. Schools all around the globe started shutting down as a precaution. By about mid-April 2020, UNESCO calculated that 1.6 billion youngsters were no longer getting an education in a physical classroom.84 The full impact of this unprecedented global shift toward remote education is unlikely to be felt for years. Some kids may leave school early, while others will not go to the next level of education because they lack the required abilities.

82

Math Scores Dropped in Every State During Pandemic, Report Card Shows, The Wall Street Journal, October 24, 2022. 83 Teacher survey: Learning loss is global—and significant, McKinsey, March 1, 2021. 84 “Why the world must urgently strengthen learning and protect finance for education,” UNESCO, October 16, 2020, en.unesco.org.

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Learning loss could be much worse in affluent countries.85 While formal education is just a small part of achieving success in life, it is significantly linked to higher income and a better quality of life. The need for higher training and degrees is also increasing (see Footnote 83). A recent research by a Stanford University found that learning loss might reduce the lifetime earnings of children in school during the pandemic by $70,000. The somber prediction is based on examining the steep drops in the eighth graders results on national math exams performed between 2019 and 2022. K-12 students will generally become less educated, lower-skilled, and less productive adults and will earn 5.6 percent less throughout their lives than students educated just before the pandemic if the learning losses aren’t recovered. Over this century, he predicted that the losses might reach $28 trillion.86 Business cycle losses will be outweighed by the economic costs of learning losses. Another study saw a decline in scores across the board.87 Eighth-grade arithmetic test results decreased by an average of eight points from 2019, before the pandemic (see Footnote 86). That represents the biggest decline ever seen on the 32-year-old exam and equates to 0.6–0.8 years of lost education. With reductions of nearly 12 points, students in Oklahoma, Delaware, and West Virginia were among the lowest. Utah students didn’t experience a statistically significant fall, while Idaho, Alabama, and Alaska students saw among the smallest declines-four points. Depending on the state, the drops could result in lifetime income losses of between 3 and 9% (see Footnote 86). The above analysis concurs with one published in October by Harvard University and Dartmouth College academics, who calculated that if the learning loss isn’t reversed, the average K–12 student’s lifetime earnings will fall by 1.6%. The study also discovered that learning loss increases teen pregnancies, arrests, and incarceration while decreasing high school graduation rates and college enrollment. The proportion of eighth-grade children who failed to demonstrate fundamental math abilities on the exam increased to 38% nationwide from 31% before the pandemic. Those pupils frequently have difficulty solving straightforward algebraic and geometrical equations, such as finding the angles in a triangle. “I think these eighth-graders are, potentially, in a difficult spot.”88 Math instruction suffered during the pandemic’s remote learning periods and frequently relied on memorization and mimicry rather than a deeper understanding

85

McKinsey in “Why the world must urgently strengthen learning and protect finance for education,” UNESCO, October 16, 2020, en.unesco.org. 86 Eric A. Hanushek, a Stanford University economist in “Why the world must urgently strengthen learning and protect finance for education,” UNESCO, October 16, 2020, en.unesco.org. 87 The Nation’s Report Card, aka as the 2022 National Assessment of Educational Progress, USA. 88 National Center for Education Statistics, USA in The Nation’s Report Card, aka as the 2022 National Assessment of Educational Progress, USA.

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of concepts.89 Students struggled to participate in group activities, took longer to understand ideas this year, and needed more tutoring. Of the approximately 2 billion school-age children in the world, 1.6 billion missed a sizable amount of class time due to the epidemic.90 Less education was gained, fewer skills were acquired, and adult unemployment rates were greater for kids who took classes online than those who attended schools. Younger kids and those from lower-income homes were more affected.91 When people reached the ages of 30–40, individuals who had missed regular classes earned 3.2% less on average for males and 1.9 percent less on average for women.92

6.2.2

What Did Work?

The concept of reimagining education through technology is not new. A series of inventions that promised to revolutionize education have failed to do so. While information technology has altered the landscape of other industries, it has had little effect on education. There is no connection between nations’ expenditure on information technology and the math, science, and reading skills of their 15-yearolds (see Footnote 104). Two factors, though, are causing the stasis to break. The first is that “EdTech” is becoming more capable of sophisticated interactions with students. Research studies have established that technology facilitates better learning. Recent research says that software that replicates the responsive function accelerates children’s learning instead of simply reeling out questions and answers. The second factor is based on the experience of a growing number of schools that do not just blindly superimpose EdTech to current procedures but reimagine how students and instructors spend their time. In both cases, it seems as though productivity has risen. Education reformers have long predicted the death of the “factory model,” in which students of the same age group learn from the same instructor similarly. Yet, the approach continues to be used today, and it seems to be on the verge of extinction, at least in certain parts. Psychology, cognitive science, and other fields of study provide pragmatic wisdom on the “science of learning.” Two fields of research influence the development of new technology. Artificial intelligence (AI) enables machines to learn about the students who use them by analyzing the data generated during the procedure (see

89

National Council of Teachers of Mathematics in The Nation’s Report Card, aka as the 2022 National Assessment of Educational Progress, USA. 90 UNICEF, 2021 in Pandemic Learning Loss Could Cost Students $70,000 in Lifetime Earnings, The Wall Street Journal, December 27, 2022. 91 Norwegian School of Economics in Bergen, Norway in Pandemic Learning Loss Could Cost Students $70,000 in Lifetime Earnings, The Wall Street Journal, December 27, 2022. 92 Pandemic Learning Loss Could Cost Students $70,000 in Lifetime Earnings, The Wall Street Journal, December 27, 2022.

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Fig. 6.13 Computer based training helps. Source J-PAL a group at MIT in Technology is transforming what happens when a child goes to school, The Economist, 22 July 2017

Footnote 94). Artificial intelligence’s branch of machine learning, which allows computers to detect patterns they were not expressly taught to recognize, is wellsuited for this technique. Newer programs developed worldwide employ machine learning to identify pupil-specific error and strength patterns. Rapid advancements in speech recognition and generation may enable such concepts to be developed further. A paper published by an MIT team examined the evidence of what works in terms of poverty alleviation, reviewing several randomized controlled trials, including educational technology. For the most part, students taught using adaptive software outperformed their conventionally tutored counterparts in all 41 studies conducted on the topic, except for one(see Footnote 101). The study also found that language scores were higher93 (Fig. 6.13). Additionally, Indian pupils performed the best in language and math among developing nations—and for less than a third of the cost of attending a government-run school.94 According to the findings, individuals who were least well-served by the existing system benefitted the most from it—those who had the worst academic records previously experienced higher advancements. It’s hard to envision students not benefitting if schools effectively combine personalization with rigor. Teachers will not be replaced by education software, and

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J-PAL a group at MIT in Technology is transforming what happens when a child goes to school, The Economist, 22 July 2017. 94 Technology is transforming what happens when a child goes to school, The Economist, 22 July 2017.

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if anything, it emphasizes the importance of the teaching craft. That would be a positive development for both the classroom and the staffroom. As a 12-year-old put it, “too many teachers are just trying to get to the end of the day.” There’s hope for the 12-year old; EdTech can make up for bad teachers. “Books will soon become obsolete in schools,” Silent films, according to Edison’s prediction in 1913, would take their place. Radio, television, and computers have all sparked similar predictions as new waves of information technology have emerged. Each time, books, classrooms, and instructors have shown remarkable resiliency in the conventional technology. As with teachers, digital educational technology takes on various forms, ranging from outstanding to terrifying. However, technology deserves a larger place in education when correctly utilized, especially in impoverished nations where human instructors are often absent, ignorant, or both. All children in the world should have completed elementary education by 2015, according to the United Nations’ Millennium Development Goals. It has been accomplished to a large extent: At this point, nine out of 10 kids are in the school. Unfortunately, the number isn’t as remarkable as it first seems. Most children go to school, yet they learn very little or nothing. Most nine-year-olds in Sub-Saharan Africa cannot read even essential words, according to a new World Bank survey of seven nations in the region. The cause for this is inadequate instruction. Only 7% of instructors had the minimum essential expertise needed to teach reading and writing successfully. Inspections revealed that teachers were missing more than half the classrooms.95 Increasing teacher salaries to recruit better teachers is not the solution. Teachers in low-income nations are well-paid by local standards; in India, their yearly wages are four times the GDP per person, while in Nigeria and Kenya, they are five times (Fig. 6.1496 ). Teachers in OECD nations earn between 75 and 150% of GDP per capita. Neither does an increase nor decreases in pay appear to affect learning outcomes significantly: Learning results were not affected by a significant decrease in Pakistan in the late 1990s or a significant rise in Indonesia after 2005. In terms of absenteeism, governments would fire highly paid staff who do not show up to class. It’s a lot easier to say than it is to accomplish. Governments in developing countries sometimes lack the means to supervise instructors in remote areas. Teachers’ unions are also strong in many nations, and governments dread their fury, ensuring that the employment of its members is secure. Current studies indicate that educational technology can be beneficial, and it appears to have a more significant impact in developing nations than on developed ones. Technology was the most effective in studying several stimuli in developing nations—such as nutritional supplements, lower class sizes, deworming, and teacher and pupil rewards. As a result, some of the limited resources presently allocated to instructors might be effectively allocated to educational technology.

95

World Bank in How technology can make up for bad, absent teachers in poor-country schools, The Economist, 17 November 2018. 96 Center for Global Development in How technology can make up for bad, absent teachers in poorcountry schools, The Economist, 17 November 2018.

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Fig. 6.14 Primary school teacher salaries. Source Center for Global Development (2018)

But it doesn’t imply equipping schools with computers and expecting students to learn how to use them, which would be a costly blunder. Instead, it means providing schools with software that children can use with little help from an adult, which gets things right more often than teachers do, adapts to the child’s ability, and prompts teachers about what they should be teaching. Authorities can also monitor whether teachers are in the classroom using this software, if necessary. Skeptics can question whether the most impoverished areas lack the necessary infrastructure. On the other hand, Africa is electrifying rapidly; in only three years, electricity coverage in Kenya has risen from 27 to 55% of homes. Solar chargers can be used in areas where the grid is unavailable. Internet access is not required in schools, and devices can be taken to locations with internet access to upload/download vital data. Cost is a non-issue. One of the most effective programs, Tusome (“let us read” in Kiswahili), costs around $4 per year per kid in Kenya, administered in all public elementary schools (see Footnote 97). The government’s commitment is the most critical factor: Success is more likely to occur when people are enthused about something. Technology, on the other hand, is not a panacea. Excellent traditional educators are not and will never be obsolete. However, educational technology can significantly assist—by keeping an eye on both pupils and instructors, aiding the best tutors, and making up for the inadequacies of the worst ones.97 Additionally, authorities must hold educators accountable.

97

How technology can make up for bad, absent teachers in poor-country schools, The Economist, 17 November 2018.

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Extensive research findings are coming out on the effectiveness and versatility of online learning. The recent worldwide lockdown highlighted the advantages of distance learning. Students could continue their education off-campus through virtual learning apps, providing an example of how to do things differently in the future. Indeed, several analysts predict that online education will continue to grow in popularity. Supporters think that online education will revolutionize education, allowing millions of individuals to access life-changing educational possibilities at a low cost. However, some critical questions remain unanswered. For instance, does an online education compete with traditional classroom instruction? Additionally, do employers value online credentials? During the lockdown, colleges, as well as schools, shifted to online education. Education did not come to a halt during the lockdown. Rather, it went online. Virtual tutoring platforms and learning management systems have been deployed in schools and universities throughout the country. Many schools have found Google Classroom to be a helpful tool. It is a free application that acts as a one-stop shop for online education. Google Classroom includes video conferencing for one-on-one tutoring, virtual classrooms, and a shared drive system to store learning materials or work assignments. It had over 50 million downloads during the lockdown, making it the top educational app. Numerous academic organizations were caught off guard by the shift to online learning. Challenges of transitioning to online education included the digital divide and inequity in preparedness. Fortunately, several administrators rose to these new challenges with aplomb. Eight thousand new Wi-Fi hotspots have been purchased in New Orleans, with another 6000 on the way in the coming months. Public subsidiaries help kids acquire computers and other internet-enabled gadgets they may need in school. Uneven internet access exacerbates socioeconomic disparities, as the lockdown demonstrated. Many individuals are now questioning the very idea of internet accessibility. According to some, it is a necessary facility, if not a fundamental human right. The Supreme Court of India has declared internet access a fundamental right. The decision is consistent with the United Nations’ recommendation that all countries make internet access a fundamental right.98 The World Bank-funded initiatives have already spent over $1 billion in emerging African nations, including Burundi, the Democratic Republic of Congo, Liberia, and Gabon, to improve their digital infrastructures. By the end of the year, 35 landlocked and island countries will have developed affordable internet connections for all their people (see Footnote 99). Online education has become more popular, but the choices for study remain somewhat restricted. Before the epidemic, only around 10% of French higher education courses were offered online. Since then, the number has increased, though

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Internet accesses a fundamental right, Supreme Court makes it official: Article 19 explained, India Today, January 10, 2020.

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most courses emphasize skills for white-collar jobs. A consequence of this is that those seeking professions like mechanical repair or carpentry are limited in their options. As a result, they must put their skill upgradation on hold for the foreseeable future (see Footnote 99). If online learning achieves its full potential, the course selection must become broader based. When faced with a highly competitive employment market, some students choose to postpone their education by enrolling in less desirable programs. That is to say, there is still a long way to go before online education is accessible to everyone. However, there is cause to be sanguine. Students may learn practical skills without ever having to set foot in a workshop or laboratory, thanks to advances in robotics, virtual reality, and augmented reality. Similarly, medical students and prospective surgeons may now learn virtual reality through simulators without stepping into hospitals.99 A report on e-learning recently examined how universities adhere to e-learning standards and identify areas for future improvement. Significant challenges include integrating curriculum components that do not fit the online model, such as laboratory work and other hands-on training.100 However, the report strongly votes for distance learning and should reassure those still on the fence about enrolling in an online program. The report makes it abundantly clear that there is no reason to be skeptical about the quality of online education. Additionally, it highlights several of the additional benefits that online students enjoy, such as flexibility and affordability. Without a doubt, the pandemic has inspired education reform. Large-scale shocks have occasionally improved education. The Second World War gave birth to the Butler Act in the United Kingdom, increasing the number of years of compulsory schooling and abolishing many state school fees. Following the devastation caused by Hurricane Katrina, officials in New Orleans embarked on sweeping school reforms. Graduation rates increased 9–13 percentage points nine years later (see Footnote 106). Covid-19 disrupted education comprehensively. By mid-April 2020, over 90% of the world’s students were locked out of classrooms. Closures have lasted months, jeopardizing children’s education, safety, and well-being (Fig. 6.15). However, as children in wealthy countries return to their classrooms, reformers hope that the shock will result in enduring changes that make schools more efficient, flexible, and equitable. Nonetheless, there were reasons to suspect that the developed world’s schools ran out of steam even before the pandemic. The OECD’s tests across developed countries reveal that children are generally performing no better than they were two decades ago, despite increased spending per pupil (its analysts also find that

99

The Versatility and Effectiveness of Online Learning, Keystone Online studies, Ashley Murphy, September 15, 2020. 100 ENQA (“European Association for Quality Assurance”) in Higher Education in How Covid-19 is inspiring education reform, The Economist, 24 June 2021.

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Fig. 6.15 Learning lost, months. Source OECD (2021)

those with the lowest scores have been kept out of schools due to prolonged closure as (Fig. 6.16) shows. Numerous individuals are uninterested, and Gallup pollsters found that only one-third of older high school students in the United States felt “engaged” by their classes before the pandemic (see Footnote 106). Covid-19 and the closure of school buildings compelled teachers to quickly transition to remote learning, cobbling together online teaching platforms using business tools (above figure). Curriculums have been pared down to their essential components. Several countries, including the United Kingdom, France, and Ireland, postponed significant exams. Many American schools abandoned grades

Fig. 6.16 Effectiveness of remote learning. Source OECD (2021)

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Fig. 6.17 The brutal impact of school closures

entirely for a portion of the 2020 school year, reverting to pass/fail. Online education has been “something between disappointing and disastrous” for most families in America.101 According to global statistics, children have learned considerably less than they would have in the regular run of events. England elementary school students were almost three months behind schedule by March 2021. Similar lags were discovered last summer in children in Belgium. In the first half of 2020, a study of students in the Netherlands discovered that the average pupil learned nothing new during eight weeks of remote learning (see Footnote 106). The most vulnerable children have suffered the most. According to a Dutch study, children with low-education parents experienced a more than 50% greater learning loss. By autumn 2020, eight- and nine-year-olds in Ohio would be approximately a third of a year behind their peers in English. Black students’ test scores fell nearly 50% faster than white students (Fig. 6.17). School closures have emphasized the critical nature of in-person education for children’s mental and physical health. When school buildings in Italy were closed, children ate less than the norm. Child abuse reports have decreased significantly due to teachers—who are frequently the first to notice—not seeing their students in person. Nonetheless, some rays of hope have emerged. The crisis has strengthened relationships between teachers and parents, which has increased attendance rates

101

MIT in How Covid-19 is inspiring education reform, The Economist, 24 June 2021.

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and thus academic performance. Over half of American school leaders surveyed recently stated they were closer to parents than before school buildings closed.102 The crisis has accelerated the adoption of technology in a field that had previously been slow to do so. There has been a more than twofold increase in venture capital investment in educational technology firms, from $7 billion in 2019 to approximately $16 billion in 2020.103 There is evidence that some children, especially those who suffer from chronic angst or are bullied, do better when they learn remotely. Video conferences and chat rooms have proven less frightening for shy students, generally afraid to speak out in class. Closures of schools have increased public awareness of inequity. England teenagers from low-income backgrounds had fallen behind academically by 18 months, even before the flu epidemic. The mathematics abilities of the highest and lowest achieving American children are growing increasingly disparate. According to the report, outsiders have become clearer how poverty outside the school gates impacts a child’s capacity to profit from what occurs within as they see instructors struggle to provide computers, Wi-Fi dongles, and lunches to their disadvantaged pupils. It is not too early to consider how this could improve future school systems. The experiences of Covid-19 are likely to encourage reformers who argue that schools must do more to foster children’s resilience, which will aid them in coping with shocks. Remote learning is challenging for pupils used to spoon-feeding before the pandemic.104 Efforts to assist children in regaining lost knowledge are the first significant opportunity to lay the groundwork for a more equitable system. Numerous governments believe that increasing one-on-one or small-group tutoring will benefit struggling students, backed by compelling evidence. A recent study conducted in the United Kingdom discovered that 12 h of tutoring could advance a child’s math skills as much as three months of traditional schooling. Tutoring receives a large portion of the £3 billion invested by the government in reviving education in England (see Footnote 106). Teachers recognized long before Covid-19 that material delivered to the entire class at the start of lessons could be taught via prerecorded videos.105 Some particularly engaging teachers were tasked with creating video lessons that could be shared with all students. In contrast, others focused their efforts on assisting individual students. This type of shift would allow teachers to spend less time lecturing in the classroom and more time assisting students in applying previously acquired knowledge. It may be especially advantageous for those who are falling behind.

102

Johns Hopkins University in How Covid-19 is inspiring education reform, The Economist, 24 June 2021. 103 Holon IQ in How Covid-19 is inspiring education reform, The Economist, 24 June 2021. 104 OECD in How Covid-19 is inspiring education reform, The Economist, 24 June 2021. 105 Christensen Institute in How Covid-19 is inspiring education reform, The Economist, 24 June 2021.

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There are numerous reasons to be skeptical about schools’ ability to recover quickly and ultimately from the pandemic. The educators are worn out, and the unions-authority relationship has deteriorated. Governments are enforcing fiscal austerity measures. Parents who have juggled full-time work and full-time child supervision and education are desperate to give their children more time, not less.106 However, the rapid adoption of remote learning demonstrates that schools can dramatically change. Reforms that appeared frightening at one point now appear trivial in comparison with that. A strong case for blended learning: Blended learning has become an imperative need for online education. Blended learning is an educational approach that combines online educational materials with traditional face-to-face classroom methods. The real challenge in education reform is that of the digital divide, particularly in developing countries, its devastating effect on learning, and the long-term consequences for society. Online education is pervasive; it’s upending conventional education, although there is no threat to that happening soon. Nearly a third of graduate education in the United States is now delivered online.107 Universities committed to blended learning will consider developing a digital library of high-quality lessons integrated with the Learning Management System (LMS) to create a Blended Learning System. All stakeholders (students, faculty, and university) should win. According to studies, low-income students do worse in online courses than in traditional classroom settings. Nearly one out of every eight children in the United States does not have access to a desktop or laptop/computer. There may also be an additional 648,000 high school dropouts (see Footnote 84). In contrast to entirely online or face-to-face learning, research suggests that blended learning experiences result in better student performance (Siemens et al., 2015). Blended learning is utilized in higher education to “facilitate a simultaneous independent and collaborative learning experience.” Students enrolling in these courses need this inclusion if they are to be satisfied and successful (Garrison & Kanuka, 2004; Gosper et al., 2008). The productivity of faculty members should increase with the blended mode. Rather than preparing PPTs (which may vary by faculty), faculty can focus on supplemental lessons, practical examples, and use cases to provide students with a more holistic teaching experience. Additionally, faculty should be given more time to focus on research, which is critical for increasing the university’s intangible net worth. Possessing a robust digital library of lessons will serve as an excellent source of intellectual capital and a vital intangible asset that will serve as a significant differentiator. Going digital also liberates universities from campus constraints; the University of Illinois (UoI) has 99 MBA learners, whereas 1750 more are registered online. Most online degrees are comparable to on-campus

106

How Covid-19 is inspiring education reform, The Economist, 24 June 2021. Richard Garrett of Eduventures Inc. in How Covid-19 is inspiring education reform, The Economist, 24 June 2021.

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programs, if not more expensive. A by-product of blended learning frees up faculty time for research. As a result, it is possible to hold faculty accountable for increased research output. The resulting increase in university research output will be significant.

6.3

Digital Divide

The digital divide is a term that refers to the chasm that exists between those who can use the internet and those who cannot (Smith, 2002). Traditionally viewed as having or not having access (Bukht & Heeks, 2017), with over 95%108 of the world’s population owning a mobile phone, it has evolved into relative inequality between those with more or less bandwidth and greater or lesser skills. Recent studies have quantified the digital divide in terms of available bandwidth per individual (in kbit/s per capita) rather than technological devices (Hilbert, 2016). Access may be determined by age, gender, socioeconomic status, education, income, ethnic origin, and location (Jenkins, 2009; Wei & Hindman, 2011). New forms of connectivity are never introduced to society rapidly and uniformly but slowly spread through social networks. The digital divide in terms of kbit/s does not decrease monotonically but rather widens with each innovation. For example, the widespread adoption of narrow-band internet and mobile phones in the late 1990s increased digital inequality, as did the initial deployment of broadband DSL and cable modems in 2003–2004 (Hilbert, 2013). Communication capacity was more unequally distributed in the mid-2000s than in the late 1980s, when fixed-line phones were the only option. The recent increase in digital equality is due to the widespread adoption of cutting-edge digital technologies (such as 3G, 4G, 5G, and fiber optics) (SciDevNet, 2014). Rather than tracking various types of digital divides such as fixed and mobile phones, narrow- and broadband Internet, and digital television, it has been suggested recently to measure the kbit/s per user. This method has demonstrated that the digital divide in terms of kbit/s per capita is growing in relative terms: While the average resident of the developed world had approximately 40 kbit/s more bandwidth than the average citizen in developing countries in 2001, this disparity increased to more than 3 Mbit/s per capita in 2010.109 With the advancement of new communication technologies, the term “digital divide” acquired a new meaning: “the digital divide—the divide between those with access to new technologies and those without.” While there is a digital

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“Overview of ITU’s History (8)”. International Telecommunication Union. Retrieved November 23, 2020. 109 “Mapping the dimensions and characteristics of the world’s technological communication capacity during the period of digitization”, Martin Hilbert (2011), Presented at the 9th World Telecommunication/ICT Indicators Meeting, Mauritius: International Telecommunication Union (ITU); free access to the article can be found here: http://www.itu.int/ITU-D/ict/wtim11/docume nts/inf/015INF-E.pdf.

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Fig. 6.18 Household with internet access, %. Source World Bank, OECD, National statistics in Rubin (2010)

disparity between advanced and poorer nations, internet availability shows divergence among rich nations (Fig. 6.18110 ). One telling statistic is that “as income rises, so does Internet use …,” strongly implying that the digital divide persists partly because of income disparities (Rubin, 2010). The digital divide is frequently caused by poverty and economic barriers that restrict people’s access to and use of newer technologies. Education: In low-income school districts, the digital gap harms children’s capacity to learn and develop. Students will not acquire the essential technical abilities to comprehend today’s dynamic economy if they do not have access to the internet.111 FCC’s Broadband Task Force found that roughly 70% of instructors give coursework that necessitates broadband connectivity.112 About 65% of students use the internet at home to complete homework and communicate with instructors and classmates via discussion boards and shared files. Around half of students say they can’t do their assignments because they can’t go online or, in some instances, find a computer to use (see Footnote 112). It has resulted in a new finding: 42% of learners say they got poor results from this issue (see Footnote 112). Further research by the Center for American Progress shows that if whitenative-born students and black and Hispanic students in the United States could

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World Bank, OECD, National statistics in Rubin, R.E. (2010). Foundations of library and information science. 178–179. New York: Neal-Schuman Publishers. 111 “Digital Divide: The Technology Gap between the Rich and Poor”. Digital Responsibility. Retrieved April 17, 2017. 112 “The Homework Gap: The ‘Cruelest Part of the Digital Divide’”. NEA Today. April 20, 2016. Retrieved April 17, 2017.

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close the achievement gap, the US GDP would increase by 5.8%—or almost $2.3 trillion—by 2050.113 Gender disparity: Learning technology is geared toward men rather than women.114 This is because males make up the majority of software developers and programmers, and they convey their learning software in a way that matches how their counterparts receive it. The association of computers with education is typically associated with the male gender, which affects women’s education in computers and technology (Cooper, 2008). There is a slew of learning software for women and girls who want to acquire computer skills. As youngsters become older, the gender gap widens, and females are less likely to pursue degrees in IT or computer science. In 1990, females held 36% of computing jobs; by 2016, that figure had dropped to 25%. Women’s underrepresentation demonstrates this in high-tech hubs like Silicon Valley (Mundy, 2017). Algorithmic bias has been found in the machine learning algorithms used by major corporations. Amazon was compelled to withdraw a recruitment algorithm for software engineers and other technical positions in 2015. Consequently, it was found that Amazon’s machine learning algorithms were biased against female candidates by giving preference to male applicants’ CVs over females. This happened since Amazon’s computer models have been programmed for over ten years to detect resume patterns. Throughout these ten years, male candidates submitted most resumes, reflecting male dominance in the technology industry (Dastin, 2018). Disparities in demographics: Furthermore, according to the 2012 Pew Report “Digital Differences,” only 62% of households earning less than $30,000 per year have access to the Internet, compared to 90% of households earning between $50,000 and $75,000 per year. Additionally, only 51% of Hispanics and 49% of African Americans have high-speed internet at home. This compares to 66% of Caucasians who have high-speed internet access.115 In aggregate, 10% of Americans lack access to high-speed Internet, or nearly 34 million people (Kang, 2016). The rapid digital expansion has excluded those who fall into the lower class.116 60% of the world’s population, or nearly 4 billion people, lack access to the internet and are thus disadvantaged (Elliott, 2016). Another telling metric is the rapid growth of mobile broadband subscriptions, which reached nearly 111 active subscriptions per 100 people in developed countries and 61 in developing countries in 2018. In the same year, with 3.9 billion people online, half (51.2%) of the world’s population reached the internet

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“The Digital Divide in the Age of the Connected Classroom | NetRef”. NetRef . January 14, 2016. Retrieved April 17, 2017. 114 Princeton University in Cooper, J. (2008). “The digital divide: the special case of gender” (PDF). Journal of Computer Assisted Learning (22). 115 “Digital Divide: The Technology Gap between the Rich and Poor”. Digital Responsibility. Retrieved April 17, 2017. 116 Guardian in Elliott, Larry (January 13, 2016). “Spread of internet has not conquered ’digital divide’ between rich and poor—report”. The Guardian. ISSN 0261-3077. Retrieved April 17, 2017.

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Fig. 6.19 Digital disparity, internet use, % of population. Source UNCTAD, based on ITU Statistics database (https://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx)

milestone.117 Today, the divide has worsened. For example, in Least Developed Countries (LDCs), only one in every five is online, compared to four in every five in developed countries. Most internet use growth occurs in developing countries, which account for approximately 90% of global growth, with the LDCs experiencing the fastest growth (Fig. 6.19118 ). The growth of internet use has slowed in recent years, indicating that many low- and middle-income countries (LMICs) still have room for improvement. Limited internet access is impeding the digital economy from scaling. The slowing growth of new online users is partly due to their inability to afford a primary internet connection and associated devices. In general, only 40% of LMICs have affordable internet access. Around 2.3 billion people live in countries where one-gigabyte mobile broadband plans are unaffordable to individuals earning an average income. Africa has the highest average cost of internet access among developing country regions (see Footnote 117). Inclusive connectivity: In both developed and developing nations, broadband (or high-speed) internet connection is no longer an option; it is instead a need. As a potent tool for providing essential services like education and health care, it also expands possibilities for environmental sustainability and women’s empowerment while also helping to improve government accountability as well as transparency. Additionally, it contributes to the social well-being of society, both locally and globally.

117

Digital Economy Report, 2019, United Nations Conference on Trade and Development (UNCTAD), 2019. 118 UNCTAD, based on ITU Statistics database (https://www.itu.int/en/ITU-D/Statistics/Pages/ stat/default.aspx).

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Only 35% of people in developing countries have access to the internet (vs. around 80% in advanced economies). The challenge is to ensure that everyone has broadband access. As new wireless technologies have emerged, broadband has evolved into a basis for smart infrastructure (such as Intelligent Transportation Systems and Smart Electric Grids). It has the potential to stimulate job creation in engineering, information and communication technology (ICT), and other industries and catalyze job skill development, a critical component of shared prosperity and reducing poverty. The growth of task-based employment through online outsourcing platforms, which is projected to create millions of jobs and billions of dollars in income over the next several years, may also be aided by the internet. The global GDP would rise by $2 trillion, and over 140 million jobs would be created if internet access was extended to 75% of the population in all emerging economies (from the existing 35%) (see Footnote 119). Increased internet availability throughout the country is a challenge, especially in rural regions. Even though “digital divides” are present across nations and regions, the poor and rural areas are disproportionately affected. For instance, whereas broadband penetration in Organization for Economic Cooperation and Development (OECD) members is comparable to that available in capital cities of India, Moldova, and the Kyrgyz Republic, the rural areas of these countries experience one of the lowest internet penetrations in the world. Private investment may be used to complement public investment in broadband expansion. These investments have more social value than private value, especially in rural regions with high expenses and low profits.119 The digital divide in India: Numerous Indians are in a pickle. Up to 80% of Indian students could not attend online classes during the lockdown, and many would not return to schools when they reopened.120 This is one instance of how the epidemic has widened the digital gap in India—the gap between those who can use the internet to derive benefits and those who can’t, which exacerbates already high levels of inequality while hindering economic development. While the divide is not unique to India, it is especially pronounced in a country where over half of the 1.3 billion-strong population is under 25 years of age. Services like banking, schooling, medical consultations, and job searches migrated online when India announced lockdowns in 2020, and they are still there nine months later. Numerous businesses regard “work from home” as the new standard. The Indian government predicted before the outbreak of the epidemic that digital transformation might unleash up to $1 trillion in economic value in the country over the following five years. On the other hand, the crisis unequally distributes these advantages and aggravates socioeconomic disparities, with females suffering more than males and rural regions suffering more than cities. About 600 million

119

Connecting for Inclusion: Broadband Access for All, World Bank. Oxfam in India’s New Class of “Digitally Poor” Citizens, Vrishti Beniwal, Bloomberg, Dec 17, 2020.

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internet users exist in India, making up more than 13% of all users globally, to be the world’s second-largest internet users. However, just 20% of Indians are familiar with using internet devices, with half of the country’s population being “internet-illiterate.” India’s economic output is linked to internet connectivity. For every increase of ten percent in internet traffic, the country’s per-capita gross domestic product rises by 3.1%.121 However, the benefits of those gains are not being shared equally: Less than 5% of the population is served by government-run digital literacy initiatives, which are focused on rural regions and face a variety of design and implementation challenges (see Footnote 122). The digital revolution increased the trading ability of services and made it possible for India to develop quickly in contrast to China using a distinct growth strategy, but the digital divide now constrains this growth. India is at risk of losing a generation due to a virus that forces children to work. In the digital revolution, China has narrowed the gap with the United States, but India still has some distance to travel.122 People in India who aren’t computer savvy may have lost out on online employment chances. Increased investment in digital infrastructure will be necessary to close the digital divide.123

6.3.1

The Pandemic Deepens the Digital Divide

Disrupted schooling deepens inequality: “Achievement gaps will become achievement chasms” is a frequently quoted warning.124 McKinsey analysts estimate that if in-person instruction is not resumed soon, the average American student will lose 6.8 months of learning. There may also be 648,000 more high school dropouts in the future (see Footnote 128). If this were to happen, black children would be disproportionately affected, as would impoverished pupils who would be more than a year behind because of the loss of teaching. We won’t know the full depth of the educational consequences for a long time, which will show itself in future decisions like leaving high school or university. Standardized exams in overcrowded school halls have also been affected, which could have provided better clarity of students’ academic strengths. The evidence that is currently available does not appear to be encouraging.125 According to research conducted by five education scholars, American students will know 30% less about reading and 50% less about math than in a normal period of education. Despite this, the top third of students improved in reading. According

121

Indian Council for Research on International Economic Relations in India’s New Class of “Digitally Poor” Citizens, Vrishti Beniwal, Bloomberg, Dec 17, 2020. 122 India’s New Class of “Digitally Poor” Citizens, Vrishti Beniwal, Bloomberg, Dec 17, 2020. 123 World Bank in Why America has done such a poor job of keeping schools open, The Economist, 19 Jan 2021. 124 Centre on Reinventing Public Education in Why America has done such a poor job of keeping schools open, The Economist, 19 Jan 2021. 125 Why America has done such a poor job of keeping schools open, The Economist, 19 Jan 2021.

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513

Fig. 6.20 US, school-student participation in online maths coursework, 2020. Source Opportunity Insights in Disrupted schooling will deepen inequality for American students, The Economist, August 29, 2020

to a Harvard University economic research group, students from low-income areas fell chronically behind in online math courses when lockdowns started in March. In contrast, those from wealthier neighborhoods quickly recovered126 (Fig. 6.20). Disturbances to education typically result in lower achievement and increased inequality. However, it is uncommon for many such shocks to coincide. Education is now almost done entirely online (sputtered in classroom learning has started recently with Omicron hovering in the background), to begin with. Virtual education attempts in the United States have failed in the past. A study of virtual public schools in Georgia revealed poorer test scores and a 10-percentage point drop in graduation rate. Children of black and Hispanic descent seem to have poorer outcomes.127 Then there is the issue of online class access. Almost half of the Native American kids are without computers or internet at home; thirty-five percent of black and Hispanic children suffer the same fate. In comparison, 81% of white school kids fully enjoy such access. Deteriorated mental health in children from lowincome households harms their ability to succeed. According to a recent study, anxiety and depression were prevalent among Philadelphia hourly service industry employees with young children. In the event of a school closing, children from low-income families are deprived of the last-resort social institution—one that

126

Opportunity Insights in Disrupted schooling will deepen inequality for American students, The Economist, Aug 29, 2020. 127 Brown University in Disrupted schooling will deepen inequality for American students, The Economist, Aug 29, 2020.

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serves as a source of education, food, counseling, and clothing—while wealthy students remain more protected.128 Closing schools has hit the poorer children. The New York City public school system now has 31,000 fewer students than in 2019; Austin, Texas, has a 6% smaller enrollment. There are significant racial disparities in the types of instruction received: 70% of black and Hispanic children receive an entirely remote education, compared to 50% of white students. Parents who have the financial means to do so appear to be withdrawing their children from public education entirely. Rather than that, parents are hiring private tutors to teach their children individually. This almost certainly will contribute to the widening of the achievement gap.129 Months of remote learning are now widely acknowledged to have harmed poor children more than their wealthy peers. According to a Pew Research Center survey published in October, 53% of low-income students took all of their classes online, while just 40% of students from the wealthiest families did so.130 However, America’s uneven return to school for in-person education risk exacerbating these inequities. Suburban and rural districts are significantly more likely to offer in-person education than large urban districts, which are more frequently served by poor and minority families. The pandemic is increasing educational disparity. Educational inequality is worsening due to the pandemic. Children from low-income families were twice as likely as their wealthier counterparts in 2018 to drop out of school without the basic credential in English or mathematics. That chasm has undoubtedly grown broader following months of coronavirus-related school closures. For several lowincome learners, online classes are an inadequate replacement for face-to-face instruction. Before the epidemic, a significant achievement gap existed between wealthy and low-income pupils. With children barred from classrooms, the majority of learning has shifted online. For some, the transition has been easier than for others. About two-thirds of private schools in the UK currently have online learning platforms, compared to only a quarter of the poorest-funded public schools.131 Many less-privileged students are forced to share laptops with family members or use their cellphones to access educational resources. Nearly one out of every eight youngsters in the

128

Disrupted schooling will deepen inequality for American students, The Economist, Aug 29, 2020. 129 Shutting schools has hit poor American children’s learning, The Economist, 19 December 2020. 130 Pew Research Center in Shutting schools has hit poor American children’s learning, The Economist, 19 December 2020. 131 Sutton Trust in Shutting schools has hit poor American children’s learning, The Economist, 19 December 2020.

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United States does not have access to a desktop or laptop computer.132 Some students are unable to attend lessons at all. This is an issue that affects both developed and developing nations. Even those that are proficient in using the internet will inevitably lag. In a study133 conducted by Harvard and Brown University researchers, the online math platform Zearn by American schoolchildren after March (after the schools closed) was directly related to the median household incomes in the surrounding neighborhood, and success on online tests revealed an even greater disparity.134 Many kids will likely miss the physical framework of a conventional classroom. Distance learning requires a higher level of self-direction and intrinsic motivation than in-person education.135 This may be particularly problematic for students from low-income backgrounds who are more worried about earning their livelihood. Educated parents are more inclined to encourage their children to study for learning, and they are also more prepared to help their children succeed in the classroom if necessary. It’s doubtful that things will get better once students are back in the classrooms: According to the Institute for Fiscal Studies, a British think tank, impoverished parents were less inclined than affluent ones to have their children return to school at the earliest. While online education has widened the disparities, preexisted inequities have worsened. Few parents are keen to see their wards go back to full-time school when they open fully. Sixty-five percent of American parents wanted their children to get some form of online education (the majority (46%) chose only online learning, while the remainder (19%) wanted both online and face-to-face learning). Online schooling dissatisfies white parents the least. Only 34% of white families prefer completely remote schooling, compared to 59% of black, 58% of Hispanic, and 66% of Asian families. Even though 72% of parents said they were happy with their child’s present learning style in December, just 65% of white parents got their desired model, compared to 85% of black, 80% of Hispanic, and 74% of Asian families. Non-white students are receiving a more significant proportion of online classes, and their parents, on the whole, like it (see Footnote 138). Experts are concerned about the loss of knowledge associated with remote education. On the other hand, schools with a large population of minority pupils are already experiencing difficulties, and these institutions are more apt to be understaffed and overcrowded. On a nationwide math exam, white fourth graders (about nine years old) scored 25 points higher than African–American children and 19

132

US Education department in Shutting schools has hit poor American children’s learning, The Economist, 19 December 2020. 133 The Economic Impacts of Covid-19: Evidence from a New Public Database Built Using Private Sector Data, Raj Chetty, John N. Friedman, Nathaniel Hendren, Michael Stepner, and the Opportunity Insights Team, Harvard University, November 2020. 134 Zearn Inc., Opportunity Insights in The pandemic is widening educational inequality, The Economist, 27 July 2020. 135 The pandemic is widening educational inequality, The Economist, 27 July 2020.

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points higher than Hispanic and Pacific Islander students in 2017. Two years later, compared to forty-two percent white eighth graders (approximately 13 years old), just 22% of Hispanic and 15% of black eighth graders (about 12 years old) could read at or above grade level. Math is also abysmal. For eighth graders, the proficiency rate was just 14% and 20% for black and Hispanic, respectively, whereas it stood at 44% for white students in the same class. These figures do little to instill confidence in the educational system (see Footnote 138). Black and Hispanic Americans have three times the hospitalization rate of whites and are twice as likely to die from Covid-19.136 Asian–Americans have a 53 percent higher death rate than whites.137 Many non-white parents are more concerned about their children’s exposure to Covid-19 than any possible academic loss. According to the CDC, schools aren’t places where the Covid-19 virus spreads. However, they can spread the disease when community rates are greater, and the Covid-19 rate is considerably higher in minority groups. Poor academic achievement, the possibility of infection with Covid-19, and ramshackle facilities prevent many minority families from choosing in-person study as a viable option. This has exacerbated racial disparities in education by limiting access to in-person education. White kids are more likely than their racial minority classmates to access safe in-person teaching even within the same school system. New York City had 12,000 more white pupils in December than black students, despite having around 100,000 more black residents (see Footnote 138). Fewer than 30% of Chicago’s eligible high school students plan to return in March, and those who will return are primarily white. To close the achievement gap, school districts may provide high-dose tutoring—focused sessions with a tutor and 1–4 students three or more times per week throughout the school day, either in person or online. A comprehensive tutoring program for all public schools would cost $49 billion; it is estimated that a focused program for just the poorest schools would cost $26 billion, and it is expected that stimulus money would accelerate initiatives to expand tutoring (see Footnote 138). Online learning can only be as effective as the instructors who implement it. While face-to-face education is best for socializing and other informal elements of education, online education may be better for teaching. Remote learning enables opportunities for feedback and group work that are not always accessible in person via polling capabilities, breakout rooms, and collaboration tools like Google documents.138 And remote capabilities will only improve. According to the state government, remote learning may become a long-term reality in New Jersey, and

136

Center for Disease Control (CDC) in More non-white than white parents prefer remote learning for their children, The Economist, 14 March 2021. 137 Washington Post in More non-white than white parents prefer remote learning for their children, The Economist, 14 March 2021. 138 More non-white than white parents prefer remote learning for their children, The Economist, 14 March 2021.

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Fig. 6.21 Availability of device for learning, by income band. Source US Census Bureau in More non-white than white parents prefer remote learning for their children, The Economist, 14 March 2021

all instructors may be required to undergo remote learning professional development. States may want to follow suit since Covid-19 shows entrenched educational disparities and will be difficult to change. The worrisome aspect of the digital divide is that income seems to determine internet access. More than a few education experts are concerned that the 2020 school closures would leave the most disadvantaged children with no other option than to drop out of school. Covid-19 has had a significant effect on children’s education, as shown by a recent study conducted by the US Census Bureau. Ten percent of children from low-income families in the United States are much more likely to be without adequate access to educational technology. A digital gadget was seldom or never accessible for a child to utilize for educational reasons for the 12.2% of respondents from families earning less than $25,000 (Fig. 6.21139 ). In contrast, the internet was inaccessible for 9.8% of those polled in this income category. A comparison of median family income statistics for the five most affluent and the five poorest states in the United States shows that impoverished children residing in poor states suffer an even larger disadvantage.140

139

US Census Bureau in More non-white than white parents prefer remote learning for their children, The Economist, 14 March 2021. 140 Unequally disconnected: Access to online learning in the US, Brookings Institution, 22 June 2020.

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Worst of all, the study found a significant correlation between race and a child’s ability to access online learning. Nearly nine percent of black respondents said their children seldom or never got access to a computer for educational purposes. Likewise, 6.7% of black participants report that internet access is rarely or never available in their homes (see Footnote 139). There is a significant link between privilege and the availability of fundamental distance learning technologies, regardless of revenue, geography, parental education, or race. For children who are already far behind their peers, policymakers should consider immediate action to minimize the learning gap and further ruin their lives.

6.3.2

Homework Gap—The Unkindest Part of the Digital Divide

Although considerable progress has been achieved in bridging the “digital divide,” inequalities still exist in communities throughout the nation. While multiple attempts have been made to improve low-income school districts’ access to modern technology, there is concern that as more teachers embrace digital learning, “technology will become another way to exacerbate inequities rather than a bridge to narrow them.”141 The “homework gap,” as experts term it, refers to students’ challenges while trying to complete homework assignments without a stable internet connection. As more schools integrate internet-based education into their everyday curriculum, this gap has widened. Three-fourths of school districts are doing nothing to ensure that students access broadband outside of school (see Footnote 141). Around 70% of instructors give homework that necessitates a broadband connection.142 Approximately, 65% of students also utilized the internet at home to do schoolwork, complete assignments, communicate with instructors and other students through discussion boards, conduct online research for a school paper, and work on shared documents. Many schools now use online grading systems so that parents may keep up to date on their children’s academic progress. However, what does this imply for the 5 million families with school-aged children who do not have a high-speed internet connection? (see Footnote 144). Families in these areas are compelled to send their children away from home after school to public libraries to catch up with their homework. Some students may decide to leave their homes and go to a parking lot with free Wi-Fi to finish and upload their assignments. Alternatively, some children are simply incapable of completing the assignment (Fig. 6.22).

141

Consortium for School Networking (CoSN) in The Homework Gap: The ’Cruellest Part of the Digital Divide’, Clare McLaughlin, neaToday, April 2016. 142 Broadband Task Force of the Federal Communications Commission in The Homework Gap: The ’Cruellest Part of the Digital Divide’, Clare McLaughlin, neaToday, April 2016.

6.3 Digital Divide

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Fig. 6.22 Share of households with school-aged children with high-speed internet at home. Source The Homework Gap: The “Cruellest Part of the Digital Divide,” Clare McLaughlin, neaToday, April 2016

Half of some children have confessed to not doing homework because they don’t have access to the internet or computers. Additionally, 42% of children reported a worse mark on an assignment because they didn’t have connectivity. There is a genuine homework gap, and it has long-term implications for students. Students from lower-income families often lack the resources to succeed inside and outside the classroom, creating an unequal playing field.143 The FCC announced plans to enhance its Lifeline program, which provides lowincome families with telephone service. This will allow users to choose between voice and broadband support rather than relying only on voice. This specific change would modernize the program while increasing broadband access for lowincome families with school-aged children. The homework gap is the most brutal aspect of the digital divide.144 The pandemic poses new challenges for disconnected students. As the virus spreads throughout the nation, states and local governments are under increasing pressure on school closure. Many states moved quickly, but the exact number of closures is still a shifting goal since the situation is fluid. At the moment, at least 104,000 schools have been closed, impacting 47.9 million children. Closing

143

Hispanic Heritage Foundation, the Family Online Safety Institute, My College Options in The Homework Gap: The ‘Cruellest Part of the Digital Divide’, Clare McLaughlin, neaToday, April 2016. 144 The Homework Gap: The ‘Cruellest Part of the Digital Divide’, Clare McLaughlin, neaToday, April 2016.

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Fig. 6.23 Poverty and broadband adoption. Source As classes move online during Covid-19, what are disconnected students to do? Brookings Institution, 20 March 2020

schools and switching to online education is essential to stop the virus from spreading, but experts believe it will be challenging to make the change. Using remote learning and online courses exposes the country’s vast digital inequalities, among other challenges, such as providing meals for low-income students and obtaining childcare for essential employees. Simply put, an excessive number of American children lack access to critical internet services (Fig. 6.23). The pandemic has accelerated internet penetration, increasing demand for online classes. Brookings estimates that between 2000 and 2010, internet connectivity improved considerably but dipped after that till 2016, only to go up further. A wired internet connection is not available in 3.1 million school-aged families (14.1%). While some of these households may have a cellular connection, their data plans are inadequate for prolonged online study.145 As the poverty level rises, so does the fall in broadband acceptance. As more schools transition to online learning in response to Covid-19, students already at risk of falling behind will face additional obstacles in staying current (Fig. 6.24146 ). The transformation from traditional education to digital learning will be incredibly challenging

145

National Telecommunications and Information Administration (NTIA) in As classes move online during Covid-19, what are disconnected students to do? Brookings Institution, 20 March 2020. 146 Brookings Institution in As classes move online during Covid-19, what are disconnected students to do? Brookings Institution, 20 March 2020.

References

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Fig. 6.24 Percentage of people able to use internet in India. Source Brookings Institution in As classes move online during Covid-19, what are disconnected students to do? Brookings Institution, 20 March 2020

for low-income communities and communities of color. In Latino or Hispanic and black families, broadband adoption rates are 3.4% and 6.8% behind white homes. Due to the “homework gap,” millions of students without access to broadband internet have not finished their tasks at home. Although new research suggests that the commonly quoted figure of 15% of pupils in this gap—or 12 million students— is overstated, there is no doubt that millions of children continue to lack access to either home broadband or a computer (see Footnote 145). Low-income children and their families confront many challenges, including the homework gap. The reality, however, is that these difficulties are not new. In a developing country like India, the digital divide between men and women is heavily moderated by the location; the rural population fares poorly compared to their urban counterparts (chart; see Footnote 145). The coronavirus pandemic is not establishing broadband as a necessity; it demonstrates that it has always been.147

References Allen, E. (2017). Distance Education Enrollment Report 2017a (PDF). Digital Learning Compass. Allen, I. E., Seaman, J. (2006, November 15). Making the grade: Online education in the United States, 2006 (PDF). Sloan Consortium. Allen, I. E., & Seaman, J. (2013). Changing course: Ten years of tracking online education in the United States. Sloan Consortium.

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Alpert, W. T., Couch, K. A., & Harmon, O. R. (2016). A randomized assessment of online learning. American Economic Review, 106(5), 378–382. Aristovnik, A., Keržiˇc, D., Ravšelj, D., Tomaževiˇc, N., & Umek, L. (2020). Impacts of the COVID19 pandemic on life of higher education students: A global perspective. Sustainability, 12(20), 8438. https://doi.org/10.3390/su12208438 Balaji, S. (2018, March 11). How are India’s biggest EdTech startups winning students? By treating it like a game. Forbes India. Archived from the original on 20 July 2019. Retrieved May 4, 2019. Bettinger, E., & Loeb, S. (2017). Economic studies at Brookings. Bettinger, E., Fox, L., Loeb, S., & Taylor, E. (Forthcoming). Changing distributions: How online college classes alter student and professor performance. American Economic Review. Bukht, R., & Heeks, R. (2017). Defining, conceptualising and measuring the digital economy. Centre for Development Informatics Global Development Institute, SEED. ISBN 978-1-90546962-8. Center for Global Development. (2018). How technology can make up for bad, absent teachers in poor-country schools, The Economist, November 17, 2018. Center for Global Development. (2020). Economist in School closures in poor countries could be devastating, The Economist, July 18, 2020. Cooper, J. (2008). The digital divide: the special case of gender (PDF). Journal of Computer Assisted Learning (22). Dastin, J. (2018, October 10). Amazon scraps secret AI recruiting tool that showed bias against women. Reuters. Retrieved April 17, 2020. Deming, D. J., Goldin, C., Katz, L. F., & Yuchtman, N. (2015). Can online learning bend the higher education cost curve? American Economic Review, Papers & Proceedings, 105(5), 496–501. Deming, D. J., Goldin, C., Katz, L. F., & Yuchtman, N. (2015). Can online learning bend the higher education cost curve? American Economic Review, 105(5), 496–501. https://scholar.harvard. edu/files/ddeming/files/aer.p20151024.pdf Elliott, L. (2016, January 13). Spread of internet has not conquered ‘digital divide’ between rich and poor—report. The Guardian. ISSN 0261-3077. Retrieved April 17, 2017. Friedman, J. (2018, January 11). Study: More students are enrolling in online courses. U.S News. Garrison, D. R., & Kanuka, H. (2004). Blended learning: Uncovering its transformative potential in higher education. The Internet and Higher Education, 7(2), 95–105. Gosper, M., Green, D., McNeill, M., Phillips, R. A., Preston, G., & Woo, K. (2008). Final report: The impact of web-based lecture technologies on current and future practices in learning and teaching. Graesser, A. C., Conley, M. W., & Olney, A. (2012). Intelligent tutoring systems. In K. R. Harris, S. Graham, & T. Urdan (Eds.), APA educational psychology handbook, Vol. 3: Application to learning and teaching. American Psychological Association. Hilbert, M. (2013). Technological information inequality as an incessantly moving target: The redistribution of information and communication capacities between 1986 and 2010 (PDF). Journal of the Association for Information Science and Technology., 65(4), 821–835. https:/ /doi.org/10.1002/asi.23020.S2CID15820273 Hilbert, M. (2016). The bad news is that the digital access divide is here to stay: Domestically installed bandwidths among 172 countries for 1986–2014. Telecommunications Policy, 40(6), 567–581. https://doi.org/10.1016/j.telpol.2016.01.006 Jaggars, S. S., Edgecombe, N., & Stacey, G. W. (2013). What we know about online course outcomes (research overview). Community College Research Center. Jazzar, M. (2012, December 7). Online student retention strategies: A baker’s dozen of recommendations. Faculty Focus. Jenkins, H. (2009). Confronting the challenges of participatory culture: Media education for the 21st century. The MIT Press. Kang, C. (2016, June 7). The challenges of closing the digital divide. The New York Times. ISSN 0362-4331. Retrieved April 17, 2017.

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Kaplan, A. M., & Haenlein, M. (2016). Higher education and the digital revolution: About MOOCs, SPOCs, social media, and the Cookie Monster. Business Horizons, 59(4), 441–450. https://doi.org/10.1016/j.bushor.2016.03.008 Kemp, N., Grieve, R. (2014, January 01). Face-to-face or face-to-screen? Undergraduates’ opinions and test performance in classroom vs. online learning. Frontiers in Psychology, 5, 1278. https:/ /doi.org/10.3389/fpsyg.2014.01278. PMC 4228829. PMID 25429276. Kofoed, M. S., et al. (2021). Zooming to class? Experimental evidence on college students’ online learning during COVID-19. IZA – Institute of Labor Economics, May 2021. Kolowich, S. (2013, April 8). Coursera takes a Nuanced view of MOOC dropout rates. The Chronicle of Higher Education. MacKay, R. F. (2013, April 11). Learning analytics at Stanford takes huge leap forward with MOOCs. Stanford Report. Stanford University. Retrieved April 22, 2013. Major, C. (2015). Teaching online: A guide to theory, research, and practice. Johns Hopkins University Press. Mundy, L. (2017). Why is silicon valley so awful to women? The Atlantic. Retrieved April 17, 2020. National Assessment of Educational Progress. (2022). Math scores dropped in every state during pandemic, report card shows. The Wall Street Journal, October 24, 2022. National Center for Education Statistics. (2022). Schools are back and confronting severe learning losses. The Wall Street Journal, Sept 6, 2022. OECD. (2012). How covid-19 is inspiring education reform, The Economist, June 24, 2021. Pappano, L. (2012, November 2). The Year of the MOOC. The New York Times. Pérez-Peña, R. (2012, July 17). Top universities test the online appeal of free. The New York Times. Robinson, R., Molenda, M., Rezabek, L. (2016). Facilitating Learning (PDF). Association for Educational Communications and Technology. Archived (PDF) from the original on 22 September 2015. Retrieved March 18, 2016. Rosé, C. P., Carlson, R., Yang, D., Wen, M., Resnick, L., Goldman, P., & Sherer, J. (2014, January 1). Social factors that contribute to attrition in MOOCs. In Proceedings of the First ACM Conference on Learning @ Scale Conference. L@S ’14 (pp. 197–198). ACM. https://doi.org/10. 1145/2556325.2567879. ISBN 978-1450326698. S2CID 2630420. Rubin, R. E. (2010). Foundations of library and information science (pp. 178–179). Neal-Schuman Publishers. SciDevNet. (2014). How mobile phones increased the digital divide. http://www.scidev.net/global/ data/scidev-net-at-large/how-mobile-phones-increased-the-digital-divide.html Siemens, G., Gaševi´c, D., & Dawson, S. (2015). Preparing for the Digital University: a review of the history and current state of distance, blended, and online learning (p. 62). Athabasca University. Smith, C. W. (2002). Digital corporate citizenship: the business response to the digital divide. The Center on Philanthropy at Indiana University. ISBN 1884354203. Tabs, E. D. (2003, July 15). Distance education at degree-granting postsecondary institutions: 2000–2001 (PDF). National Center for Education Statistics. Theen, A. (2012, February 12). MIT begins offering free online course with certificate. Bloomberg. Trucano, M. (2013, December 11). More about MOOCs and developing countries. In EduTech: A World Bank Blog on ICT use in Education. UNESCO. (2020). American Enterprise Institute in How covid-19 is interrupting children’s education, The Economist, March 21, 2020. Waldrop, M. M., (2013, March 13). Nature magazine. Massive Open Online Courses, aka MOOCs, Transform Higher Education and Science. Scientific American. Wei, L., & Hindman, D. (2011). Does the digital divide matter more? Comparing the effects of new media and old media use on the education-based knowledge gap. Mass Communication and Society., 14(1), 216–235. https://doi.org/10.1080/15205431003642707.S2CID144745385 Young, J. R. (2013, April 5). Stanford U. and edX Will Jointly Build Open-Source Software to Deliver MOOCs. Chronicle of Higher Education.

7

The Might of MAAMA

7.1

The Daunting Presence of Big Tech

The big tech acronym FAAMA1 —“Facebook, Amazon, Apple, Microsoft, and Alphabet” is the industry’s largest and most powerful companies.2 While Saudi Aramco continues to be the most valuable public company globally, these five other firms have had a market valuation that has fluctuated between $500 billion and $3.0 trillion in the last decade.3 E-commerce giant Amazon accounts for half of all online sales, making it the most influential player in the industry; its cloud computing accounts for 32% of the market, and live streaming accounts for 76% of the market. Amazon is also the market leader in artificially intelligent personal digital assistants and smart speakers,4 with a commanding 69% market share. The combined market capitalization of the five Big Tech accounts for nearly a quarter of the S&P 500’s total value. This is nearly double the proportion observed five years ago (see Footnote 171) (Fig. 7.1). As a manufacturer of high-margin smartphones and other consumer goods, Apple competes with Google for market dominance in mobile operating systems. Apple controls 27% of the market (iOS), and Google controls 72% (Android).5 Apple is the most valued company in the world. Apple is the first company on the planet to have a market cap of $3 trillion.

1 With the birth of Meta, FAAMA has become MAAMA. In this book, however, they are used interchangeably. 2 “Most Valuable Companies in the World—2020”. FXSSI—Forex Sentiment Board. Archived from the original on January 27, 2020. 3 https://www.cnbc.com/2020/08/19/apple-reaches-2-trillion-market-cap.html. 4 Digital Economy Report, 2019, United Nation Conference on Trade and Development (UNCTAD). 5 How 5 Tech Giants Have Become More Like Governments Than Companies, October 26, 2017.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 V. Kumar, The Economic Value of Digital Disruption, Management for Professionals, https://doi.org/10.1007/978-981-19-8148-7_7

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Fig. 7.1 Share of FAAMA in S&P market cap. Source Five Tech Giants Just Keep Growing, The Wall Street Journal, May 1, 2021

Along with social networking, social media giant Facebook has a stranglehold on online picture sharing (through Instagram) and messaging services (WhatsApp). Google and Facebook monopolize global digital advertising. Search engine giant Google dominates the internet video sharing (YouTube) and mapping-based online navigation markets (Google Maps). Google’s predominance in search advertising is unquestionable. When it comes to desktop operating systems (Microsoft Windows) and office productivity applications, Microsoft still has a dominating edge (Microsoft Office). Aside from being the second-largest cloud computing provider behind Amazon, Microsoft is also a significant participant in the video games business (Xbox) (Vargas, 2019). Microsoft’s valuation is just behind Apple’s, and the industry pundits predict that Microsoft will overtake Apple in 2022. The five most significant technology companies have remained market darlings.6 By 2022, the five largest American technology companies would be worth more than $10 trillion, accounting for more than half the value of the Nasdaq 100.7 ,8 The FAMAA companies bear the burden of carrying the stock markets; it is a “tale of two stock markets.”9 FAAMA’s total returns fell in the summer

6

A perky stockmarket v a glum economy, The Economist, 5 July 2020. The ‘Big Five’ Could Destroy the Tech Ecosystem in USA Inc.’s ponderous recovery, The Economist, 11 July 2020. 8 Investopedia in USA Inc.’s ponderous recovery, The Economist, 11 July 2020. 9 Deutsche Bank in USA Inc.’s ponderous recovery, The Economist, 11 July 2020. 7

7.1 The Daunting Presence of Big Tech

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Fig. 7.2 The Big five’s heavy lifting (total returns). Source The Conference Board, Bloomberg, Deutsche Bank, Compustat, Moody’s in USA Inc.’s ponderous recovery, The Economist, 11 July 2020

of 2020, while the S&P 500 fell even more precipitously. Despite this, they generated a 39% return for shareholders in 2020, while the 495 others generated a negative-one percent return (Fig. 7.2) (Evans & Gawer, 2016).10 ,11 The powerful platforms of FAAMA: big tech has been largely driven by the platform model, a business marketplace. The advent of the platform business model has radically transformed the world. A few powerful global digital platforms emerging, mainly from the US and China, are a significant feature of the evolving digital economy. Using data-driven business strategies, seven of the world’s top eight publicly listed businesses thrive today.12 While many of the world’s most successful firms started as software firms (such as Microsoft and Apple) or internet startups (Facebook, Amazon, Google, Tencent, and Alibaba), they have since shifted their focus to data and digital intelligence. The platform economy is highly concentrated geographically. US platforms worth more than $1 billion form 72% of total market capitalization, with Asia (mainly China) accounting for 25% of it and the European Union making up the remaining 2% (Dutch Transformation Forum, 2018). There is less concentration on platforms: 46% are based in the United States, 35% in Asia, 1% in Africa and Latin America, and 18% in the EU. A few features, such as market domination and control over digital and data intelligence, are common across the digital platforms in the US and China. Still, they have developed in quite distinct economic contexts. US platforms have grown in a free-market environment. China’s top digital platforms have risen due to substantial government involvement, keeping out the international competition (Bieli´nski, 2018; Thun & Sturgeon, 2017).

10

USA Inc.’s ponderous recovery, The Economist, 11 July 2020. The Wall Street Journal, 25 April 2019, Microsoft Hits $1 Trillion Market Value for First Time. 12 The 2018 Global Innovation 1000 study: Investigating trends at the world’s 1000 largest corporate R&D spenders. London. Available at: https://www.strategyand.pwc.com/innovation1000. 11

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In terms of profits, global platform companies based in the United States earned the most. While the US accounts for eighty percent of profits of the fifty largest digital companies, Europe accounts for a measly five percent.13 In the meantime, a few data-centric tech firms are commanding massive valuations without ever being in the black. Despite a history of losses, Uber and Lyft raised money via initial public offerings (IPO) in 2019.14 In 2018, Walmart paid $22 billion for a 77% stake in Flipkart, India’s most prominent e-commerce firm. Flipkart was just 11 years old and had minimal material and intellectual assets. This was despite both Flipkart and Amazon have suffered significant losses in India.15 The high valuations and the speed with which the FAAMA companies got there to testify to the value linked to these firms’ ability to turn data into business insights. Investors place their money on disrupted and restructured economic sectors like retail, transportation, health, lodging, agriculture, and education; they hope to generate future profits by investing in long-term digital intelligence control of such industries (see Footnote 61). Leaders in more established industries have also come to appreciate the importance of digital data. A few examples are Monsanto (now owned by Bayer), General Electric (GE), and Intel (Intel) have recast themselves as data-centric firms.16 Specific digital platforms can withstand losses not just because of solid investor support but because they have also hedged bets in complimentary businesses (Kenney & Zysman, 2019). As a result, they can offset losses in one market with gains in another. For instance, while Google has a well-deserved reputation for dominance in the search industry, with about 90% of the market share, Facebook is the leading social networking platform, with two-thirds of the worldwide market share (Cosenza, 2018). In addition, 92% of the nation’s globally utilize Facebook as their primary social network. But notably, the digital advertising industry, which these two firms have largely controlled, accounts for most of their income. In the case of Amazon, which is best known for its online retail service with a global market share of 37%, the main source of revenue is its cloud computing business, driven by Amazon Web Services17 (Fig. 7.3). China’s mobile payment industry is dominated by Tencent’s WeChat (over 1 billion active users) and Alipay (Alibaba’s

13

The Economist, 28 May 2016, Taming the beasts. The Economist, 11 May 2019, Lyft’s revenues double, losses quintuple—and prospects darken. 15 Bloomberg, 21 March 2018, Flipkart’s losses have wiped out half of $6.1 billion injected by investors; and The Hindu BusinessLine, 15 January 2018, Amazon India headed for $1 b loss in FY17. 16 For the example of Monsanto, see Bayer, 4 January 2018, Coming soon: Better, more sustainable and integrated innovations for the farm” at https://monsanto.com/innovations/research-develo pment/articles/farm-innovations/; for GE, see MIT Sloan Management Review, 18 February 2016, GE’s big bet on data and analytics; and for Intel, see The Circle, 16 November 2018, “We are more data centric than hardware driven”. 17 The Economist, 28 June 2018, How regulators can prevent excessive concentration online. 14

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Fig. 7.3 US cloud market share, %. Source The new rules of competition in the technology industry, The Economist, 27 Feb 2021

payment platform)18 ; strategically, Alibaba is estimated to control nearly 60% of China’s e-commerce market (Internet Society, 2019). Numerous global platforms may place a higher premium on growth than profits, as they see the importance of securing data control, which secures them a strong market position. Data control is essential to take advantage of future technological advances such as artificial intelligence and machine learning, which are heavily dependent on massive amounts of data processing (see Footnote 61). Big tech’s dominance has resulted in worldwide “techlash,” which alludes to consumer and regulatory backlash potential against big tech. But the threat seems to be a sham. When regulators debate new regulations and campaigners are concerned about privacy, shares of the five biggest American internet firms have risen by 52% in the past year. It’s impossible to fathom the almost $2 trillion rise in the aggregate worth of the companies: that’s about equal to the whole of the German stock market. Each of the Big Five with such heft: Alphabet ($1.9 trn, market cap), Amazon ($1.7 trn), Apple ($3 trn), Microsoft ($2.5 trn), and Facebook ($1.0 trn) seems unconcerned. Contrary to popular belief, there has been no digital backlash among the top fund managers in Boston, London, and Singapore. They believe that nothing will stop these companies from amassing unprecedented wealth (see Footnote 20). The investors’ role in creating a financial bubble is one question. Two issues are raised by the recent increase in the share prices of technology giants. Nearly a fifth of the value of the S&P 500 index is made up of these five companies, which have a combined market capitalization of nearly $10 trillion. The last time the

18

Digital Marketing China, 30 December 2018.

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Fig. 7.4 Net profit margin, %. Source Bloomberg in How to make sense of the latest tech surge, The Economist, 20 Oct 2020

market was this concentrated was before the financial sector collapse that set off the current slump, which lasted for two decades. Investors may be right after all, according to the contrarian view. Big tech’s inflated valuations predict earnings will quadruple in the next decade, resulting in more economic earthquakes in developed nations and an unsettling political and economic power concentration. The bubble theory has some merit. Modern economies cannot function without technological cycles. In the 1980s, the semiconductor industry went through a period of expansion. In the 1990s, personal computers and the internet were widely available to the general populace. Every cycle ends in a bust or fades into obscurity. The Facebook data scandals crystallized outrage over the tech giants’ cavalier attitude toward privacy. Global antitrust authorities were alerted. Flaky digital “unicorns” like WeWork and Uber engaged in hazardous conduct, evoking the kind of speculative froth often seen toward the conclusion of a lengthy boom. But, today’s values sit on strong economic ground, at least in the case of the biggest technological firms. Over the last year, the five biggest companies produced cash flow after investments totaling $178 billion. Despite their size, they’ve continued to expand at a 17% annual rate, which is just as remarkable as it was five years ago. But more than brute growth, FAAMA’s real strength is its consistent profitability (Fig. 7.4). These companies have plowed back a substantial part of their profits into R&D and innovation and sustained a dominant position in the market.19 Consumers claim they are concerned about privacy but behave as if obtaining goods is more important than protecting their privacy. Regulators have levied fines and penalties against internet companies for privacy, tax, and competition

19

https://www.economist.com/business/2019/05/02/american-technology-firms-mixed-results.

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breaches (but the combined fines have been less than 1% of their market cap), but to no avail. There are now 2.3 billion individuals hooked on Facebook’s services (including Instagram, Messenger, and WhatsApp). Replicating the big five’s size and network effects are challenging; SoftBank, for example, should know this with their portfolio of struggling unicorns trying to scale up (see Footnote 20). The big tech operates globally, providing additional room to grow, particularly in emerging economies where digital technology spending is still relatively low. Meanwhile, many areas of the economy are still not fully digital, throwing up a vast untapped market. Only a tenth of retail transactions in the West is made online, while Amazon and Microsoft host only a fifth of computer workloads. Increasingly, non-tech companies will find their revenues reduced as big tech extends its reach, disrupting the lives of more employees leading to large swathes of dissatisfaction. One yardstick is the ratio of worldwide earnings to American GDP. On this benchmark, Apple has grown to a scale comparable to Standard Oil and US Steel in the early 1900s. Microsoft, Google, and Amazon have the fire-power to surpass them in a few years.20 It’s estimated that the top five corporations employ 1.2 million people and invest almost $200 billion yearly. There will be as much debate on the big five decisions over whether to squeeze suppliers, reduce investment, or go after weaker rivals. Big tech already hurts politics; from Minnesota to Myanmar, social media and videos affect elections. Big tech has mostly been untouched till today. It’s hard to overstate how valuable the world’s five most valuable businesses with a formidable combined market value of $10 trn. It does, however, presume that they will continue to expand as long as the rest of the world does nothing except being a mute spectator. Spearheaded by Cook, the other CEOs of FAAMA generated considerable shareholder value (Fig. 7.5). The big tech controls the internet is no longer hyperbole; they even control almost all fiber-optic cables that carry the internet signals. Millions of kilometers (1.3 million kilometers are underwater) of the fiber-optic cables that carry ninety-five percent of global internet traffic are now largely owned by Google, Microsoft, Meta, and Amazon. They collectively own two-thirds of the submarine cable capacity. There’s understandable trepidation that the world’s most influential internet services providers also own the infrastructure that carries their traffic. It’s akin to Amazon owning the roads on which the packages are delivered. The flip side is that the big tech ownership of fiber capacity has lowered the cost and has increased global data transmission by forty-one percent in 2020 alone.21 Big tech firms (except Apple) have invested a colossal $90 billion in 2020

20

How to make sense of the latest tech surge, The Economist, 20 Oct 2020. TeleGeography in Google, Amazon, Meta, and Microsoft Weave a Fiber-Optic Web of Power, The Wall Street Journal, Jan 15, 2022.

21

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Fig. 7.5 FAAMA MasterChefs. Source Datastream Refinitiv in Why prospects for post-Trump social media aren’t all bad, The Economist, Jan 16, 2021

in upgrading the inter-continental fiber infrastructure. By owning the fiber capacity in the world, the tech giants save the rentals they were paying third-party fiber owners. For the tech giants, investing in fiber capacity is a no-brainer.22 Regardless of the backlash against big tech, it is undeniable that they have provided numerous consumer benefits that are essentially free (consumer surplus). For instance, users on Facebook spend an average of 50 min a day on the site, and the social network promises them that “it is and always will be free.” That does indeed sound like a bargain. However, this is only one of the bargains that appear to abound on the internet: For example, one billion hours of video are watched every day by YouTube users. These meals are not free, and someone has to pay for them somehow; the problem is figuring out how much. Unless you include the cost of an internet connection, many digital services cannot be seen as regular transactions by economists since they aren’t paid for with cash. The economics of freebees is unique. Unlike traditional merchants, companies such as Facebook and Google rely on their users to generate value attracted to the site by information and images shared on social media. Algorithms learn what people want through online searches, selections, and “likes.” While users may not pay anything, companies like Facebook and Google have fixed expenses. They charge companies to display relevant ads in front of captive audiences to make money. This squeezes their users in a roundabout way. Users’ screens are inundated with advertisements and sponsored content; Facebook extracts an average of $4.65 from each user (see Footnote 25).

22

Google, Amazon, Meta, and Microsoft Weave a Fiber-Optic Web of Power, The Wall Street Journal, Jan 15, 2022.

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Economists can’t tell what individuals return for their attention and data when they barter them for digital services. They appear to be doing quite well, according to some evidence. MIT recently conducted a study in which it offered people money in exchange for not using Facebook for a whole month. They then estimated the average annual value of the product to the customer at approx.—$750.23 People place a value on free search engines ($16,600 per year), maps ($2800), and video ($900). Using advertising expenditure, a study estimated that the US economic output was undercounted by about $19 billion greater.24 Today, the corresponding figures will be significantly higher (see Footnote 25). Privacy advocates are concerned about the “free economy.” In contrast to prices that are just a sliver more than zero, customers respond considerably more favorably to “free offerings.” Orders skyrocketed when Amazon offered free delivery to European nations for the first time—except in France, where it charged customers around ten cents by mistake. In their opinion, the word “free” encourages people to make bad decisions, such as revealing more personal information than they would in a more formal setting. The “privacy paradox” is a term used by researchers to describe how individuals claim to care more about their privacy than their hypocritical online behavior indicates. Competition authorities are also concerned about the free economy. Overcharging in a competitive market is known to have excessive market power. Without the ability to compare prices and alternative options just a click away, some businesses, like Google, seem to be in a competitive position. It would be foolish to think otherwise. Consumers’ low switching costs mask a greater degree of servitude. Antitrust regulators in the European Union penalized Google $2.7 billion because it had a market dominance of over 90% in most countries a few years ago for favoring its comparison shopping services over those of competitors. Even though its services were provided free of charge, the trustbusters found that its market dominance restricted customers’ freedom of choice. With no pricing, lack of competition shows itself in various ways: by requesting more information from customers than they are prepared to give or by making them annoyed by overburdening their services with advertising.25 As long as these free services continue to flow, big tech’s billions of users will continue to love them. How much do we value Google services? The US economy has grown at such a sluggish pace in the last several decades is one of the great mysteries. The average yearly growth rate of the US GDP per person was 2.3% between 1946 and 1975, and since then, it has only increased by an average of 1.8% each year. Technological advances, according to many economists, are overestimated in national accounts. The official contribution of the information sector to GDP has remained

23

MIT in The “free” economy comes at a cost, The Economist, 24 August 2017. Federal Reserve Bank of Philadelphia and Bureau of Economic Analysis in The “free” economy comes at a cost, The Economist, 24 August 2017. 25 The “free” economy comes at a cost, The Economist, 24 August 2017. 24

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Fig. 7.6 Cost of foregoing Google services. Source Brynjolfsson et al. (2018)

almost unchanged since 2000 despite the emergence of smartphones, the internet, and artificial intelligence. What might be the explanation for this seeming contradiction? One of the issues is that GDP only considers products and services that individuals have paid for with their hard-earned cash. Because companies like Google and Facebook don’t charge users for access, the benefits of the internet’s growth will be understated in national income figures.26 If you want to know how much individuals value these internet services, you may ask them how much they’d have to be paid to give them up for a year (Fig. 7.6). A recent working paper does just this and concludes that certain online services provide significant value for customers (Brynjolfsson et al., 2018). A year’s worth of internet maps costs $3600, while a year’s worth of e-mail costs $8400. When asked how much they would have to pay to give up using search engines for a year, respondents indicated each would have to pay $17,500. The major technology companies have grown at a healthy clip over the last decade and will likely continue to do so in years to come. However, the technology industry faces a more challenging 2022. The pandemic aided in propelling global technology behemoths such as Microsoft and Amazon to new statures in 2021. The shift to remote work and online shopping would have been impossible without the coronavirus. However, there are signs that the good times may be drawing to a close. The debate is increasingly becoming strident on whether big tech has gotten out of hand. There will be many hurdles to cross.

26

How much would you pay to keep using Google? The Economist, 25 April 2018.

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Regulation: The primary regulatory concern for significant companies would continue to be antitrust litigation. The antitrust threat is already genuine for Google and Facebook. Both companies appear to be motivated to put the cases behind them. The number of IP infringement cases is also growing. In each case, the denial of guilt has been unequivocal. Technology companies must also worry about Congress passing legislation to strengthen existing antitrust laws, apart from the ongoing investigations and lawsuits. As interpreted by courts, current antitrust laws are primarily concerned with the impact of business practices on consumer prices. As a result, enforcing essentially free search and social media services can be challenging. US lawmakers may press social media organizations like Twitter and Facebook to take a harder line against disinformation and hate speech. Additionally, new privacy rules and stricter liability standards will come into play. Will Big Tech continue to grow? As homebound Americans and companies become more reliant on online commerce, cloud computing, software services, intelligent gadgets, and video streaming, their dependence on big tech will grow substantially. Zoom, a videoconferencing company, has seen rapid growth due to its pandemicpreparedness strategy. Revenues of the big five have never been flagged in the last 20 years (Fig. 7.7). That the network effects working is quite evident. Big tech will have to deal with a possible slowdown after a roller-coaster ride of high earnings. Analysts predict that the industry’s continued success this year is due to the industry’s entrenchment in everyday life. E-commerce, which is expected to expand by approximately 50% in 2020 due to the pandemic-induced change in consumer behaviors, will continue to profit from this shift. And corporate adoption of remote work is likely to maintain demand for the platforms that

Fig. 7.7 Soaring revenues of FAAMA, $bn. Source Bloomberg in How to make sense of the latest tech surge, The Economist, 20 Oct 2020

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have allowed individuals to remain connected even as workplaces and public areas are becoming more accessible to widespread vaccinations (see Footnote 27). Tech nationalism: In 2021, the US government crippled several of China’s technology industry leaders, including Huawei, Chinese chipmakers, and telecom equipment giants. By keeping things as they are, US authorities will have more time to think about boosting the country’s technological sector. Efforts to incentivize US companies to develop open-source 5G equipment capable of competing with Huawei will gain traction.27 Support of $3 billion per project is on the way to bolster US chip companies. Tech’s fortunes seem to have lost steam in 2022. This was the year Silicon Valley fell to earth. Silicon Valley always appeared to be in the sun, regardless of the economic climate. During the Covid-19 lockdowns, when much of the economy was collapsing, tech companies in the Valley produced record earnings, reaffirming their ability to prosper while others failed. In the ten years leading up to 2021, the revenues and profits of the top five technology companies in the United States— Apple, Microsoft, Alphabet, Amazon, and Meta (MAAMA)—grew at a rate that was five times faster than the country’s GDP. Everyone has had a terrible year; the S&P 500 has dropped by 5% since January. The Nasdaq composite, a tech-heavy index, lost a third of its value, but digital firms were affected worse. The market capitalization of the five largest tech companies has fallen by an astounding $3 trillion (Fig. 7.8). The most notable loser, Meta, hardly qualifies as “big” tech anymore after losing over two-thirds of its value and having a market capitalization of little over $300 billion. There are several reasons why tech exceptionalism is ending. One is that the digital market is aging after years of expansion. Consider advertising, which supports Amazon, Apple, and Microsoft and is the lifeblood of Alphabet and Meta. Advertising revenue dropped during previous recessions but spending on digital ads increased as marketers switched their money away from traditional media like TV and newspapers and toward online advertising. Today, a large portion of that movement has already occurred: in America this year, approximately two-thirds of advertising expenditures were digital. Therefore, the cyclical adjustments that have long plagued their physical competitors have affected online ad platforms. Meta announced its first-ever quarterly revenue decline in July and another in October. Competition is the upcoming adjustment. For many years, the IT industry was associated with monopolistic markets: Google dominated search, Facebook dominated social media, and so on. Competition is tough today. New competitors, especially TikTok, caused Facebook to see its first-ever decline in user counts. This was a source of grief for Meta. Tech companies are also invading each other’s territory more frequently. Because Google is investing billions in its cloud service (and suffering significant losses to establish a foothold in the market), Amazon’s cloud

27

The Five Biggest Issues for Technology Companies in 2021, The Wall Street Journal, Jan 16, 2021.

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Fig. 7.8 The $3 trn nightmare. Source Refinitiv Datastream, Economist in How tech’s defiance of economic gravity came to an abrupt end, The Economist, Dec 2022

computing division has suffered a steep slowdown in growth. Netflix, which had streaming almost to itself for years, is coming up against competition from Apple, Amazon, Disney, and Warner Bros., who can spend more freely on content. Its market value has decreased by 50% this year partly because of this. Headwinds particularly problematic for digital enterprises have coincided with these developments in the tech industry’s structure. To combat inflation, the Federal Reserve in America increased the upper bound on its policy interest rate to 4.5% from 0.25% in January. All firms have a harder time as a result. But in a world of high rates, which reduce the present value of those anticipated earnings, tech companies, whose high values reflect investors’ assumption that they would generate huge earnings far in the future, appear much less alluring. The venture capital (VC) industry, which makes long-term bets on unprofitable firms, has been particularly hard hit by higher rates. The value of new venture capital deals decreased worldwide in the first 11 months of 2022 by 42% compared to the previous year.28 This decline was more pronounced than that which followed the financial crisis of 2007–2009. Another thorn in the side of the tech industry has been semiconductors. The supply of chips has increased over the last two years as manufacturers have boosted capacity. However, as chip output grew, demand dwindled due to declining PC and smartphone sales. The collapse of the cryptoverse, which meant that miners of virtual currencies no longer required the cutting-edge processors created by two major chipmakers, Nvidia and AMD, caused additional suffering. A tenth

28

Preqin in How tech’s defiance of economic gravity came to an abrupt end, The Economist, Dec 2022.

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of Micron Technology’s workforce would be laid off in the new year after the American memory chip manufacturer announced a quarterly loss in December. The conflict was made worse by geopolitical tensions. The United States announced several new trade limitations on selling semiconductor machinery to China, the largest consumer of chips worldwide. Additionally, China has increased operational risk. Before its severe zero-Covid policy was repealed in recent weeks, factories were abruptly locked down. Apple, which manufactures most of its devices in China, is gradually moving new production to Vietnam and India. Although outperforming its rivals, the world’s most valuable firm has suffered from supply chain glitches and lost more than a quarter of its market value over the past year. Due to these issues, 2023 will be tough for the tech industry. Most people have resolved to decrease expenses, which frequently entails reducing payroll. More than 150,000 job cutbacks have already been declared by tech companies globally in 2022.29 Eleven-thousand of those are attributed to Meta alone. Amazon has informed graduates who were supposed to start working in May 2022 that they will have to wait until the end of 2023. In contrast to how investors and employees historically perceived the tech industry, it may seem very different in the coming months.30

7.1.1

Market Concentration

The digital disruptors: As the robber barons did following the American Civil War, the world is currently ruled by Internet-centric technological firms. The internet is controlled by one social network, one search engine, and one micro-blogger. Google dominates global search activity, with a 69% market share, and controls 90% of the smartphone operating system market, along with Apple. Their continuous innovation allows them to remain one step ahead of the competition. Google does 4 billion searches per day and is responsible for 40% of all online traffic through its many linked sites.31 Facebook’s monthly users now outnumber the people of China.32 More than half of all internet traffic is now directed to Facebook’s mobile apps. The money generated by internet advertising is split evenly between Facebook and Google (see Footnote 31). More than a third of all U.S. computer science students work for Amazon, Facebook, or Google.33 In the United States,

29

Layoffs.fyi in How tech’s defiance of economic gravity came to an abrupt end, The Economist, Dec 2022. 30 How tech’s defiance of economic gravity came to an abrupt end, The Economist, Dec 2022. 31 Reweaving the web, The Economist, June 18, 2016. 32 The rise of superstars, The Economist, Sept 17, 2016. 33 The Economist, Nov 5–11, 2016.

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Fig. 7.9 The might of FAAMA. Source https://companiesmarketcap.com/

Google and Facebook accounted for 58% of digital advertising revenue and almost all of the market’s expansion.34 Firms that have disrupted the global economy now control much of it. In the last several decades, companies like Alphabet (Internet search), Microsoft (Windows), Amazon (e-commerce), Apple (iPhone), and Facebook (social media) has had a profound impact on the global scene. The number of digital companies has increased from one in the top ten years ago (Microsoft) to five in the top ten presently, although their market valuations have fallen because of the recent Russian-Ukraine war (Fig. 7.9). The FAAMA firms have amassed more than $10 trillion in combined market capitalization. In terms of gross domestic product, this would make them the world’s third-largest economy.35 These firms have taken advantage of their vast size to gain market share and see their profits soar as a dominating one-third market share in cloud services; the rest is shared by Google, Microsoft, and a host of fringe players (see Footnote 32). With a market capitalization of approximately $85 billion, Uber has surpassed GM and Fiat Chrysler in market capitalization in the United States. It still does not possess even a single car. Over 2 million homes in 191 countries are listed on Airbnb’s website as short-term rentals.36 Airbnb is worth $75 billion, more than any hotel chain on the planet, despite not owning a single hotel room.37

34

Snap to it, The Economist, Feb 4–10, 2017. A global tipping point for reining in tech has arrived, NY Times, April 21, 2021. 36 The Economist, Oct 29–Nov 4, 2016. 37 Bloomberg Businessweek, Oct 24, 2016–Jan 6, 2017. 35

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While digital businesses employ fewer people, they have considerably more intangible assets than their predecessors. There are 137,000 workers at the top three Silicon Valley internet companies valued at over $1 trillion. In contrast, the top three automakers had 1.2 million employees and were valued at $36 billion. Many of Silicon Valley’s most giant workplaces have been acquired or built by asset-light digital firms. In new office space for its workers, Apple has spent $5 billion, and Google is not far behind (see Footnote 32). However powerful they become, the new breed of digital companies will continue to provide value for society and the end-user. Apple’s iPhones are coveted because they’re convenient and very portable. While hailing a cab, Uber provides an unparalleled level of convenience, compelling traditional taxi companies to improve. Airbnb operates similarly to hotels in terms of booking accommodations: Because of Airbnb, hotel companies have upgraded their service. Then there’s the free stuff! Facebook, Twitter, and Google, among others, offer $280 billion in services to American and European customers (such as directions or information) that would have taken a considerable amount of time and money in the pre-internet period (see Footnote 32). In less than ten years after its inception, the Internet has produced wonders such as Airbnb, which is currently utilized by more than half a million people globally each night.38 Uber is more valuable than Viacom, Delta, and FedEx combined (see Footnote 38). The big five belong to the trillion-dollar club. Apple is the only American company to have a market capitalization of $3 trillion. However, that elite group may eventually have a lot more competition. Microsoft has a market capitalization of $2.5 trillion. Amazon has a $1.8 trillion market capitalization, while Alphabet, the parent company of Google, is worth approximately $1.9 trillion. Indeed, the Magnificent Seven of technology, Amazon, Facebook, Netflix, Apple, Alphabet, Tesla, and Microsoft, are currently worth 10 trillion dollars. This is approximately a fourth of the $37.5 trillion market value of the S&P 500 (see Footnote 39). In recent weeks, technology stocks have surged back to life, helping to push these Nasdaq heavyweights and others to near-record highs. While Amazon and Tesla have incredibly high price-to-earnings ratios, Facebook and Google have more reasonable valuations.39 Similarly, Microsoft and Apple both pay quarterly dividends, making them more appealing than lowyielding Treasury bonds. Additionally, the balance sheets of the majority of the large technology companies are spotless, with plenty of cash and little debt. That is one of the primary reasons why the leading technology companies have emerged as safer investments during these turbulent times. Most of them offer products and services that have performed admirably during the pandemic—and should do so as the economy recovers.

38

Shared Economy, Time, Feb 9, 2015. Apple is the only company worth $2 trillion. That’s probably about to change, CNN, 26 April 2021.

39

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7.1.1.1 The Oligopoly Play The internet was intended to decentralize the world, but the opposite has occurred. The internet has fueled dominance. In recent years, many people have become more critical of it, concerned that it breeds online addicts, collects everyone’s data, and empowers malicious trolls and hackers. Their disenchantment stems from the fact that the internet has become significantly more “centralized” than ten years ago. In the West and China, the activities enabled by this global network of networks are dominated by a few mega-corporations, ranging from Facebook to Tencent.40 Simultaneously, the internet has become much more tightly regulated. When it was primarily accessible via desktop or laptop computers, users could discover excellent new services and experiment with various things. Nowadays, the primary method of accessing the internet is smartphones and tablets, which confine users to carefully defined spaces or “walled gardens” that are barely more exciting than television channels. Mobile operating system manufacturers can control which services are available to smartphone owners via their app stores. Another control point is cloud computing, which places applications and their associated data in the hands of third parties. Meanwhile, governments, which previously had no role on the internet, have established control over large swathes of the network, frequently by coercing large internet firms into acting as willing enforcers, such as by compelling them to block objectionable content. 7.1.1.2 How Big Tech Consolidates Its Dominance The commercial domination of some worldwide digital platforms is due to several reasons that, taken together, help explain these companies’ growing power. The near-monopoly of big tech stems from monopolistic tendencies in data-driven business models and markets, platform actions to consolidate their market positions, the growth of digital platforms into new areas, asymmetry in information, and lobbying efforts to influence legislation. Also, a strong reason for the continued dominance of the big five has been their sustained profitability (Fig. 7.10). The cumulative profits of FAAMA are more than one trillion dollars, with Apple cornering nearly $300 billion cumulative profit in the last six years. Apple’s cash reserve at the end of 2011 was larger than the Federal reserves of the US! 1. Trends toward monopolization The fast acquisition of large market shares is a defining characteristic of the most successful digital platforms. Three major factors contribute to the emergence of platforms as monopolies. The most crucial factor is network effects: The greater the number of users on a platform, the more valuable it becomes to everyone. Using Facebook as an example, the more friends, family, and colleagues join, the platform becomes

40

How to fix what has gone wrong with the internet, The Economist, 28 June 2018.

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Fig. 7.10 FAAMA companies are most profitable. Source Bloomberg in How to make sense of the latest tech surge, The Economist, 20 Oct 2020

increasingly helpful as a tool for social interaction and connection as time goes on. Uber’s network effects extend to all of the platform’s components: more drivers increase riders’ chances of finding a ride, which results in more riders using the platform. Drivers profit from less downtime and more revenue when more passengers arrive, encouraging more drivers to join the platform. Consequently, a virtuous loop between the platform’s two sides is created. Importantly, network effects reach a point where a new user would be better off joining the biggest existing platform. Existing and prospective rivals rapidly fade away in the face of such a “winner-takes-all” dynamic. This is also true on a global scale (see Footnote 4). The second factor is a platform’s data extraction, control, and analysis capacity. Platform owners usually have a substantial competitive edge over non-platform companies. They gather data from each contact because they serve as middlemen. Compared to less data-intensive rivals, the more data can be accessed and converted into digital knowledge, the more a company may cut costs, enhance customer happiness, and improve its goods. A virtuous cycle may emerge: fewer competitors lead to more users, more users lead to more data, and more data leads to rivals being outcompeted. The path dependency dynamics is the third element to consider. When a platform develops traction, the expenses of moving to a different platform start to grow (Farrell & Klemperer, 2007). Users of social media sites, for example, devote time and resources to establishing accounts and customizing services. Users may be

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discouraged from moving to another platform if leaving one requires losing years’ worth of conversations, posts, and pictures. Similarly, to build bespoke applications and features for a specific innovation platform, ecosystems of developers get acquainted with the code and intricacies of the platform. This content may need to be relearned if you move to a new platform. When the video was hailed as the future of the Facebook newsfeed, media firms switched their attention to video to capitalize on the transition, increasing their dependence on Facebook for exposure.41 Because of this dependence, they were susceptible to changes in Facebook’s algorithm.42 Apple’s effort to lock customers in via proprietary hardware and software shows path dependency logic: buying an Apple device necessitates buying all Apple accessories. Users are less likely to move to rivals after investing in the development of this product portfolio. Platform firms have also increased the size of the moats surrounding their operations. These moats are essential because they enable companies to solidify their market positions and strategic advantages by using hardware and trained employees (Howard, 2018; Mayer-Schönberger & Ramge, 2018; Nahles, 2018). Google’s supremacy as a search engine is unlikely to be challenged since transforming raw data into digital intelligence and commercial possibilities require enormous computing power and skill. 2. How platform companies bolster their market positions Acquisition of existing or potential competitors has been a critical strategy. For example, Facebook bought Instagram, a growing social media rival, in 2012 and WhatsApp, a Messenger competitor, in 2014.43 Google has made similar acquisitions, most notably Waze, posing a rising threat to Google Maps. Throughout its existence, Google has purchased over 230 businesses, at times at a pace of one per week.44 Instead of competing with Facebook, Google, or Amazon, many new startups now want to be bought by them. Facebook’s acquisition of WhatsApp ($19 billion) and Microsoft’s acquisition of LinkedIn ($27 billion) were significant acquisitions of high-technology companies. Alphabet and Microsoft acquired companies in the telecommunications sector: Nokia ($5 billion) and Motorola ($12 billion). Amazon and Alibaba made significant retail acquisitions, including Amazon’s $14 billion acquisition of Whole Foods Market (see Footnote 4). When target companies have declined acquisition offers, global digital platforms have taken a different strategic approach: copying the competitor. For example, in 2013, Facebook allegedly made a $3 billion purchase bid to Snapchat, a rival social networking site. The offer was turned down, and Snapchat raised

41

New York Magazine, 12 December 2017, Can Facebook and Google be disrupted? Adweek, 12 January 2018, On Facebook’s nuclear bomb. 43 Wall Street Journal, 9 August. 2017, The new copycats: How Facebook squashes competition from startups. 44 CBInsights, The Google Acquisition Tracker, at: https://www.cbinsights.com/research-googleacquisitions. 42

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$33 billion in an “Initial Public Offering” (IPO) in 2017. Following the rejection, Facebook copied Snapchat’s features, such as augmented reality effects, QR codes, the “story” structure, comparable filters, and even identical user interfaces. Snapchat has suffered from sluggish user growth and waning investor confidence, with shares down approximately 75% from its initial public offering price (Gallagher, 2018). In this scenario, even a $33 billion business would be unable to compete with the resources of a top-tier platform. Additionally, the largest platform companies consolidate their market positions through significant capital expenditure and research and development spending. Amazon and Google, for example, are emerging as the world’s top two R&D spenders (Bessen, 2017; PwC, 2018): Amazon, Alibaba, Microsoft, and Google, for example, all need significant expenditures that most prospective rivals cannot afford. Since 2015, spending on AI-related mergers and acquisitions has increased by twenty-six.45 Each of the largest platforms has a sizable infrastructure footprint, adding another difficulty for competitors. 3. Diversification into new sectors Numerous global platforms are beginning to “eat the world” due to their insatiable appetite for data.46 Platforms have attempted to capitalize on their intermediary status to seize control of their verticals (different phases of a platform). It is a relatively common strategy for Chinese platforms: lax intellectual property protection means businesses do not depend on a single idea; instead, they must protect themselves from the competition through vertical integration (Lee, 2018). Similar examples apply to platforms in the United States: • Facebook plans a $1 billion investment in original content, primarily television shows.47 • Rather than relying on third-party providers, Google develops its services, such as review sites (see Footnote 47). • Amazon has expanded its product offerings to include its own branded goods (Amazon Basics). Its function as a marketplace for consumers and sellers gives information on which goods are selling for what prices and to whom. Several merchants have accused Amazon of copying their goods and selling them on its website at a lower price (and with more exposure) (Khan, 2017).48 Due to this practice, the European Commission has launched preliminary inquiries into whether these data are exploited to undercut rivals.49

45

The Economist, 7 December 2017, Google leads in the race to dominate artificial intelligence. The Wall Street Journal, 20 August 2011, Why software is eating the world. 47 The Wall Street Journal, 8 September 2017, Facebook is willing to spend big in video push. 48 The New York Times, 25 June 2018, How Amazon steers shoppers to its own products. 49 The Wall Street Journal, 19 September 2018, EU starts preliminary probe into Amazon’s treatment of merchants. 46

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Even though it owns no cars, Uber was previously referred to as its most extensive taxi business (Goodwin, 2015). It is now banking on the future of self-driving cars. In 2015, it bought the majority of Carnegie Mellon’s robotics researchers, and in 2017, it stated that it would buy up to 24,000 Volvo cars as part of its driverless car initiative.50 Uber is attempting to expand its ownership of vehicles on the taxi side of the platform, thus posing a threat to current Uber-platform taxi drivers. Beyond verticals, platforms expand their activities as non-digital industries become more digitized. The excursions into self-driving vehicles by Tencent and Google, Amazon’s attempts to manufacture smartphones and tablets, Facebook’s purchase of virtual reality firm Oculus, and Alibaba’s development into convenience shops are examples. Data trails drive these growths rather than conventional vertical or horizontal merger logic. Artificial intelligence repeats this pattern because machine learning is a general-purpose technology used across many sectors (Bresnahan & Trajtenberg, 1995; Jovanovic & Rousseau, 2005). Consequently, AI-focused businesses may quickly grow into new markets and implement their services. AI firms, for example, are growing rapidly in health care, energy, and transportation. Leading digital firms are collaborating with businesses that offer complementary capabilities. Walmart, for example, has teamed up with Google to utilize Google Assistant, realizing the benefits that Amazon’s voice assistant, Alexa, may bring to its e-commerce operations.51 The Apollo platform, nicknamed the “Android” of “autonomous driving,” collaborates between Ford, Daimler, and Baidu (CBInsights, 2018). Volvo and Audi have embraced Google’s “Android Automotive” platform, which Google created. After going it alone with its Predix digital manufacturing technology, GE has collaborated with Microsoft to utilize its Azure cloud services. Meanwhile, Intel and Facebook are working on a new artificial intelligence processor together.52 AI exacerbates the monopolies dynamics since such strategic alliances of digital business networks are formed around privately produced technological standards aiming at sectoral domination. 4. Asymmetry of information and data Through extensive digital penetration into the former’s production systems and personal virtual surroundings, platforms control enormous data on producers and consumers/users in the digital economy. But the two sides, producers, and consumers/users—maybe even both—lack such data about each other, particularly given the platforms’ breadth and depth of information. This means that platform owners may have an impact on the performance of producers that utilize their marketplace by analyzing underlying behavioral/psychological patterns and then

50

Reuters, 20 November 2017, Volvo cars to supply Uber with up to 24,000 self-driving cars. Tech Crunch, 22 August 2017, Walmart and Google partner on voice-based shopping. 52 Livemint, 8 January 2019, Intel working with Facebook on AI chip coming later this year. 51

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“surfacing” or “generating” customer “demand.” These knowledge asymmetries may stifle the market’s ability to operate freely (Simpson, 2016). As a result, the market’s “invisible hand” becomes more digital and controlled by platform firms.53 Competitive businesses and checks against price-fixing and collusion tend to lose relevance when private platforms set prices dynamically, opaquely, and sometimes algorithmically. As digital monopolies grow, the balance of power will favor the platforms’ proprietors. 5. Participation in global policymaking The declared imperatives of global digital platforms to expand, extract, and enclose extend beyond national boundaries. Consequently, it’s to their best advantage to promote international norms and laws that allow for and ease the implementation of their business models (see Footnote 4). The pandemic has further consolidated Big Tech. Before Covid-19, the IT industry’s giants had already risen to sky-high values and were the focus of ever-increasing antitrust probes. They have only grown in size as a result of the pandemic significantly larger (Fig. 7.11). The forces that are propelling them forward are expected to outlive Covid-19. Since last year, almost every area of life has grown increasingly dependent on technology: the tools we use to work, study, and play; the way we buy and connect; and how companies function and promote their goods. Digital advertising, cloud computing, and online retail saw increases even as the economy went through one of its worst slumps. In the end, several of the world’s biggest companies have seen their stock values soar. Total revenue of the five biggest US technology firms, while airlines and brick-and-mortar shops took hard knocks, FAAMA increased by a fifth to $1.1 trillion. Revenues saw frenzied growth in 2021 (Fig. 7.12). A whopping 24% was added to their overall earnings. Amazon alone hired 500,000 additional workers in a single year, nearly equaling Atlanta’s population. The economic and social factors pushing it forward will certainly outlive Covid-19. Microsoft CEO Satya Nadella has said that he expects technology expenditure to quadruple from its present level of 5–10% of gross domestic product. Recently, he has indicated that he now expects this to happen even quicker (see Footnote 172).

7.1.1.3 Big Tech Faces Competition The digital revolution is divided into two stages. First, Silicon Valley firms do all the work; new markets are being created, while weak companies in inactive sectors are eliminated. Up until this point, this has been the story.54 As anticipated by investors, technology companies have accounted for 42% of the rise in the value of the American stock market since 2014, and they will continue to take a more

53

The Wall Street Journal, 28 November 2016, The invisible digital hand. IBM in 2018 will be the year that big, incumbent companies take on big tech, The Economist, 3 Jan 2018.

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Fig. 7.11 Soaring market value of FAAMA from 2012 to 2020. Source FactSet in 2018 will be the year that big, incumbent companies take on big tech, The Economist, 3 Jan 2018

Fig. 7.12 Frenzied growth of FAAMA. Source S&P Capital IQ in 2018 will be the year that big, incumbent companies take on big tech, The Economist, 3 Jan 2018

significant part of corporate earnings. A frightening phrase of the 2000s has been rehashed as the new corporate lexicon: being “Amazoned.”55

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2018 will be the year that big, incumbent companies take on big tech, The Economist, 3 Jan 2018.

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The second phase is now in progress and is designed to assist existing brickand-mortar companies. Brick-and-mortar businesses are becoming more astute. They rekindle the drive to adapt and innovate to develop new digital goods and increase efficiency. It’s a self-serving scheme. The bulk of IBM’s customers have established companies, and the company itself is fighting for survival against cloud-based technology competitors. In many industries, incumbents are finally getting their act together regarding technology. The strategies of 14 of America’s 20 most valued non-technology businesses now have a digital component. Several Fortune 500 businesses combine e-commerce, big data, and artificial intelligence (AI) projects as fashionable brews. Incumbents have several advantages. They control approximately 80% of the commercial world’s data. Suppose AI will transform civilization by enabling better decision-making through data. In that scenario, the vast bulk of historical datasets regarding, for example, jet engine performance or textile supply chains are held by well-established companies that are outside Amazon and Facebook’s grasp. The overall cash flow of incumbents is four times that of technology companies and 18 times that of venture capitalists each year (see Footnote 55). As more CEOs take notice of pioneers like Walmart’s soaring share prices after digital infusion, traditional companies’ digital investments will only grow in scale. Even if a significant percentage of companies make a total mess of things, it would still make sense. A digital strategy will act as a method of survival and growth for big incumbents (see Footnote 55). The widely held belief that monopolies dominate the technology industry has monopolized much thought, from investor strategies to antitrust watchdogs’ legal briefs. Nonetheless, it is becoming more challenging to sustain. The industry is entering a dynamic phase following a long period of ossification. Oligopolies are forming in America’s digital markets, with second and third firms fiercely competing against the incumbent. As demonstrated by the dispute between Facebook and Apple over who controls iPhone users’ privacy, the big technology firms are battling over consumers and data. Digital giants are fighting all across Asia. The industry’s developing structure is a long cry from open, dispersed capitalism. On the other hand, an oligopoly of competitors is better than a monopoly. In Silicon Valley, the creative destruction gale used to be fierce. After establishing dominance in their chosen field, many technology firms, particularly the large ones, have demonstrated little appetite for direct competition over the last decade. From Fairchild Semiconductor to Hewlett-Packard, the list of firms dethroned from dominance is lengthy. Yet the giants have clung to their positions in recent years: Apple and Microsoft are in their forties, Alphabet and Amazon are in their twenties, and Facebook is turning seventeen this month. So, what happened? Due to network and scale effects, size breeds size, and data may be a barrier to entry. Facebook, YouTube, and Google are the three most frequently searched terms on Microsoft Bing.

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Nothing appears to have changed at first glance. Investors are betting on a profitable 2021 for technology firms. The $9.6 trillion market value of America’s five juggernauts implies that their sales will double over the next decade. However, upon closer examination, a shift is evident. The incumbents are not shrinking— Across 11 American technology subsectors, big tech’s weighted-average market share has remained steady at approximately 35%. However, since 2015, the share of second and third companies has risen from 18 to 26%. Two fundamental patterns are shown in this (see Footnote 56). To begin with, big technology firms are diversifying as their main products age, new technical possibilities arise, and regulatory challenges in Europe, the United States, and China become more intense. Alphabet and Microsoft are waging a cloud war against Amazon, and Amazon, in turn, is a growing force in digital advertising. Since 2015, the percentage of income produced by the five American behemoths that overlap with the revenues of the others has risen from 22 to 38%. Outsiders are gaining traction in the second trend, accounting for roughly a third of the market share change. Disney gained 116 million new streaming subscribers in 18 months at the age of 98, while Walmart earned $38 billion in online sales last year at the age of 58. Due to the pandemic digital boom, independent technology companies such as Shopify in e-commerce and PayPal have become prominent and are now profitable enough to survive (see Footnote 56). While some may think this is just a fad, it has happened before in Asia, where consumers have leapfrogged ahead, resulting in market share changes, reduced margins, and innovation. Alibaba, Tencent, and five more businesses in China are valued at least $100 billion. Jio operates in India, while Grab, Gojek, and Sea operate in Southeast Asia. Koo, India’s new kid on the block and a Twitter alternative has surpassed 100 million users in a short period. Instead of protecting a static monopoly at all costs, these companies consider subscribers who could be convinced to buy a wide variety of services. They want diversity for development, even if it means clashing with rivals. One danger is that Apple and Alphabet’s duopoly over phone operating systems and app marketplaces has yet to be challenged by this oligopolistic competition. Advertisers now have more choices, such as Facebook and Amazon, but prospective buyers still have no credible alternatives to Facebook’s goods. Furthermore, there are too many unscrupulous ties between companies. For making Google the default search engine on the iPhone, Alphabet pays Apple up to $12 billion each year. Both Alibaba and Tencent own interests in several of China’s startups (see Footnote 56). This is where new antitrust enforcement may help. A Department of Justice lawsuit has been filed over the Google payments, while Apple and Google have received complaints regarding their app shops. Europe is working on regulations to make various companies’ products operate together and make it easier for consumers to transfer their data. China has issued a new list of “the nine do nots” for e-commerce companies, including not closing the doors to new competitors.

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It helps that there is a lot of it. In luring business to its cloud platform, Alphabet is losing $6 billion each year, more than Amazon has lost in its entire existence. Facebook is branching out into e-commerce. Microsoft is considering purchasing TikTok (subsequently, the plans were shelved) and Pinterest, two social media companies. Huawei is working on an alternative to Apple’s iOS and Google’s Android operating systems in China (see Footnote 56). Consumers may profit from oligopolistic competition in a variety of ways. It may increase options if more businesses compete to provide a wider variety of services: Over 100 million digital subscribers are served by 11 American companies.56 It can improve standards by allowing platforms to distinguish themselves based on their trustworthiness. As a result, Apple has asked iPhone users whether they want to opt out of Facebook’s data collection, potentially upending the ad industry. It may also drive innovation as companies look for new methods to restrict consumer access, such as virtual reality. Regulators are attempting to break up regional markets; a financial boom means plenty of cash, and internet activity has increased demand worldwide. Markets, consumers, and companies benefit from a more competitive digital economy. No one knows whether the oligopolistic development struggle will endure or benefit consumers. The rules have changed: A peculiar linguistic feature exists in technology firms. The verbs Google and Zoom are nouns. Taobao, Alibaba’s massive e-mall, is a Chinese noun. “Cab” is synonymous with Uber and Didi, its Chinese ride-hailing competitor. In Vietnam, Facebook refers to the internet, which is mainly accessed via social media by the Vietnamese. Technologists’ detractors claim that these definitional regularities reveal a hidden agenda by summarizing each company’s control over its digital fief, some of which may have been ill-gotten. Trust breakers in the United States sued Facebook for claimed anticompetitive conduct, while investigators in China began looking into Alibaba’s business practices. An arrangement under which Google pays Apple between $8 and $12 billion a year—about a fifth of Apple’s worldwide profits—for its search engine to display as the default on Apple devices is the central plank of one of three antitrust lawsuits against the company. Furthermore, Google reportedly offered Facebook a sweetheart deal not to endorse a competing ad system supported by media companies (see Footnote 58). This gives the industry a nice club look from the outside, with its members staying out of each other’s way or worse, helping each other keep their monopolies alive. And the giants’ power is just growing. More and more individuals turn to socially distant work, entertainment, buying, and socializing on digital platforms like Facebook and Google. Last year, the ten largest digital firms made $261 billion in net earnings. This growth in their total market capitalization— which now exceeds the value of the whole British stock market—indicates that investors anticipate them to acquire even greater power in the coming years.

56

The rules of the tech game are changing, The Economist, 27 Feb 2021.

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Big tech has a distinct point of view. The cohort of Apple, Google, Facebook, and Alibaba claims that their agreements are lawful. True, American companies collaborate, but only to verify that their goods are compatible with one another. Indeed, the big tech companies claim that their business ties are everything but amicable. Mr. Zuckerberg named Apple “one of our greatest rivals” in a recent Facebook post. “We feel like every day we wake up, we are under incredible competitive pressure,” says Apple (see Footnote 56). Big tech has experienced more abuse than goodwill in recent weeks. Facebook has launched advertisements criticizing Apple over the new privacy settings. According to Facebook, the new iPhone privacy settings will ask users whether they want to opt out of being tracked across other companies’ applications and websites, which would harm small businesses that rely on Facebook to reach consumers. The brawling underscores a rising feeling among technology executives that incumbents are under siege. Even though dominating companies are strong and sometimes collaborative, challengers are gaining ground in every digital market space. Old industry giants like Walmart and Disney, who dominate online shopping and streaming, finally put their digital house in order. Smaller digital companies like Shopify, which specializes in e-commerce, and Salesforce, which provides cloud-based business software, are also expanding. More money flowing into startups has the potential to lead to more competition. The world’s most powerful tech companies are rapidly invading one another’s sphere of influence. As technology moves into a new, more competitive phase, the winner-takes-all land grab period may end. If that’s the case, the industry’s task may become more complicated quickly. China is the country that has progressed the most. Alibaba and Tencent, the country’s two largest digital conglomerates, have already fought with up-andcoming competitors in various sectors. Alibaba’s share in Chinese e-commerce peaked at 62% in 2013, and it was 51% last year (Fig. 7.13). A competition that was formerly fragmented is now becoming more consolidated. The following two most prominent companies, Pinduoduo and JD.com, an e-merchant backed by Tencent, have taken 24% of the market. CLSA predicts that by 2026, they will have reached 33%. Tencent’s WeChat Pay and Alibaba’s Alipay have long competed to be the digital wallets of Chinese consumers. Tencent stated last year that it would spend $70 billion over five years to catch up with Alibaba in cloud computing. The technological environment in the United States is also changing. The Economist examined 11 major technological markets in the United States, which produced $1.6 trillion in total sales. The leading firm’s market share has remained stable in app stores, business software, cloud computing, and internet advertising over the last five years. Since 2015, it has dropped by double digits in food delivery, ride-hailing, and video streaming.

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Fig. 7.13 Market share of Chinese e-commerce firms. Source CLSA in The new rules of competition in the technology industry, The Economist, 27 Feb 2021

Even in areas where the incumbent’s share increased somewhat, such as ecommerce and smartphones, the combined share of the following two most significant competitors increased faster (see chart57 ). The two runners-up now account for a third or more of the market in six of the 11 regions, up from two in 2016. Outside the top three, laggards are being left in the dust. Walmart’s years of investment in online fulfillment started to pay dividends during the epidemic. Shopify, a 14-year-old Canadian company, now owns a tenth of the US e-commerce industry, up from one-seventy percent in 2015. Its market value has increased sevenfold to $150 billion in the last two years. The increasing overlap between America’s five significant behemoths is perhaps the most striking aspect of the new language of competition. Google, Amazon, Apple, Facebook, and Microsoft are starting to mirror Alibaba and Tencent’s competition on a larger scale (see Footnote 58). To be sure, both firms have a vested interest in ensuring that their systems operate in tandem. Demand for iPhones is fueled by consumers’ desire to use Google’s search engine and Gmail and Facebook’s social networks. Amazon’s low-cost cloud computing results in more Apple App Store applications. Microsoft licenses Android for its Surface Duo smartphone, and Amazon is one of Google’s most prominent advertisers (see Footnote 56). Indeed, the five American behemoths continue to draw most of their revenues and earnings from the operations that propelled them to trillion-dollar or near-trillion-dollar status. Last year, internet advertising accounted for 80% of Alphabet’s revenue and 98% of Facebook’s. Apple’s elegant gadgets (primarily iPhones) accounted for over 80% of the company’s sales in 2020. Microsoft

57

Bloomberg, Gartner, IDC, US Census Bureau, Magna, Newzoo, Sensor Tower in The new rules of competition in the technology industry, The Economist, 27 Feb 2021.

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depends on corporate software for a significant portion of its income, while Amazon relies on its online marketplace. However, its cloud computing arm generated most of its (comparatively meager) profits, Amazon Web Services (AWS). These numbers, however, used to be more significant. Apple has decreased its dependence on iPhones, iPads, and Mac computers by diversifying into payments, finance, and entertainment, as the number of first-time iPhone purchasers has declined. The overall income from services is 20%, up from 5% five years ago. Like video and music streaming, some compete with Amazon Prime Video and Prime Music and specialized providers like Netflix and Disney (for video) and Spotify (for audio). Amazon’s e-commerce revenue share has dropped from 87% in 2015 to 72% this year; the cloud now accounts for a tenth of sales, and digital advertising accounts for 6%. Last year, Alphabet’s advertising revenue was ten percentage points lower than 2015 (see Footnote 58). Those percentage points that the core businesses have given up are coming from many new enterprises. The leading five get in each other’s way in many of them. Nearly half of their income comes from regions where their companies intersect, up from a fifth in 2015 (Fig. 7.14). Each of the digital giants is present in the majority of the business sectors, from smart speakers and smartphones to texting and videoconferencing. Many of these businesses have yet to make a substantial profit. The giants’ astronomical stock market valuations ranging from 25 to 82 times annual earnings force them to adopt aggressive growth plans. They must seek fresh growth possibilities elsewhere when their core businesses age and slow. With the trustbusters on high alert, purchasing or otherwise neutralizing upstart rivals is becoming more complex. Growth may be contingent on competing in well-known large markets via in-house efforts (see Footnote 56).

Fig. 7.14 The FAAMA play. Source Company reports in The new rules of competition in the technology industry, The Economist, 27 Feb 2021

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Mutual toe-treading ensues in a variety of ways. To begin with, companies are increasingly offering goods or services that are comparable. Second, they provide similar goods and services via different business models, such as giving free things that a rival charges or charging for a service that a competitor provides for user data sold to advertisers. Third, they’re looking at burgeoning spaces like artificial intelligence (AI) or self-driving vehicles. Direct competition is fiercest in the cloud, a $63 billion business growing at 40% annually and expected to reach $1 trillion in the next decade or two. Microsoft’s Azure cloud computing division, which is 11 years old, generates an estimated $20 billion in annual revenue. Bernstein forecasts that cloud computing will account for 13% of Google’s revenue by 2024, up 7% in 2020. Recognizing the unit is essential, Google disclosed its cloud business’s operating results in January (expected to lose $5.6 billion in 2020) (see Footnote 58). Another area of contention is e-commerce, which the pandemic has accelerated. Facebook Shops was launched to compete more directly with Amazon, providing a method to sell their goods to the roughly 160 million companies that currently utilize the social network or Instagram as a shop window. Google and Facebook have teamed up with Spotify, whose sellers sell on their platforms. Microsoft intends to offer automated checkout technology to Walmart as part of its retail strategy. Amazon will find it easier to enter social media than someone like Facebook to get into online retail because supply chains and logistics are difficult to set up. Google still owns the lion’s share of its search advertising business. However, The Amazon app or the business website now serves as the starting point for most product searches. Apple’s search goals are similar to those of Google. A search engine in the form of Apple’s voice-activated personal assistant, Siri, is what it is. When answering the most valued questions from wealthy iPhone owners, Apple could sort the wheat from the chaff. When it comes to advertising money, Amazon is directly competing with Google. Apple does not appear to be interested in directly profiting from search advertising. Rather than that, to Zuckerberg’s understandable dismay, its search effort may be intended to lure the privacy-conscious even deeper into the secure “walled garden.” It compels Facebook and Google to develop services and products that entice users to respond affirmatively to the tracking question. Instead of entering new technology sectors, businesses are being driven into them, frequently by their customers. Because of the internet and vast amounts of data, you can easily expand into the one over the fence if you’re in one industry. E-commerce and social media are excellent examples of this. “Social shopping,” in which retailers organize massive virtual shopping sprees for buyers via social media, is popular in China and may soon spread to the West. This trend is expected to pick up steam as companies stop looking over their neighbors’ shoulders and start looking forward. They are often pointing in the same direction toward data and AI. The tech giants prefer their voice assistants to be used by consumers’ method for accessing the internet. PayPal’s recent success at the cost of Visa and Mastercard has made everyone else eager for the payments business.

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Big tech is investing billions in audacious artificial intelligence projects. Many manufacturers have approached Apple about creating a self-driving vehicle which has previously been the domain of Alphabet subsidiary Waymo. Nothing has come to fruition, but the concept of an Apple car is almost certain to persist. Not everything has gotten better. There is still little competition in the handset market. Apple’s iOS and Google’s Android continue to hold a duopoly on mobile operating systems. Their app store is also a duopoly. If the skirmishes escalate, the tech companies’ profitability may suffer. Margins in cloud computing, the most competitive sector, are already contracting. Google’s challenge to the AWS/Azure quasi-duopoly has resulted in price reductions, and Tencent’s cloud investments will almost certainly add to the pressure. Over the last decade, the operating margins of Alphabet have shrunk by 13%. Apple’s margins are also down ten percentage points from their 2012 high. Facebook has fallen from a lofty 50% in 2017 to less than 40% (see Footnote 56). On the other hand, increased competition may account for the narrower total margins. Another reason is that entering new markets depletes the profitability of core businesses. The assumption that the world’s tech giants are either plotting to split the digital pie or deliberately avoiding each other is no longer valid. Understandably, many people would like to see more than a few companies fight for the economy’s crucial digital marketplaces. That being said, it’s excellent news for the rest of us as long as they’re fighting it out.58 The chickens have come home to roost for the Big Tech, it appears. The laws of physics can be suspended at the whim of a programmer in the digital realm. The corporate architects of that universe also appeared to be able to escape economic gravity. Although Covid-19 may have made physical lives more condensed, it improved digital ones, greatly enhancing big tech. The digital portion of the American GDP has increased by a third, to 10%, since 2005. Even that rapid expansion has not kept up with America’s tech oligopoly, which consists of Meta, Alphabet, Amazon, Microsoft, and Apple (or MAAMA, if you like). Over the previous ten years, MAAMA’s sales and earnings have increased together by about 20% a year, compared to America’s nominal yearly GDP growth of less than four percent (see Footnote 59). Gravity has reestablished itself this year. Since January, the tech-heavy Nasdaq index has declined by 25%, almost half as much as America’s overall stock market decline. Anemic revenue growth and rising interest rates have weighed heavily on the unprofitable not-so-big tech sector, making the future earnings of companies like Snap appear less attractive today. What’s more startling is that the giants also feel the pull of reality while making tons of money right now. Since the gloomy first few months of the epidemic, Alphabet recorded its worst quarterly

58

The new rules of competition in the technology industry, The Economist, 27 Feb 2021.

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sales growth. Even if predictions were even worse, the company’s share price only increased little, not enough to reverse previous declines. A day later, Meta reported that for the first time, year-over-year sales decline (see Footnote 59). America’s computer giants suddenly face issues that have long plagued CEOs in the old economy: clogged supply chains, protectionism, a shortage of workers, and competition. These limitations are somewhat unusual for MAAMA. In a world of seamless global supply chains and essentially borderless cyberspace, geography is one restriction that is frequently disregarded. The tech titans share in the suffering of supply disruptions to the extent that they sell actual goods rather than just bytes (see Footnote 59). Apple issued a warning in April that its second-quarter revenues will be $4–$8 billion lower than anticipated, primarily due to supply chain issues in China, where manufacturing is shut down with frightening severity whenever a case of Covid is discovered. Innovative inventory-management software has not protected Amazon, which, like traditional merchants like Walmart, underestimated what customers would want and when, from additional expenses. As regions from the European Union to India become increasingly protective of their citizens’ data and digital darlings, barriers are also being established online. That worries Alphabet, Meta, and Microsoft since there aren’t many obstacles to selling digital services outside China’s firewall. Talent is another constraint. Tech companies are not accustomed to searching for top programmers. Big IT has trouble hiring, nevertheless, having replaced banks and consultancies as graduates’ ideal employment. One factor is the enormous growth of MAAMA’s total workforce, which has increased to 2.2 million, nearly seven times in the last ten years (see Footnote 59). The difficulty is to expand, let alone replenish, as the payroll increases. Big tech is also up against more fierce competition from other sectors, many of which today exhibit a certain level of techiness without the scandals that have damaged big tech’s reputation. The MAAMA markets are the final restriction. The pandemic appears less like the beginning of an era of perpetual digitalization and more like a one-off stepchange when industries like e-commerce return to pre-Covid growth rates. Tech products are acting like other essentials as they grow more widespread. Digital ads, formerly assumed to be immune to the business cycle, may be turning out to be just as procyclical as the offline variety, as Alphabet and Meta demonstrate. Tech markets are more developed, whether in online advertising or shopping, the cloud, or cell phones. Mature markets expand more slowly, especially when authorities stop ignoring them. In several industries, incumbents’ high margins are under pressure from competition. For instance, Amazon is making significant investments in its advertising company, which is Alphabet’s area of strength, while Alphabet is spending billions to establish itself in the cloud, which is Amazon’s. MAAMA Mia, can you grow once more? The titans of technology could yet regain their ability to manipulate reality. One Medical, an American healthcare provider, was purchased by Amazon this month for $3.9 billion (see Footnote 59). This is just the most recent MAAMA endeavor to take over one of the final underdigitized areas large enough to make a difference for a trillion-dollar company.

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They might create a brand-new market once more, as Apple did with the app economy on the iPhone and intends to repeat it with augmented reality. But the big tech exceptionalism period is probably over until that happens.59

7.1.2

Duopoly in Digital Advertising

Digital advertising becomes more critical as increasingly social and economic activities migrate online. Even analog media companies such as magazines, newspapers, and television are turning digital and therefore seek digital ad money to support themselves. Digital advertising accounted for less than 5% of all advertising in the United States in 2001, when Google was a startup, and Mark Zuckerberg was still in high school (Fig. 7.15). By 2023, more than half of all media ad expenditure will be spent on digital advertising (eMarketer, 2019). There’s a duopoly in digital advertising. Google and Facebook make up about 66% of the worldwide market. These two companies generated Sixty-one percent of all digital advertising income in the United States. Meanwhile, Google’s revenue share from “search advertising” in Australia was 96%, while Facebook had a 46% revenue share in “display advertising” (with no other player having more than 5%) (Australia Competition & Consumer Commission, 2018).60 These companies’ expansion into the developing world would consolidate their control over data and online advertising revenue (Fig. 7.16).61 The digital titans’ conquest of advertising appears unstoppable as even more marketing drifts online. Offline ad sellers, who have been declining for years, and creative agencies, who act as a middleman but whose profits are squeezed on both sides, face extinction. Advertisers were spending twice on Print and radio advertising than on internet advertising in 2010, despite consumers spending more time on cellphones and computers. But businesses soon realized that they didn’t need analog advertising anymore. In contrast to conventional formats, digital advertising will stay steady or perhaps increase this year, while print advertising will see a 32% drop.62 The internet attracts new advertisers and encourages existing ones to increase their spending. Online is a viable option for small companies that can’t afford to use costly television footage. The 100 biggest advertisers on the US TV network take up nearly

59

The era of big-tech exceptionalism may be over, The Economist, 27 July 2022. The Wall Street Journal, 27 November 2018, Amazon, with little fanfare, emerges as an advertising giant. 61 Digital Economy Report, United Nations Conference on Trade and Development (UNCTAD), 2019. 62 MAGNA, a research arm of Interpublic in The advertising business is becoming less cyclical— and more concentrated, The Economist, 25 June 2020. 60

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Fig. 7.15 US advertising spending by medium, %. Source Mofett Nathanson, Bond Capital, eMarketer in The advertising business is becoming less cyclical—and more concentrated, The Economist, 25 June 2020

Fig. 7.16 Growth of spending on digital advertising in top 10 countries. Source eMarketer in The Wall Street Journal, 27 November 2018, Amazon, with little fanfare, emerges as an advertising giant

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Fig. 7.17 Time spent versus advertising spending by medium in the US, %. Source Mofett Nathanson, Bond Capital, eMarketer in The advertising business is becoming less cyclical—and more concentrated, The Economist, 25 June 2020

three-fourths of ad sales, but the top 100’s share is limited to 26% and 20%, respectively, in search and Facebook.63 The time spent by people with different media and the money spent on advertising broadly is in sync (Fig. 7.17). Direct mail and in-store advertising are being shifted online as companies shift their “below the line” marketing expenditures. Buyers have been encouraged to continue running commercials by the analytics provided by technology giants until the return on investment begins to taper off. And the growing number of businesses that exist solely online makes it challenging to reduce online advertising. Digital advertising is “the new rent” for them.64 However, while saving money on physical stores, online merchants must maintain a noticeable virtual presence, regardless of the economy. Meanwhile, everyone is powerless against a near-duopoly. Google and Facebook own nearly 60% of digital ad real estate. Google is under pressure from investors to include ads in its Maps service. Because of Google’s anticipated 4% drop in net advertising income in the US this year, their cries may grow shriller (see Footnote 63). Facebook could invest significantly more in Instagram. WhatsApp, which Facebook also owns, is described as “the most under-monetized app in existence” (see Footnote 64). As more advertising dollars migrate online, a more significant share of the pie will fall to Google and Facebook, capturing 90% of new online ads spent last year. Finally, there is a crucial explanation for the continued

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The advertising business is becoming less cyclical—and more concentrated, The Economist, 25 June 2020. 64 Bernstein in The advertising business is becoming less cyclical—and more concentrated, The Economist, 25 June 2020.

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Fig. 7.18 The top-3 digital advertising revenue share, worldwide, %. Source Mofett Nathanson, Bond Capital, eMarketer in The advertising business is becoming less cyclical—and more concentrated, The Economist, 25 June 2020

durability of digital ad expenditure. Compared to a decade ago, it closely resembles people’s actual media habits; it now bears a strong resemblance to how they spend their time.65 Additionally, as these habits evolve, they will favor digital advertising. People’s main focus has shifted away from television and onto mobile devices. Before the pandemic, each year saw an increase in Americans canceling cable television contracts. As a result, consumers on a budget turn to streaming services like Netflix. Television advertising, which has been relatively steady in recent years, is expected to change in the following years and “will finally begin to crack.”66 As more advertising dollars go online, Google and Facebook will take a larger piece of the pie, as they did last year with 90% of new online ad expenditure. Their worldwide digital advertising market share is expected to rise to approximately 70% in the next several years, and they have plenty of room to show more advertisements (Fig. 7.18). Unsurprisingly, the effect of these businesses on privacy, market power, freedom of expression, censorship (including unwanted material), national security, and law enforcement has been a source of worry for some observers. On the other hand, they continue to be popular because of the cheap or no-cost services they provide to customers (Yglesias, 2019).

65

Bond Capital in The advertising business is becoming less cyclical—and more concentrated, The Economist, 25 June 2020. 66 Moffett Nathanson in The advertising business is becoming less cyclical—and more concentrated, The Economist, 25 June 2020.

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The stakes are exceptionally high for Facebook, as digital ad revenue accounts for nearly all revenue. Its $70 billion advertising business is based on 8 million advertisers, primarily small companies with marketing expenditures of hundreds or thousands of dollars, dependent on Facebook as a crucial digital shop. The top 100 advertisers earn less than 20% of overall income, whereas the top 100 advertisers on “American network television” generate 71% of total revenue.67 ,68 ,69 After that, there is Amazon. The e-empire is still a distant third in digital advertising, but it is quickly expanding. Amazon accounts for more than half of all online product searches, a significant portion of Google’s search revenue. Its ads are incredibly successful since customers come to the site ready to buy, and also the site’s purchase history data allows it to target them accurately. It hasn’t started airing ads on its Prime Video program yet. If it succeeds, though, advertising income will pour in. When viewers see an advertisement, they may purchase on Amazon without launching the shopping, using voice control, even without lifting a finger. Within two or three years, Amazon anticipates selling commercials on Prime Video. Its two big tech competitors, Facebook Shops and Google Shopping, aim to break into retail quicker than grow in advertising. By making it easy for marketers to produce advertisements, the internet giants undermine the advertising industry. In the United Kingdom, the five biggest agencies that handle most television advertising manage just 13% of internet search ads and 44% of online display commercials. For at least three years, the share prices of five major advertising agencies have been flat or declining; all have plummeted during the pandemic (see Footnote 63). The three digital behemoths now control more than half of all advertising money spent in the United States. Amazon joins the digital ad party. They got there due to the pandemic economy. When the pandemic rocked the economy last year, businesses shifted their focus to digital advertising. As per a preliminary analysis conducted by GroupM, an ad agency, the three primary tech titans captured most of all advertising spending in the United States for the first time last year. Changes brought on by the epidemic lie underneath the shift: more time spent in front of a computer screen; more e-commerce; an increase in the creation of new businesses; and a gradual improvement in internet companies’ capacity to show a return on advertising expenditure. Success begets success in the “triopoly,” as some refer to it. Increased buying and spending on Google, Facebook, and Amazon’s platforms adds to their enormous user databases, making them even more attractive to marketers seeking to bring their messages well directed. The triopoly is data-science-driven and grows robust and faster with heavier usage-generously aided by the pandemic. Many of the changes brought about by pandemics are almost undoubtedly permanent. Even

67

Moffett Nathanson in Why Facebook is well placed to weather an advertising boycott, The Economist, Jul 2, 2020. 68 Pathmatics in Why Facebook is well placed to weather an advertising boycott, The Economist, Jul 2, 2020. 69 Why Facebook is well placed to weather an advertising boycott, The Economist, Jul 2, 2020.

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so, once the pandemic is over, it is far from clear that the IT behemoths will maintain their current rate of market share growth. Consumers may spend less time and money online because of the vaccination rollout and the relaxation of lockdowns, while marketers could diversify their spending (see Footnote 72). Last year, online advertising grew at the expense of all other forms of advertising; with double-digit losses in newspapers, television, and billboards, the IT companies gained enormously from their online advances. The triopoly increased its US digital advertising market share from 40% in 2019 to 60% in 2020.70 The increase comes as the three face increased scrutiny and lawsuits from government bodies at home and overseas about their dominance. Google revealed plans to change its ad-buying and selling tools for advertisers and publishers, indicating a move away from targeting advertisements based on users’ online surfing behavior. However, this shift could strengthen Google’s grip on the online advertising industry by increasing the value of the data flowing via Google sites like YouTube and Search. The three behemoths collect money spent on media advertising and some of the money spent on catalogs, coupons, and in-store promotions. By 2023, Amazon will stream Thursday Night Football, providing the company with a high-profile franchise that will attract advertising dollars typically spent on television broadcasters (see Footnote 72). The growth of new businesses benefited the most powerful technology platforms, which provide the advertising dollars that a startup can pay for. In the third quarter of 2021, Facebook had over ten million active advertisers, up from eight million in January. Before the outbreak, little more than 10% of all retail sales in the US were conducted via the internet. This increased to 16% in the second quarter of last year, when lockdowns peaked, significantly benefiting tech behemoths. “The pandemic zapped us two years into the future on the e-commerce site.”71 Mondelez, the maker of Oreo, spent more on digital advertising than on television commercials for the first time last year. Google and Facebook reaped the most. Mondelez reports that when they invest in advertising digitally, it receives a 25% higher return than when it advertises on television. Its Google and Facebook advertisements work exceptionally well, earning 40% more money than the typical digital ad.72 Mondelez currently spends 60–70% of its digital advertising budget on these two behemoths, up from less than 50% in 2017. Google and Facebook share the data, enabling Mondelez to understand its customers better.73 Mondelez discovered, for example, that in the morning, individuals search for healthier foods, and in the evening, they look for more fatty meals.

70

GroupM in How Covid-19 Supercharged the Advertising ‘Triopoly’ of Google, Facebook and Amazon, The Wall Street Journal, Mar 19, 2021. 71 eMarketer in The Wall Street Journal, 27 November 2018, Amazon, with little fanfare, emerges as an advertising giant 72 How Covid-19 Supercharged the Advertising ‘Triopoly’ of Google, Facebook and Amazon, The Wall Street Journal, Mar 19, 2021. 73 Mondelez in The Silicon Valley economy today and tomorrow, Alexander Quinn, Director of Research, JLL, Dec 18, 2019.

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The pandemic presented a once-in-a-generation opportunity for direct-toconsumer businesses. The pandemic has permanently altered work life, with approximately 72% of businesses opting for the hybrid model. This hybrid approach is inevitable, providing additional impetus to digital advertising. More than half of the worldwide digital ad income comes from Google and Facebook. This industry has been expanding at double-digit rates over the past decade. Advertising revenues from digital media already account for more than half of all worldwide ad expenditures, and their proportion of the market is only going to increase.74 It is anticipated that a small number of platform companies would have complete control over what people see and hear, forcing other companies to bargain away their revenues (to purchase ads) to get access to those customers and markets. Like medieval land taxes, advertising will suffocate the rest of the economy. While this may seem far-fetched, stock market investors are increasingly betting on this dystopia. Over the past five years, the combined market value of twelve U.S. businesses that depend on advertising income or are building strategies around it has risen by 126% to nearly $2.1 trillion (see Footnote 75). The advertising-centric sector of America’s economy has grown to be systemically significant, with a market value greater than that of the banking industry. Big money is being spent on advertising, which raises the question: how much more can the United States take? The two biggest firms are Google and Facebook, making almost all of their money from advertising, nearly 88 and 97%. Additionally, the possibility of advertising income justifies such big takeovers. In 2016, Microsoft’s acquisition of LinkedIn for $26 billion was predicated on “monetizing” their user base via advertisements. To build a digital advertising platform that links AT&T’s data with Time Warner’s television programming, the company has bought Time Warner for $109 billion. To put it another way, based on current share prices, advertising revenues in the United States will rise by 2027 from 1% now to 1.85 of GDP (see Footnote 75). It is going on a tear. Thanks to troves of data gathered to anticipate their needs, advertising to identify and entice consumers to spend money will become increasingly successful in the coming years. Advertisements in Time magazine or on Times Square billboards were once considered high-priced items that large corporations could only afford. However, technology platforms have effectively convinced smaller businesses to spend money to better target customers. Facebook has 6 million advertisers, which is equivalent to a fifth of all small businesses in the United States (see Footnote 73). As commerce moves online, businesses will reduce their reliance on traditional marketing (for instance, to guarantee their items are prominently displayed on Walmart’s shelves, consumer goods, and food businesses pay fees to Walmart), increasing digital advertising spending by freeing up the budgets (see Footnote 75).

74

The Silicon Valley economy today and tomorrow, Alexander Quinn, Director of Research, JLL, Dec 18, 2019.

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The digital world has already reached saturation point, and people increasingly utilize ad-blocking software. Nonetheless, there also exist numerous logical restrictions on the size of the advertising market: the irritability factor or the maximum amount of information that consumers can absorb without becoming irritated. During the analog era, ads could not comprise more than 33–50% of television or radio programs or magazine pages. Consider what would happen if advertising spending in America increased to 1.8% of GDP by 2027. As a result of higher costs for most companies, overall corporate earnings excluding advertising platforms would fall from about 6.5 to 5.7% of GDP, a level typically associated with recession. Alternatively, consider what would happen if all of the additional costs associated with the advertising boom were borne by the firms in S&P 500 index (not including the ad platforms).75 At or around their cost of capital, their total return on capital would drop from 10 to 8%. Instead of becoming the world’s most successful company, America Inc. would descend into a financial zombie state similar to that of the country it emulates: Japan. That does not appear to be the case. Investors in the stock market are mistaken in anticipating a massive increase in advertising revenues, which may be an exaggerated estimate. The Google-Meta advertising duopoly is under attack: There have been two fundamental truths about internet advertising for the past ten years. First, the industry was remarkably immune to the business cycle despite its fast expansion. The second factor was the duopoly of Google (in search ads) and Meta (in social media), which one envious competitor has compared to John Rockefeller’s monopoly on oil in the late nineteenth century. These two truths are currently being contested at the same time. Companies worldwide are cutting marketing expenses as the Chinese economy slows and the Western economy heads for a recession. That would have required decreasing nondigital advertising while maintaining or increasing internet spending until recently. That approach has lost force as most advertising revenues have already moved online. The most recent quarter saw Meta declare its first-ever revenue loss year over year. Smaller competitor Snap is firing a fifth of its employees. The cyclical issue may not be the worst for Meta and Google. They may have once thought that by snatching up a bigger piece of the digital ad pie, they might make up for its slower growth. Not anymore. Sales of their four main rivals (Amazon, Microsoft, Apple, TikTok) in the West will be close to a fourth as much as their two combined estimated $300 billion in revenue this year. Even while it might not seem like much, the incumbents have good reason to be concerned. Most of those competitors barely operated in the advertising industry five years ago (Fig. 7.19). Additionally, the rivals appear well-positioned to boost their profits as digital advertising enters a time of upheaval.

75

Something doesn’t AD up about America’s advertising market, The Economist, 18 Jan 2018.

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Fig. 7.19 Global digital ad revenues of top firms, $bn. Source eMarketer in The Wall Street Journal, 27 November 2018, Amazon, with little fanfare, emerges as an advertising giant and The $300 bn Google-Meta advertising duopoly is under attack, The Economist, 18 September 2022

TikTok is the noisiest newcomer in the digital advertising market. The shortvideo app has stolen advertising dollars from Facebook and Instagram, Meta’s two biggest properties, in the five years since its introduction. As a result, the two social networks are now remaking themselves in the likeness of their Chineseowned rival. TikTok’s global sales will surpass $11 billion this year and quadruple by 2024 (see Footnote 71). The threat posed by TikTok is well known, not least to Meta’s CEO Mark Zuckerberg, who, on a recent earnings call, cited the “unique” competition five times. But closer to home, where a trio of American digital companies is packing more and more adverts around their core operations, Meta and Google might have more cause for concern (see Footnote 78). Amazon executives now refer to advertising as one of the three “engines” of the business, along with cloud computing and retail. The largest of these is Amazon, which is predicted to grab roughly 7% of global digital ad revenues this year, up from less than 1% only six years ago. The corporation began disclosing information about its advertising operations in February when it estimated $31 billion in sales for 2021. That is almost equal to the ad sales of the worldwide newspaper industry.76 Next up is Microsoft, which is anticipated to steal more than 2% of global sales this year than TikTok. Although the search industry is enormous, Bing, its

76

Benedict Evans, a Tech analyst in The $300 bn Google-Meta advertising duopoly is under attack, The Economist, 18 September 2022.

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search engine, only has a small fraction of it. LinkedIn is an unattractive social network, but because of its business-to-business ads, it can monetize user time at a rate nearly four times that of Facebook. It brings in more money than certain medium-sized networks, such as Twitter and Snapchat from Snap (see Footnote 71). Apple is the most unexpected new advertiser. The creator of the iPhone once railed against intrusive online advertising. Now it sells a lot of its advertisements. As sales of smartphones stall, the corporation is exploring new strategies to generate income from the 1.8 billion gadgets it already has in circulation, including smartphones and smart earphones. It does not currently reveal sales data and has merely dabbled in advertising. Apple’s advertising division already makes $4 billion in annual sales, putting it about equal in size to Twitter as an advertising platform.77 Executives at Apple think there is still a lot more to be had. They might be in the right. The digital advertising sector is about to undergo changes that will benefit the rivals in big tech. The most important advancement may have some direct influence from Apple. With the introduction of its “app-tracking transparency” (ATT) guidelines last year, it has become much more difficult for advertisers to track users throughout the web and deliver relevant advertising to them. Steps in the same direction are taken by the EU’s Digital Services Act, which was unveiled earlier this year. The United States is considering similar legislation (see Footnote 78). The platforms that provide display advertisements, which target consumers based on their interests rather than things they actively seek, have been hit particularly hard by the crackdown on track. In February, the social network company Meta, which specializes in these ads, predicted that ATT would reduce its ad revenue by $10 billion this year. It is attempting to create new techniques for determining consumer interests. Smaller sites also depend on display ads, but their task is more challenging without Meta’s substantial financial resources. In the previous year, Snap’s market value decreased by 85%, or $102 billion, or at least that is how investors perceive it. In contrast, companies like Amazon, Apple, and Microsoft are protected from antitracking initiatives. They primarily rely on their own “first-party” data. If you type “socks” into Amazon’s search bar, you will see sponsored advertising for exactly that. Amazon’s adverts are based on what consumers look for on its website. Bing from Microsoft has a similar defense. LinkedIn is certainly less so, though theoretically, Microsoft could utilize information from Bing to tailor the advertisements displayed to LinkedIn users (at the moment, it does not, though it has looked into it) (see Footnote 78). Similar to Amazon, Apple’s app store also features ads. For example, if you search for TikTok, you might also get an advertisement for a competing app like Pinterest. According to rumors, Apple is

77

Bloomberg in The $300 bn Google-Meta advertising duopoly is under attack, The Economist, 18 September 2022.

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ready to roll out local business promotion adverts on its Maps app. It might discover clients’ purchasing behavior by entering the payments market. Since all this behavior occurs on Apple’s platform, no tracking is necessary. The other significant advertising trend is the switch from broadcast and cable to internet-connected TVs that can offer customized adverts. Amazon has already paired sports with advertisements on its Prime Video streaming service. Apple has done the same with Apple TV+ and may still introduce a subscription tier supported by advertisements, as rivals like Netflix and Disney+ will soon do. Microsoft doesn’t have a TV product, but earlier this year, the acquisition of adtech firm Xandr gave it a footing in serving ads for other streamers (see Footnote 78). Netflix chose Microsoft in July to manage its upcoming ad business, disappointing Google, who had submitted a bid and surprising Microsoft itself a little. In other markets where the new entrants are well-positioned, digital advertising is growing. As listening shifts to streaming music and podcasts, audio is being digitized similarly to how video is being done. Amazon and Apple, which both produce smart speakers and offer audio streaming services, will benefit from this. Alexa and Siri, two other voice-activated assistants, are available on both devices and may be used to take and bark instructions. Amazon views Alexa as both a servant and a potential salesperson. A new order will emerge as digital marketing penetrates more sectors of the economy. Within five years, the prediction is that Amazon will surpass Meta in total advertising revenue (see Footnote 78). With its robust search ads and extensive YouTube video and audio offerings, Google is better positioned to benefit from the upcoming adjustments. However, it anticipates future conditions to be more competitive (see Footnote 78). The established digital advertising duo may have believed that as more and more advertising moved online, their empires would only grow. Instead, it appears that they will face new competitors.78 In a recent move, the Justice Department has sued Google, seeking to break up the online advertising business which could have major implications for the ad-tech industry. The Justice Department (DOJ) is attempting to dismantle Google’s business of reselling digital advertising over a large portion of the internet, which is a significant expansion of the legal issues the corporation now confronts in the United States and other countries. The DOJ claims that Google misappropriates its position as one of the biggest brokers, providers, and online auctioneers of advertisements on websites and mobile applications. According to the lawsuit, Google is accused of abusing its monopoly strength in the ad-tech sector, harming online publishers and advertisers who attempt to utilize alternative solutions (see Footnote 79).

78

The $300 bn Google-Meta advertising duopoly is under attack, The Economist, 18 September 2022.

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The case requests that the court reverse Google’s “anticompetitive acquisitions,” including its 2008 acquisition of the ad-serving firm DoubleClick and demands the sale of its ad exchange. Most of the purchasing and selling of digital ads that support online publishers is facilitated by the ad-tech platforms controlled by Google while being virtually invisible to internet users (see Footnote 79). A tool for publishers to give ad space, a product for advertisers to purchase those slots, and an exchange automatically connecting bidders with webpages as they are being loaded for specific viewers are all part of Google’s business. About 80% of Alphabet’s revenue comes from advertising. The current lawsuit filed by the Justice Department is directed at the division of that industry that handles the buying and selling of advertisements on other websites and mobile applications. This ad-brokering operation brought Google $31.7 billion in revenue in 2021 or approximately 12% of Alphabet’s overall income (see Footnote 79). Google gives about 70% of such revenue to online publishers and developers. Any sale of portions of Google’s ad-tech division would significantly impact the entire internet advertising market, which has recently displayed symptoms of weakness as consumers reduce their spending in response to the deteriorating economic climate. The results could vary depending on how the lawsuit turns out, from a higher percentage of ad revenue going to publishers to less overall expenditure because digital advertisements would be less effective without Google brokering them.79

7.1.2.1 “Stop Tracking” Shakes the Ad World Some businesses, including Facebook, are concerned about Apple’s recent introduction of a significant privacy feature that would allow iOS users to choose how their data is handled. Small- and medium-sized enterprises (SMEs) may have a more challenging time reaching prospective consumers because they lack the resources, like organized software and analytics teams, to keep up with the rapid changes in technology. Many small companies target and assess their Instagram and Facebook advertising via data sharing.80 It is reasonable to assume that some of these businesses will see a decline in the benefits of digital advertising. Numerous studies demonstrate that when offered the choice to prevent their data from being sold or shared, most individuals will take it. However, firms will almost certainly adapt. Consumers will be more aware of how applications manage their data due to Apple’s iOS upgrade. “The most exciting part is users will start to expect and demand more control over their data,” Audi explained. Apple’s decision to prohibit user tracking has resulted in new digital advertising strategies. As Apple continues to roll out software updates, apps and advertisers look for alternative ways to reach users and target advertisements. It’s no secret

79

DOJ Sues Google, Seeking to Break Up Online Advertising Business, The Wall Street Journal, Jan 24, 2023. 80 Apple’s major privacy change is here. What you need to know, CNN, 26 April 2021.

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that the $400 billion-a-year digital advertising business is preparing for significant upheavals. Apple is implementing software modifications to its iPhones as part of a privacy-protecting effort known as the app-tracking transparency project. By opting out of app tracking for targeted advertising, consumers will have more control over their privacy. Immediately after the software is installed, an Apple pop-up window will ask users whether they want to enable a specific app to monitor their behavior across other businesses’ applications and websites. If users opt out of having their advertising identifier (ad ID) collected, applications will no longer follow them without their consent. While digital advertisers and data brokers widely use that ad ID, many anticipate that users will opt out of tracking due to privacy concerns. Google and Apple have a well-publicized rivalry in Silicon Valley, but the two companies also have a secret $8–$12 billion a year agreement (see Footnote 81). Facebook has been most critical of Apple’s move, making it more difficult for advertisers to use their data to identify customers who would like to use their products outside Facebook platforms. However, Google has warned that the changes would limit visibility into data showing how advertisements drive app installation and sales and how advertisers value and bid on ad efficacy. Google has indicated that it plans to comply with Apple’s new regulations. Google intends to expand its technology to determine whether an ad interaction led to an online purchase or subscription without identifying specific users.81 Marketers may decide to concentrate on increasing client loyalty rather than recruiting new consumers in the future. The video game business, which has traditionally depended on targeted advertising to bring in the rare consumer ready to shell out a lot of money on in-app purchases, may suffer significantly. Spending would eventually recover as advertisers targeted their ads based on the apps or websites on which they appeared rather than individual consumer behavior. There is no doubt that restrictions on user tracking have driven up advertising costs. Apple’s privacy change tracking costs the advertiser. For example, a loose leaf tea seller spending $27 on Instagram and Facebook ads to acquire a new customer now needs to shell out $270 to get a new customer. Apple’s change has wreaked havoc on e-commerce businesses and tech companies like Snap and Facebook. Snap cites its slowdown in revenue to Apple’s change, resulting in its share falling 20% once it made its disclosure. The next day, Snap took another hit of 27%. Apple’s change meant that advertisers find it difficult to reach their customers; thus, the ad campaigns have become sub-optimal. Advertisers have to confront higher ad outlays on Facebook by 25%. Small businesses are taking a severe beating since they do not have massive ad budgets and yet reach new customers. Stix’s ad expenses have tripled since the introduction of Apple’s privacy change. Apple says it’s committed to protecting consumer privacy and has provided the option to

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Apple’s Move to Block User Tracking Spawns New Digital Ad Strategies, The Wall Street Journal, March 26, 2021.

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Fig. 7.20 Impact of Apple’s privacy change. Source eCommerceFuel in Apple’s Privacy Change Is Hitting Tech and E-Commerce Companies. Here’s Why. The Wall Street Journal, Oct 22, 2021

its users to turn off ads that they do not want to see. “These rules apply equally to all developers—including Apple—and we have received strong support from regulators and privacy advocates for this new feature.”82 Apple users in the US opt into the tracking feature 16% of the time they promptly come upon privacy83 (Fig. 7.20). Apple’s tracking option induces a classic supply scarcity. Facebook’s ad tracking is based on a piece of software called a pixel embedded in more than 8 million websites.84 When a user visits a website, the pixel sends relevant info to Facebook. If the user has turned off tracking, no data is sent to Facebook. This reduces the number of potential users targeted through ads, increasing ad expenses (Fig. 7.21). If a user opts out of tracking, Facebook can still target users using the data collected before the opt-out, but the data rapidly loses any potency. Also, Facebook cannot give precise info on the efficacy of the ads to the advertisers and, therefore, cannot claim the credit if a user buys a product. Facebook is miffed with Apple’s decision to let users decide on tracking: Apple has the best hunting grounds under its control. Last year, iPhone users spent almost five times per person as they did on Android, owned by Google. Affected depend

82

Apple in Apple’s Privacy Change Is Hitting Tech and E-Commerce Companies. Here’s Why. The Wall Street Journal, Oct 22, 2021. 83 Flurry in Apple’s Privacy Change Is Hitting Tech and E-Commerce Companies. Here’s Why. The Wall Street Journal, Oct 22, 2021. 84 Apple’s Privacy Change Is Hitting Tech and E-Commerce Companies. Here’s Why. The Wall Street Journal, Oct 22, 2021.

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Fig. 7.21 Increase in customer acquisition cost after Apple’s change, $ per customer. Source Sozy, the company in Apple’s duel with Facebook is a new form of big-tech rivalry, The Economist, Feb 27, 2021

on Apple’s device IDs to keep track of their data. The biggest loser here will be Facebook, the chief tracker of the digital world. Facebook is strident in its protest because millions of small and medium-sized businesses depend on Facebook’s data mining techniques to attract consumers. It seems like a classic battle of access over privacy. The giants are making tremendous efforts to present their views as noble and benevolent. Each side, though, has a valid argument. Apple is right to lament how polarization and misinformation keep people hooked to their screens, enabling websites to exploit more data. The system was rigged in favor of big companies with deep pockets for advertising. The ability of smaller businesses to reach customers through low-cost online advertising is one of the significant innovations of the digital age (see Footnote 85). More privacy will harm the personalized-ad business, but it will not be doomed. Data tracking may be acceptable to specific Apple customers who prefer tailored ads over random ones. Although Apple’s current rules prohibit it, they may even incentivize users to keep the tracking option. Google plans to make Android a more relaxed privacy operating system. Consequently, the web would be split into two distinct systems: a private, gentrified iOS system and an open Android system. Ad-dependent social media sites will race to create new technologies like artificial intelligence that combine customization with greater privacy. The iOS upgrade will result in a nearly 5% decline in iOS in-app advertising revenue this year. At this point, Facebook can only grin and bear it. Whatever comes next, even Facebook recognizes the importance of privacy.85

85

Apple’s duel with Facebook is a new form of big-tech rivalry, The Economist, Feb 27, 2021.

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Apple has established itself as a champion of digital privacy. It’s also a source of irritation for Facebook, seeing Apple overreaching in ways that threaten its existence while being hypocritical, notably by doing significant business in China, where privacy is rare. What is at stake is the evolution of the internet and which companies would dominate it. The visions of Apple and Facebook are becoming increasingly incompatible. Facebook is interested in capturing and monetizing eyeballs across all devices and platforms. Apple presents itself as a privacy-conscious business to lure customers into its hardware-centric world. The battle’s result may impact the content that internet users view when they browse. Free services financed by targeted advertising are at the heart of Facebook’s business model, built on extreme openness. Apple’s goal is to provide consumers with an experience devoid of what it calls “invasive monitoring.” Apple’s position on privacy is somewhat simpler to maintain because most of its revenue comes from selling iPhones, iMacs, and iPads, not from advertising.86 These days, Apple and Facebook are increasingly in direct competition in some markets. Apple’s internet services are getting a boost as iPhone sales are plateauing. Apple’s iMessage texting service competes with WhatsApp from Facebook for users’ attention. We see an increase in Facebook’s development of hardware devices. Investing heavily in payment systems is something that both companies are doing. Another way Apple makes money is by making Google the default search engine in the Safari web browser. Google has been profiting from customer data gathering, and Apple has been critical of Facebook. As Tim Cook stated, denouncing the data mining world of Facebook, “a social dilemma cannot be allowed to become a social catastrophe.” Critics accuse Apple lures the users into its walled garden. Ad executives believe that in contrast to buying ad space from other parties, marketers targeting iPhone users will get more data on ad effectiveness when purchasing Apple ad space. The difference may offer Apple’s modest but expanding ad unit a competitive advantage. It will take three days for advertisers who buy ads through third-party sources to get insights into their campaigns. Additionally, advertisers who purchase ads will only receive aggregate data, such as the number of users who acted after seeing the advertisement. Advertisers that buy Apple ad space will have access to more data on user habits. In this way, marketers will know which consumers saw versions of their ads and which search keywords they appeared in, and the results will be sent to them immediately.87 Leaders in the ad sector say that if the tech giant develops its ad business, it may offer Apple an edge in attracting advertisers. Apple currently sells search advertisements in its App Store and displays advertisements in its News and Stocks apps. Ads in mobile phone applications face stiff competition

86

Facebook Meets Apple in Clash of the Tech Titans—‘We Need to Inflict Pain’, The Wall Street Journal, Feb 13, 2021. 87 Apple’s Privacy Changes Are Poised to Boost Its Ad Products, The Wall Street Journal, April 27, 2021.

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from Google and Facebook. In part, Google’s and Facebook’s dominance may be attributed to the vast amounts of user data they collect. The stricter privacy rules have sent digital advertisers scurrying back to the drawing board. Apple, which supplies one-fifth of the world’s smartphones and roughly half of those sold in the United States, has released a software update that will disable most data snooping. Advertisers are devastated. By micro-profiling and monitoring audiences’ behavior, digital platforms claim to resolve advertisers’ age-old problem of not knowing which half of their budget is wasted. Over the last decade, digital advertising has grown from less than 20% of the global advertising market to more than 60%.88 Even amid the pandemic last year, the business grew by 9%. It is booming as lockdowns ease. Google, the world’s largest digital advertising platform, reported a 34% increase in first-quarter advertising revenue. The following day, Facebook, the second-largest, reported a 46% increase in its ad sales. Increased privacy protections may reduce the effectiveness of their advertisements. The European Union implemented its “General Data Protection Regulation” (GDPR) in 2018, while the California Consumer Privacy Act was passed in its most populated state. With any of these methods, collecting users’ data becomes more difficult. The platforms that stand the best chance of surviving the shake-out have a significant amount of their consumer data. Google’s $147 billion advertising business derives most of its data from what users type in the search bar. Amazon, which has the third-largest digital advertising business and is increasing, can track what people buy after seeing ads on its site—a so-called “closed loop.” Apple is aware of iPhone users’ whereabouts, when they wake up, and much more. It has a small but growing advertising business. Apple’s changes are more concerning for Facebook, which knows more about its users’ interests than their shopping habits. Due to its intimate knowledge of its users, it will continue to outperform everyone in targeting.89 The fewer advertisers understand their audience, the more expensive advertising becomes, and Facebook has argued that this will hurt small businesses. Digital advertisements promise to reduce waste associated with media purchases. Now that advertisers are again in the dark about which half of their budget is being wasted, they will almost certainly increase their spending. Since Apple started requiring applications to get permission to monitor iPad and iPhone users, advertisers have started changing their spending patterns. With Apple’s iOS, the users have been bombarded with tracking permission requests since the April tracking update. The overwhelming majority of these tracking permission requests have been rejected. Only 33% of iOS users agree to their data being tracked.90 Consequently, mobile advertising prices targeted to iOS users dropped, while mobile ads directed at Android users have increased. These changes come

88

GroupM. A new type of ad is heading for your iPhone, The Economist, 29 April 2021. 90 Branch Metrics Inc. in After Apple Tightens Tracking Rules, Advertisers Shift Spending Toward Android Devices, The Wall Street Journal, July 5, 2021. 89

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after numerous members of the digital advertising industry warned that Apple’s changes would restrict advertisers’ access to consumer data, thereby hurting their businesses.91 As a result of this loss, digital marketers say they can no longer run successful mobile advertising campaigns on iOS devices or justify their pricing. As advertisers shift their ad dollars to the Android platform, it’s not obvious how that’s impacted total spending across the digital-ad giants. Following Apple’s decision to allow users to opt out of tracking, Google announced it would also stop tracking individuals. Because of this decision, the digital advertising sector may see an even quicker cataclysmic change. Alphabet says it will cease using and investing in tracking technology to identify online users as they browse the internet in the following year. Privacy champions and regulators have criticized personalized monitoring. Ad-buying tools from Google account for 40% of the money that marketers pay publishers on the open internet, i.e., digital advertising that does not take place inside closed platforms like YouTube, Google Search, and Facebook. Last year, Google took 52% of the $292 billion global digital advertising spending. According to Google, the future of the free and open web is in jeopardy unless digital advertising changes to meet people’s increasing privacy concerns and how their personal information is utilized (see Footnote 92). Third-party cookies, the most commonly used monitoring technique, will be phased out by Google by 2022, according to a statement released in 2020. Rather than that, new technologies developed in cooperation with others by Google will be used to target advertisements in a “privacy sandbox” instead of tracking users across websites. By analyzing the surfing patterns of individuals on their devices, one such technique allows marketers to target “cohorts” of users with similar interests rather than single consumers. Today, marketers utilize information collected from online surfing to target specific individuals with ads and assess whether or not those targeted individuals buy products offered on those websites. As a result of Google’s move, advertisers will no longer have access to precise data. Google’s latest movie, and the concern it has sparked, show the conflict between preserving user privacy and promoting competitiveness in the digital advertising sector. Several smaller digital ad agencies claim that Apple and Google use privacy concerns to force them to make adjustments that hurt their rivals. Of course, it is another story of how Google and Apple formed one of the most powerful alliances in technology shrouded in secrecy. Apple and Google maintain an annual deal worth between $8 and $12 billion, claims the US Department of Justice. Apple and Google have expressed a willingness to curtail the monitoring of their customers through different routes (see Footnote 92). Some experts believe that Google will gain by eliminating cross-website monitoring since it is less dependent on third-party data. On the other hand, a lot of

91

After Apple Tightens Tracking Rules, Advertisers Shift Spending Toward Android Devices, The Wall Street Journal, July 5, 2021.

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data is collected directly from the consumers of Google’s services like YouTube and Google Search.92 Google claims that this “first-party data” will be used in the future to target advertisements on Google-owned websites. The idea is that those with the most first-party data will perform better if targeting is done using solely first-party data. Internal testing has shown that methods like one-to-one targeting that utilize cohorts computed on the users’ devices have worked almost as well. Considering that Google’s announcement only covers its ad tools and unique website IDs and not mobile applications, it seems like a significant part of the digital advertising ecosystem will be untouched. In 2022, mobile advertising will account for 68% of total digital advertising spending in the United States.93 Google’s proposal and Apple’s are the latest signs that the tide may be shifting broadly on user behavior monitoring. New identifiers like strings of digits and letters generated from users’ email addresses will be developed that are more privacy-friendly and target specific customers. This new ad targeting technology from Google is said to put privacy first. The firm has already placed a long-term wager on privacy at the cost of fine-grained accurate targeting. Google announced a little more than a year ago that it would phase out thirdparty cookies in its Chrome browser and has been hinting at the possibility of additional actions to enhance user privacy since then. Google can afford to let the cookies crumble. Advertising remains the lifeblood of Google, accounting for 81% of its parent company’s revenue last year. Alphabet’s recent segment reporting changes also revealed that the advertising business is effectively financing the company’s rapidly growing but still loss-making cloud business.94 The company acknowledges that the decision may put it at a competitive disadvantage. Ad tracking throughout the web may be provided by suppliers who offer greater user identification than Google can provide (Fig. 7.22). However, other providers are not Google, which has consistently accounted for more than 90% of global search activity since 2009. This establishes the company in a strong position as the starting point for most internet activity. Additionally, it provides Google with the unique ability to develop alternatives that allow advertisers to target individuals while maintaining individual privacy. Google and Apple’s decision on user tracking has been disruptive. Google is proposing technologies that, it claims, will accomplish many of the same things advertisers were attempting to accomplish by tracking web users down to the individual level, but with greater regard for consumers’ privacy. These include tools that promise to segment consumers into interest groups or cohorts on their devices without ever transmitting their browsing data to a central server.95 Google claims

92

Google to Stop Selling Ads Based on Your Specific Web Browsing, The Wall Street Journal, March 3, 2021. 93 eMarketer. 94 Google Can Now Afford to Let the Cookies Crumble, The Wall Street Journal, March 3, 2021. 95 Google’s User-Tracking Crackdown Has Advertisers Bracing for Change, The Wall Street Journal, March 3, 2021.

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Fig. 7.22 Google advertising revenue per year, $bn. Source Company reports, FactSet in Google’s Ad Changes Prompt Big Brands to Revamp Data Strategies, The Wall Street Journal, April 1, 2021

that these tools have performed nearly as well as existing tools that track individual consumers and open them up for industry testing. Businesses with a significant amount of first-party data—information about their customers collected via apps or loyalty card programs will put advertisers in a better position to target their ads. Businesses that lack a significant amount of first-party data or whose business models prioritize new customer acquisition over existing customer marketing will face difficulties. However, there is consensus that individualized user tracking is unlikely to survive future privacy regulatory action. Madison Avenue is undergoing a seismic upheaval due to changes in Google Ads, forcing companies to depend less on Google for individual targeting—such as displaying shoe ads to people who have previously searched for shoes online—and to invest in new ways to gather first-party data. The tracking change has forced big brands to recast their data strategies. As a result, marketers will be forced to adjust without knowing strictly how digital advertising would work without cookies. “We are building a cookieless future without really knowing what that future is,” a brand executive explained. Google says it is working on technologies that let marketers deliver advertisements to big groups of individuals with common traits outside Google’s walls to compensate for the loss of individual ad targeting. Google plans to eliminate third-party cookies in Chrome, the market leader in browsing (Fig. 7.23). Within Google properties such as YouTube and Gmail, marketers will target individuals using their first-party data in some cases. However, it is not straightforward to disable third-party cookies. This is especially true for packaged goods companies, which lack the wealth of consumer data available to retailers, who are awash in first-party purchase and browsing data. It is difficult to take, even more so for advertisers who have not had direct access.

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Fig. 7.23 Chrome in control. Source StatCounter in Google’s Ad Changes Prompt Big Brands to Revamp Data Strategies, The Wall Street Journal, April 1, 2021

Marketers will soon have to adjust their strategies for reaching the right consumers and their metrics for success. As a result of Google’s adjustments, companies will no longer access specific rows of data. Instead, Google will be relied upon for a more comprehensive reporting of campaign outcomes. It’ll be more anonymous and aggregated than it is right now. The industry may function more as it did before the introduction of cookies when companies lacked insight into which ad placements drove customers to make purchases. Advertising in conventional television and print advertising has been likened to this situation. “I know 50% of my advertising works; I just don’t know which 50%.”96 In a major announcement, Google has stated it would delay its plan to remove cookies. Google is trying to meet privacy demands without rattling the $455 billion digital advertising business, its raison d’etre in the digital economy.97 Regulatory and privacy advocacy concerns and the advertising business have been cited as reasons for Google delaying the phase-out of a web surfing tracking technology until late 2023. Google said that the delay would give publishers, regulators, and advertisers more time in a cookieless world. Digital Advertising is being shaken up: 2021 was always going to be a tough act for digital ad providers to follow. During the Covid-19 epidemic, internet advertising surged as work, play, and shopping moved online. Expenditure in America increased by 38% to $211 billion, compared to an average annual growth rate of

96

Google’s Ad Changes Prompt Big Brands to Revamp Data Strategies, The Wall Street Journal, April 1, 2021. 97 Google Delays Cookie Removal to Late 2023, The Wall Street Journal, June 24, 2021.

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21% over the previous five years (see Footnote 93). Smaller social media companies like Pinterest and Snap have occasionally experienced triple-digit quarterly revenue growth year over year. Even industry titans like Alphabet and Meta (Facebook and Instagram), who respectively get a third and a fifth of global digital ad revenue, recorded rates of 50% (see Footnote 99). The difference with 2022 is stark. Recently Snap announced that its secondquarter sales growth was the most pitiful ever, at just 13% year over year. The company acknowledged in a letter to investors that revenue for this quarter has been “roughly flat” thus far. The firm’s stock price dropped by over 40% due to the market fright (see Footnote 99). The next day, Twitter, which similarly relies on advertising, said that its revenue in the three months leading up to June had decreased marginally from last year. That raised doubts about the viability of internet advertising, which caused the titans of the sector to see their share prices fall. Alphabet dutifully reported Snaplike quarterly sales growth of 13%, down from 62% in the corresponding period last year. Even though the announcement caused its market value to increase by 8%, that was still pretty poor (it remains a bit below what it had been before the Snap bombshell). A day later, Meta reported that its revenue had dropped by 1% year over year for the first time (see Footnote 99). The most vulnerable are the upstart competitors, like Snap. Advertisers tend to stick with what they are familiar with when marketing expenditures are cut.98 Additionally, they are more familiar with Google search than with Snap’s augmented reality efforts. The big companies also have larger and more varied customer bases; Meta, for example, serves 10 million advertisers globally as opposed to Snap’s estimated 1 million or fewer. As a result, they are relatively protected from declining demand. Almost, but not entirely. The Covid-boosted baseline from last year is not the only factor affecting the digital ad market. The adjustment Apple made to the privacy settings on iPhones last year, which prevents advertisers from tracking users’ behavior on the company’s devices and, as a result, from determining the efficacy of digital ads, is now having a delayed impact on ad sellers. Snap attributed the current poor performance to Apple’s policy. According to Meta, the shift will result in a $10 billion, or 8%, decrease in sales this year (see Footnote 99). Additionally, Alphabet and Meta are up against more aggressive rivalry. TikTok, a Chinese-owned short-video site favored by Western adolescents, is stealing users and ad money from American social media. More worryingly, heretofore, ad-uninvolved tech heavyweights are also joining the fray. Amazon has developed the fourth-largest internet advertising business in the world during the last few years. Apple’s advertising business is modest but expanding. Additionally, Netflix has just announced Microsoft as a partner in its new ad-supported service. Similar structural factors also contribute to the slowdown of the major ad sellers. Since many consumers learned to view online advertisements as a virtual

98

Bernstein in The online-ad industry is being shaken up, The Economist, 28 July 2022.

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Fig. 7.24 Share of US digital-ad revenue, %. Source Wall Street Journal, Insider Intelligence Inc. in Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023

shopfront that needed to be maintained even in hard times—often at the expense of another ad spending—they brushed off economic downturns for years. As a result, ever-fewer non-digital advertising expenditures can be diverted online. Therefore, advertisers might suddenly be forced to destroy their digital billboards in a pinch. Pain is not experienced uniformly. It’s possible that Meta’s suffering helped Google, whose search ads rely less on the kind of surveillance Apple has restricted, offset some of the slowness. With unexpectedly strong ad sales from its music streaming service, Spotify recently defied the trend among rival platforms, helping to boost its share price by 12%. Even so, big tech might be being overtaken by the business cycle.99 The year 2022 saw a discerning trend in digital advertising, as Google and Meta’s dominance diminished while TikTok, streamers emerge to take centre stage. The two biggest players in online advertising are no longer raking in the bulk of revenue from digital advertising in the United States for the first time in almost ten years, and insiders in the sector anticipate this trend to continue in the years to come. Google and Meta Platforms will jointly account for 48.4% of digital advertising spending in the United States in 2022. Since 2014, their total U.S. market share hasn’t dipped below 50% and is predicted to fall to 44.9% this year100 (Fig. 7.24). Google and Meta’s ad businesses are still expanding, but the growth rate is slower than the rest of the US digital advertising market (see Footnote 100). Businesses’ increased access to more advertising formats was the cause of the decline in their combined market share (see Footnote 100).

99

The online-ad industry is being shaken up, The Economist, 28 July 2022. Insider Intelligence Inc. in Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023.

100

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In 2022, Google and Meta both faced challenges as less time was spent online than in the epidemic’s early days; advertisers reined in their expenditure, concerned about an economic meltdown. Amazon and TikTok continued to grow as forces in digital advertising, and new streaming services began to accept advertising (see Footnote 106). Apple’s 2021 decision to mandate those apps on its devices must ask users if they want to be tracked also hurt Meta. Most iPhone users chose not to be, which struck at the core of Meta’s business: its capacity to precisely target advertisements to users and demonstrate to marketers that the advertisements result in sales. TikTok needs to know how long you spend looking at a piece of material to determine your desire. The app tracks you every time you pause or rewind.101 Because Google’s search-ad business relies on user intent rather than information gathered from the app and website tracking, Apple’s decision wasn’t as negatively impacted. Users’ search keywords quickly indicate their interest; thus, Google wasn’t as negatively impacted. Google averred how search-based advertising typically performs well during difficult economic times. Its share of the U.S. digital advertising industry increased significantly to 28.8% in 2022 but is predicted to decline to 26.5% this year (see Footnote 100). Apple’s monitoring ban affected new e-commerce businesses, which are crucial to Meta’s advertising business. Companies claimed they needed to spend twice the amount to acquire new customers after Apple switched. Some have diverted part of their ad budget to TikTok, a platform for short videos that attract younger people (see Footnote 106). TikTok’s dominance of the U.S. digital-ad market more than doubled in 2022 due to the platform’s approximately 100 million U.S. monthly active users, virality, and influence among Gen Z, millennials, and influencers. Nevertheless, its overall proportion of U.S. digital ad spending is only 2%, which will rise to 2.5% this year (see Footnote 100). Amazon, an already sizable participant in digital advertising, increased its market share in the U.S. last year. Amazon’s ad business is fueled by its ability to target consumers based on browsing and purchasing history. The e-commerce behemoth accounted for 11.7% of US digital ad spending last year and is expected to increase to 12.4% in 2023 (see Footnote 100). “Our advertising is at the point where consumers are ready to spend”102 (Fig. 7.25). Other retailers have followed in Amazon’s footsteps by establishing retail media networks—digital ad businesses based on consumer data. Retail media networks are growing due to a “massive race to do what Amazon did.” Walmart, eBay, Etsy,

101

Wall Street Journal in Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023. 102 Amazon in Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023.

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Fig. 7.25 Pandemic spurt. Source GroupM, Wall Street Journal in Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023

and Instacart collectively took away 1.4% of all digital ad dollars spent in the U.S. in 2022 (see Footnote 100).103 In an effort to appeal to younger audiences, many customers are diverting their expenditure away from traditional television and toward video platforms (see Footnote 102). Additionally, streaming services are gaining more market share in digital advertising. Now that the two biggest competitors in the streaming sector, Netflix, and Disney+, have introduced ad-supported versions, the trend is anticipated to pick up speed. “A game-changing moment” as they bring a ton of high-quality video content and “a potentially enormous number of viewers.”104 The amount of advertising dollars spent on digital platforms will increase this year despite forecasts of decreasing growth: In 2023, over two-thirds of all U.S. advertising spending is anticipated to move toward digital advertising, up from less than half in 2019, the year before the epidemic.105 ,106

103

Placements.io Inc. in Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023. 104 Interpublic Group of Cos.’ Mediabrands in Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023. 105 GroupM in Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023. 106 Google and Meta’s Advertising Dominance Fades as TikTok, Streamers Emerge, The Wall Street Journal, Jan 4, 2023.

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Fig. 7.26 Google’s domination. Source Company reports in Google has outgrown its corporate culture, The Economist, Aug 1, 2020

7.1.3

Google: The King of Search Advertising

Google gets 6 billion requests each day on its search engine. YouTube gets enough video submissions to last 49 years. Every day, Gmail handles about 100 billion emails. Google earned $34 billion in profit last year due to its dominance in online advertising. Apart from its primary business, the company is a worldwide leader in AI, quantum computing, and self-driving vehicles. Its market share in search advertising stands at an imperious 90%. Google now employs nearly 120,000 people and an additional 20,000 temporary contractors. Sundar Pichai, the company’s CEO, was grilled by lawmakers in Washington, DC. On its surface, it is being hauled before Congress is a sign of success.107 The king of search engines has more than 90% (Fig. 7.26). Google’s portfolio of products and services includes a search engine, online advertising, hardware, software, and cloud computing. Google’s search engine is designed to find specific information specified in a textual online search query via systematic web searches (Internet searches). Google is one of the best examples of a company founded on an algorithm (to rank websites) and then enhanced through machine learning (Ritholtz, 2017). Google.com is the world’s most visited website. Also on the list of most popular sites are YouTube and Blogger, both owned by Google.108 In 2017, Google was the most valuable brand globally (Amazon,

107 108

Google has outgrown its corporate culture, The Economist, Aug 1, 2020. “The top 500 sites on the web”. Alexa Internet.

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Fig. 7.27 Diversity at Google. Source The Economist in How to win friends and influence people, The Economist, April 9, 2016

Apple, and Microsoft have surpassed it).109 As of March 2021, Google has 92.4% of the global search engine market.110 Mid-life at Google: Google had yearly sales of $66 billion and a net profit of $14 billion when Pichai took over as CEO of the Google division in August 2015. When he took over as the boss of Alphabet in 2019, his division was earning $34 billion on $161 billion in sales, and Alphabet was valued almost twice as much as it had been four years earlier when Google co-founders Larry Page and Sergey Brin gave him the keys. While the whites and the Asians make up almost 95% of the workforce, the blacks remain in miniscule numbers (Fig. 7.27), a common diversity problem across Silicon Valley. An estimated 4 billion individuals utilize at least one of Alphabet’s services. As Alphabet has grown, so has the pull of political and economic forces. Legislators and antitrust campaigners have sought an explanation to disprove the misuse of market dominance in internet search and digital advertising. The challenge for Alphabet is to avoid becoming a “conventional company” that withers away due to a lack of innovation and growth decline. Commercially, Alphabet’s focal point is Google. It’s a firm that specializes in internet advertising. This is responsible for 83% of the company’s revenue and profit margins. The “online ad stack” is a constellation unto itself, with a plethora of goods that make up the various components: automated services for selling, buying, and serving ads, as well as measuring their effectiveness. Google’s market share in some components of the ad-serving stack surpasses 90%.

109 110

“Google is now the world’s most valuable brand”. The Independent. February 1, 2017. “Search Engine Market Share Worldwide”. StatCounter GlobalStats. Retrieved April 8, 2021.

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Fig. 7.28 The wide swathe of Google. Source Bernstein, company reports in Google’s problems are bigger than just the antitrust case, The Economist, Aug 1, 2020

On the surface, this may suggest that Alphabet, like the majority of large technology companies, is a “one-trick pony.” Indeed, it is a herd of ponies, several of which resemble fully grown Shires. Nine have more than a billion users globally (Fig. 7.28). More than 300 billion emails are exchanged every day, and even if just a third of them come from Gmail, it would create a paper mountain 10,000 km high. Google was envisioned as an ever-expanding network of teams of engineers united by a single language and shared objectives, much like the internet, most notably to “organize all the world’s information.” Google employees have always taken pleasure in solving the most challenging computer science issues rather than earning money. This may be one of the reasons why some of Google’s most popular services, including YouTube and Maps, earn lower incomes than they should. The “other bets” have only just started to generate revenue. In the four quarters leading up to March 2020, they suffered losses of almost $5 bn. Material revenues are generated only by Access and Verily. Waymo, for example, was recently valued at $30 billion when the company received new outside funding in the spring. Even still, it’s a far cry from previous projections, which put the worth of the self-driving car division at over $100 billion. None of this mattered till Google’s ad products were “a gold-threaded safety net underneath every daring innovation.” It becomes an issue when it reflects reduced margins and a worse stock market performance than competing tech titans (Figs. 7.29 and 7.30). Search advertisements provide approximately 60% of Alphabet’s income, although the internet advertising industry is far from mature. Specialized searches are also “hollowing out” general internet searches. Sixty percent of product searches now begin on Amazon, ranking third for online advertising revenue after Facebook and Google (see Footnote 111). Google’s cloud

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Fig. 7.29 Growth of share prices since 2012. Source Datastream in Google’s problems are bigger than just the antitrust case, The Economist, Aug 1, 2020

Fig. 7.30 Operating margin under pressure (in %). Source Bloomberg in Google’s problems are bigger than just the antitrust case, The Economist, Aug 1, 2020

business has received a lot of flak for lacking any kind of customer care. So, it falls short of the customer service standards set by Microsoft Azure and Amazon’s web Services. Since 2020, compared to the previous year, YouTube’s revenues have increased by more than a third. As a result, share repurchases have increased from $8.5 billion in the three months ending in March 2020. In 2021, revenues reached $13 billion, or 8% of Alphabet’s overall revenue.111 The cloud business is expanding at more than 50% each year.

111

Google’s problems are bigger than just the antitrust case, The Economist, Aug 1, 2020.

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To be like Microsoft, Google needs to be bolder. Charging for some of the company’s services is one option. Google may take on the role of data fiduciary, managing people’s information on their behalf, similar to what a bank does with its customers’ money. The company has already begun to create the required tools, such as software that can mine encrypted data and extract relevant information. It would be inspiring if Google were to do this. This provides Alphabet leeway to continue experimenting on more exotic things (see Footnote 111). A rise in digital ad expenditure has bolstered Google’s position even as authorities seek to limit the company’s influence. Analysts’ expectation of an uptick in company activity and Google’s significant position in digital commerce coincides with the economy’s reopening, resulting in Google’s solid firm performance. People were more likely to resort to Google search during a stay-at-home year to locate takeaway meals or grocery delivery choices while watching videos on Google’s YouTube. To reach consumers across the Google world, brands began moving their ad expenditure away from traditional media such as television, print, and in-store promotions. Even as its proportion of the US search advertising market shrinks, the increase in digital expenditure has helped Google maintain revenue growth. Google’s search market share dropped to 57% last year from 61% before, while Amazon’s share rose to 19% (Fig. 7.31). To keep Google as the default search engine on Apple phones, the firm continues to spend strongly. It announced a slew of multibillion-dollar orders in recent months, generating quarterly revenues of $4.05 billion, showing a 46% growth. In addition, Google has also been investing in its cloud computing service to compete with Microsoft and Amazon (see Footnote 112).

Fig. 7.31 US advertising market share movement, %. Source The new rules of competition in the technology industry, The Economist, 27 Feb 2021

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Fig. 7.32 Google’s advertising revenue, $bn. Source Five Tech Giants Just Keep Growing, The Wall Street Journal, May 1, 2021

To maintain its lead in digital advertising, Google will have to tread carefully to enforce privacy limits on its mobile operating system. Advertising companies and privacy groups have criticized Google over its intention to cease selling advertisements to those who visit several websites simultaneously. Advocacy groups argue that the proposal to divide people into ad cohorts does not go far enough, while competitors argue it is anticompetitive.112 Alphabet’s cash machine isn’t likely to be slowed down by privacy issues. Google’s search engine is the undisputed king, while its Maps services account for 89% of all navigation, and YouTube is responsible for 73% of all online videos. As more individuals spent time online and moved their money to digital channels during the epidemic, Google, the advertising giant, powered through (Fig. 7.32). During the early months of the pandemic, marketers cut down on spending, and the Alphabet subsidiary suffered. However, the company rebounded in the second half of 2020. For years, even though Google was the company’s primary source of ad revenue, YouTube chipping in handsomely in ad spending, logging a 49% increase in the second quarter of 2021 (see Footnote 172). During a stay-at-home year, YouTube became the nation’s entertainment hub, attracting enough viewers to generate $6 billion in ad revenue in the third quarter, just 16% less than Netflix Inc. By offering new ad forms, such as direct purchases inside YouTube ads, Google extorted more money from businesses.

112

Google Earnings Smash Sales Records as Digital Ad Market Booms, The Wall Street Journal, 27 April 2021.

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7.1.3.1 How Google Makes Money Google Ads-the money-spinner: Online marketers may bid to have their ads shown in front of web users, and Google Ads is a platform for doing so. Advertisements may be placed in search engine results (like Google Search Network) and on websites, mobile applications, and videos that aren’t search-related (the Google Display Network).113 Charges are based on Pay-Per-Click (PPC) model. Internet advertising strategy is known as “Pay Per Click” (PPC), in which the advertiser pays a publisher (usually a search engine) pays every time an advertisement is clicked on.114 Typically, search engines allow advertisers to bid on keyword phrases related to their target market, who pay when those advertisements, whether text-based search advertising or shopping ads that combine pictures and text, are clicked. Two main variables determine how much an advertiser pays: the quality of their ad and their maximum price per click. The better the ad, the lower will be the cost charged per click, and vice versa. Many online services offered by Google are used by millions every day. Most people don’t realize that these services are all completely free. In other words, how does Google get paid? Search advertising income makes up the majority of Google’s total revenue.115 When Google search is used to seek information for anything, from stock market data to sports listings, a list of search results produced by Google’s algorithm will be dumped on the screen. Google’s search system tries to provide the most relevant results for the query; users may find recommended pages from advertisers on the Google Ads platform. Advertisers must compete with one another to place at the top of Google’s ad results. A higher offer will rise on the list, while a low offer may go unnoticed. Google charges publishers for each time a visitor clicks on their advertising. For highly competitive search keywords, such as loans, insurance, and other financial services, a click may be valued at a few cents to over $50 (see Footnote 115). Google’s ads advertisements span all Google properties. Any ads shown in Google properties such as Gmail, Google Maps, and YouTube are also generated through the advertising platform. The AdSense program allows non-Google websites to include Google display advertising on their pages in addition to search advertising. Like Google’s onsite advertising, AdSense advertisements are shown on Google-approved sites across the Internet. The site owner receives part of the income for every display advertising clicked, while Google retains the rest. AdSense is the primary source of revenue for many businesses because of the wide range of firms that advertise on the network. While Google’s revenue comes from various sources, internet advertising is where the company earns the vast majority of its money and profits.

113

“About targeting for Display Network campaigns”. Google Inc. Retrieved 2020-04-11. “Get More Customers with Pay Per Click (PPC) Ads—Google Ads”. ads.google.com. Retrieved 2021-05-04. 115 How Google Makes Money, Investopedia, Eric Rosenberg, Jun 23, 2020. 114

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Economic Value of Google ads: How do we value Google ads?116 A model developed by Hal Varian, the Chief Economist at Google, for the following sections details how search engines offer ad space through auction. Using basic pricing theory, the advertiser’s conduct is examined in this context, and the resulting producer surplus is estimated straightforwardly. The model concludes that the estimated value of online advertising tends to be between 2 and 2.3 times advertising expenditures.117 Major search engines’ ad auctions follow the same format, and system users may place bids based on various factors. Whenever a user enters a search query into the search engine, the system discovers a list of advertisements with keyword phrases that match the query and decides which ads to display and where. The user may click on an ad to get more information when the search results and advertisements are shown. In this scenario, advertisers pay search engines based on the other advertisers’ bids. Generally, the search engine should prefer to sell the most important positions that are most likely to get clicks—to those advertisements with the greatest anticipated income. For this, advertisements are ranked according to bid times anticipated clickthrough rates, with the most profitable ones displayed in the most important places. The price per click multiplied by the projected number of clicks represents the search engine’s projected income. Ad clickers who have good experiences will most likely raise their tendency to click on advertisements in the future, whereas those who have bad experiences will be less likely to click. Search engines may use many metrics of “ad quality” to choose which advertisements to show. Auction rules: Search engines use a variety of factors to decide which advertisements to display and where, as well as how much money to pay for each click? We start with certain basic notation. Let a = 1, …, A index advertisers and s = 1, …, S index slots. Let (va , ba , pa ) be the value, bid, and price per click of advertiser a for a particular keyword. We assume that the expected clickthrough rate of advertiser a in slot s (zas ) can be written as the product of an ad-specific effect (ea ) and a position-specific effect (x s ), so we write zas = ea x s . Other formulas for predicting clicks could be used, but this one leads to particularly simple results. Here are the Generalized Second Price Auction rules used by the major search engines. (1) Each advertiser chooses a bid ba . (2) The advertisers are ordered by bid times predicted clickthrough rate (ba ea ). (3) The price that an advertiser ‘a’ pays for a click is the minimum necessary to retain its position. (4) If there are fewer bidders than slots, the last bidder pays a reserve price r. value  ca − cˆa xa  . ≥ cost xa − xˆa b cb A

a=1

116

For a more rigorous study of the model, refer to the paper Online Ad Auctions By Hal R. Varian: February 16, 2009, University of Berkeley, and Google. 117 Online Ad Auctions By Hal R. Varian: February 16, 2009, University of Berkeley, and Google.

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Consider a specific auction and identify the advertisers with their slot position. Neglecting ties for the sake of exposition, the rules of the auction imply b1 e1 > b2 e2 > … > bm em where m less than or equal to the number of possible slots. The price paid by advertiser in slot s is the minimum necessary to retain its position so ps es = bs+1 es+1 which implies so ps = (bs+1 es+1 )/es . The price paid per click by the last advertiser is the reserve price if m < S or determined by the bid of the first omitted advertiser if m = S. We assume that advertisers are interested in maximizing surplus: the value of clicks they receive minus the cost of those clicks. Bidding behavior: The approach discussed above implies that an advertiser may select its bid on each auction. However, advertisers select a single bid for a variety of auctions. Let’s assume that an advertiser’s bid and the number of clicks it gets have a very consistent connection, which we can sum up by ba = Ba (x a ). We also construct the cost function ca (x a ), which is the amount an advertiser A must spend to get x a clicks over a certain time. Although the bid and cost functions are dependent on the other advertisers in the ad auction mentioned, we treat this as a fixed behavior. Using this model, the advertiser’s profit is expressed as va x a − ca (x a ). Instead of “profit,” we term this “surplus” because the latter usually involves fixed expenses. The goal of increasing surplus always equates to increasing profit, at the very least, when profit is not a negative number. The advertiser determines the profit-maximizing number of clicks, which is the point where value equals marginal cost, given a cost curve, exactly as in traditional pricing theory. We can calculate the average cost per click by knowing how many clicks are ideal. The advertiser may then utilize the bid tool to get the bid that generates the most clicks. As a result, it may identify its optimal behavior if an advertiser understands the cost per click and the bids per click functions. Hal Varian conducted these calculations on a private sample of advertisement auctions and discovered that advertisers get an overall value of 2–2.3 times their entire spending. It’s important to note that this number just represents the value of paid clicks; advertisers will get many more valuable hits from search results.

7.1.4

Amazon-Largest Onliner

Disruptive online retailing: E-commerce is a part of the digital economy and includes online sales and purchases of products and services, including transactions using platform-based businesses like ride-hailing applications and room-sharing platforms. Global business-to-business (B2B) e-commerce constitutes about 87% of all e-commerce, while B2C accounts for the balance. China, the UK, and the US are the top three nations for B2C e-commerce sales. The UK is the most e-commerce savvy nation in the world. And to consider that Napoleon once supposedly ridiculed Britain as “a nation of shopkeepers.” It’s becoming a nation of internet buyers. Online shopping was done by 1.3 billion individuals, or onequarter of the world’s population over 15. China has the most online consumers, while the UK has the greatest percentage of people who buy online (82% of 15 or

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Fig. 7.33 US e-commerce market share, %. Source The new rules of competition in the technology industry, The Economist, 27 Feb 2021

older). The uptake in low-income countries is considerably lower, indicating that e-commerce needs more than just wireless connections to take off. Some 277 million individuals made a cross-border transaction in 2021. In the first half of 2021, fashion remained the most popular category for cross-border online purchasing, while luxury experienced the greatest increase. Millennials and Gen Zers bought three times as many international purchases as Baby Boomers, excluding apparel.118 Online shopping has become more popular due to the widespread use of the internet. Many Americans (and individuals in other countries) choose to buy online rather than go to a mall. E-commerce’s proportion of retail sales in the United States dipped to 13.3 in 2021 due to the pandemic, with Amazon notching up a commanding 50% of the US e-commerce market (Walmart was at 7.1%)119 (Fig. 7.33). Bricks-and-mortar retailers have two choices: adapt or decline (see Footnote 120). About 90% of Americans do not have to go more than 10 miles to a Walmart store to do their shopping there. In the 2012 US presidential election, Walmart customers outnumbered voters by two to one. The Internet is threatening this titan. In terms of selection, Amazon alone has 1.8 million products for women’s apparel, making Walmart’s range of 120,000 items seem insignificant.120 The impact of e-commerce on conventional retail, on the other hand, has been devastating. Every ninth employment in the United States is retail; 15.9 million people work in that sector. However, the number of retail jobs has been steadily declining, which has led to an increase in the number of retail shops by 30%-50%.

118

Businesswire in Thinking outside the box, The Economist, June 4, 2016. Statista in Thinking outside the box, The Economist, June 4, 2016. 120 Thinking outside the box, The Economist, June 4, 2016. 119

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Fig. 7.34 E-commerce penetration by sector, %. Source Cowen and company, US Census Bureau in Stores are being hit by online retailing, The Economist, 26 Oct 2017

Likewise, 4.8 million employments may be at risk,121 and retail employment losses are as severe as those in manufacturing. Furthermore, the pattern has spread across the world. Over 70% of books, films, and music are already available exclusively via e-commerce, expected to rise to nearly 80% by 2022 (see Footnote 121). Office supplies and children’s toys are purchased primarily online (Fig. 7.34). A quarter of clothing and accessories are sold through online retail channels. The problem is particularly severe in the United States, where people have access to five times as much space in shopping malls than they have in Britain. Before Amazon’s rise, chains already in difficulty are now in even more danger. Consumers get better suggestions from a website since it knows more about them than any store associate could. When shopping online, it’s simple to compare costs across different merchants. Interestingly, businesses may use bots to rapidly raise or lower their pricing to keep up with the competition. If this pricing trend continues, prices may be adjusted individually. Alibaba and JD already provide discounts on certain goods to some consumers using their massive data. Amazon has conditioned customers to believe that free shipping does not help matters. Furthermore, internet purchases often eat into current store revenues. Analysts at According to Morgan Stanley, each extra percentage point of shopping that goes online reduces a retailer’s margins by roughly half a point. Recruiting IT personnel for brick-and-mortar stores is also a challenge. Working at a department store isn’t an obvious option for a promising data scientist. Traditional retailers often have to pay a premium to attract talented IT employees, while Amazon has no such issues.

121

Sorry, we’re closed, Economist, May 13, 2017.

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On the other hand, Amazon is always evolving, even as Walmart does. Peach ripeness is measured using machine learning. Inventory updates are available on the fly, and predictive ordering through AI reduces stock-out situations. Brick and mortar have a lot to catch up on.122 One important component of the e-Commerce revolution is the automation of e-Commerce for physical products. Warehouse automation is being driven mostly by the growth of e-commerce, which will continue to rise as internet and mobile device usage increases. Over the past decade, global e-Commerce sales have increased at a compound yearly growth rate of 20%, and online retail sales have risen from ~ 2 to ~ 14% in 2021 (see Footnote 118). Millennials, the generation most likely to do their shopping online, will hit their financial lives’ prime. Estimates indicate that 80% of transportation, warehouse, and logistics occupations are at risk of becoming automated. Companies in the United States presently employ 2 million people solely to perform stock and order fulfillment jobs, and warehouse picking is still done by hand in 90% of cases. Automated picking increases productivity by 2x–3x over pick-to-conveyor operations and 5x–6x over human pick-to-pallet fulfillment centers. Technology adoption is not a homogeneous process. While certain areas of the U.S. and Europe offer one-hour delivery for online purchases, Brazil’s average claimed delivery time is nine days. E-Commerce penetration is 87% in the UK but just 18% in Romania. There are also physical limitations in the virtual world. The United States’ warehouse supply is at an all-time low. Even in London, where 60–70% of industrial properties sold are “lost” to residential construction, finding land for warehouses is already a challenge. Compared to store-based fulfillment, online businesses need 300% more storage space. A total of 2.3 billion square feet of additional warehouse space would be needed by 2035 for worldwide e-Commerce development.123 Road traffic is also a problem; in the UK, light goods vehicle kilometers traveled in 2015 were 47% more than in 2000, but passenger car kilometers traveled were only 5% higher.124 Traditional retail shops in the U.S. and Europe went out of business last year due to lockdowns and social-distancing strategies. Despite this, internet platforms have survived and thrived (Fig. 7.35). In the fourth quarter of 2020, Amazon’s quarterly sales surpassed $100 billion for the first time. In other cases, the stock prices of Chinese e-commerce companies increased by as much as thrice over this period. Direct-to-consumer (DTC) companies focusing on individual consumers are booming. At the start of lockdown, Nike exceeded its online sales goal of 30%, which it had set for 2023. The overall number of “members” rose from 70 to

122

Stores are being hit by online retailing, The Economist, 26 Oct 2017. Euromonitor in Technology at work v3.0 Automating, Citi GPS: Global Perspectives & Solutions, 2017. 124 Technology at work v3.0 Automating, Citi GPS: Global Perspectives & Solutions, 2017. 123

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Fig. 7.35 Retail e-commerce sales worldwide, $bn. Source eMarketer in The return of one-to-one commerce, The Economist, Mar 13, 2021

250 million last year. Customers are connected through applications that provide anything from free-running instruction to accessibility to sneaker vending machines. The data-driven shopping upheaval is unstoppable. Because internet advertisements target customers more precisely than broadcast jingles or billboards, they disrupt marketing. As a result, physical and internet purchasing will be intertwined in a new way. In addition, it will pave the way for brand-new methods of manufacturing. Nike serves as an example. Thanks to its apps and interactive stores, it collects real-time data from its pavement-pounding consumers. It quickly produced new yoga gear when it noticed that more people were doing yoga. The third retail revolution, driven by digitization and analytics, is creating, in retailers’ jargon, a consumers’ “pull” system rather than a producers’ “push.” This instability is causing concern in the West. This is because the retail infrastructure was not created for the digital era. The retail space per person (24 ft2 ) in the United States is three times more than that of the United Kingdom and six times greater than in China.125 Last year, more than 8700 businesses in the United States went out of business. In the United Kingdom, 16,000 shops closed, coupled with a loss of 183,000 jobs in the retail industry.126 Clothing and footwear, according to Nike, have been particularly hard affected (see Footnote 128).

125

Bernstein in The return of one-to-one commerce, The Economist, Mar 13, 2021. Centre for Retail Research in The return of one-to-one commerce, The Economist, Mar 13, 2021.

126

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Yet even in China, the Mecca of online retail, the ultimate objective is not to go ahead of the store. For instance, Alibaba, China’s main e-commerce corporation, has introduced cashier-free stores and video promotions to its supermarkets in its most populous areas. JD.com and Pinduoduo, two of its main competitors, collaborate with grocery stores in remote areas to lower costs and improve delivery efficiency. Three hundred seventy-four big malls were built last year in China, and retail property values in city centers have not fallen much.127 For this reason, the combination of physical and internet channels is often known as “omnichannel.” This is a major trend that will impact how people buy. Both online and offline shopping will coexist (see Footnote 128). Because of the enormous untapped segments of the market yet to be conquered, it may become even more profitable in the future. E-commerce sales in 2020 totaled $4 trn worldwide, accounting for less than a fifth of all retail sales and a smaller share of total consumer expenditure, which the “World Bank” estimates to be $65 trillion.128 There are still tens of trillions of dollars up for grabs. A digital dystopia may emerge amid the Covid-19 epidemic, with stores closing and doorsteps under assault from Amazon’s bombardment. Shops are losing their age-old function as a place for social contact, banter, and support for the lonely. However, such an outlook is too negative. Some things never change. We’ll still have the traveling salesmen, roving traders, food vendors, and artisan stall owners in new avatars. The greatest change will be in the future marketplace, controlled by IT companies and their digital infrastructure, which will support our desire to spend. “Amazon is the titan of twenty-first-century commerce. In addition to being a retailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space.” Lina Khan, FTC Chairman in the US (Khan, 2017). Amazon specializes in artificial intelligence, digital media streaming, cloud computing, and e-commerce.129 The company was described as “one of the most influential economic and cultural forces globally” and as the world’s most valuable brand.130 In terms of market capitalization, Amazon surpassed Walmart in 2015 as the most significant retailer in the US (Streitfeld & Kantor, 2015). Amazon acquired Whole Foods Market, substantially expanding its physical retail footprint. Bezos announced in 2018 that Amazon Prime, his two-day delivery service,

127

McKinsey in The return of one-to-one commerce, The Economist, Mar 13, 2021. The return of one-to-one commerce, The Economist, Mar 13, 2021. 129 Lotz, Amanda. “‘Big Tech’ isn’t one big monopoly—it’s 5 companies all in different businesses”. The Conversation. 130 Kantar. “Accelerated Growth Sees Amazon Crowned 2019’s BrandZ™ Top 100 Most Valuable Global Brand”. www.prnewswire.com. 128

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has over 100 million members globally.131 Amazon is renowned for upsetting traditional sectors through technical innovation and large-scale distribution. Amazon is the world’s largest Internet company in terms of revenue,132 and it is US’s second-largest private employer (Cheng, 2016). In 2017, Amazon had a 37% share of the US e-commerce retail industry, projected to increase further by 2021. Amazon had a projected 50% share of total e-commerce retail Gross Merchandise Volume (GMV) (see Footnote 133). Amazon uses its Prime membership program to increase consumer spending, offering free and expedited delivery and music and movie streaming. With over 200 million Prime members, the cohort accounts for more than two-thirds of Amazon’s US customers. This is significant for Amazon’s success as a company, as Prime members are more engaged shoppers who spend more than twice as much on the platform as non-Prime members. Amazon Prime members’ most popular shopping categories are apparel, electronics, and kitchen and home items.133 While most people are familiar with Amazon’s namesake e-commerce platform, the world’s most successful online retailer has significantly diversified its business, demonstrating its ambition to become a multifaced technology firm instead of a one-trick pony. As illustrated in the (Fig. 7.36), Amazon’s core “online stores” business, i.e., first-party e-commerce gross sales, was slightly more than half (51%) of overall revenues, with commissions from third-party vendors, AWS cloud services, and premium services being the bulk of the remaining 49% of sales revenue.134 Pandemic-induced online shopping accelerated consumers’ adoption of ecommerce, and few benefited more than Amazon. Last year, the business made $386.1 billion in sales, up 38%. Amazon went on a recruiting frenzy to match the soaring demand, adding roughly 500,000 new workers. Currently, Amazon employs 1.3 million people globally. If present hiring trends continue, the firm may surpass Walmart Inc. as the biggest employer in the United States over the next few years (see Footnote 171). In the not-too-distant future, Amazon will sell 85% of the world’s products. In the United States, members of Amazon’s Prime spend an average of $1500 each year, compared to non-members who spend just $625. Its delivery times have improved from two days to the next day to the evening of the same day, made possible because of nearly 100 warehouses in the US alone. This isn’t the end: Amazon has filed a patent application for predictive buying (which involves delivering goods you are likely to like even before you order them) (Simpson, 2016).

131

“Jeff Bezos reveals Amazon has 100 million Prime members in letter to shareholders”. April 18, 2018. 132 “Fortune Global 500 List 2018: See Who Made It”. Fortune. 133 Statista, Dec 1, 2020 in Amazon: More Than an Online Store, Felix Richter, Statista, Sep 28, 2020. 134 Amazon: More Than an Online Store, Felix Richter, Statista, Sep 28, 2020.

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Fig. 7.36 Amazon’s pie. Source Amazon in Amazon: More Than an Online Store, Felix Richter, Statista, Sep 28, 2020

The e-commerce ride is getting tougher. Amazon and Alibaba are not as invincible as they appear to be, though, in Europe and America, the consensus is that Amazon is winning. The gap between Amazon’s and Walmart’s e-commerce market share in America is significantly larger than Alibaba’s lead over the number two player in China. While Amazon earns a loss on its core retail business, its rapidly growing cloud and online advertising businesses generate enormous margins reinvested in retail expansion. At the end of 2020, it had $42 billion in cash on hand. Amazon may spend $100 billion on information technology, more than the world’s top ten traditional retailers combined over the next five years. Additionally, it will continue to invest heavily in logistics, putting additional pressure on companies such as UPS and FedEx (see Footnote 136). Trustbusters may be scrutinizing how it sells products on its website to compete with those sold by third parties, but this is not dissimilar to large retailers selling their label products. Although Amazon is the market leader online in America, Walmart is the market leader in total sales. Amazon is the market leader in some categories, such as books and groceries. Additionally, Amazon possesses political capital. The jobs it generates, its support to small and medium-sized businesses, and its technological prowess may all work to its advantage135 (Fig. 7.37). As with China, new entrants may emerge as long as the pie grows. Some will come from the world of big technology. Numerous online merchants pay Facebook and Google to discover their products via search. While online advertising continues to be the most profitable part of their businesses, Facebook and Google are

135

Morgan Stanley in E-commerce profits may become harder to make, The Economist, Mar 13, 2021.

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Fig. 7.37 Online retain market share, %. Source Bloomberg, CLSA, The Economist in Ecommerce profits may become harder to make, The Economist, Mar 13, 2021

diversifying their revenue streams. Facebook has 160 million small businesses on its platform (see Footnote 136). In 2020, it let them create a single online store on its app and Instagram. Google eliminated commissions for retailers selling directly through its site last year. Another area of competition will develop from shifts in online shopping. In America and Europe, smartphones may eventually supplant personal computers in e-commerce. This will increase the popularity of “social commerce,” defined as commerce conducted through social media and video. According to the Financial Times, TikTok, a platform for fostering brand awareness, may allow its most popular celebrities to market products on the platform.136 Logistics and payment services will be included in the battle. In the United States, Amazon delivers more parcels than the US Postal Service. However, competitors such as Walmart are developing subscription services similar to Amazon Prime that include free shipping and other perks. In the long run, increased taxes, regulatory scrutiny, and increased competition may make profits in e-commerce more difficult. The ecommerce behemoths have had an incredible run thus far. However, few will cry even if they are regulated similarly to utilities. Despite success in other e-commerce areas, Amazon lags in groceries. Amazon’s disruptive streak has yet to reach the grocery aisles. Amazon launched its grocery delivery service, Amazon Fresh, 14 years ago and acquired Whole Foods Market about four years ago. Nonetheless, its overall grocery market share by Amazon is still modest. Amazon and Whole Foods Market accounted for 1.4 and 1.2% of

136

E-commerce profits may become harder to make, The Economist, Mar 13, 2021.

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total grocery expenditure in the United States. Walmart and Kroger, two industry giants, held 22 and 12% combined market shares.137 Whole Foods Market sales of Amazon have stagnated.138 However, Whole Foods is only a portion of Amazon’s grocery aspirations, and the company has been operating Amazon Fresh for some time now. Additionally, it has begun developing physical locations for that brand. There are currently 12 such locations. Additionally, Fresh is the new name for Amazon’s Go grocery stores.139 Nonetheless, the tech company will almost certainly need to invest significantly more to impact grocery significantly. Amazon will require around 2000 additional locations to develop a significant presence in grocery. And that will require the approval of legislators and regulators who believe that Amazon already wields excessive market power. That may be the lone factor preventing Amazon from fully bagging the grocery business. Amazon continues to run the e-commerce behemoth with the zeal of a struggling startup, and that part of its corporate DNA is proving to be a liability. Amazon employs 1.1 million people and has approximately $1.8 trillion market capitalization. However, Amazon never truly matured, and it still operates with the zeal of a fledgling business attempting to survive. This ethos, nevertheless, contributes to Amazon’s continued growth and annihilation of its competitors and partners. Competitiveness is frequently a defining characteristic of a successful company, including wresting market share from competitors. Because of this, the technology and retail behemoth has come under criticism from competitors, regulators, and politicians who claim that its methods are unfair for a business of its scale and may even be unlawful. Its business has expanded, and so has its ability to tackle competition (Fig. 7.38). Amazon’s management teams have conducted systematic campaigns against competitors and partners alike to keep consumers happy-a strategy has remained consistent across their product spectrum, from diapers to footwear. No rival is too small to capture Amazon’s attention. It copied a series of camera tripods sold on Amazon by a small outside company, severely reducing the vendor’s sales to a fraction of their original level. Amazon asserted that it did not infringe upon its intellectual property rights. When Amazon wanted to compete with furniture retailer Wayfair, its deputies created the Wayfair Parity Team, investigating how Wayfair sourced, sold, and transported large furniture before duplicating most of its products (see Footnote 140). Because of the popularity of Allbirds’ shoes produced from natural and recyclable materials, Amazon launched Galen, a shoe that appears almost similar to Allbirds’ best-selling model. But it is made of less environmentally friendly materials and costs less than half as much. This year, Amazon has concentrated its efforts on Shopify, a rapidly expanding Canadian firm specializing in assisting

137

Numerator in Grocers Need Not Fear Amazon—for Now, The Wall Street Journal, May 22, 2021. 138 FactSet in Grocers Need Not Fear Amazon—for Now, The Wall Street Journal, May 22, 2021. 139 Grocers Need Not Fear Amazon—for Now, The Wall Street Journal, May 22, 2021.

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Fig. 7.38 Timeline of Amazon’s growth, $bn. Source FactSet in Grocers Need Not Fear Amazon—for Now, The Wall Street Journal, May 22, 2021

small merchants in establishing online stores. Amazon has formed a secret team called “Project Santos” to imitate parts of Shopify’s business model (see Footnote 140). Amazon’s founder, Bezos, frequently encouraged employees to view the company as a startup. “It is always day one,” he likes to say. Day two is characterized by “stasis, followed by irrelevance, followed by an excruciating, painful decline, followed by death.” Bezos considered the name Relentless for his company at one point, and “www.relentless.com” still points to Amazon’s website.140 According to The Wall Street Journal, Amazon workers have developed competitive goods using data about independent merchants on its site. Journal reporting demonstrated how Amazon had restricted rivals’ ability to advertise competing streaming devices and other products on its e-commerce site. Predicting purchases based on a customer’s previous Amazon transactions will enable a personalized approach. Anticipatory shipping patents will use data about a customer’s browsing and purchasing habits on the site and real-world data such as telephone inquiries to ship goods before the customer has even decided to buy.141

140

How Amazon Wins: By Steamrolling Rivals and Partners, The Wall Street Journal, Dec 22, 2020. 141 http://www.forbes.com/sites/onmarketing/2014/01/28/why-amazons-anticipatoryshipping-ispure-genius/#6b23c6b92fac.

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Fig. 7.39 Cloud computing market share. Source Gartner in The Empires Jeff Bezos Built, The Wall Street Journal, July 4, 2021

7.1.4.1 The Rein of Jeff Bezos The company is expanding at a breakneck pace, despite its founder and CEO has exited the company. Jeff Bezos built Amazon into a colossus over 27 years, with repercussions across numerous industries. Bezos’s and Amazon’s fortunes have exploded in recent years. As demand for its core online shopping business increased, the company also achieved phenomenal success in cloud computing and successfully expanded into entertainment and advertising (Fig. 7.39). With Amazon’s growing power and ambition, the company has embarked on an unprecedented hiring spree and expanded its footprint across the United States. When Bezos stepped down as CEO to become executive chairman, and he embarked on a life of space exploration, philanthropy, and extravagant spending on real estate and new toys. Consider the personal and professional empires he built: Long commercial tentacles: Amazon is the king of online retail, accounting for approximately 41% of online sales (see Footnote 124). However, the company pioneered cloud computing and is a force in the advertising industry, where it now competes with advertising titans Google and Facebook.142 ,143 Amazon has pushed deeper into the daily lives of Americans in recent years through its streaming services and smart devices, categories in which it has maintained a lead despite increased competition. Amazon’s Alexa assistant and Fire TV streaming devices consistently rank among the site’s best-selling items due to frequent discounts. Never-ending hiring: Few companies have ever come close to matching Amazon’s hiring efforts. The company added more than 500,000 employees globally in 2020

142 143

Gartner in The Empires Jeff Bezos Built, The Wall Street Journal, July 4, 2021. eMarketer in The Empires Jeff Bezos Built, The Wall Street Journal, July 4, 2021.

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and is on track to overtake Walmart as the country’s largest employer in the coming years. To meet the increased demand, Amazon has been steadily expanding its warehouse footprint to deliver packages to customers in one day or less. Amazon has gone on several hiring sprees. It hired 175,000 workers in the spring of 2020 to meet a surge in demand caused by the pandemic, later declaring that 125,000 of those workers could remain full-time employees. It added another 100,000 employees in Canada and the US in September. And in May, it announced an additional 75,000 job additions. Additionally, the company increased its corporate headcount. It announced in January the addition of approximately 3000 employees to its corporate ranks in the Boston area, one of several expansions of technology jobs in major American cities. Additionally, in June, it added 800 positions to its Amazon Web Services team in Redmond, Washington. Amazon reported that approximately 130,000 of its 950,000 employees in the United States work in its corporate offices.144 Foray into Hollywood: Amazon achieved Hollywood success in 2010 with the launch of Amazon Studios. Now a recognized producer and distributor of feature films and television series, the Studios division has earned Oscar nominations for exclusive titles and star-studded casts featuring big stars like Michael B. Jordan. The Bezos kingdom: Bezos launched into space in a capsule developed by his rocket company, Blue Origin, in what will be the program’s inaugural human space flight. Apart from space, Bezos has made a gradual transition to a more expansive postCEO existence that involves climate-focused charity and a willingness to embrace celebrity. According to the Bloomberg Billionaires Index, Bezos is the wealthiest person on the planet, with an estimated net worth of approximately $200 billion. Amazon’s tale is far from typical. Due to Bezos’s demand that workers approach each day as if it were “day one” at a fledgling startup, revenues have continued to rise well beyond what most businesses reach equilibrium, decline, or stagnate. Bezos’s initial bizarre concept of selling books via a new medium known as the web was quickly followed by others. Things took off in 2006 when Amazon had the audacious notion of renting out its computing capacity to other businesses. The result—AWS (“Amazon Web Services”), the uncontested global leader in cloud computing—has fueled the company’s growth. True, Bezos did not invent AWS; however, he created the corporate culture that enabled a junior engineer to have an original concept heard and financed it (see Footnote 144). Amazon’s growth has been meteoric (Fig. 7.40). Another differentiator is the growing disparity between Amazon’s revenues and profits. The company reported pitiful profits for nearly two decades, choosing to reinvest in growth. However, due to AWS’s strong profit margins in recent years, the company has seen profits and growth.145 In 2020, the pandemic increased a

144 145

The Empires Jeff Bezos Built, The Wall Street Journal, July 4, 2021. Jeff Bezos ends his extraordinary run in charge of Amazon, The Economist, 5 July 2021.

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Fig. 7.40 Amazon’s growth story, $trn. Source Bernstein, Bloomberg in Jeff Bezos ends his extraordinary run in charge of Amazon, The Economist, 5 July 2021

long-term trend toward online activities, like e-commerce, shipping, and cloud computing, and raised Amazon’s income by 38% to another record-breaking $386 billion. Jassy, Amazon’s new CEO, will inherit an enviable position. Amazon is not without issues—the company has struggled in some international markets and has come under fire from trustbusters in the United States and elsewhere. Nonetheless, few businesses are better equipped to deal with those obstacles. While Amazon’s retail sales are expected to remain approximately two-thirds of overall revenues in the coming years, by 2024, digital advertisements may overtake cloud computing as the company’s largest source of profits; retail may contribute materially to the bottom line. Customers in the United States complain that Amazon has devolved into a flea market, with increasingly shoddy products bolstered by fabricated reviews. As the most recent results demonstrate, this has not deterred them from shopping there. However, this may become an issue. Outside of the United States, where sales increased rapidly last year, the next CEO will have to decide whether to expand into countries such as South America and India, where Amazon confronts stiff domestic competition (see Footnote 146). The third landlord of digital advertising, Amazon, is fast catching up with the other two duopolies, Google, and Facebook. It is also a big contributor to its operating margin (Fig. 7.41). The company has invested significantly in improving working conditions and paying a $15 hourly wage in the United States.146 However, it continues to draw criticism, particularly because it opposes the unionization of logistics employees. Many of AWS’s highly compensated programmers empathize with their warehouse colleagues. Against a backdrop of widespread

146

Can Amazon’s next boss fill Jeff Bezos’s supersized boots? The Economist, 3 Feb 2021.

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Fig. 7.41 Operating margin of Amazon, $bn. Source Bernstein, Bloomberg in Jeff Bezos ends his extraordinary run in charge of Amazon, The Economist, 5 July 2021

disillusionment with big tech’s utopian promises, the success of Amazon has also garnered the interest of American trustbusters. They are concerned that it could be utilizing sales data from third-party merchants on its platform to help develop in-house goods, thereby eroding the viability of those sellers. Amid one of the worst stretches for financial performance in Amazon’s history, the new CEO, Andy Jassy, is seeking to bring back the excesses of an e-commerce division the company built at a breakneck pace over much of the Covid-19 epidemic. Nearly a year after taking over as chief executive of Amazon, he’s learning how to tap the brakes. And he spent years overseeing one of the fastest-growing departments in a firm famous for its quick rise. Using a renowned internal forecasting program, Bezos and other executives approved a strategy that exceeded Amazon’s long-term demand forecasts. Instead, the pandemic-driven surge in internet purchasing decreased as in-person shopping recovered, defying early predictions by industry experts about a long-lasting change in consumer behavior. Early in the pandemic, Amazon identified a key time to meet demand and grow its e-commerce reach. Under its founder, the company doubled its employment from 2020 to March to more than 1.6 million employees and established hundreds of new warehouses, sorting centers, and other logistics facilities. That boosted the firm for a time—Amazon was one of the largest benefactors of the early tech boom. Between 2020 and 2021, its sales increased by two-thirds, and its profit nearly tripled (see Footnote 147). But demand hasn’t kept pace with that planned capacity, and its setback has been among the most significant.

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The gap caused a significant decline in earnings this year, and Amazon warned that the extra space would cost $10 billion in the first half of 2022. During Jassy’s leadership, the company’s stock price has decreased by more than a third, wiping out more than $600 billion in market value (see Footnote 147). Currently, Jassy and his group are seeking to delay the construction of new facilities on land that Amazon has purchased, sublease at least 10 million square feet of extra warehouse space and investigate ways to terminate or renegotiate leases with outside warehouse owners. He has shuttered 68 of the company’s brickand-mortar outlets and wants to reduce the number of employees. Other retailers have also been surprised by the pandemic’s shifting implications on consumer behavior. As more individuals moved their lives and jobs online due to the pandemic, businesses like Amazon, Apple, Microsoft, and Google grew even stronger. As people resume their prepandemic behaviors, many halt their hiring and take other steps to tighten their belts. And Amazon’s missteps are a part of a larger setback for the massive internet firms that have grown in influence and money for a large portion of the previous two decades. Homebound clients turned to Amazon at an unprecedented rate when Covid19 spread in early 2020. The company was understaffed and frequently out of stock on essential items as order volume approached that of the holiday season, when Amazon routinely employs legions of temporary workers to accommodate demand, stretching delivery windows for some items from two days to weeks. The internal forecasting system known as Supply Chain Optimization Technologies, or SCOT, which Bezos long regarded as a hidden weapon, contributes to some of Amazon’s current e-commerce difficulties. It was created to consider a wide range of variables and spit out estimates for product demand and the expansion of logistics required to meet it. Low, medium, and high projections were derived using the SCOT forecasts of Amazon. Amazon executives consistently opted for the higher end of SCOT’s estimations due to the record volume in the early stages of the pandemic. According to those projections, the company had to build a lot more infrastructure, including fulfillment centers, to stay up. To ensure that customers receive their products, Bezos, and the board of directors of Amazon approved plans to quickly develop new warehouses and transportation hubs and go on a recruiting binge as many jobs were added by Amazon in 27 months as were added by the combined workforce of UPS and Costco (see Footnote 147). Senior Amazon officials who are acquainted with the forecasting technology claimed that it was ill-equipped to handle a sudden occurrence like the pandemic, which prompted the corporation to commit to building out warehouses and infrastructure early in the pandemic, which took 18 months–2 years to come online. Amazon had more anticipated capacity than there were orders after the outbreak subsided. When Jassy assumed the CEO position on July 5, 2021, Amazon was still perceived as being on a pandemic high. Amazon’s sales increased by 44% over the three months that ended on March 31, smashing its results report. The company’s stock reached an all-time high a few days after he started his new job. The executive had become accustomed to rapid expansion inside his domain. The

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cloud computing subsidiary Amazon Web Services, which Jassy had led since its founding in 2006, reported a 32% increase in quarterly sales (see Footnote 147). The cloud industry has long been Amazon’s main source of revenue. In 2021, it contributed to little about a seventh of total sales but almost three-quarters of operational profit. Amazon’s retail operation, which includes a sizable logistical operation, was bigger but had a lower profit margin. Additionally, Amazon has a rapidly expanding advertising company. Before Jassy’s appointment, cracks in Amazon’s retail and logistics business had already started to appear; nonetheless, their growth pattern was unforeseeable. As the number of virus instances decreased, consumers went shopping in person outside of their houses. They returned to relying on online sales when demand for new varieties spiked. Amazon often reduces its employees in the warehouse after Christmas as business slows down, but Omicron persisted until February, and Amazon could not do so. After the virus subsided in March, the surge of orders slowed, but all of Amazon’s warehouse employees—including those absent due to illness—were back, reducing productivity and driving up prices. Amazon hired 14,000 new employees during the three months that concluded on March 31. The company was unexpectedly overstaffed after two years of being understaffed (see Footnote 147). Despite having a growth strategy to nearly increase its shop presence as recently as December, Amazon abruptly closed most of its physical retail stores in March, except for food. In April, the business canceled over 1500 corporate retail job openings and charged certain Amazon sellers an additional fee for fuel and inflation. The company’s plan called for cutting back immediately on Amazon’s extensive network of warehouses, attrition-thinning out its workforce, and returning to the operational effectiveness that had come to be associated with Amazon. The business would endeavor to reduce expenses and resume its one-day shipping strategy. The last word on Amazon’s turnaround has not been said.147

7.2

Facebook-Mogul of Social Media

The social media landscape: It all started with Facebook, but many social media sites are now. Globally, it is estimated that nearly 4 billion people use social media, up from 3.4 billion in 2019, and is projected to reach 4.4 billion by 2025.148 YouTube and Facebook are the most popular social media platforms among adults in the European Union, the US, and India (Facebook has the largest number of users in India). In the 18–24 age group, Snapchat was utilized by around 78% of

147

Amazon CEO Andy Jassy’s First Year on the Job: Undoing Bezos-Led Overexpansion, The Wall Street Journal, June 16, 2022. 148 Statista in Amazon CEO Andy Jassy’s First Year on the Job: Undoing Bezos-Led Overexpansion, The Wall Street Journal, June 16, 2022.

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people, with 71% of those people using it several times a day. About 71% of Americans in this age range use Instagram, while almost half (45%) use Twitter. Despite this, Facebook has remained the most popular choice for most American adults: approximately two-thirds of adults in the United States (68%) reported being Facebook users, with nearly three-quarters of those users accessing Facebook daily. The majority of Americans, except those 65 and older, are active Facebook users.149 With the fast growth in the United States peaked, there hasn’t been much change in creating new accounts. Facebook generated revenue of approximately 86 billion US dollars in 2020, up from 70.7 billion the previous fiscal year. The main income source of the social network has been digital advertising. Facebook is the most commonly utilized social media advertising and marketing platform since it is the biggest social network. 94% of worldwide marketers use Facebook in their marketing initiatives. Brands and companies find it an appealing advertising platform because of its large online audience reach and high rate of user interaction.150 After the Internet, the advent of social media is arguably the most significant development. The “social” phenomena have spread throughout the globe, encompassing huge swathes of the population. This expansion reflects the attraction of social technology and is made possible by the Internet’s scope, speed, and economic value for social interactions received from the Internet. Although most social media users consume content, Facebook is trying to exploit the spare time available to the users and encourage them to create content for the platform (Chui et al., 2012). A collaborative culture may create up to $1.3 trillion in annual value due to using social technology widely while improving intra-business communication (Shirky, 2010). Enhancing communication and fostering a collaborative culture may uncover two-thirds of this value. The adoption of social media platforms has occurred at a rate and intensity unheard of in the history of media. Social networks are habitually used by 80% of internet-connected individuals across the globe, and in the US, social networking’s share of total internet time spent increased to 36% in 2020; the average human being spends 2 h 45 min per day on social media (see Footnote 148). Social technologies add significant value by generating massive amounts of data due to human interactions. By 2022, 2.44 billion people will use social media, up from 970,000 in 2010, increasing at a 20% CAGR. Facebook receives 30 million messages every minute, and Twitter receives 350,000 tweets151 (Fig. 7.42). One of the main reasons for social technologies’ popularity is their accessibility via mobile devices. Consumers may socialize online wherever they go, as there are nearly 7 billion mobile devices, and the number is increasing rapidly. According to Facebook, more than half of its clients access the service via mobile phones.152

149

“Social Media Use 2018: Demographics and Statistics | Pew Research Center”. March 2018. Archived from the original on 2018-10-24. Retrieved 2018-10-24. 150 Published by H. Tankovska, Statista, Feb 5, 2021. 151 6 ways social media is changing the world, World Economic Forum, 7 April 2016. 152 Invisible ads, phantom readers, The Economist March 26, 2016.

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Fig. 7.42 Most popular social media platforms, worldwide. Source Backlinko, Brian Dean (updated Jan 2022) https://backlinko.com/instagram-users

The Internet and social media have persuaded billions of individuals to carry their own personal “hidden persuaders” everywhere, allowing global internet firms to track and influence their online activities and decisions. “We know where you are, we know where you’ve been, we can more or less know what you’re thinking about,” Eric Schmidt said forebodingly.153 A psychiatric disorder affects a quarter of British adults at some time in their life, costing the economy 4.5% of GDP every year. A growing number of studies indicate that adolescents’ excessive use of social media contributes to these diseases.154 Unsurprisingly, the consortium of social media platforms (particularly Facebook) is increasingly scrutinized by lawmakers for being opinionated and attempting to influence elections. Additionally, the issue of fake news is wreaking havoc. The legislators’ denouement may not be far away (see Footnote 154). While 80% of the world’s population with Internet access uses social media regularly, nearly 60% of the world’s population, or 4.2 billion people, do not have access to the Internet (International Telecommunication Union, 2011). The reality for businesses is even starker. Over 30% of Fortune 500 firms have no presence on online social media (Barnes & Andonian, 2011), and 70% of SMEs in the United States are not active on social technology platforms.155 According to some estimates, social technologies may boost interaction employees’ productivity in large companies by 20–25% if the firms are completely networked. Email use among

153

The rise of superstars, The Economist, Sept 17, 2016. How heavy use of social media is linked to mental illness, The Economist, May 18, 2018. 155 The state of small business report: January 2011 survey of small business success, Network Solutions LLC, and Robert H. Smith School of Business at University of Maryland, 2011. 154

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interaction employees is projected to fall by 25% freeing up 7–8% of workers’ time for other productive tasks and thus boosting employee productivity. On social networks, a huge pool of business information that was previously locked away in emails will be accessible, where multiple workers can access it concurrently, avoiding the need for repeated searches for the same information. What characteristics do social media users share? Globally, social media users primarily live in metropolitan areas. There is a strong association between social media usage intensity and economic growth in town/area/city. Social media usage is likely to increase in lockstep with incomes and economic development at the city level. As a result, social media is associated with income, economic output, and educational attainment. Additionally, the use of social media is focused on hightech areas. Areas with high use of social media are also likely to be populated by creative individuals, such as entertainers, designers, writers, musicians, and artists, as measured collectively by the Bohemian Index (Florida, 2010) (Fig. 7.43). Individual differences may describe who uses social media and who does not: Extraversion and openness positively correlate with social media, whereas emotional stability has a sloping negative correlation (Correa & Hinsley, 2009). People with a greater social comparison orientation tend to use social media (Vogel et al., 2015). However, the median age at which people begin using social media is 14. Children under the age of 13 use social networking services in the United States, even though that may be illegal (Jargon, 2019). YouTube (67%) was the most popular application overall among children in the age group 9–12 (Patchin, & Hinduja, 2020). Social media platforms wield enormous influence over human behavior. Consumers actively use social technologies to seek advice and learn about product prices. Social technologies affect one-third of consumer spending, amounting to

Fig. 7.43 Social standing drives social media usage. Source Florida (2010)

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Fig. 7.44 “Social shopping” can influence additional business. Source McKinsey, Euromonitor; iConsumer in Court et al. (2009)

nearly $1 trillion in yearly consumption in certain US and European product categories (Court et al., 2009) (Fig. 7.44). Social technologies appear to have the greatest impact on four industries: consumer financial services, advanced manufacturing, professional services, and packaged goods. Between $900 billion and $1.3 trillion in annual value creation are estimated in these four sectors. Approximately $345 billion may come from product development and operations, $500 bn from marketing and after-sales support, and $230 billion from improvements in business support activities (Chui et al., 2012). Social media influences the stock market too. Adding a public mood component derived from Twitter feed content into the calculation increased their accuracy in forecasting Dow Jones Industrial Average (DJIA) closing values (Bollen et al., 2011). Among the most effective ways social technology influences are its ability to affect purchasing decisions in supermarkets. There is significant potential for increased impact, particularly in purchasing behavior along the “consumer decision journey” (factors like loyalty, purchase and consideration) (Court et al., 2009). One-third of overall users’ spending may occur on social media platforms, resulting in an extra $940 billion in consumption in the United States and Europe alone (Chui et al., 2012). Online social platforms add important value to businesses by offering insights into customer purchasing patterns. The individual customer is the primary beneficiary of this value creation. Consumers benefit from this value accrual in the form of higher-quality products, lower prices, offerings that are more aligned with their

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needs, improved consumer service, and overall raised consumer satisfaction.156 ,157 Social media has spawned an App ecosystem that has created between 182,000 and 235,000 jobs in the United States, increasing salaries by between $12.2 and $15.7 billion (Daraius, 2012). Through increased choice, lower prices, and convenience, the consumer benefits from social technologies. As a result of competitive pressure, businesses also benefit consumers with improved products, lower prices, faster replies to changing demands, and better customer service. Additionally, transparency is a key feature of social technology: Customers use social media to voice their views about goods and services, which may rapidly become viral and force companies to react. Most social media users would want to share their bad experiences with goods/services, and a comparable proportion would rather believe customer evaluations and ratings than corporate advertising.158 A bigger source of consumer surplus is created through more product options rather than lower prices, although e-commerce creates higher competition and cheaper pricing. Amazon has almost sixty times the number of book titles as a typical big bookstore and provides 23 times the number of book titles as a typical Barnes and Noble superstore. The increased consumer surplus due to enhanced product selection at online bookstores is seven to ten times more than the increased competition and cheaper costs. Other consumer goods like movies, consumer electronics, software, computer hardware, and music see even greater gains (Brynjolfsson et al., 2003). In addition to economic value, social media contributes substantially to social value. Non-profit groups such as the United Nations Programme on AIDS/HIV utilized social media to collect information and create six policies for their HIV work.159 Government entities in the United States, like the Department of Homeland Security, use social data to direct the deployment of first responders in disaster management plans (Skarda, 2011). Infectious illness epidemics may be detected early using social media conversation; informal records on microblogs about neighborhood outbreaks prompted health specialists to take proactive action well before the Haitian cholera outbreak (Chunara et al., 2012). Organizations outsource work to third parties via social media platforms. Amazon’s MTurk (“Mechanical Turk”) uses thousands of individuals to scan billions of product description pages for duplicates to save costs and increase efficiency (Ipeirotis, 2010). Google Map Maker is similarly updated in 190 countries via a similar process.160

156

Consumers driving the digital uptake: The economic value of online advertising-based services for consumers, McKinsey & Company for Internet Advertising Board, Europe, September 2010. 157 Consumers driving the digital uptake: The economic value of online advertising-based services for consumers, McKinsey & Company for IAB Europe, Sept 2010. 158 State of the media: Social media report Q3 2011, NM Incite, 2011. 159 “Young people present first-ever ‘crowdsourced’ recommendations for AIDS response in UN history,” UNAIDS press release, April 24, 2012. 160 Google, “Countries and regions being mapped” (as of June 2012), retrieved from https://sup port.google.com/mapmaker/answer/155415?hl=en.

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Fig. 7.45 Diversity at Facebook. Source The Economist in How to win friends and influence people, The Economist, April 9, 2016

Social media may now predict complex social events like revolutions and societal discontent. Social media produced petabytes of data, which can illuminate how a social unrest movement like the Arab Spring spreads and gains momentum (Allnutt, 2012). Three-quarters of Liberia’s conflicts were forecasted two years ahead of time using a social media model built after the country’s 2011 elections, confirming the usefulness of social media mood data (Beardsley et al., 2006; Blair et al., 2011). The United Nations Global Pulse program analyzes data produced by social media to identify possible areas of concern and outbreaks of illness. Facebook’s family has over 2.5 billion members (more than the population of the world’s most populous country), generating economic activity in ecosystems comprising marketers, application developers, broadband service suppliers, and mobile device manufacturers. While the whites and the Asians make up almost 95% of the workforce, the blacks remain in miniscule numbers (Fig. 7.45). Facebook has a chronic diversity problem. Facebook serves roughly half of all Internet users and offers them everything they read on the web. Facebook is the primary source of political news for half of the adult population in the United States. It has accumulated more data about its online users than any other company, even Google.161 And to believe that social media was virtually unknown only a few years ago! Facebook hopes to have a decisive impact on global online e-commerce by influencing subterranean human behavioral patterns. It is currently valued at more than $1.1 trillion, making it the sixth-most valuable corporation. A billion people, or one-seventh of the global population, log in to Facebook.162 Nearly a third of

161 162

The Economist, Nov 26–Dec 2, 2016. How to win friends and influence people, The Economist, April 9, 2016.

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mobile phone Internet time in the United States was spent on Facebook and its applications, compared to 11% for Google search and YouTube combined. As a result, Facebook has the most user data of any business history. It has leveraged this benefit to establish itself as a main force in the advertising industry, with incomes expected to double to $29 billion in 2021, accounting for 56% of total revenue (see Footnote 162). The rise of social media influence has been spectacular, with over 1 million “influencers” are estimated to exist worldwide, speaking to 84 billion accounts, and influencing viewer perceptions and buying habits via videos, images, tweets, and “stories.” They differ from athletes, politicians, and celebrities in that they acquired their influence via social media platforms first, typically by developing a genuine voice that appeals to a particular (usually millennial) audience. Although the blogosphere has long been a haven for influencers, Instagram, Twitter, and YouTube are the three largest platforms for individual influence. Approximately 26 million brand-sponsored influence posts were made on Instagram alone, creating a market worth approximately $10 billion in 2020 (see Footnote 163). The influencer economy in China is worth $17 billion. China’s growing army of social influencers contributed to the meme’s popularity. They frequently portray themselves as having recently fallen from a high-end car and dumped their most expensive things over the street. Influencers in China have also utilized their online celebrity to create apparel and cosmetics brands and sell automobiles to fans through live-streaming applications with a combined audience of 398 million. Many individuals own companies that offer goods based on their personalities and lives. Influencers in India have successfully inverted the funnels where marketers include them in their annual calendars. Young African influencers are emerging in fashion, music, the arts, and food. Influencers have a lot of chances to promote new brands or goods to a larger market in Africa since new items and services are always being launched. Influence has even infiltrated the medical field. Patients with social media influence in the United States, for example, are compensated by pharmaceutical companies for their opinions (see Footnote 163). While consumer goods and fashion industries place a premium on megainfluencers, nanoinfluencers may be as important, particularly for ideas and brands that rely on authenticity and trust. The term “nanoinfluencer” is a new name that refers to individuals with as few as 1000 followers who are ready to promote goods on social media. One of the qualities that lend them an accessible and genuine air is their absence of celebrity status. Influencer marketing is fundamentally about storytelling and collaboratively creating unique and engaging content. Transparency and honesty are frequently critical, and this classification has provided a platform for a diverse range of perspectives and opinions that are frequently overlooked by mainstream media, advertisers, and channels. Influencer marketing has elevated digital advertising to new heights. According to research, election mobilization features on social media platforms (such as digital equivalents of the “I Voted” sticker) have affected voting behaviors.

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Fig. 7.46 Marketers using influencer marketing. Source EMarketer in Facebook eyes a future beyond social media, The Economist, 29 July 2021

Influencers leverage their platforms to endorse particular applicants and establish themselves as active and activist voices. Youth influencers are actively combating censorship, corruption, and economic crises afflicting most of Africa, where there is a generational gap between elderly political leaders and their youthful supporters. According to some, “influencers will become Africa’s new liberated power.”163 To many, this appears to be a way for ordinary citizens to influence politics. In the run-up to elections, political actors in Indonesia are paying social media influencers to disseminate propaganda. Many influencers, dubbed “buzzers,” are swarming social media to influence election outcomes (Fig. 7.46). The purchasers are speaking back in the age of social media. Influencers, in particular, are getting through to fashion leaders. These individuals have amassed significant followings by evaluating, advertising, and occasionally panning various goods. Their celebrity originates from the skillful use of Instagram, Snapchat, and TikTok, rather than non-digital hobbies (Fig. 7.47).164 Influencers are both a walking ad and a trusted friend for consumers. They are a hot commodity for intermediaries who sit between them and brands. Millennial and Gen-Z consumers would account for 70% of the $350 billion global spending on expensive, ostentatious clothing and jewelry by 2025.165

163

“The Rise—and Fall?—of the Social Media Influence” by Erica Orange & Jared Weiner, The Future Hunters, and Eshanthi Ranasinghe, Exploration & Future Sensing, Omidyar Network. 164 The business of influencing is not frivolous. It’s serious, The Economist, April 2, 2022. 165 Bain Consulting in Facebook eyes a future beyond social media, The Economist, 29 July 2021.

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Fig. 7.47 The growth of influencers. Source EMarketer in Facebook eyes a future beyond social media, The Economist, 29 July 2021

Influencers’ contribution to the economy is projected at $210 billion, or 1.4% of GDP.166 75% of American marketers would spend money on influencers in 2022, up from 65% in 2020.167 Facebook eyes a future beyond social media. Facebook is a company that advertisers, investors, and users could not live without. It is on track to surpass $100 billion in revenue in 2021. It appears to be on track to join the exclusive club of companies with a market capitalization greater than $1 trillion, which it formally joined at the beginning of the year. With 2.9 billion daily users worldwide, Facebook’s core products—its flagship social network (dubbed Blue internally), messaging applications Messenger and WhatsApp, and photo-sharing app Instagram—serve as a digital magnifying glass for human nature. This glass magnifies both the good (neighborly assistance during the epidemic) and the bad (conspiracy concepts and quack cures). Additionally, it acts as an extraordinary lens through which advertisers can view customers all across the globe. And the duality is probable to become more apparent if Facebook succeeds in its most ambitious project: creating a “metaverse” that combines a three-dimensional digital world with a three-dimensional physical one (see Footnote 168). At its heart, Facebook is a massive advertising platform. Advertisements account for 98% of revenue. Blue is the world’s largest advertising platform, generating $55 billion in revenue last year. Instagram, which Facebook acquired for $1 billion in 2012, now contributes another $20 billion or more, bringing its share of total advertising revenue to approximately 30%. Facebook’s ad targeting capabilities are “incredibly precise” (see Footnote 167). The company monitors its users’ behavior not just on its services but nearly everywhere else’s. This allows it to determine which items to recommend to a certain user, find other users with similar interests, and evaluate whether they buy anything after viewing an advertisement. Advertisers place a premium on this precision: In terms of revenue per user, Facebook makes $8 a quarter, almost twice as much as Twitter.

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China’s National Bureau of Statistics in Facebook eyes a future beyond social media, The Economist, 29 July 2021. 167 EMarketer in Facebook eyes a future beyond social media, The Economist, 29 July 2021.

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Smaller businesses with fewer resources account for the lion’s share of Facebook’s 10 million advertisers. Chinese merchants are also investing billions of dollars in Facebook. While Facebook’s apps are prohibited in China, Chinese merchants can promote their products to Western consumers. Covid-19 has accelerated Facebook’s growth. In 2020, self-isolating adults in the United States spent an average of approximately 35 min each day on Blue, a two-minute increase over the previous year (see Footnote 172). This equates to an additional 10,000 years of collective attention. Today, operating an online consumer business without targeted advertisements is as unthinkable as operating a brick-and-mortar establishment without a physical storefront. The future appears to be rosy, if slightly tinted.168 In the last 15 months, Facebook has added more than 2 million users. It will continue to grow as economies recover and digital advertisers, which now account for 60% of total advertising spending in the United States, continue to erode traditional media. Apple’s tracking opt-out is expected to have a “greater impact” in the current quarter, according to Facebook, which predicts that four out of five iPhone users have opted out. However, even if this reduces the effectiveness of Facebook’s targeting, it will remain at least as effective as its competitors. Facebook officially changed its name to Meta to reflect the high growth opportunities in the realm of the digital virtual world. “We believe the metaverse will be the mobile internet’s successor.”169 Facebook has already made inroads in the area of shared online spaces teeming with digital avatars and said, “retooling our teams to prioritize serving young adults.” Acknowledging that payoffs from the Meta world are years away, Zuckerberg said, “I view this work as critical to our mission because delivering a sense of presence—as if you are in the same room as another person—is the holy grail of online social experiences.”170 At least once a month, 3.45 billion individuals access Facebook, Instagram, Messenger, or WhatsApp. This is almost a sixth higher than the forecasted 2.99 billion for 2020.171 Facebook alone has more than 2.5 billion average daily users (Fig. 7.48). Before the pandemic, because individuals were spending more time online due to the rise of stay-at-home and the consequent decrease in time spent socializing in person, Facebook’s suite of services, which includes WhatsApp, Instagram, and Messenger, continued to increase in popularity worldwide through 2020. To capitalize on the e-commerce growth and improve the links across its platforms to compete more effectively with competitors, the business has introduced new services such as shopping on Instagram. Additionally, the moves are intended to make it more difficult to discontinue using its products.172

168

Facebook eyes a future beyond social media, The Economist, 29 July 2021. Mark Zuckerberg in Facebook Changes Company Name to Meta in Focus on Metaverse, The Wall Street Journal, Oct 28, 2021. 170 Facebook Changes Company Name to Meta in Focus on Metaverse, The Wall Street Journal, Oct 28, 2021. 171 Five Tech Giants Just Keep Growing, The Wall Street Journal, May 1, 2021. 172 How Big Tech Got Even Bigger, The Wall Street Journal, Feb 6, 2021. 169

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Fig. 7.48 Average daily users of Facebook platforms, bn. Source Five Tech Giants Just Keep Growing, The Wall Street Journal, May 1, 2021

However, Meta (Facebook’s parent company) faces uncertain times. The signs for Meta are ominous. The headwinds are strong, with its loss of $10 billion in ad revenue by virtue of Apple’s privacy policy change. Coupled with this, its users are not growing. Not too long ago, market watchers valued the company at $1 trillion, riding on its ad revenue. Cut to today; the day of reckoning seems near. Meta is in a deeper hole than its compatriots. Unlike Meta, the underlying profitability of the other big tech firms, Apple, Microsoft, and Google, will probably ride over the current business environment and overcome regulatory challenges (see Footnote 181). Several issues could be debilitating for Meta. The first is overly restrictive regulation, which is currently under consideration by the Federal Trade Commission, the European Union, and possibly even Congress. The second is how Apple’s privacy reforms would affect its advertising strategy. The third is the quick expansion of TikTok and a few other up-and-coming rivals that are stealing Facebook’s younger users and competing with it for the attention of its older ones. The fourth is that Meta is placing a large wager on creating a brand-new industry for itself, the metaverse, that may not pay off, wagering about $10 billion in research and development annually (see Footnote 181). To aggravate Meta’s problems, Google will implement privacy improvements similar to Apple’s and could further limit Meta’s access to the personal information of around three of every four smartphone users worldwide. Google’s adjustments may particularly worry Meta’s future revenue because Apple’s privacy reforms have shifted ad delivery through Facebook toward Android devices. Young people are Meta’s most valued demographic and crucial for the future, but TikTok is stealing them away. TikTok will exceed Facebook in 2020 in terms

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of daily app usage time spent by users.173 TikTok rose to become the most downloaded app worldwide around the same time.174 TikTok’s ad business by the end of 2022 is projected to be bigger than Snapchat’s and Twitter’s combined and will likely surpass YouTube’s in 2024.175 TikTok had fewer than a third of Facebook’s U.S. users in 2021.176 Collectively, these trends show that TikTok is experiencing significant momentum and can expand on both the user and revenue sides (see Footnote 181). The company’s metaverse projects will be losing money for up to five years, and some of the technologies needed to accomplish its goal may take ten to fifteen years to develop.177 Creating a virtual or augmented reality system that people can wear for extended periods, and that is, in the end, no bulkier than a pair of glasses, “is as hard a problem as our industry has tackled in 60 years.”178 Meta has also encouraged businesses to open stores on Facebook and Instagram. Although this endeavor is very young, several shops have expressed dissatisfaction with the outcomes. To make up for the data lost due to device manufacturers’ privacy changes, Meta uses retail on its websites and mobile applications to collect the data it’s AI needs to target advertising and complete purchases (see Footnote 181). New opportunities to collect data will result from Meta’s expensive investment in new virtual- and mixed-reality headsets, which merge VR and the real world. These headsets may even enable even more effective ad targeting.179 Google or Apple can’t stop Meta from collecting all the user data that the law permits if individuals are wearing a headset that the firm has manufactured. Furthermore, a headset would give Meta access to an unprecedented quantity of data on not just where we are and what we are doing but also our current emotional state. A headset can recognize our body language and posture while watching our eyes and listening to our voice (see Footnote 179). With this knowledge, Meta could market to us in subtler—and possibly more sinister—ways than we have ever seen before.180 “In a metaverse, you don’t know where the ads are anymore.” In the real world, they’re in squares and rectangles;

173

App Annie in Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022. 174 Sensor Tower in Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022. 175 Insider Intelligence in Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022. 176 Pew in Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022. 177 Zuckerberg in Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022. 178 Andrew Bosworth, chief technology officer of Meta in Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022. 179 Stern School of Business in Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022. 180 Linden Lab in Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022.

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you can choose to ignore them. That’s not true in a metaverse. The ad is that person across the street, who isn’t necessarily a real person; they’re an ad. Moreover, all the biometric data gathered by a headset could rapidly tell Meta’s systems things like your sexual orientation and mental health status and sell that information to an advertiser. It’s unclear yet whether unconscious behaviors could be as valuable as conscious ones. There are early signs that Facebook is looking for more methods to monetize the metaverse besides traditional advertising. For instance, Meta recently declared that it might charge metaverse content producers up to 47.5% of the price of virtual products sold through its new sales platform.181 Meta is careful to distinguish between the prices the firm charges for sales within its metaverse, which can be accessible through apps bought from its VR store or elsewhere, and sales within its VR app store, where it takes a 30% share (see Footnote 181). Therefore, something purchased in Meta’s metaverse would only be subject to a 25% in-metaverse sales fee if the customer used a web browser or a mobile device to do so (the ability to do so will soon be available) (see Footnote 178). Even if Apple prevails in the battle over who will sell the most headsets, Meta will still have plenty of room to profit from its metaverse. A sleek and userfriendly VR or AR headset from Apple might be the ideal delivery mechanism for a metaverse-based social network delivered to you by Meta, much as the iPhone accelerated Meta’s growth back when it was still known as Facebook (see Footnote 181). Added to the tremors of Meta’s meltdown, the social media landscape felt the tremors of Elon Musk’s acquisition of Twitter. Elon Musk tweeted, “The bird is freed” in late October after finally completing his acquisition of Twitter. He already fired Twitter’s CEO and renamed his personal Twitter account to “Chief Twit.” The richest guy in the world, the third-most followed Twitter user (almost overtaking Justin Bieber), now controls what is perhaps the most significant news outlet in the world (see Footnote 182). Elon Musk says he wants to charge $8 monthly for Twitter’s “blue check” verification badge and adjust the fee based on “purchasing-power parity.” So this means a user in the US would pay $8 while an Indian user would pay $2.4 (Rs. 187).182 Musk wants to let go of 50% of the workforce as a part of the rejig. The little bird will be singing a different tune by the time Musk is done with his rejig.

181

Meta-morphosis or More Pain? Possible Futures for Facebook’s Parent Company, The Wall Street Journal, June 11, 2022. 182 Elon Musk buys Twitter at last, The Economist, 28 October 2022.

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Ill Effects of Social Media

The way we view the world is controlled by social media algorithms. What you see in your feeds is not entirely your choice, and what is at stake is one’s sanity—and the future of the world. Algorithms on social media dictate how we perceive the world. It is difficult to pinpoint the precise point when we ceded control of what we read, see, and even believe to the largest social media firms. Instagram and Twitter joined YouTube and Facebook in the algorithmic future in 2016. They promoted content that we were most likely to share, tap, or heart—and buried everything else. Simultaneously, Facebook—whose News Feed was algorithm-driven as of 2009—hid the option to revert to “Most Recent.” The opaque algorithms did not just boost Taylor Swift’s newest album release coverage. Additionally, they expanded the scope of incendiary misinformation, attacks, and conspiracy concepts. They further isolated us within our own hyperpolarized filter bubbles (see Footnote 183). Worst-case situations are no longer speculative. Individuals are given content that appeals to them; they click, read, watch, interact with like-minded individuals and fall into rabbit holes that support their views and ideals. They eventually find themselves in their customized version of reality. Without a doubt, social media is not solely to blame. And even if the blame is placed squarely on social media, robots are not the only ones to blame. The humans who run these businesses retain the final say over what appears and does not.183 However, this is still a massive technological problem at its core: Computers control what we see, and they operate in an opaque manner. There is still hope. In the weeks preceding the 2020 US presidential election, Instagram and Facebook made measures to restrict the distribution of material categorized as potentially deceptive by its algorithms, including discredited claims of voter and ballot fraud. Trustworthy news websites saw a rise in traffic while traffic to political websites decreased. Additionally, data suggests that when Trump’s account was suspended, the number of election-fraud claims on Twitter dropped substantially. An economy that is based on attention is easily gamed. What began as an innocuous Facebook post eventually resulted in the ouster of Ukraine’s President Viktor Yanukovych in 2017. The notion had taken hold that social media had become a worldwide force for pluralism, democracy, and development by linking people and giving them a voice. Fears and misinformation disseminated on social media like the concept that Syrian migrants get greater profits than native Germans helped the far-right Alternative for the “Germany” party win 12.6% of parliamentary seats in Germany. Online rumors and false news that have been weaponized have further undermined confidence in Kenya’s democratic system. In addition, Russia has a long history of propaganda and a political system that is

183

Social-Media Algorithms Rule How We See the World. Good Luck Trying to Stop Them, The Wall Street Journal, Jan 17, 2021.

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mainly unconcerned with the truth. Not only for internal consumption but also for export, it has clung to the evil side of social media much as a rat to a drainpipe (see Footnote 185). The articles and incendiary posts circulate across social media platforms, like Twitter, Instagram, and Facebook. They frequently outperform content created by actual people and media firms. According to Facebook, Russian material, including posts and sponsored ads on its network, reached 126 million Americans, or approximately 40% of its population. Bots were responsible for one in every five political posts posted on Twitter during last year’s American presidential campaign. In two ways, social media has transformed the attention economy. The first is a quantitative assessment. New devices and services have infiltrated every corner of life, sucking up an increasing amount of time.184 The second is a qualitative distinction. Sharing has made individuals more active attention seekers, significantly impacting the economy. Adults in the United States who use Instagram, WhatsApp, or Facebook each month spend approximately 20 h on the services. Americans, on average, use their smartphones over 2600 times each day (the most active ones are on their phones twice the average) (see Footnote 185). On Facebook, users “like” things approximately 4 million times per minute. It is becoming a growing lucrative business. Individuals disseminate information to draw attention to themselves and the items they disseminate. They want to be heard and noticed and admired. They want their tweets and posts to be liked and retweeted. Some information spreads faster than others, like a virus across social media networks—a characteristic that the social media industry is designed to promote. Companies that work with social media understand what goes viral and how to modify a message until it does. The Leave campaign in the 2016 Brexit referendum in the UK was one of the pioneers. It delivered around 1 billion targeted digital ads, mainly on Facebook, testing with numerous versions and terminating unsuccessful ones. In 2016, the Trump team used a similar strategy on an average day but a much larger scale, feeding Facebook between 50,000 and 60,000 unique copies of its ads.185 Several were targeted at a few dozen voters in a single district. These environments are a manifestation of political polarization, and additionally, they propel it forward. The algorithms used by YouTube and Facebook to maximize “engagement” guarantee that users see the information they are likely to interact with. This tends to pull them into groups of like-minded people with similar interests, turning moderate viewpoints into extreme ones (see Footnote 185). Outrage and humor are highly effective political tools; they may simply be included in rumor campaigns like the one regarding the health of Hillary Clinton that circulated in 2016. During the summer of 2016, far-right bloggers began

184

GroupM in Once considered a boon to democracy, social media have started to look like its nemesis, The Economist, 4 November 2017. 185 Once considered a boon to democracy, social media have started to look like its nemesis, The Economist, 4 November 2017.

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spreading rumors that she had seizures and was physically weak and that the Democrats and their supporters in the mainstream media had been concealing this information. Her past coughing episodes have been mocked in online videos that went viral. The Drudge Report and Fox News, two conservative media sources, covered the issue mainly with innuendos and stoked rumor-mongering. Clinton was forced to refute the allegations, but they gained momentum when she was diagnosed with pneumonia.186 Both Facebook and Google are startlingly closed and secluded for a business that once said its mission was to make the world more accessible and connected. It is now clear that heavy social media use is associated with mental illness, especially among teenagers. A psychiatric disorder affects approximately a quarter of “British” adults at some time in their life, costing the economy nearly 5% of GDP annually. A growing number of studies indicate that teenagers’ excessive use of social media contributes to these diseases. People between the ages of 14 and 24 in the United Kingdom think that social media sites like Twitter, Snapchat, Instagram, and Facebook, are bad for their mental health. They stated that the platforms exacerbated their depression and anxiety, deprived them of sleep, subjected them to bullying, and instilled concerns about their body image and “Fear of Missing Out” (FOMO).187 Academic surveys have discovered that these issues are exacerbated significantly among frequent users. According to Sean Parker, Facebook’s co-founder and president, the product work by “exploiting a vulnerability in human psychology.” Indeed, a study shows that Facebook activates the same region of the brain associated with impulsivity as gambling and drug addiction. However, mental illness may be caused by fixing likes and comments, although this is difficult to demonstrate.188 Reducing screen time is a straightforward solution to the issue. The cognitive capacity of participants to control impulsive behavior was less affected than that of drug or gambling addicts, according to research done on Facebook. More than any other social network, nearly two-thirds of users of Instagram feel wretched. They spend approximately an hour every day on the app. The 37% who are content spend slightly more than half as much time on average.189 FaceTime (91%), a video-calling application, and phone conversations (84%) have a much higher happiness rate. Nothing beats real conversations on social networking. Damning evidence suggests that Facebook knew about the teens’ ill effects. Investors, however, remain unconvinced despite the harsh glare of critical media reports. One need only read The Wall Street Journal’s Facebook Files series to

186

BuzzFeed News in How heavy use of social media is linked to mental illness, The Economist, 18 May 2018. 187 Royal Society for Public Health in How heavy use of social media is linked to mental illness, The Economist, 18 May 2018. 188 How heavy use of social media is linked to mental illness, The Economist, 18 May 2018. 189 Moment App in Facebook’s Investors Are the Biggest Addicts, The Wall Street Journal, September 17, 2021.

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realize that things are not so flattering right now under the surface for anybody who believed Facebook simply “woke up like this.” According to the Journal’s research, the social media giant is aware that its platforms—which are now utilized by almost half of the world’s population— harm users in ways that only the social media cohorts fully comprehend. Several of the facts was especially troubling: As per the Journal’s report, Facebook’s internal study revealed that among teenagers who expressed suicidal thoughts, 6% of American and 13% of British users linked their desire to kill themselves to Instagram. Facebook’s stock has dropped less than 1.5% of its value, but investors seemed to be mostly glossing over these troubling disclosures (see Footnote 190). Say what you want about Facebook’s platforms, but it is hard to quit them. The Journal this week reported on evidence that teens often find Instagram particularly addictive—a conclusion that would hardly surprise anyone who is regularly on it. Facebook’s platforms are designed to be habit-forming. Investors aren’t blind to this; rather, it is likely a key reason they continue to buy in, even as controversies around the company have piled up (see Footnote 190). As far as addictive products go, Facebook’s are lucrative. According to FactSet, tobacco seller Philip Morris International is taking in $31 billion in revenue this year, and beer conglomerate Anheuser-Busch InBev $45 billion. Before the pandemic, casino operator MGM Resorts International did less than $13 billion in revenue in 2019. Analysts forecast that Facebook will post multiples more revenue than these so-called sin stocks, at more than $119 billion this year. “We want to build technology that makes people’s relationships and lives better, not simply take up their time,” Facebook said, adding that they have “invested billions in keeping people safe.” Recent history suggests that no matter how appalled Facebook’s users purport to be by what the company does behind the scenes, most don’t permanently change their habits. Facebook added 180 million monthly users in the year after it revealed that “Cambridge Analytica,” a data company with connections to President “Donald Trump’s” 2016 campaign, had illegally accessed data on tens of millions of Facebook users. Reviewing “The Social Dilemma,” a documentary depicting how Facebook’s algorithms can manipulate human behavior, the New York Times advised readers to “Unplug and Run.” But Wall Street estimates that Facebook will have added 185 million monthly users in 3-months (see Footnote 190). So, will users now leave Facebook’s networks en masse because of reports of preferential treatment for its glamorous, high-profile users or its divisive content? The hard truth—and what Facebook’s investors already know—is exactly the kind of stuff that keeps users engaged. That doesn’t mean Facebook’s stock will remain forever impervious to its image problem. Consider how the company hopes to grow next. Survey data from Cowen suggest competitor TikTok’s penetration among people aged 18–24 has surged from 42% in the second quarter of 2020 to 56% in the third quarter of 2021. TikTok claims to have a special version of the app for children under 13 that includes extra safety and privacy protections on its website. Younger demographics weren’t covered in the survey, but data from Jiminy, an app for parents that tracks the

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smartphone habits of their children, showed that in 2019 about 70% of 10-year-old girls with smartphones in the U.S. used TikTok (see Footnote 190). Continuing to reach young adults, teenagers, and even younger children is key to Facebook’s future, as evidenced by the company’s initiative to develop an Instagram app for kids, albeit one that will require adults’ buy-in. But even parents addicted to Facebook’s products themselves won’t necessarily approve of their children using them. More broadly, Facebook is now looking to transition from a social media company into what it calls a “metaverse” company, building a kind of virtual forum for users to work, play and buy things. That, too, is not without competition: Technology companies such as Intel, Unity Software, Microsoft, and Nvidia have also discussed the metaverse. Facebook’s users today can’t give up what they are already on doesn’t mean they will line up to get hooked on something new and all-consuming.190 Fake news has grown into a monstrous problem that jeopardizes the very fabric of democracy. The question is, do social media threaten democracy? Only 37% of Americans trust information obtained via social media, less than half the percentage who trust printed newspapers and magazines. Facebook acknowledged that during the 2016 United States presidential election, 146 million users might have been exposed to Russian disinformation on the platform. YouTube admitted to having 1108 Russian-related videos and Twitter to having 36,746 Russian-linked accounts. Rather than bring enlightenment, social media has served to spread the poison. Google and Facebook account for roughly 40% of all digital content consumption in the United States (see Footnote 191). Russia’s antics are only the beginning. Politics is becoming increasingly acrimonious worldwide, from South Africa to Spain. One of the reasons is that social media erodes the environment for horse-trading by disseminating misinformation and anger, corroding voters’ discernment, and escalating partisanship. The usage of social media only serves to amplify existing divisions. The financial crisis of 2008 fueled popular outrage at the wealthy elite that had abandoned the rest of society. And due to the way social media platforms operate, they wield extraordinary influence. In an “attention economy” where users read, click, and share repeatedly, social media companies gather your data to train computers to predict what will grab your attention.191 A person attempting to influence public opinion may produce an unlimited number of ads, examine them, and decide which ones are the most effective. This undermines liberal democracy’s compromises and subtleties while bolstering politicians who profit from conspiracy and nativism. Following Russia’s attack on America, Americans began attacking one another. Facebook is the primary news source for many in Myanmar, it has fueled hatred toward the Rohingya,

190 191

Facebook’s Investors Are the Biggest Addicts, The Wall Street Journal, September 17, 2021. Do social media threaten democracy? The Economist, 4 November 2017.

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sufferers of racial cleansing. Social media platforms are berated. However, society may harness them with enough willpower and resurrect the ancient dream of enlightenment. The stakes for liberal democracy could hardly be greater. The frightening prospect is that social media has the power to unseat the powerful. Donald Trump didn’t hurt social networks’ business; in fact, prospects for post-Trump social media brightened up considerably. Donald Trump was booted out of Twitter, before which he had the sixth-most followed account on Twitter, with 90 million followers. As a result of his incitement to violence on social media, the departing president was forever banned from using it. Nor will the ban be unlikely to hurt social networks’ business. Free-speech supporters erupted, including Angela Merkel, Germany’s (former) chancellor and a vocal opponent of Trump. Investors felt the same way. Since Trump’s ejection, Twitter’s stock has dropped by approximately 10%. Facebook’s stock has dropped after it suspended its account “indefinitely” on its main social network and Instagram. “Trump” was the most banned term by internet marketers until being replaced by “coronavirus.” They didn’t want their logos to display alongside material that could alienate consumers (see Footnote 192). Twitter’s algorithms give priority to tweets that get the most attention. To put it mildly, Trump was highly engaging and often appearing at the top of users’ feeds. Automated auctions are used to sell this prized internet real estate. Many prospective bidders refused to bid because “Trump,” hence prices fell. This advertising inventory has become more valuable now that Trump is no longer president. People who came to the site to gape at Trump’s newest outrage but stayed to read about movies or sports (or some other minor squabble) may not return as often as before. While becoming more brand—friendly has its disadvantages, the gains from dumping Trump may outweigh those disadvantages to a certain extent. Snap’s stock price soared when the company also banned the president’s account. Twitter use remained high despite Trump’s loss (Fig. 7.49). Fig. 7.49 Social media share prices. Source Datastream Refinitiv in Why prospects for post-Trump social media aren’t all bad, The Economist, Jan 16, 2021

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Fig. 7.50 Annual revenue per registered user. Source Datastream Refinitiv in Why prospects for post-Trump social media aren’t all bad, The Economist, Jan 16, 2021

The impact will probably be negligible for YouTube, Instagram, and Facebook, which banned Trump’s account.192 Their monthly users (2.6, 1, and 2 bn, respectively) are larger and more global than Twitter’s (300 m). Facebook has done a better job than Twitter and YouTube in realizing better revenues per user (Fig. 7.50). The larger question is whether muting is an option to the extent that muting undercuts the argument made by social media companies that they are unbiased platforms and are not responsible for what their members write. Deeppocketed incumbents will benefit greatly if Trump muting brings more regulatory clarity. Adding to its problems, Facebook faced a 6-h outage in October 2021. More embarrassment followed when a whistle-blower testified that Facebook was encouraging eating disorders body shaming and was a threat to democracy. While the charges hurled at Facebook have not dented its stock prices, it may be a moment of reckoning for the company. Though Instagram is accused of making 20% of US teenagers feel bad about their bodies, it also enhances self-esteem by double that number.193 Facebook has given a clarion call in making the minimum age for viewership on the internet statutory legislation. It has constituted a seemingly useful “oversight board” to regulate free speeches and fake news. What seems like a body blow to Facebook is a sharp drop in its teenage user base in the US. This would mean that the total user base of Facebook would recede by almost

192 193

Why prospects for post-Trump social media aren’t all bad, The Economist, Jan 16, 2021. Facebook is nearing a reputational point of no return, The Economist, 9 October 2021.

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50% in the next two years.194 In all this, the US Justice Department’s rile against Facebook was ill-conceived. It claimed Facebook was a monopolist in the social media space but did not include other major social networks such as Telegram, Twitter, and TikTok. Yet, there is a danger of Facebook becoming a pariah and is frequently bracketed with the tobacco lobby. Who’s interested in Facebook-built metaverse? It’s akin to Philip Morris providing health care. Facebook and Google are the two biggest players in terms of internet advertising. Facebook is still among the most valuable, biggest, and most well-known technology firms globally. Nevertheless, in recent times, it has garnered much more attention for copying important features from rivals than it has for developing new attributes and products from scratch. Industry experts believe Facebook has developed into a gigantic clone factory. Rather than brain technology or other new hardware gadgets, Facebook has launched plenty of lookalikes plagiarized from Slack, Pinterest, Linked In, TikTok, Twitch, and YouTube. Facebook has created a dating app, released a Craigslist rival, and notably copied Snapchat’s most famous Stories feature just before the latter went public in 2016. In the same way, Facebook is reportedly interested in acquiring Clubhouse, the popular audio-focused app of the moment. While copying, Facebook also purchased businesses it couldn’t defeat. It bought Instagram, in addition to WhatsApp and Oculus (see Footnote 197). However, Facebook’s ongoing and visible cloning attempts raise serious concerns about the firm’s capacity to innovate. It’s also difficult to recall when Facebook came up with anything genuinely original and unique. Since introducing the News Feed in 2006, a few months after the launch of Twitter, Facebook has made several significant changes to the way people use the internet and consume information. It introduced the Facebook phone, which was a failure, and tested a solar-powered flying internet delivery drone, which was killed, and a new cryptocurrency (TBD, but some early struggles). Numerous additional flops may be found throughout a user’s home page in the form of seldom-used buttons. Conversely, some of the company’s attempts to imitate competitors have been a resounding success. The company’s Snapchat clone, Instagram Stories, has become a popular method for millions of people to communicate and interact. A popular and safer alternative to Craigslist has arisen in Facebook Marketplace, quickly becoming the preferred method of selling locally. Even though Facebook didn’t come up with vanishing postings, Instagram Stories rapidly overtook Snapchat’s whole user base in a year.195 To some degree, Facebook thus has publicly accepted the position as iterator rather than inventor. What matters to the average customer

194

Ms Haugen, the whistle-blower at the congressional hearing in Analysis: Facebook has become a $770 billion clone factory, Kaya Yurieff, CNN Business, Feb 21, 2021. 195 Analysis: Facebook has become a $770 billion clone factory, Kaya Yurieff, CNN Business, Feb 21, 2021.

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isn’t about who came up with the concept initially, as it is about how well the idea was implemented. Apple was not the first to launch a smartphone, but it built the finest one (see Footnote 197).

7.2.2

A Cohort of Other Social Media

WhatsApp, which two billion people use and send 100 billion messages per day, is seldom in the headlines. Most of the headlines revolve around whether or not it should be separated from its corporate parent, Facebook, which is seldom absent from the news cycle. What and who gets attention and what could be done to keep it away from certain individuals and ideas are hotly debated topics. For the companies concerned, the visibility gap is critical. An advertising-supported social media company like Facebook operates to get people’s attention and generate revenue for itself. Most individuals use messaging services such as WhatsApp to keep in contact with their loved ones and communicate with friendship groups and colleagues. They’re increasingly providing methods for customers to contact companies as well. Unlike most social media, they have a functional purpose. However, since they are not in the public eye, they generate much less anger and controversy and far fewer debates about regulation (see Footnote 197). That could have begun to alter for two reasons. One was Facebook’s announcement of a change to WhatsApp’s terms of service, which many interpreted to imply that their data will be used for a broader variety of reasons. Consequently, many rushed to install Telegram and Signal, two applications with considerably smaller user counts-about 500 million for Telegram, much less for Signal-which sell themselves on promises of improved security (see chart196 ). The boss of Telegram named it the “largest digital migration in human history.” The uprising in the US Capitol was another catalyst. So, Apple deleted Parler, a Twitter clone where users expressed views like “we need to start systematically assassinating #liberal leaders” from its app store, and Amazon discontinued hosting the business in its cloud. In terms of online life, messaging services have a far wider and more balanced beneficial impact. Social media creates a worldwide and noisy “public sphere” in which the worst of humanity spreads quickly. It has proven viable to rebuild safeguards that enable the river of human conversation to flow freely in the private realm of messaging applications. Conversations that create controversy in public may be had privately with more subtlety and without trolling. Messaging services are distinct from social media platforms like Instagram, Twitter, Facebook, and others in two key aspects. Addressability is one among them. When users publish on Facebook, the company’s software determines which of their “friends” will immediately see the post (others will have to search for it). The program will

196

Sensor Tower in Messaging services are providing a more private internet, The Economist, Jan 21, 2021.

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distribute the message further if it shows itself to be popular. When someone uses WhatsApp to send a message, the message is solely sent to the person or group that the user specifies. People know who they are talking to while using texting applications (see Footnote 197). Messaging services are desired by users, maybe even more so than social media. There is also a distinction in the business model followed. To offer the services they provide to advertising, social media companies must know what their users are saying, visiting, and enjoying. And to increase sales, algorithms are required that provide consumers with more relevant and interesting options. Anything which tends to go viral is of interest to Facebook. Messaging providers have no reason and, in certain instances, no ability to peek behind the backs of their users. Despite the pandemic, the number of Europeans who use Facebook daily (305 m) has stayed the same since 2019, while the number of North American daily users has dropped. The amount of time spent on the five most popular social media apps decreased by 5% in 2020, while the amount spent on messaging apps increased by 2.3% (see Footnote 197). The fact that message service providers are unaware of what their customers are saying to one another has far-reaching consequences. Conversations on sites such as Twitter and Facebook are shaped by whoever controls the platform, whether they are corporate hosts or government agents and authorities.197 Members have control over messaging’s private areas since they set the rules. This may lead to longer-lasting communities without requiring infrastructure suppliers to agree to more restrictive terms of service. Individuals have more freedom and a better feeling of community in private online environments. Naturally, there are dangers associated with doing so. In the last two years, radical utterances have all but disappeared on the internet. To believe that it currently takes place in a private setting would be understandable. Many people value what messaging services provide and would do everything to maintain them. Instagram is a cash cow. Many Wall Street analysts were perplexed when Facebook bought the photo-sharing application Instagram for approximately $1 billion in cash and stock in April 2012. Instagram was less than two years old, with a staff of 13 and no revenue. In 2021, Instagram earned $33 billion in advertising income, expecting to hit $40 billion in 2023. In the United States, 69% of marketers spend most of their 2020 influencer expenditure on Instagram.198 According to Bloomberg Intelligence, Instagram was worth $100 billion in 2022. It has a daily user base of more than 1.4 billion.199 Its revenue growth has now surpassed that of its parent company. Indeed, during the second quarter of 2021, advertising expenditure on Instagram increased 177% year over year, compared to just a 40% rise

197

Messaging services are providing a more private internet, The Economist, Jan 21, 2021. Omnicore in Backlinko, Brian Dean (updated Jan 2022) https://backlinko.com/instagram-users. 199 Bloomberg in Backlinko, Brian Dean (updated Jan 2022) https://backlinko.com/instagramusers. 198

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on Facebook during the same time.200 For the price of chicken feed, Facebook got a cash cow. Additionally, Instagram impressions grew by 209% year over year in the same quarter, compared to a negative 17% rise for Facebook. Impressions are critical in the world of internet marketing. An impression implies a real click on a link embedded in an ad and is an order to display an ad server. (An advertisement display, on the other hand, is less valuable.) (see Footnote 202). Instagram has several advantages, which provide a handsome return for the advertisers (see Footnote 198). • It attracts a younger demographic. Instagram is used by approximately 72% of adolescents, and 73% of them think it is the best possible way brands can communicate with them. • It is predominantly die-hard young users who click on the links. Around 130 million users clicked on the link from commercial link to obtain additional information about a product. • Its users genuinely desire to see advertising. Around 70% of shoppers use Instagram for “product discovery.” • It has a global audience. Around 89% of Instagram users are located outside the United States.201 A predominantly young crowd enjoys Instagram. Two-thirds of its users are below 35 years of age (Fig. 7.51). Instagram thrives primarily because of its dedicated and increasing mobile user base, which exceeded one billion four years back when Facebook’s mobile user base was significantly smaller. When Facebook acquired Instagram, the app was purely for image sharing. Within a year, video capabilities were added. Instagram advertising is getting more sophisticated all the time. Advertisers can display slideshows and links to other websites using one feature. Carousel advertisements on mobile phones allow for multipage print campaigns. This kind of brand advertising has evaded many of Facebook’s biggest online rivals, enabling Instagram to take a significant share of the market (see Footnote 202). As with many other well-known names in social media, Instagram began as a side project with no clear path to profitability. Advertising has become the primary revenue stream for Instagram and Facebook. Instagram is ideal for advertising a company’s product because it is fundamentally a visual platform. And Instagram is well-positioned to become the main advertising platform in the twenty-first century as computing shifts away from desktops, particularly among millennials.202

200

Merkle’s Digital Marketing Report in Backlinko, Brian Dean (updated Jan 2022) https://backli nko.com/instagram-users. 201 Backlinko, Brian Dean (updated Jan 2022) https://backlinko.com/instagram-users. 202 How Instagram makes money, Investopedia, Ellen Simon, May 29, 2020.

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Fig. 7.51 Instagram US user profile. Source Statista in Thinking outside the box, The Economist, June 4, 2016

One-third of users buy directly from Instagram ads. Over a third of 1000 Instagram users aged 16–45 had made purchases directly through the site. As per the study, pricing influences women, while males are more swayed by advertising aesthetics. Male Instagram users are 10% more likely than female Instagram users to buy anything, but 81% of women buy from unknown companies, compared to 75% of men. Surprisingly, celebrity or influencer endorsements in the Instagram advertisements seemed to have little effect on men’s and women’s purchase intent. As shoppable ads’ popularity increases, Instagram is becoming a shopping destination.203 Advertisements have also been shown to play a major role in acquiring new followers for marketers, with 6 out of 10 customers following a new brand on Instagram after viewing an attractive advertisement. Brand loyalty is waning in importance as a purchase motivator. After seeing an appealing advertisement, consumers demonstrate a strong desire to purchase from unknown brands and follow the new brands. This means that well-designed advertisements can level the playing field between disruptors and incumbent brands.204 Instagram provides businesses of all sizes with tremendous opportunities to connect with their target audiences. However, as more businesses join Instagram, it will become increasingly difficult to stand out in the crowded feed. Instagram launched Instagram ads in late 2015. Marketers may now target any part of Instagram’s large users via the Facebook advertising system. And with billions of daily

203

VidMob in Study Finds 1/3 of Users Buy Directly From Instagram Ad, Forbes, Heather Leighton, Sep 27, 2019. 204 Study Finds 1/3 of Users Buy Directly From Instagram Ad, Forbes, Heather Leighton, Sep 27, 2019.

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users, Instagram advertisements have become an alluring option for brands seeking to boost engagement. Currently, advertising on Instagram gives the best returns among all social media choices.205 Instagram’s advertiser base has surpassed 500,000. According to a Strata survey, Instagram advertisements are expected to be used by 63% of advertising agency professionals in the United States. What makes Instagram advertisements so popular? 1. Growth of the audience: Instagram is among the most rapidly expanding social media networks. TrackMaven analyzed 26,965 brands from all sectors and discovered that brands experienced a year-over-year median follower growth of 100%. 2. Attention: Messenger, Facebook, and Instagram are the top three places where people spend 50 min each day. In the United States, 20% of mobile time is spent on Instagram or Facebook. 3. Intent: According to an Instagram study, 60% of Instagram users say they learn about new goods and services via the app, and 75% say they act on that information after seeing it on the app, such as visiting a website, doing research, or informing a friend (see Footnote 204). 4. Targeting: Instagram advertisements use Facebook’s ad system, which offers the most precise targeting capabilities. Advertisers may specify their target audience’s location, interests, demographics, and behaviors. They can also target individuals who have purchased from them or engaged; similar cohorts can also be targeted. 5. Results: As per Instagram, which analyzed over 400 campaigns worldwide, advertisements recalled from Instagram advertisements were 2.8 times Nielsen’s online advertising standards (see Footnote 205). TikTok is a serious social media player. “When you gaze into TikTok, TikTok gazes into you,” a technology blogger wrote in 2020, elucidating TikTok’s almost clairvoyant nature. One cannot help but notice the busty seductiveness of many of the clips. It is serious money that is being exchanged. Additionally, there is nothing quite like the unmistakable rush of creative destruction. It is about time. A data aggregator has predicted that TikTok will surpass Facebook in 2022 and WhatsApp and Instagram in terms of time spent by users.206 The success of TikTok appears to be a mockery of the argument that Facebook is impregnable. TikTok’s magic is derived from its algorithm and the data used to train it. In contrast to Facebook’s rolling feed, TikTok’s simple, single-video interface ensures that the app is always aware of what a user is watching. Because clips are brief, viewers see many of them, which generates a lot of information. This, combined

205

The Complete Guide to Instagram Ads: A Step-by-Step Guide to Advertising on Instagram Alfred Lua, @Buffer. 206 App Annie in TikTok isn’t silly. It’s serious, The Economist, 15 Jan 2022.

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with the fact that only a few friends and family members clog the feed, enables the algorithm to connect users with content creators who truly entertain them. And, because the majority of videos are shot on a smartphone, they are accessible to anyone. The entry requirements are minimal. There is a high level of virality. In the absence of further geopolitical turmoil, TikTok has the potential to disrupt not just the user experience but also the business model of social media in America. It could do so in a variety of ways. Commence with advertising. Google and Facebook were early adopters of the pay-per-click model. TikTok enhances this transformation by inviting brands to collaborate with creators to create potentially viral content. Second, is electronic commerce. TikTok now allows viewers to purchase goods directly from videos by tapping a shopping tab on other American social media platforms. It has partnered with Shopify, an e-commerce platform, to expand the site’s merchant base. In China, so-called social commerce—which includes live streaming—is significantly larger than in the United States (see Footnote 207). TikTok also faces a slew of other difficulties. It must make significant investments in content moderation to remove harmful videos before they go viral. Addiction is a real concern, not just as a meme—#tiktokaddict has over 500 million views.207 The app is under fire for data privacy concerns, particularly among underage users. Regulatory risk will increase as TikTok gains popularity. One thing TikTok need not fear is being crushed by Silicon Valley’s big beasts (at least without help from Uncle Sam). TikTok is at the forefront of concepts pioneered in China’s video-obsessed social media landscape that have taken years to catch on in the United States. When the Chinese Communist Party is arbitrarily cracking down on the consumer-tech industry, it is especially heartening to see Chinese entrepreneurialism and ingenuity capturing the world’s attention. TikTok’s rapid growth shows the power of video. TikTok is not just for teenagers who enjoy lip-sync on the app. People of all age groups are thronging the relatively new sensation, which clocked a billion active monthly users a few months quickly. Facebook reached the billion-user mark in approximately nine years, Instagram in approximately eight years, and YouTube and WhatsApp in seven years. TikTok, which launched in 2016, reached a milestone in less than five years (Fig. 7.52). TikTok’s popularity is partly attributed to the explosion in internet usage. The number of web users has grown three-fold since the early days of Facebook.208 TikTok, which had a user base of 500 million before 2018, had an accelerated run during the pandemic. The app’s “For You” page is especially popular with its algorithm-driven curated videos, keeping the users riveted to the screens. Various governments such as India, Indonesia, and Bangladesh have banned TikTok for its seemingly offensive content. The Chinese government ticked it

207

TikTok isn’t silly. It’s serious, The Economist, 15 Jan 2022. Our World in Data, an Oxford University research project in TikTok’s rapid growth shows the potency of video, The Economist, 7 October 2021.

208

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Fig. 7.52 Social media platforms, monthly active users, bn. Source Statista (2021)

off, alleging anticompetitive behavior. TikTok has shrugged off all this and has marched on relentlessly.209 Rivals are trying to catch up. Instagram has an “Instagram Video” leaning on video, an essentially static photo-sharing app. YouTube now has a short-video feature dubbed “Reels” and “Shorts.” TikTok’s spectacular rise demonstrates a clear vote for video content among social media users.

7.3

Apple—The Cook Knows the Recipe

Apple is the world’s most profitable technology business and the most valued public company. With its $3 trillion market capitalization (Salinas, 2018), Apple became the first publicly traded corporation in the United States to be valued at more than thrice the amount four years later (Nicas, 2020). By 2022, the company expects to have 137,000 full-time employees and 510 retail outlets across 25 different countries. It is the company that owns and runs the iTunes Store, the world’s biggest music store. By the end of 2022, there will be more than 1.5 billion active Apple devices across the globe, accounting for a quarter of all smartphones in the world.210 Furthermore, Huawei and Samsung is the world’s third-largest mobile phone manufacturer.211 Apple briefly reached a market capitalization of $3 trillion, making it the first American company to do so. The latest move in a pandemic-era rally propelled Apple and other large technology companies to record highs. Since the pandemic lows of March 2020, its share price has more than tripled, adding nearly $2 trillion

209

TikTok’s rapid growth shows the potency of video, The Economist, 7 October 2021. “Apple Now Has 1.5 Billion Active Devices Worldwide”. 211 “Huawei beats Apple to become second-largest smartphone maker”. The Guardian. August 3, 2018. 210

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Fig. 7.53 Apple revenue breakup. Source Bloomberg (2022a)

to the company’s market capitalization. Apple is a core holding in the portfolios of both retail and institutional investors. Apple’s shares have risen 41% since 2021, ranking among the Dow Jones Industrial Average’s best performers. Apple was one of the top five contributors to the S&P 500’s 27% gain in 2021.212 Historically, strong iPhone sales have fueled Apple’s phenomenal rise in sales, earnings, and the value of its shares. However, as sales of its iPhones and other technological hardware products have plateaued, the firm has made an aggressive effort to establish itself among the world’s top digital service providers (Fig. 7.53). Since 2009, Apple’s flagship product, the iPhone, has ranked among the world’s top five smartphone suppliers.213 Due to Covid-19 lockdowns, many businesses, including Apple, experienced a surge in demand for laptops, tablets, and other gadgets. The Cupertino, Californiabased firm launched several new iPhone models, with the gadgets accounting for a significant part of its yearly sales.214 Apple sold $47 billion worth of iPhones between January and March of 2021, a rise of 66% compared to last year, thanks to new devices, including 5G technology. Consumers also paid more for high-end iPhones, increasing the average retail price by $52–$847 in the US.215 Ten years of Cook: The apple will undoubtedly fall, albeit slowly. When Tim Cook succeeded Steve Jobs a decade ago, even the most zealous Apple fanboys expressed concern that the business was doomed to decline. Without the creative Apple’s Willie Wonka (Steve Jobs), the digital chocolate factory would be managed by an automaton who had built a career organizing global supply lines and

212

Apple Briefly Tops $3 Trillion Market Cap, The Wall Street Journal, Jan 3, 2022. Apple’s 5 Most Profitable Lines of Business, Shoshanna Delventhal, Investopedia, Mar 20, 2020. 214 IDC in Apple’s quarterly sales exceed $100 bn for the first time, The Economist, Jan 30, 2021. 215 Consumer Intelligence Research Partners LLC in Apple’s quarterly sales exceed $100 bn for the first time, The Economist, Jan 30, 2021. 213

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examining spreadsheets. How can someone so unassuming inspire Apple workers to keep producing “insanely great” products, to use Jobs’ famous phrase? Nobody said a word as he marked his 10th anniversary as Apple’s CEO. Cook, it turned out, could. And with justification. He has arguably achieved the best succession success in technology, an industry rife with many managers who have failed to carry on in their founders’ footsteps. Indeed, to put it in purely monetary terms, he was a far more successful CEO than the late Jobs. The business was valued at $349 billion when he took control of Jobs. More than any other publicly listed business in history, it’s now valued at $3 trillion, the first company on this planet to reach that figure. Annual sales increased from $108 billion in 2011 to $366 billion last year under his stewardship. Apple’s net profit was nearly $100 billion, surpassing Saudi Aramco’s oil-fueled earnings and establishing the company as the world’s most profitable. Apple has cash reserves of $200 billion, the highest ever held by any company. Less well-known is that during his tenure, the “Apple economy”—defined as Apple’s annual revenue plus all revenue generated by third parties using one of its services—has risen sevenfold to over $1 trillion (see Footnote 216). Cook might have announced his retirement given these accomplishments now that he was being praised so much (and with a spot in the billionaire club). Instead, he’s expected to be around until at least 2025, when his existing stock award completely vests. The question is how long he will maintain Apple’s stratospheric growth trajectory. The simple answer is that it would be significantly more difficult than during his first decade. Numerous worldwide tailwinds that propelled Apple to stratospheric heights are now reversing course. It helps to appreciate what Cook got right in the last ten years as he propelled Apple to commanding heights. The first was the digitization of life facilitated by mobile devices. He continued to push for iPhone improvements to satisfy the world’s insatiable demand for mobile computing. The iPhone 4s, which was released soon after he became CEO and was a beefed-up smartphone, has been replaced by iPhone 13, a hand-sized supercomputer with a processor that is 50 times faster. Even Apple’s Watch and Air Pods, the company’s two most significant new products since he assumed control, may be viewed as extensions of the powerful iPhone. Apple’s smartphones are now used by more than a billion people worldwide, or one for every seven Human beings (Fig. 7.54). Globalization, particularly China’s rise, is another force that Cook has deftly harnessed. Before he succeeded Jobs, he moved Apple’s device assembly to the country. Foxconn, the company’s largest contract manufacturer, now employs approximately 1 million people there, and the majority of them construct iGadgets. Additionally, companies that provide components for other devices employ an unknown number of people. And in addition to using China as a manufacturing base, Cook recognized its market potential early on. After the United States and Europe, China is now Apple’s 3rd largest market, generating 19% of sales and potentially an even greater proportion of profits. Cook’s 3rd coup recognized the significance of network effects—the economic process in digital markets that magnifies the size of large businesses. Even Steve

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Fig. 7.54 Cook’s tenure. Source Refinitiv Datastream in How Satya Nadella turned Microsoft around, The Economist, 22 Oct 2020

Jobs, who had mixed feelings about the App Store on the iPhone, failed to grasp. On the other hand, Cook doubled down on the digital “flywheel”: the App Store drew in more developers, who in turn drew in more users, who drew in even more programmers, etc.—until it became the world’s largest digital marketplace in terms of revenue. Today, it hosts nearly 2 million apps, enabling app developers to generate $643 billion in billings and sales in 2021 (see Footnote 216). Cook was also the first CEO of a large technology company to signal loudly and frequently that companies the size and scope of Apple must bear a certain responsibility for their global effect. Under Jobs, the appearance of a device was more important than how it was manufactured. Apple has set an admirable intention of becoming carbon neutral by 2030 across all its products. And Cook has dubbed privacy a “fundamental human right” and compelled app developers to ask users if they want to be monitored by advertisers, among other things (Fig. 7.55). Being pro-privacy aligns with Apple’s business model, which, unlike Google and Facebook, does not profit from data collection to sell targeted advertisements, and climate-cuddling appeals to Apple’s sensibilities, mostly wealthy users gave Apple’s relatively low carbon footprint. Apple’s green pledge does not impact Apple’s P&L. This has aided in keeping regulators at bay—and elevated Apple to the status of the world’s most valuable brands. In other words, Apple is a larger and better form of itself after ten years of Cookery. That is not to say, however, that it is impenetrable. Three issues are particularly noteworthy: competition, geopolitics, and growth. On the surface, the rate of growth appears to be normal. Analysts have forecasted the demise of the iPhone for years; the device continues to generate truckloads of money. Global unit sales have decreased slightly from a peak of

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Fig. 7.55 US handsets market share by value, %. Source The new rules of competition in the technology industry, The Economist, 27 Feb 2021

231 million in 2015, but only slightly: However, the smartphone market will eventually taper off. Even if this takes time, Apple will confront a challenge that all big businesses face: the more they expand, the more difficult it gets to develop quickly (see Footnote 216). Cook was able to diversify his revenue streams. Apple’s services division, which contains the App Store and Apple Music, has grown from $8 billion in revenue in 2011 to $65 billion in the last four quarters.216 While wearables such as the Apple Watch and accessories like the AirPods are smaller than the iPhone, they produce significant revenue: approximately $9 billion in the three months ending in June. Last year, AirPods ended up into over 200 million ears, and Apple Watches into 34 million wrists outselling all other premium earbuds and Swiss watches combined.217 For the first time, Apple’s quarterly revenue exceeded $100 billion, surpassing Microsoft’s record sales by two-and-a-half times and Facebook’s by four times. Only Amazon outperforms the other tech giants in terms of annual revenue—though at much lower margins. Cook had limited success in building a heterogenous workforce. Apple has a chronic diversity problem. A predominant White and Asian workforce, Blacks remain in miniscule numbers (Fig. 7.56). Decoupling from China: It appears the end of Apple’s long sojourn with China. The world’s largest technology business enters a new chapter as manufacturing proliferates in southern India. Apple’s pivot away from China is significant for the

216

Apple’s quarterly sales exceed $100 bn for the first time, The Economist, Jan 30, 2021. Apple has had a successful decade. The next one looks tougher, The Economist, 28 August 2021.

217

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Fig. 7.56 Diversity at Apple. Source Apple has had a successful decade. The next one looks tougher, The Economist, 28 August 2021

company and a sign of a far larger one for the global economy. Apple’s extraordinary success over the past 20 years—revenue up 70-fold, share price up 600-fold, and market value of $2.4 trillion—is partly due to a significant bet on China. Apple placed its bets on factories in China, which today produce more than 90% of its products, and courted Chinese consumers, who provided up to a quarter of its income in certain years. However, the company is forced to start a hasty decoupling by economic and geopolitics changes (see Footnote 218). Although Apple’s product packaging states that it was “Designed by Apple in California,” its devices are put together along a supply chain that runs from Amazonas to Zhejiang. China, where 150 of Apple’s largest suppliers have production facilities, is at the center of this production chain. Chinese supply chains that are deteriorating, and waning consumer demand hurt Apple’s most recent earnings. Therefore, Mr. Cook, who hasn’t been spotted in China since 2019, is courting new business associates. He entertained the prime minister of Vietnam in May at Apple’s cutting-edge headquarters. Apple is anticipated to launch its first physical store in India in the following year (see Footnote 218). The two nations stand to gain the most from Apple’s new strategy. Apple listed 18 significant suppliers in Vietnam and India in 2017 compared to 37 the year before. In India, where it had previously exclusively produced older models, Apple began producing its new iPhone 14 in September. By 2025, 25% of Apple’s products will be produced outside China, up from less than 5% currently (Fig. 7.57). Apple’s suppliers are diversifying away from China as well. The proportion of long-term assets Taiwanese tech, hardware, and electronics companies hold in China is a rough indicator of this. The average percentage in 2017 was 43%; it was 31% last year (Bloomberg, 2022b). Covid gave the message that tech companies needed a “China + 1” strategy. The need to disperse operational risk is the primary driver for the rush. Lockdowns

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Fig. 7.57 China manufactures bulk of Apple products. Source Economist in The end of Apple’s affair with China, The Economist, 24 October 2022 and JPMorgan Chase in The end of Apple’s affair with China, The Economist, 24 October 2022

in Shanghai in the spring forced the temporary closure of a Quanta factory, a Taiwanese company said to be Apple’s primary supplier of MacBooks. Preventing this turmoil is the “primary driving force” behind Apple’s supply chain decisions (see Footnote 218). Cost control is another reason. In the last ten years, China’s average salaries have doubled. By 2020, the average wage for a factory worker in China was $530 per month, over twice that of workers in Vietnam or India (see Footnote 218). India lagged behind due to its shoddy infrastructure, which included inadequate roads and an unstable electrical grid. But things have changed, and subsidies from the Indian government have made the offer more enticing. The bureaucracy involved in visas and customs is still a hassle. However, it is comparable to the work ethic in China. Locals are being increasingly seen as potential customers by Apple, notably in India, which has the second-largest smartphone market in the world. In July, Apple reported that iPhone sales had nearly doubled India’s revenues over the previous quarter. As a result, China’s relative importance as a consumer market is decreasing. At its peak in 2015, China accounted for more than Europe for 25% of Apple’s annual sales. Since then, its market share has rapidly decreased, reaching 19% so far this fiscal year (Fig. 7.58). It appears that Chinese President Xi Jinping wants it to decline even further. Recently, he promoted “self-reliance and strength in science and technology,” implying that Chinese national champions may provide a greater threat to foreign importers. He said it five times in a row. This suggests that geopolitics was possibly the primary driver of Apple’s change. China is becoming an uncomfortable environment to conduct business due to rising Sino-American tensions. Chinese sensitivity has increased, which is causing additional friction. To placate newly picky Chinese customs inspectors, Apple reportedly had to request this summer that Taiwanese producers mark their products “Made in Chinese Taipei” (at the risk of angering Taiwanese ones) (see Footnote 218).

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Fig. 7.58 Apple revenue spread. Source Refinitiv, Datastream, Economist in The end of Apple’s affair with China, The Economist, 24 October 2022

The issue is whether moving production outside China will be sufficient to fend off further restrictions. Apple still depends on Chinese-owned companies to manufacture its products even though it produces more outside China. Chinese producers like Luxshare, Goertek, and Wingtech are capturing a bigger portion of Apple’s market share outside China. Given the growing gap between the United States and China, it makes sense for Apple to place some side bets before restrictions get much tighter. A Western investor in Asia claims that Chinese firms doing business outside of China are currently safe. But the “noose is tightening.”218

7.4

Microsoft-Roaring Back with Nadella

Microsoft has officially joined the world’s most exclusive club: companies with a market capitalization greater than $2 trillion (which has since come down due to the Russia-Ukraine war). The revenue profile presents a balanced picture of three revenue streams—Personal Computing, Intelligent Cloud, Productivity, and Business Processes (Fig. 7.59). The company passed the $2 trillion mark two years after surpassing the $1 trillion mark; Covid-19 aided in helping reach the goalpost. During the pandemic, people spent more time on various gadgets, increasing the requirement for gaming systems, Microsoft’s computers, and cloud computing platforms. “Over a year into the pandemic, digital adoption curves aren’t slowing down,” Satya Nadella, Microsoft CEO, has said.219 The reboot with Nadella: It did—with poise. Nadella deposed Microsoft’s Windows operating system as its central product. No longer a votary of closed system architecture, he extended Microsoft’s products and services to other platforms and

218 219

The end of Apple’s affair with China, The Economist, 24 October 2022. Microsoft reaches a $2 trillion market cap, CNN, 22 June 2021.

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Fig. 7.59 Microsoft revenue profile. Source Investopedia https://www.investopedia. com/how-microsoft-makesmoney-4798809

included “open-source” Linux, Google’s, and Apple’s operating systems. He elevated Microsoft’s Azure cloud computing business and put it on a pedestal. As a result, revenue growth has been in the double digits, and the company now has a market capitalization of $2.5 trillion, the second most valuable company in the world (see Footnote 221). Microsoft reinvented itself, whereas other technology companies looking for a second chance, like Oracle and IBM, did not. However, nothing is permanent in the fast-paced world of technology. The market for older personal computers (PCs) has slowed, and it is not always the case that the company’s goods are the best or most famous. Many experts believe Azure is technically behind market leader AWS (“Amazon Web Services”), launched four years earlier. Many consumers prefer to use Zoom for video calls and Slack for chat instead of Microsoft’s Teams. Microsoft failed to acquire TikTok, which would have bolstered its consumerfacing businesses, including the Xbox gaming console and (less significantly for TikTokers) (see Footnote 221). The stakes are extremely high. Since Nadella took over, the company’s shares have more than quadrupled in value (Fig. 7.60). They are now trading at 37 times earnings, which is more than Facebook, Apple, or Alphabet (though significantly less than Amazon’s 123). Microsoft is priced to perfection and is poised for takeoff. To live up to the expectations, he’s dusting up old weapons like bundling and licensing, which got Microsoft in hot water with antitrust regulators in the late 1990s, earning the company the moniker “evil empire.” Since 1992, he has been an insider, recalling the days when the company narrowly avoided being forced to be broken up. Is it possible to keep expanding while avoiding the pitfalls of the past? Microsoft operated in five distinct business segments until 2014. The majority of profit came from three of them: Windows, its Microsoft Office software (PowerPoint, word processing, and spreadsheets), and programs that operate servers in data centers and corporate networks. Entertainment and devices, such as the Xbox, generated some revenue. However, online services like MSN web portal and Bing search were also-rans. Nadella restructured this organization. Today,

7.4 Microsoft-Roaring Back with Nadella

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Fig. 7.60 Satya Nadella tenure. Source Refinitiv Datastream in How Satya Nadella turned Microsoft around, The Economist, 22 Oct 2020

Microsoft’s approximately 20 businesses are divided into three broad categories: cloud, business processes, productivity software, and personal computing. Each comprises a revenue-generating stalwart—servers, Office, or Windows. If any of those audacious bets succeed at scale, they will hone Microsoft’s creative edge, which currently appears to be blunter than Amazon or Alphabet. But even if they don’t succeed in developing new goods instead of Microsoft may be successful in commercializing existing products. As insiders joke, the company is rarely the first to market and frequently not even the second, but “man, we are going to make all the money.” Excel was not the 1st spreadsheet application (do you recall Lotus 1-2-3 or VisiCalc?). However, many software engineers regard it as the most important program ever created due to its widespread adoption. That has undoubtedly been the case with Office. Around 1.2 billion employees use Office/Office365, a cloud-based version delivered via Azure. Yet, managers wrench Office—particularly Excel—at the peril of desk jockeys (see Footnote 221). There has been a significant increase in Microsoft’s revenues as companies and people adapt to the new normal of pandemic life. This is due to the strong demand for Xbox video games, Surface computers, and a wide range of cloud computing services. The average daily usage of the company’s Teams software package, which includes video and text chat features comparable to Zoom and Slack, has more than tripled (Fig. 7.61). Microsoft’s Bing search advertising division, struggling in the epidemic’s early stages, made significant progress. At record highs, Microsoft shares are up more than 30% year so far, valuing the software giant at more than $1.8 trillion, second only to Apple in market capitalization (see Footnote 172).

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Fig. 7.61 Average daily users of Microsoft Teams, in million. Source Five Tech Giants Just Keep Growing, The Wall Street Journal, May 1, 2021

Microsoft began bundling Teams with Office365 for free to boost adoption; Teams had 120 million daily users by April 2021. Consequently, Microsoft controls 87.6% of the market share for this type of software, while Google controls the rest (see Footnote 205). Slack filed an antitrust lawsuit against Microsoft, terming Teams a cloned product aimed at destroying it—much like “Microsoft’s Internet Explorer (IE)” destroyed Netscape, a competitor web browser that precipitated its battle with trustbusters. It’s another matter that IE is now in the also-ran category. Microsoft too has a diversity problem. A predominant White and Asian workforce, Blacks remain in miniscule numbers (Fig. 7.62). Crucially, Microsoft was a lightning-fast adopter of cloud computing. AWS was already firmly entrenched when Azure was launched. “Amazon was leading a revolution, and we had not even mustered our troops,” he wrote. The stakes are enormous. Over time, most of the world’s businesses are expected to migrate to the cloud. Cloud spending is approaching 10% of the IT budget. But this already amounts to a $240 billion annual market. It may reach $1 trillion in the not-too-distant future. Azure competes in the cloud against two large competitors—GCP (“Google Cloud Platform”) and AWS and two smaller rivals—Oracle and Alibaba Cloud. It has gradually grown its market share to 18% (Fig. 7.63). Again, Microsoft’s relationship with firms’ information technology departments has benefited. Windows is the operating system of choice for almost four out of five personal computers and over 72% of all servers. It may provide single pricing for Azure, Office, and other customers. As a result, Microsoft claims that Azure will eventually cost less than a fifth as much as AWS. Additionally, it’s simpler to use than Amazon’s product, which has advanced features that even some IT pros find overwhelming (see Footnote 221). Additionally, it is more palatable to several customers than using Amazon products. There’s concern that Jeff Bezos, Amazon’s voracious CEO, would use his

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Fig. 7.62 Diversity at Microsoft. Source How Satya Nadella turned Microsoft around, The Economist, 22 Oct 2020

Fig. 7.63 Ranking of cloud services. Source Gartner in How Satya Nadella turned Microsoft around, The Economist, 22 Oct 2020

wealth and data to infiltrate their territory. Suspicion of Bezos might describe why AWS lost a $10 billion Pentagon cloud contract to Microsoft (subsequently scrapped). Amazon thinks Microsoft benefited from Donald Trump’s dispute with Amazon CEO Jeff Bezos, who owned the Washington Post, a publication the president despises. Amazon has filed a legal challenge to the award but has been unsuccessful thus far.

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Azure aspires to compete with or surpass AWS in the cloud. However, in Gartner’s rating of cloud service providers, Azure ranks far behind AWS, which has recently fallen in the rankings. Microsoft’s worldwide cloud infrastructure may be less dependable due to its sparser distribution than AWS’s, which covers a greater geographic territory. Gartner cites a lack of redundant capacity to deal with data centers knocked offline due to bad weather or other calamities. Even in the absence of disruptions, capacity has proven to be a problem. Azure has struggled to keep up with demand during the epidemic, with millions of remote employees migrating to the cloud. In March, Microsoft Teams experienced a blackout, and Microsoft implemented temporary resource restrictions on new Azure subscriptions that month while AWS has not been required to do so. Microsoft could not afford to make a mistake with Azure. It is what determines the company’s share price. Azure is expected to account for less than a 10th of Microsoft’s annual operating profit of $53 billion. However, each quarter, Wall Street obsesses over the rate at which the cloud is growing. AWS hosts 57% of all Windows software in the cloud, nearly twice as much as Azure (see Footnote 221). Microsoft is the only large cloud provider that also offers many of the applications that clouds host. “Is there a piece of software that Amazon or Google has built that runs on Azure? Zero,” Nadella asserts. This also provides Azure with a significant advantage to exploit. Nadella has no intention of making the same mistake he made in the past by moving all Windows workloads to Amazon’s cloud. “We were stupid, not realizing what was happening,” he admits. “We will monetize our intellectual property on their clouds.” Nadella is adamantly opposed to the notion that Microsoft is going too far. “Look at the number of enterprise SaaS [software-as-a-service] and infrastructure firms,” he says—hardly indicative of “a monopoly company collecting monopoly rent.” Microsoft can undoubtedly argue in its defense that Azure has injected competition into a market that AWS might otherwise have cornered. Microsoft was not singled out in a congressional study on big tech’s digital dominance. America’s trust-busters have shifted their focus to Google. Microsoft’s rebuffed $25–$30 billion bid for TikTok could have benefited the competition. Microsoft would have quickly surpassed Facebook and Google in digital advertising if it succeeded. Microsoft’s AI, which competes against algorithms created by all of its major tech competitors in the United States and China, would have been fueled by TikTok’s masses of data on its adolescent users. Google’s antitrust woes may provide solace. The case has the potential to reshape internet search, benefiting Bing. Even if the quality of its search results is comparable to Google’s, it is a tiddler. As a hint that Microsoft may wish to resurrect its search engine, it was renamed “Microsoft Bing” earlier this month (see Footnote 221). Nadella is optimistic about the future, and a justified and resolute assurance has replaced his early awkwardness. “We’re lucky enough to be in the tech business, and IT spending is going from 5% of GDP to 10% over the next ten years,” he states. However, the rivalry for those IT dollars is fierce. Microsoft’s response—heavily relying on clients to remain loyal—may work in the short term.

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Nevertheless, customers may prioritize innovation over loyalty to long-standing suppliers as the speed of progress in the technology sector accelerates.220 ,221 At the very least, in cloud computing, the competition is fierce. The cloud has many advantages. It enables businesses to replace one-time capital expenditures on flimsy bespoke infrastructure with a variable subscription for a service that could be quickly increased as required. It is possible to maximize infrastructure efficiency by having multiple users for every piece of infrastructure. That is one of the reasons why firms like Zoom were able to expand at such a rapid pace during the lockdown. Additionally, the cloud was cited as an illustration of the fragmentation of the internet. Tencent and Alibaba cloud businesses dominate China and have begun to make inroads in other parts of Asia. Europe is so concerned about American corporations that it has created Gaia-X, a state-backed competitor. Businesses in developing countries may face difficulties gaining access to the cloud, impeding their development. Microsoft’s strategic entry into healthcare: Microsoft’s $16 billion acquisition of Nuance Communications is the latest indication that healthcare will be the next battleground for technology giants, an industry whose need for data and software was highlighted by the epidemic. The acquisition will enable Microsoft to tap into Nuance’s sizable business providing software for healthcare systems. Speech recognition software, such as that created by Nuance, is emerging as a significant new potential in medicine, as physicians seek to expedite documentation of patient work by dictating instead of taking notes. “This collaboration is about empowering healthcare,” Microsoft CEO Satya Nadella said. “It is now abundantly clear that healthcare organizations that accelerate their digital investments can significantly improve patient outcomes while simultaneously reducing costs.” The pandemic highlighted healthcare’s potential as a growth sector for technology companies, evidenced by the telehealth services explosion. Analysts said that Microsoft would use Nuance to sell more lucrative products and services to healthcare customers, such as cloud computing. The healthcare industry’s pandemic response has demonstrated the value of technology in healthcare delivery. All the digital behemoths are paying close attention.222 Healthcare is a paper-based, manual, inefficient industry. By assisting the sector in developing a more cohesive digital strategy and selling cloud computing services and software applications to power emerging technologies such as telehealth, Microsoft may be able to tap into a billion-dollar market (see Footnote 222). The major technology companies are attacking the healthcare market in various ways, each playing to its strengths. Patient data is a priority, whether from health systems’ medical records or directly from consumers, including through

220

Economist in The end of Apple’s affair with China, The Economist, 24 October 2022. How Satya Nadella turned Microsoft around, The Economist, 22 Oct 2020. 222 Gartner in The method in Microsoft’s merger madness, The Economist, 15 April 2021. 221

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wearable devices. By collecting and analyzing such data, businesses can identify new markets and revenue opportunities (see Footnote 223). After successfully reviving Microsoft, its CEO may be succumbing to merger madness. Indeed, there may be a method to this madness. Take our money or, at the very least, our stock. That seems to be Microsoft’s current credo. It was well known before this recent flurry that Microsoft had developed a reputation for coveting tech companies that were as alien to its main business of selling office software as TikTok’s dancing videos are to Word and Excel. Five years ago, it paid $26 billion for LinkedIn, a business-oriented social network, in its largest acquisition. It acquired GitHub, a platform for developing open-source software, for $7.5 billion in 2018. It invests significantly more in growing current businesses than in acquiring new ones. Except for the Nuance acquisition, the firm has spent only $33 billion on large acquisitions over the last four years, compared to $64 billion on research and development. It possesses a sizable cash reserve ($132 billion at the end of last year) and is a valued currency (its share price has increased by over 600% since Nadella took over in 2014). Unlike competitors like Facebook and Alphabet, which are facing antitrust investigations and have refrained from large deals in recent months, Microsoft is no longer on the radar of trustbusters. However, by Microsoft’s modest standards, it has become increasingly acquisitive in recent years (Fig. 7.64) and has mastered the art of successfully integrating targets. As a result of Nadella’s leadership, it now has a more compatible fit with its growth plans (see Footnote 223). It has evolved into a massive computing cloud capable of digesting any data and providing any service. Even TikTok might have added new cloud computing jobs, given reams of videos for artificial intelligence algorithm training, and allowed

Fig. 7.64 Microsoft acquisitions and investments. Source Bloomberg in The method in Microsoft’s merger madness, The Economist, 15 April 2021

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to bolster its consumer business. Additionally, acquisitions enable Microsoft to grow quickly by capitalizing on major industry trends. Discord appeared to be a gamble on the change toward content creation and associated user communities that Microsoft CEO Satya Nadella believes will eventually dominate online life. Similar to LinkedIn, Pinterest would provide Microsoft with information about people’s interests, facilitating new forms of e-commerce (see Footnote 223). The acquisition by Nuance incorporates all of these factors. Seventy-seven percent of American hospitals utilize the company’s speech recognition technology and healthcare platform. This technology will bolster Microsoft’s “health cloud with a wealth of useful health data.” Nuance’s patent portfolio may be used throughout Nadella’s empire. Though $20 billion may seem excessive for a company with a net profit of $29 million on $1.5 billion in revenue last year, Microsoft can afford it. However, Microsoft is expected to surprise you with additional deals. Do not be deceived by their apparent randomness.223 Microsoft made its biggest acquisition yet by acquiring Activision Blizzard, a video game developer, by paying $69 billion in an all-cash deal (Fig. 7.65). Gaming was already big before the pandemic, but the lockdowns forced families to play more games. The gaming business revenue in 2020 increased by 23% to $180 billion—no wonder the bigwigs such as Netflix, Apple, and Amazon have forayed into the sector. Microsoft has been in the gaming business for twenty years. If it goes through without any legislative hitch, all the acquisitions that Microsoft has planned will make it third-largest in the gaming business after Tencent and Sony.224 Microsoft’s latest acquisition is a sensible move in fulfilling the long-term goal of Microsoft to be a leading player in the gaming market. Activision Blizzard has a rich library of video games and other media content.225 Microsoft hopes to deploy its cloud computing arm for video games which Netflix did for movies and TV. Running a game’s code in the cloud removes the need to own a powerful, pricey console or PC.

7.5

Going After the Big Tech

Until 2017, most mainstream assessments of the platform economy were overwhelmingly positive about its societal benefits. This trend began to shift in 2017. The larger privately held platforms have come under increasing scrutiny for their expanding role and responsibilities (Weigel, 2017). The Financial Times reported in the United States that attitudes toward online platforms had shifted significantly across the political spectrum, owing to their “sheer size and power.” Additionally, both European and Chinese regulators scrutinized the larger platforms. In China,

223

The method in Microsoft’s merger madness, The Economist, 15 April 2021. Why Microsoft is splashing $69 bn on video games, The Economist, Jan 22, 2022. 225 Ampere Analysis in Why Microsoft is splashing $69 bn on video games, The Economist, Jan 22, 2022. 224

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Fig. 7.65 Microsoft biggest acquisitions, $bn. Source Bloomberg in The method in Microsoft’s merger madness, The Economist, 15 April 2021

where several large US-owned platforms have already been banned, the focus has shifted to their own largest domestic platforms, with commentators expressing concern that they have grown too powerful (Lucas, 2017). Recent criticism has focused on the notion that big platforms are too huge, dominant, anticompetitive, and harmful to democracy, as shown by Russia’s involvement in the 2016 election. Heavy use of social media, Facebook admitted, may be detrimental to mental health, while active participation may be good. Unilever, one of the world’s largest advertisers, threatened in February 2018 to pull advertisements from digital platforms if they “create division, foster hate or fail to protect children” (Foroohar, 2018a). Additional worries have been voiced in light of AI’s growing role. According to scientists, AI is a black box that frequently defies explanation. AI may operate as a black box even with its creators, let alone its users, who cannot predict or perceive its principles of behavior and end decisions. Despite politicians and media critics, major privately owned platforms remained “wildly popular” among users, especially with free consumer surplus sweetening possible misdemeanors (Weigel, 2017). They have been immune to the backlash, a “stunning demonstration of their platform power” (Foroohar, 2018b). In January 2019, the American Dialect Society named “techlash” the digital word of the year. The Daily Telegraph reported in December 2019 that despite high-profile criticism and legal proceedings, such as CEOs of platform companies being questioned by legislators on both sides of the Atlantic, a digital backlash has mostly failed to restrain platforms’ increasing influence (Field, 2019). The Economist said way back in 2016 that America’s record corporate profits and increasing market share for big companies showed that competition in the economy had diminished. According to OECD data, the top eight companies in a

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Fig. 7.66 Big firms’ share of total sales, %. Source Field (2019)

particular sector increased their revenues by four percentage points in Europe and eight percentage points in North America between 2000 and 2014 (Fig. 7.66). Is it significant if the successful platforms dominate the digital economy? It appears to be a sweet deal in terms of consumer welfare: users receive service of genuine value at no cost to them. However, the situation on the opposite side of the platforms seems more alarming. Recent research estimates that internet advertising costs companies about $650 per family each year.226 Some of these savings might be passed on to customers through lower prices if the market were less consolidated (see Footnote 227). Another potential concern is that many big tech business models involve conflicts of interest. For example, when Amazon gathers data on the sales of thirdparty goods with which it competes, or when Apple sells via its app store software which competes with its own. Concentration might be tolerable if the large corporations were always worried about being overtaken by a hot new competitor. Starting a new company has many challenges, and one of the most significant is gathering the mountains of data needed to customize services to individual customers. Another issue is that an incumbent may easily discover what customers appreciate about a startup’s digital economy product, duplicate it, and spread it to millions (if not billions) of current customers. This minimizes the incentive for innovators to begin with. Last but not least, wealthy incumbents may remove new entrant competition by buying them before they can pose a danger, as Facebook did in 2012 with Instagram and WhatsApp in 2014. Nearly 400 businesses were purchased with minimal intervention from competition regulators between 2000 and 2019.227

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Britain’s Competition and Markets Authority. What more should antitrust be doing? The Economist, 6 August 2020.

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The other question is, who owns the data? The web is on the verge of devolving into a dystopia of prejudice, hatred, and disinformation. People use the term “digital feudalism” to refer to large technology platforms wielding power over data. It has a quixotic ring to it. After all, data use is now the world’s largest industry. Because of the growing “Internet of Things,” which includes sensors implanted in everything from automobiles to household appliances, more personal data will be generated rapidly. About $2.4 trillion of Alphabet and Facebook’s combined market worth of $2.9 trillion comes from mining users’ data after subtracting the value of their cash, physical and intangible assets, and accumulated R&D. They are not yet satisfied (see Footnote 228). They are a rising source of worry for policymakers on two fronts because of their insatiable demand for data. The first one is political. As a result of network effects and scalability, platforms’ business models are built to keep users engaged while increasing advertising revenue. It’s led to the growth of a viral culture that, while amusing, is also contaminating. The second consideration is economics. As technology companies grow in size, it becomes more difficult for their data advantage to be overcome, thus limiting innovation. Capital access is no longer the primary barrier to entry for startups, and it is data access. Legislators accuse Google of abusing contracts with device manufacturers, such as Apple, to obstruct alternative search engines. Google denies this, claiming that people use its services voluntarily, not because they are required to. Regardless of the case’s merits, some believe that the only solution is to break up the tech giants. That is oversimplified. The issues will not be resolved simply by shrinking largescale technology. Any solution must make data more widely accessible, allowing for the growth of potential competitors. This can be accomplished in a variety of ways. To begin, individuals must be empowered. Another possibility is to contemplate collective action. Thirdly, governments can be relied upon. To succeed, all three will need to reinforce one another (see Footnote 228). Silicon Valley asserts that it has received the message. Facebook stated this year that it would pay people to record their voices to improve speech recognition on the social network. Technology firms are facilitating user migration from one platform to another. However, these are merely symbolic moves. Switching platforms continues to be an arduous task.228 Because of the importance of scale and virality to their economic models, they are fierce opponents of regulation. Most customers still accept data sharing in return for free products to rest easy. However, they must be aware that data access has evolved into a philosophical problem of the contemporary age. Feudalism eventually gave place to a more liberal system of property rights. Data serfdom will meet the same demise one day. Litigating big tech, however, is not a cakewalk. Finally, it is occurring. A congressional committee has approved six bills to rein in Amazon, Alphabet, Facebook, and Apple. Or so the critics of big tech believed. When a federal judge

228

Who owns the web’s data?, The Economist, 22 Oct 2020.

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Fig. 7.67 The trillion-dollar club. Source Refinitiv Datastream in Is Facebook a monopolist? The Economist, 3 July 2021

rejected two antitrust lawsuits against Facebook in June 2021, he delivered a sobering dose of reality. Unexpectedly increasing Facebook’s worth to over $1 trillion, the decision served as a warning that the burgeoning “techlash” in American politics may have only modest effects (Fig. 7.67). The lawsuit, which charged Facebook with consolidating its social networking monopoly by purchasing fledgling competitors like Instagram in 2012 and WhatsApp in 2014, was rejected because it was submitted too late. Furthermore, the court ruled that the FTC’s second lawsuit was “legally insufficient.” “It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist [in social-networking],” he said. That is really what the FTC hopes to see in this case. FTC averred that Facebook enjoyed a “dominant market share (over 60%),” but no more details were provided. The term “personal social networking” was established by FTC to exclude professional networking sites (like LinkedIn) as well as video-sharing services (YouTube). To be fair to FTC, defining digital markets is a difficult task. Because most social media businesses, like Facebook, don’t charge their users, the traditional method of evaluating an industry’s revenues generated from its customers is useless. Facebook does have clients who pay companies who buy ads on its platforms, but the extent of that market is likewise hazy. If all online advertisements in the United States are included, its share is 25% (Fig. 7.68). However, Facebook’s share of social media advertising in the US is 60%, although its worldwide share is shrinking. The problem is that the definition of social media is fluid, changing as new features and rivals arise. When the Federal Trade Commission filed its complaint, it said that Facebook was restricting the ability of its rivals to use its platform. Because of Supreme Court decisions and monopolists’ lack of “obligation to deal,” the court said such behavior is permissible.

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Fig. 7.68 Facebook advertising market share, %. Source Bloomberg (2021)

Before the digital age, this may have made sense. As Lina Khan points out, in the digital era, where dominating platforms resemble pipe-owning utilities, this amounts to a license to eliminate competitors. If additional antitrust issues against big tech fail—as can be the case with Apple and Google—it will lend credence to calls for antitrust reform.229 The world’s largest technology companies are bracing for increased scrutiny of their businesses by employing a time-honored strategy: opening their wallets. Last year, Facebook and Amazon outspent all other US companies in federal lobbying expenditures. They outspent all other companies for the second consecutive year. Last year, Facebook and Amazon spent much more on federal lobbying than any other company. Due to federal and state antitrust litigation and hearings where CEO Mark Zuckerberg was called to Washington, Facebook spent over $20 million in 2020, an increase of 18% over the last year. According to the company’s financial disclosures, Amazon spent $18 million last year, an increase of 11% over the previous year. In a time when the internet titans are under more scrutiny than ever, these expenses, which are required to be reported under federal law, are only one part of a variety of tactics they are using to quell critics and build goodwill in Washington.230 Large dollar amounts are being spent by technology firms, which have overtaken banks in recent years as the most influential lobbyists.231 For example, FAAMA lobbied the US government at historic expenditure levels (Fig. 7.69).

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Is Facebook a monopolist? The Economist, 3 July 2021. Facebook and Amazon Boosted Lobbying Spending in 2020, The Wall Street Journal, Jan 24, 2021. 231 BuzzFeed, 24 January 2017, SpaceX, Uber reach new heights in lobbying spending. 230

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Fig. 7.69 Increasing big tech lobbying. Source Digital Economy Report, 2019, United Nations Conference on Trade and Development (UNCTAD), 2019

7.5.1

FAAMA’s Restrictive Practices

Jedi Blue: A 2018 business agreement between two digital advertising giants, Facebook and Google, is alleged to have been an illegal price-fixing arrangement. According to the companies, everything was legal. Google granted Facebook preferential treatment and access to their ad server, a widely used technology for distributing ad space on the internet. Google’s behavior, it is argued, is anticompetitive and deprives “advertisers, publishers, and consumers of improved quality, greater transparency, increased output and/or lower prices.” Despite their ever-increasing digital advertising market share, the two tech behemoths have been dubbed competitors. The advertising industry’s shift toward header bidding was critical in setting the stage for the Google-Facebook deal. As a background to the deal, header bidding, an ad sales method, enabled website publishers to bypass Google’s platform for buying and selling advertisements across the web. The exchange auctions off ad space to the highest bidder takes a web page to load in a split second. Header bidding enabled publishers to solicit bids directly from multiple ad exchanges simultaneously, resulting in more favorable prices for publishers. According to the states’ lawsuit, approximately 70% of major publishers used the tool in 2016. Google was concerned that a large competitor would adopt header bidding, undermining Google’s profitable monopoly on ad tools. Facebook publicly endorsed header bidding in March 2017. According to the states, Google approached Facebook and reached a digital advertising agreement in September 2018. According to the draft lawsuit, Google codenamed it “Jedi Blue.” In December 2018, Facebook announced its participation in Google’s alternative to header bidding, “Open Bidding.”

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The “Jedi Blue” contract terms are (see Footnote 232): • Facebook pays Google a transaction fee between 5 and 10% (according to Google, this fee is standard). • Google assists Facebook in identifying mobile and web users. • Facebook bids on the right to show ads to 90% of users it recognizes. • Facebook has a 300 ms “timeout” for user recognition and bidding, and other participants have a shorter timeout of 160 ms. • Beginning in the fourth year, Facebook is obligated to spend $500 million annually. In exchange, Google is alleged to have given Facebook preferential treatment. The draft lawsuit states that it enabled Facebook to submit bids directly to Google’s commonly used ad server software. Typically, bidders make their way through an exchange, which forwards the winning bid to Google’s servers. By doing so, Facebook could face less competition and save money by cutting out the middleman. According to the draft lawsuit, Google’s exchange charges a transaction fee of about 20%. Google charged Facebook between 5 and 10% on each transaction, in addition to the exchange fee, and prohibited Facebook from discussing pricing terms publicly. Experts believe that agreements to fix prices or rig auctions are inherently illegal, implying possible trouble for the “Jedi Blue” deal.232 Google Apple deal to stifle Bing: The Department of Justice (DOJ) has opened another front against Google by filing a federal antitrust case against the company. The DOJ accuses Google of abusing its monopoly position in “general search services, search advertising, and general search text advertising.” They assert that to stymie competitors such as Microsoft’s Bing search engine, Google employs a network of “exclusionary” contracts with smartphone manufacturers that they argue cover 80% of American mobile search inquiries. According to the report, Google pays Apple over $8 billion in advertising money each year to guarantee that its search engine is the default on Apple devices and has similar agreements with manufacturers who use Google’s Android operating system (see Footnote 233). The DOJ’s focus on a single issue may be prudent. While the sums involved are substantial, the charges are limited and apply only to text searches, not images or video. The suit makes no mention of claims that Google exploits its market dominance in digital advertising or handicaps potential competitors in specialized search categories such as travel. Amazon has surpassed Google in terms of product-specific search. It is more difficult to demonstrate that Google has monopolized digital advertising: it controls less than a third of the market, with Facebook following closely behind a quarter.

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Inside the Google-Facebook Ad Deal at the Heart of a Price-Fixing Lawsuit, The Wall Street Journal, Dec 29, 2020.

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The DOJ’s action may compel monopolists to modify their bad behavior, thereby unleashing previously suppressed creative destruction. As the US Attorney General put it, “If we continue to tolerate Google’s anticompetitive behavior… Americans may never see the ‘next Google.’”233 Forced revenue sharing on Apps: A group of US senators questioned Apple and Google executives on Wednesday about their respective mobile app stores’ dominance and whether the firms misuse their positions to the detriment of smaller rivals. The issue was whether Google and Apple could use their clout to exclude or restrict applications that competed with their products and exorbitant charge fees that stifled competition. App developers appreciate music streaming services. Spotify Technology SA and Match Group, which runs the Tinder app, have long claimed that Apple’s App Store for iPads and iPhones and Google’s Play Store for Android devices are anticompetitive since they require revenue sharing on digital goods sales and enforcing strict inclusion rules. Representatives from Google and Apple told senators that the firms’ tight control over their stores and the revenue-sharing obligations accompanying them are necessary to enforce and compensate for security measures that safeguard users from dangerous applications and activities. However, lawmakers are perplexed as to why Uber and apps that sell tangible items are exempt from the businesses’ charges. Apple and Google charge an outrageous 30% of all digital transactions, increasing consumer prices. Match pays approximately $500 million in in-app store fees annually, making it the firm’s single biggest cost. Spotify and Match allege that Apple’s app review process is muddy, and that Apple rejected a Tinder app safety upgrade that warned LGBTQ+ users if they were going to a country where revealing their identity might be risky, claiming that the update violated the “spirit” of the new regulation (see Footnote 234). Additionally, Apple is considering selling Air Tags in direct rivalry with Tile, which has been selling a comparable tracking gadget for more than a decade. The fallout was predictable, as a senior US senator charged that “Apple has once again exploited its market power and dominance to condition our customers’ access to data on effectively breaking user experience and directing users to FindMy.” Apple stated that AirTags evolved from its “FindMy” app, which is used to locate lost Apple devices and share user locations and was launched in 2010, before the founding of Tile. A component of Apple’s “FindMy” software is pre-installed on iPhones and could not be removed.234 The walled garden of Apple-Epic versus Apple: Apple is facing one of the most serious legal challenges it has faced in recent years: A trial that threatens to undermine the company’s iron grip on its app store, which generates billions of dollars annually while powering over 1.6 billion iPhones, iPads, and other devices. Epic

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American trustbusters take on Google, The Economist, Oct 24, 2020. Reuters, 22 April 2021.

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Games, the creators of the famous video game Fortnite, have filed a case in federal court. Epic wants to demolish the app store’s so-called walled garden, which Apple began building 13 years ago as a strategy spearheaded by co-founder Steve Jobs. Epic alleges that Apple has morphed a once-tiny digital storefront into an illegal monopoly that extorts a sizable portion of revenue from mobile apps. Apple charges a 15–30% commission on purchases made within apps, ranging from digital items in games to subscriptions. Apple refutes Epic’s assertions. Additionally, the North Carolina-based company wishes to free Apple’s commissions. Epic claims it paid Apple hundreds of millions of dollars before Apple removed Fortnite from its app store last August, following Epic’s addition of a payment system that circumvented Apple. Most of the evidence will center on arcane but critical debates about market definitions. Epic argues that the iPhone has become so ingrained in society that the device and ecosystem have developed into a monopoly that Apple can use to enrich itself unfairly and hinder competition. Apple asserts significant competition from various alternatives to iPhone video games. For example, it notes that approximately 2 billion other smartphones—primarily those running Google’s Android operating system—do not run iPhone software or work with its app store. Apple’s app store revenue is estimated to be between $15 and $18 billion per year. Apple disputes those estimates, though it has not made its figures public. Rather than that, it has emphasized that it receives no revenue from 85% of the apps in its store (see Footnote 235). Apple asserts that the commissions it earns are a reasonable way to recoup its investment while funding an app review process it deems necessary for app and user security. Epic will attempt to demonstrate that Apple uses the security issue to conceal its true motivation—preserving a monopoly that extracts higher profits from app developers who cannot afford to be excluded from the iPhone.235 The Apple-Epic battle highlights a central issue for the technology industry: how to characterize a market in the digital era. Epic asserts that Apple has a monopoly on the App Store because it is the only distributor of applications to over a billion Apple Phones and controls the sole payment mechanism for digital services offered by those apps. Apple takes a much wider perspective of the market, one in which the App Store is just one of several distribution channels for Epic’s games, which also include Google’s Android software, Sony Group Corp.’s PlayStation, as well as personal computers of the video game maker, is not satisfied with Apple’s terms. Apple maintains that it has no monopoly power in that broader market and merely ensures that its customers can easily and safely use apps.236

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Apple’s app store goes on trial in threat to ‘walled garden’, AP, May 3, 2021. Epic versus Apple Trial Features Battle Over How to Define Digital Markets, The Wall Street Journal, May 2, 2021.

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For both parties, the ruling is a mixed bag. Apple wins a pyrrhic against Epic Games in the Apple-Epic battle, which has concluded. A cursory reading of the 185-page decision suggests that Apple is the clear winner.237 The judge argued that this was not the case. The relevant market, in her opinion, is not the App Store or the iPhone but rather “digital mobile gaming transactions,” in which Google’s Android operating system competes with Apple’s. Although Apple owns more than half of this market, this is not illegal. “Success is not illegal,” the judge wrote, adding that there was no proof that Apple had created obstacles to entry or engaged in behavior that would have damaged production or innovation. Apple makes a concession: As part of a proposed settlement of a class-action lawsuit, Apple announced modifications to its App Store rules that would enable software developers to inform consumers how to pay for services outside of the Apple ecosystem. The change would simplify certain applications to direct consumers away from the App Store, where Apple charges a 30% fee. Most fees for developers who earn less than $1 million in income via the software platform were cut in half to 15% last year, and the possible settlement will keep that adjustment. The company will also establish a $100 million fund for small developers. From June 2015 to April 2021, developers with annual sales of less than $1 million will be eligible to receive between $250 and $30,000 from the Small Developer Assistance Fund. It will profit more than 99% of developers, Apple stated. The agreement would be a partial concession for app developers who have long wished to avoid paying Apple’s fee by having users pay directly for their services. The firm had previously banned developers from informing consumers directly about alternative payment methods using information they received from Apple, but the possible settlement lifts that restriction.238 Google and Apple will have to open their app stores to alternative payment systems putting their lucrative commissions on digital sales at risk. The National Assembly of South Korea approved a law that is the first to challenge the technology giants’ control over how applications on their platforms sell digital products. Large app-market operators are prohibited from demanding the usage of their inapp buying systems under the legislation. A prohibition on unreasonable delays in-app approval or deletions from the marketplace is also included to prevent app developers from retaliating against them. South Korea’s law will serve as a model for legislation on app-market platform rules across the world when comparable measures are introduced in the United States and Europe.239 Apple tightens user data flow: As part of Apple’s ongoing assault on consumer privacy, digital marketers are closely monitoring new steps the company has taken that they believe may restrict their access to user data. Apple’s modifications may

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Apple wins a court battle with Epic Games—sort of, The Economist, 11 September 2021. Apple Set to Let App Developers Alert Users to Alternate Payment Methods, The Wall Street Journal, August 26, 2021. 239 Google, Apple Hit by First Law Threatening Dominance Over App-Store Payments, The Wall Street Journal, August 31, 2021. 238

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make it more difficult for businesses to monitor and collect information about users’ online activity from third parties, like data brokers. These improvements will be included in a new version of Apple’s operating system that will be released this fall due to Apple’s restrictions on in-app monitoring that roiled the digital advertising sector at the time. Instead of only affecting iOS applications, the most recent modifications have an effect on all online traffic on Apple devices, prompting advertisers, publishers, email marketers, as well as ad-tech firms to expect even more drastic consequences in the coming months. Apple’s improvements are a significant step toward enforcing the garden’s boundaries by ensuring that all access to the outside world is proxy-controlled.240 The Safari browser from Apple prevents users’ IP addresses from being sent to websites accessed via trackers by default. Many businesses capture an individual’s IP address and use it with other information to create a “fingerprint” and track a user’s repeat visits to provide customized advertisements. Despite Apple’s long-standing policy of not allowing fingerprinting in Safari, users’ IP addresses remain publicly available. Apple will enforce its prohibition better if those are blocked since fingerprint printers would no longer have a way to identify Safari users uniquely. According to a March study by Statista, Safari has a browser market share of approximately 19% worldwide, second only to Google’s Chrome. IP blocking for trackers is a huge step forward, and it’s almost certainly the last nail in the coffin for user-centric profiling. Tracking firms won’t uniquely identify individuals in a commercially reliable manner without an IP address to grab onto (see Footnote 240). Apple has also taken steps to limit the monitoring of email users. A hidden pixel in the body of most marketing emails can detect when an email has been opened. These trackers also collect users’ IP addresses to provide advertisers with information about when and where their messages have been seen. Despite the introduction of chatbots and social media influencers, email has remained a key tool for many businesses to interact with existing customers, acquire new ones, and raise brand recognition. Apple has stated that users gain greater transparency and control over how data about their online activity is handled. Free speech and social media: The debate over the enormous power of technology companies to shape what people see online has long centered on consumerfacing platforms such as Facebook and Twitter. After President Donald Trump was banned from the two more well-known sites, Parler, another wants to be Twitter, rocketed to the top of Apple’s app store in America, nearly quadrupling downloads in a single day. The same day, Google removed the app from its Android app store, citing a lax moderation policy, and Apple followed suit. The end came when AWS, Amazon’s cloud computing subsidiary, shut down Parler. Parler was unavailable as

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Apple’s Moves to Tighten Flow of User Data Leave Advertisers Anxious, The Wall Street Journal, June 9, 2021.

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an app on Android or iOS devices, and its roughly 12 million accounts vanished from the web.241 The firms have a legal right to terminate their relationship with Parler. Additionally, Section 230 of the “Communications Decency Act” authorizes them to delete any “objectionable” content in good faith. It is improbable that Microsoft or Google, the two other major cloud providers, will want Parler anywhere near their servers. Their actions prompted legal experts to say, “wielding unchecked power over key internet arteries.”242 As a result, there will be increased calls for regulation of internet companies—not just from American politicians but also from world leaders. A more defined set of rules, established by legislatures rather than Silicon Valley executives, would be warmly welcomed in America and worldwide. A hurricane is brewing against Twitter, Facebook, and other social networking platforms. A laser-like emphasis is placed on a certain kind of business contract, while a category five storm of public anger is aimed against unaccountable technology corporations for supposedly ruining the society they claim to serve. Before the 2016 presidential election, 110–130 million adult Americans were exposed to false rumors. A Muslim minority in Myanmar, the Rohingyas, have been the target of genocidal assaults instigated by posts on the social media site Facebook. Following a social media campaign against French teacher Samuel Paty, who used caricatures of the Prophet Muhammad to promote free speech, he was murdered last week. After killing Paty, the murderer posted a picture of Paty’s decapitated head lying on the street.243 Truth and decency suffer another sad consequence due to this power over the public. Algorithms used by IT firms give you news and articles that they think would pique your interest and therefore boost ad income. Political cynics, scam artists, and extremists use this propensity for virality to disseminate disinformation and hate. Bots and deep fakes, which are postings showing prominent people doing or saying things they never did or said, help them do their job more cheaply and efficiently. They are rapidly progressing in sophistication. It is too critical to be decided by a few tech managers.

7.5.2

Checks and Balances for the Big Tech

Techlash against Big Tech: Big tech has been concerned about the simmering backlash against technology that has intensified in recent months. The heat directed at businesses has undoubtedly increased, and the industry is debating the severe business and political risks that technology companies experience. Europe has been

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Donald Trump’s ban from online platforms underlines their power, The Economist, 14 Jan 2021. 242 Columbia Law School in How to deal with free speech on social media, The Economist, 22 Oct 2020. 243 How to deal with free speech on social media, The Economist, 22 Oct 2020.

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going through a difficult period for some time, deteriorating. Five years back, the European Commission imposed a $2.7 billion penalty on Google, one of the first to do so (see Footnote 244). Additionally, national governments are showing their teeth. According to Germany’s antitrust authorities, Facebook has abused its dominant position to monitor its users’ online activities. Almost daily, it is chastised for failing to properly police the content on its platforms, including extremist videos, revenge porn, and fake news. The French government has threatened to slap a punishment on Facebook if it doesn’t stop sharing data across all of its apps. Four of the top five most valuable publicly listed businesses globally are technology companies, with a combined market capitalization of $10 trillion, which lends them muscle. As do the massive revenues, the majority of which is profit. IT companies have so many foes because the numbers connected with the sector are huge, apart from the tax obligations (see Footnote 244). One ray of light exists. Consumers continue to be wildly popular with almost all of their services; they utilize their products to navigate, communicate, find things, purchase things, and socialize. They are incapable of imagining life without big technology. One of the reasons investors see antitechnology rhetoric as political grandstanding is this. While “tech” is not yet a four-letter word, it is on the verge of becoming one. Large technology companies are excessively powerful, addictive, anticompetitive, and divisive to democracy. Think tanks and academia that oppose big tech point to the increasing concentration of American business, which some attribute to high corporate benefits contributing to inequality. The usefulness of internet firms’ mountains of data is becoming increasingly apparent, particularly as they extend into new sectors that gather more data on customers while bringing them closer together, such as home microphones (euphemistically called home speakers). About 80% of all referral traffic to news publishers comes from Google and Facebook, and they account for roughly 80% of all new online advertising dollars in the United States. When Amazon promotes its marketplace to buy and sell products, it controls roughly 40% of all online commerce in the United States (see Footnote 244). Additionally, many believe FAAMA is anticompetitive. Amazon serves as both a marketplace and a retailer. Publishers’ rankings in search results and the advertisements delivered to their customers are all under the thumb of Google, as is the algorithm that decides whether or not those ads were seen and, if so, how much compensation should be given to publishers. The European Commission penalized it for restricting competition in online shopping; it may face further penalties for forcing smartphone manufacturers to adopt its Android operating system, which includes numerous Google applications. Google, Facebook, and Amazon have used data insights to identify and acquire competitors. Onavo, a little-known app of Facebook that monitors users’ smartphone activity, aided Facebook in identifying various possible risks, such as Instagram, a photo app it acquired in 2012; TBH, a social polling app. Many of Netscape’s capabilities were integrated into Microsoft’s software and made freely

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accessible to everyone after Microsoft failed in its acquisition effort in the 1990s. This landed it in serious trouble (see Footnote 244). Products of tech firms are prone to be addictive. The most affected lot is the online teens, who are ostensibly unhappy compared to their peers. Rates of teen despair and suicide have soared in some places; some adults are more susceptible to sleeplessness, depression, and nervousness due to online activities. Following the London terror attacks, fingers were pointed at YouTube, a platform used by jihadists to spread extremist propaganda. Because of the filter bubbles created by social media corporations, users only see material that supports their views, and because of the false news they disseminate, society becomes even more polarized. On nuclear boasting on Twitter, the fewer words, the better. The following are some suggestions made by US legislators: Dismember. This has many proponents for dismantling the FAAMA companies. By attempting to force Facebook to sell Instagram and WhatsApp (the transaction that European regulators are most interested in), the Department of Justice or the European Commission might create three competing social networks. Google may separate from YouTube (the world’s second-largest search engine). Scholars aver that this government-sanctioned disruption aids progress just as much as any endogenous “creative destruction.” Regulators choosing which limb to sever may be worse than self-severance. Even so, it’s an important first step. And divorces are not permanent solutions. These marketplaces have a winner-takes-all quality because of the network effects that make bigger networks more appealing to new members. One of the Googlettes or Facebabies will outperform the rest, establishing a new giant. Regulation of utilities. Exaggerating the winner-takes-all argument may backfire, and the industry may lament the day. The idea that Facebook’s market-dominating social network might become as ubiquitous as electricity and is equated with the term “utility” could be a double-edged sword. Utilities so large that they are essential for everyone are regulated. That could be extremely detrimental. Price regulation is difficult when the service is essentially free to the user. However, a regulator can compel price increases—for example, by requiring Google and Facebook to offer customers the option of paying for an ad-free facility. However, a more likely course of action would be to impose profit caps. A mandatory 20% rate of return would result in an 11% decline in Google’s profitability and a 56% decline in Facebook’s profitability. Both stock prices would plummet (see Footnote 244). Thwart new acquisitions. Considering technology is often free for consumers and continually reshapes the market, many feel that concentrating only on pricing and market shares is too simple. UK’s Office of Fair Trading was too naïve when it regarded Instagram as a “camera and photo-editing app” and not a social network. Therefore, they presumed that it was unlikely to ever be “attractive to advertisers on a stand-alone basis” and made no attempt to block the acquisition. They lacked imagination (see Footnote 244).

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Portability and interoperability of data. Two problems overlap with consumer data. The first is that data connects customers to technology firms; the second is that data provides firms with an anticompetitive edge. When it comes to solving the first problem, remedies include allowing consumers to transfer their data elsewhere; when solving the second problem, solutions include compelling tech companies to share their data. Currently, Google offers a “takeout service” that allows users to voluntarily export a copy of their data. The GDPR (“General Data Protection Regulation”) in Europe will extend the data portability principle to other platforms. The nearest analogy is that Mobile phone customers may switch networks without losing their phone numbers. The majority of customers are unconcerned; just a small percentage of customers are willing to use Google’s takeaway service. In addition, because of the dominant position of FAAMA in the market, new search engines and social networks get relatively little financing, leaving customers with limited options for porting their data elsewhere (see Footnote 244). However, this dominance has a cost. Some believe that companies should offer “API keys” that give rivals access to particular data, such as Amazon’s sales statistics or the Facebook “social graph.” Tech companies will want to fight such data sharing. Instagram’s days of rapid expansion based on an API that made it possible for users to see who they followed on Twitter after joining the service are long gone. The notion of sharing data in this way worries some privacy advocates.244 It may appear uncomfortable for FAAMA to lose, but it wouldn’t be deadly. Due to the increased competition, FAAMA’s role in the ecosystem is strengthened, and the ecosystem may develop quicker. While this would harm stock prices in the short term, the long-term advantages may outweigh the negatives. An example exists in history. When Microsoft was forced to make Windows interoperable around the century, rivals could make their products more compatible with Windows, and Microsoft flourished. Since then, its value has increased by a factor of three (see Footnote 244). Liability for content. The regulations and precedents protecting technology firms from being held liable for the material they host are a blessing; however, they were not created for a world where platforms have grown into important media assets in their own right. The blanket protection is unlikely to last indefinitely. A bill in the United States has been passed to hold the technology company liable for online sex trafficking. Germany can now levy fat fines for failing to remove flagged content within 24 h. If these rules are enforced, technology firms will be forced to create new methods to screen spam and other unwanted material. People’s request that personal information about them that has been collected about them be erased (the right to be forgotten) has been smoothly implemented by Google. Some believe that until tech companies change their ad-based revenue

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The techlash against Amazon, Facebook, and Google—and what they can do, The Economist, Jan 20, 2018.

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model, they will never provide what customers want, prioritizing engagement over the value of experience. One suggestion made is that FAAMA must compete with one another. They appear to be far less monopolistic when they fight on multiple fronts, like digital advertising and commerce. There is probably a case for sustaining businesses that would otherwise be shut down, as Google did with its social network, Google+. Making forward-looking rules. Antitrust lawsuits based on prior behavior have been largely ineffective. As a result, regulators are focusing their efforts on developing forward-looking rules. Regardless of political posturing, the lawsuit will not destroy Google. The company’s overall advertising operation will very likely be unaffected. If the Microsoft trial is any indicator, the ordeal will go for years and lead Google to lose focus. However, other jurisdictions are considering potentially more consequential tech regulations. Many policymakers think that antitrust lawsuits filed after the fact (“ex-post”) are useless in fast-moving markets for technology. As in other sectors, they propose “ex-ante” laws to limit internet platforms proactively. Because the EU’s antitrust probes and penalties have not been successful in changing the conduct of the tech giants, it is turning to ex-ante. Its main argument is that big gatekeepers shouldn’t be allowed to engage in “unfair practices.” If all of the EU’s recommendations are implemented, gatekeepers will find themselves legally bound. It is possible that the ideas would reduce “network effects.” For instance, dominant messaging applications like Facebook’s WhatsApp may be forced to accept messages from smaller rivals. Platforms may be forced to share data with rivals, making it easier to enter the market. $9.7 billion in penalties were levied on Google due to three EU competition probes (see Footnote 227). What exactly is a gatekeeper? Users and income are important. The question is, how do you measure data assets, which are more difficult? Which information should be shared by the platforms? As mobile service providers are required to accept calls from rival networks, interoperability across messaging applications may be advantageous in certain respects. Interoperable applications would be forced to standardize encryption techniques, limiting competition. Being too inflexible may deter big platforms from implementing new ideas.245 Developing effective regulations is time-consuming, as arduous as building effective antitrust cases. As with other systemically vital sectors, such as banking and food, it would be unprecedented in history if technology was not closely controlled. According to a Pew poll, the public appears to be prepared: 72% of people in the United States think social media firms have too much political influence. Smaller technological companies are also pursuing ex-post initiatives. The technological slog has begun. A policy agenda based on curiosity. Certainty prevailed as the major tech/antitrust discussion raged last year. Some argue that Apple, Amazon, Google, and Facebook

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Google, antitrust and how best to regulate big tech, The Economist, 7 January 2020.

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have monopolies in their respective fields of search and social networking and ecommerce and app stores. They’re certain that acquisitions between Instagram and Facebook harmed competition. They also believe that antitrust regulations have become ossified, unable to morph with changing times. Within a short period, companies that began as scrappy, underdog startups have developed into monopolies last seen during the era of railroad tycoons and oil barons (see Footnote 246). Then some think that competition in the technology industry has led to better goods at cheaper costs and upstarts like TikTok and Snap upsetting the status quo. In their opinion, consolidation has benefitted customers. They also believe that antitrust theory does not need to be reexamined due to technological advancements. As a result of its purchases of Instagram and WhatsApp, Facebook has made significant investments in developing new features and enhancing the products’ overall security and infrastructure. So, it is difficult to agree with the antitrust arguments currently being advanced against it. Despite the antitrust debate’s strident rhetoric, a lot needs to be comprehended. TikTok is an illustrative example. While many have claimed algorithmic preferencing should be prioritized above privacy, better content, and human choice in technological products, TikTok has arisen as a formidable rival despite its default to public sharing, salacious content, and near-exclusive reliance algorithmic recommendations. TikTok’s success shows that traditional thinking regarding technology goods may be out of sync with user inclinations (see Footnote 246). This unpredictability necessitates a new approach to antitrust policymaking. To begin with, policymakers should facilitate data sharing between platforms, and researchers are studying competitive technological dynamics. Unfortunately, the present setup is impractical. Even though platforms face significant risks when sharing data, even with academics, academics often criticize platforms for restricting access to data. As a result, legislators should pass legislation protecting companies that share data compliant with the privacy best practices. Additionally, platforms should make public data that aids in evaluating the effectiveness of existing antitrust laws, such as regular reporting on merger performance. Second, policymakers should be willing to experiment. Other governments have experimented with “regulatory sandboxes” to assess new policy frameworks to influence future product and policy creation. We may learn more about the impact of antitrust regulation by conducting experiments. For instance, the capacity to transfer data across services is known as data portability. However, the effect of portability on competitiveness is still unknown. If individuals can move more easily between big and smaller platforms because of better portability, this may help entrench existing platforms by allowing access to user data at rival startups. Transferring data to less secure systems may put user privacy at risk. A regulatory sandbox for portability would help us find the most effective rules since there is so much uncertainty (see Footnote 246). Government agencies may need to bring more cases to modernize antitrust, even if a victory is not guaranteed. With lawsuits being filed against Google and Facebook, it appears as though this reluctance to litigate is waning. This change

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may be a crucial part of antitrust regulatory inquiry since the rigor of a court battle may help collect the evidence that will alter our knowledge of the technology industry, regardless of who wins. The idea is to embrace an antitrust policy agenda founded on a sense of curiosity.246 Which products are in direct competition with one another? How are we quantifying quality? Is the price of an app on the app store fair? What differentiates user-beneficial acquisitions from those that stifle choice? Changes to antitrust laws mooted: Democrats and Republicans have emphasized strengthening the United States antitrust laws. This year may demonstrate their commitment to hammering out legislation to make it happen. Congress is considering the most significant antitrust reforms in decades, including proposals that enjoy bipartisan support. Legislators are considering raising the bar for acquisitions by market-dominating companies, making it easier for the government to challenge anticompetitive behavior and potentially forcing some massive technology companies to separate their business lines. To pass these measures, lawmakers will need to overcome their general aversion to dominant companies—particularly in the technology sector—and negotiate with constituencies that disagree on whether antitrust law requires a complete overhaul or targeted changes (see Footnote 247). This proposal includes measures to enhance civil penalties for antitrust breaches and revise legal criteria to simplify businesses and consumers to contest proposed merchandising arrangements. Additionally, limiting mergers by dominant companies and prohibiting self-preferencing are being considered. When businesses like Amazon utilize proprietary platforms to push their goods and services above those of rivals, they are engaging in a behavior known as self-preferencing. Amazon has stated that it will always provide consumers with the best product, regardless of who makes it. Concerns about powerful technology companies such as Google, Amazon, and Facebook have galvanized both parties. The debate over those firms’ economic clout in the United States—and large swathes of American society—has elevated antitrust from a political afterthought to a high-profile Washington issue. Large businesses are fighting numerous measures which see them as a threat to their bottom lines.247 More than any other US company in 2020, Facebook and Amazon are lobbying to influence antitrust and other laws. Because of intense rivalry and customer enthusiasm for their products, the IT giants claim they have accumulated significant market shares, but fierce competition drives them to innovate continuously. Breaking up the Big Tech: One of the earliest proposals to rein in big tech has been dismantling them, a la AT&T’s dismemberment in the 1980s. The tech titans are predominantly bipedal beasts. They compete in their market but operate it too.

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Big Tech and Antitrust: A Path Forward, The Wall Street Journal, Dec 16, 2020. Congress Eyes Antitrust Changes to Counter Big Tech, Consolidation, The Wall Street Journal, March 11, 2021.

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Apple sells its applications and the apps it hosts for the iPhone. As the biggest e-commerce platform globally, Amazon also offers goods under its private brands. Businesses, therefore, have an incentive to advertise their products unjustly by putting them at the top of search engine results pages. While most analysts believe that the split parts are more valuable than the whole, could the opposite be true? Breakups can obliterate value, and synergies would be extinguished. Apple’s ability to provide a fully integrated hardware, software, and service bundle may become a less competitive advantage. Amazon would lose its most lucrative sector if it divested cloud computing, making the other offerings less appealing. Diversification may decrease the economic pressures that allow big companies to expand, but the markets may not respond the same way if that happens (see Footnote 248). It seems that separating platforms from the services that operate on them is a simple solution. To what use could tech companies’ vast stores of data be put? What’s included and what’s not on the platform? Suppose the lines that link them moved. What would happen then? There is a place for instant messaging on social networking platforms, but it may also be used as a stand-alone service. A lawsuit was filed against Microsoft when the software giant merged its Windows operating system and web browser into one package.248 Ironically, the browser has become an essential component of the operating system in today’s world. Rapidly evolving technology has the potential to render breakups obsolete. They may result in higher prices due to the friction they create. If platforms are restricted in their capabilities, they may reduce investment, thereby slowing innovation. Additionally, breakups alone will not be sufficient to rein in big tech. Certain starfish possess incredible regeneration abilities: take them apart, and the fragments will swiftly recombine to form whole new entities. Likewise, one dismembered technology behemoth may reclaim dominance due to network effects. Breakups must be accompanied by regulation that mitigates this effect, for example, requiring text communication between users of different instant-messaging services. Stifling acquisition: Many legislators are alarmed that the five largest technology companies have recently spent billions of dollars purchasing their competitors. If big technological firms abuse their power to destroy their rivals and restrict competition, that’s a problem. When it comes to criticizing technology in America, officials in the United States are more divided than ever. Increased antitrust scrutiny is a result, in part, of the sheer size of technology firms. The big five—Apple, Microsoft, Amazon, Facebook, and Alphabet—are collectively worth $10 trillion, accounting for roughly one-fifth of America’s total stock market value ($47 trillion in July 2021). A tenth of all U.S. publicly listed company earnings were made by the big tech in the previous year, or $180 billion in pretax profits (see Footnote 249).

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Dismembering Big Tech, The Economist, 24 October 2019.

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Massive cash reserves at the companies have fueled an acquisition frenzy. Big tech’s acquisition spree started with Google purchasing Motorola Mobility in 2011 for $12.5 billion. It’s estimated that companies have acquired smaller competitor firms for $92 billion (in cash and shares) in the past five years (Bloomberg, 2019). Regulators and politicians are concerned for other reasons as well. For anticompetitive conduct in online retail search results, its mobile operating system, and advertising, Alphabet, Google’s parent firm, has been fined three times by EU authorities a total of e8.25 billion ($9.27 billion).249 France recently announced a new tax on large technology companies’ digital services. A slew of European nations is considering similar taxes. According to reports, a $5 billion fine is being considered by the US Federal Trade Commission for data privacy breaches. To retaliate, the big five technology companies have spent approximately $265 million lobbying members of Congress on Capitol Hill since 2014. Alphabet, the parent company of Google, is a significant spender. Google spent $22 million on lobbying last year. Yet, the demand for action has only grown shriller. Simply enter “Should Google…” into the search box on the company’s website. The autocomplete answer for the first word is “be broken up.”

7.5.2.1 Social Media Forced to Pay for Content The creator is the king: Last decade, everyone with a phone was transformed into a potential content producer. More powerful computers and quicker networks have resulted in sharper cameras, faster processors, and a more responsive network. Apps can help even the worst material enhanced. When Instagram first debuted in 2010, it provided interesting filters for pictures. TikTok has simplified the process of video editing. As Instagram did for amateur photographers, Facebook revealed recording capabilities for podcasters. Limitless, unrestricted free dissemination and searchability on the internet have made it possible for this—videos, music, jokes, rants, and anything else that defies categorization—to establish followers, however niche (see Footnote 252). Save for a few well-known “influencers,” most producers are unpaid except for the satisfaction of amassing large numbers of followers. To keep up with the growth in its ad revenue, Facebook’s biggest social network now sells space alongside unpaid postings from 2.8 billion users to generate $92 bn in revenue annually. Twitter earns $3.4 billion a year by selling advertisements alongside the free editorial written by its 350 million contributors. Being an active participant in the platform resembles “the greatest unpaid internship of all.”250 However, the users plowing the internet are increasingly discovering that their output is marketable, driving a number of the internet’s most successful businesses to change their business strategies as some creators migrated from Instagram to OnlyFans to discover how they could monetize their work. Video game creators

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Calls to rein in the tech titans are getting louder, The Economist, 16 July 2019. Samhita Mukhopadhyay, an American journalist in The new rules of the “creator economy”, The Economist, 8 May 2021.

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selling their pixelated creations on platforms like Roblox; spectators paying to watch professionals play on streaming sites such as Twitch, which Amazon controls, are all examples of the migration of bloggers and tweeters to for-profit email services. The success of online media platforms has depended on their capacity to help people find their audience. Instead of putting out their material, they’ve been working on creating algorithms and content management systems that let consumers get the most out of other people’s efforts. These new upstarts are forcing incumbents like Facebook to pay users for their work for free, making it possible for professionals who previously had to rely on intermediaries to communicate with their audience directly. Providers are forced to commoditize themselves since the platform’s algorithm determines whether or not a piece of content will be successful or not. As with Uber drivers, content producers become interchangeable and a cog in the wheel in an environment of excessive supply. Platforms now compete for material more than ever before, although there is more of it. Startups are pioneering new revenue models for creators. Substack compensates writers with 90% of the subscription fees they charge for newsletters; its top 10 authors together make more than $15 million per year. Twitch pays game broadcasters more than half of their membership costs, plus a portion of ad income. Contributors get 75% of the profits from Cameo, a site where 40,000 celebrities sell customized clips to followers. In the American comedy “The Office,” actor Brian Baumgartner earned almost $1 million last year. An “accelerator program” is available to presenters who show promise using Clubhouse, a social audio app that takes tips. It’s going to look at things like tickets and subscriptions. Consequently, platforms that paid artists little or nothing in the past are now paying more. To avoid becoming a venue for Substack authors and Clubhouse presenters to advertise their work, Twitter is currently trying to outsmart both entities. After buying Revue’s newsletter company, Twitter cut its fee to five percent, half of Substack’s fee. Users will soon be able to sell tickets to their conversations with the addition of Spaces, a Clubhouse-style audio feature. The ability to subscribe to newsletters or join an audio room straight from Twitter without moving between applications provides a competitive advantage for Twitter.251 Facebook is also attempting to retain creators. Last year, it opened up paid memberships and introduced tipping. A Cameo-like feature called “Super,” a Substack lookalike, is being tested; Facebook Gaming, a tribute to Twitter, rewards those who sign up for the service. Facebook claims that the number of content producers on the site making more than $1000 per month doubled in 2020 (see Footnote 252). “In developing all of these things, we’re focused on the creator side, even more than the consumption side,” Mark Zuckerberg explained. Rather than just paying them, it’s giving them power: newsletter writers will control their recipient list and be able to move it to another platform, much as how Facebook users may move their friends from the social network to Twitter.

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Bernstein in The new rules of the “creator economy”, The Economist, 8 May 2021.

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YouTube has long given a 55% cut of ad revenue from regular video publishers and is developing new features, including paid “applause.” More than twice as many channels in 2020 joined the company’s paid “partner program” compared to 2019. Over the past three years, it has paid contributors $30 billion in ad revenue shares and membership fees, much more than any other social network. As a result of its “creator fund” initiative, TikTok claims to have given over $2 billion to its users in its first three years of operation. Its Chinese counterpart, Douyin, has committed $1.5 billion to double the creators’ income. The creators of Snapchat’s most popular videos are paid $1 million per day using Spotlight, the app’s new sharing function introduced last year. There’s a spurt of newer forms of media. Biggest Chinese gaming streaming platforms Douyu and Huya handed out $1.1 billion last year to streamers, up 31% from the previous year. The two largest podcast platforms, Spotify, and Apple are courting amateur broadcasters. Apple announced last month that it would allow podcasters to charge subscription fees; it would retain a 30% cut in the first year, then reduce it to fifteen percent; Days later, Spotify followed suit—but claimed that all revenue would be retained by creators (it will take 5% from 2023) (see Footnote 252). Platforms are vying for the most popular content, which gives creators more negotiating power. Many companies provide more enticing contracts to their most popular creators: Streamers on Twitch are allegedly paid a larger proportion of subscription income; Substack provides upfront payments to authors it thinks will be big hits. For the most part, the proportion of income creators may make is tied to how important they are to the platform.252 Substack enables its authors to retain 90% of their revenue since creators can easily move their email list away to another platform. What about creators with a smaller following? While a few online celebrities earn millions, the tail is quite long. Spotify claims to want to enable “a million creative artists the opportunity to live off their art,” but only around 0.2% of the platform’s 7 million musicians earn more than $50,000 in royalties per year, and only 3% earn more than $1000. On Patreon, a platform where people can subscribe to various creative services, 200,000 creators earn $1 billion per year. About 98% of workers make less than the federal minimum wage of $1257 per month (see Footnote 252). Advertising has historically been the primary method of monetizing online content. To make any money at all, you need a large following. Even 1 million YouTube views will net the poster $2000 in earnings. Some kinds of content draw even smaller ad rates. Amateur contributors on Porn Hub make around $0.60 for every 1000 views, and a million views only net you about $600. Although advertising may make megastars rich, they will not sustain indie artists like small-time foot goddesses. A new middle class of creators is emerging because of the growing popularity of subscription services and other revenue models (see Footnote 252).

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The new rules of the “creator economy”, The Economist, 8 May 2021.

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Record labels are another rapidly vanishing intermediary. Historically, they have transformed a song into a popular hit in exchange for recurring royalty. However, an increasing number of artists are striking out on their own. Every day, Spotify receives over 60,000 new songs uploaded by bedroom rockstars who can handle logistics themselves, thanks to new online services (see Footnote 252). Like how internet-enabled brands bypass brick-and-mortar stores and sell directly to customers, social platforms enable creators to communicate directly with their audience. Nonetheless, they require new media platforms, which increasingly resemble traditional media companies. Rather than merely assisting consumers in navigating a sea of commoditized online content, they actively participate in its commissioning and curation. Zuckerberg avers that Facebook should be regarded somewhat between a phone business, where information simply flows, and a newspaper, which exerts editorial control over the material it publishes. As platforms like his and others go after and pay creators more aggressively, they’re getting closer to the newspaper end of the spectrum. News organizations rely on the audience delivered by Facebook and Google. According to a fall 2020 Pew Research study, roughly 36% of Americans get their news from Facebook, compared to 23% from YouTube and 15% from Twitter. Several countries have joined Australia in demanding Facebook and Google pay for the news content posted on their sites. If Facebook were required to pay for news content globally, the cost would be substantial. An industry expert observed that margin disappears when previously free items must be paid for.253 The spat between Facebook and Australia’s news providers comes as Facebook and Google face antitrust lawsuits and regulatory scrutiny in the United States and elsewhere. Australia and other countries seeking payment on behalf of publishers for news content argue that Facebook abuses its market power by minimizing or avoiding such costs. Facebook and Google both assert that their platforms bolster journalism. As Facebook has noted, publishers worldwide are already attempting to maximize the amount of attention their work receives on social media without any guarantee of compensation.

7.5.3

Global Initiatives to Rein in Big Tech

America’s antitrust enforcement agency is preparing to act against big tech: The breadth of the complaints leveled against the technology industry is becoming more apparent. They are available in three flavors. First, there are antitrust concerns, which encompass large technology firms’ market shares, acquisitions of promising competitors, and potential monopsony power over suppliers and vendors. The five largest American technology companies account for roughly a tenth

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Facebook’s Tussle With Australia Over News Is Just the Beginning, The Wall Street Journal, Feb 23, 2021.

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of all corporate profits. Second, they may impose externalities on their users, such as losing privacy or becoming addicted to technology. Thirdly, they potentially contaminate the public sphere through fake news, mass manipulation, and lobbying. Due to their surveillance-based business models and large market shares, Facebook and Google are the most vulnerable to regulation. Apple was deemed less problematic because it does not sell advertisements and faces significant competition from Samsung. Amazon polarizes opinion: However, despite its stratospheric value, it is now helping to reduce consumer prices by decreasing its monopolistic power. Microsoft, which was the focus of an antitrust probe from 1998 to 2001, is now seen as big tech’s kind uncle, which should delight the company. Ultimately, big tech is an antitrust issue. The dominant position of the large firms may be transitory. However, this is a dangerous assumption. Facebook, Alphabet, and Amazon all have massive valuations, implying that they will double in size by 2022.254 Each of the five firms stifles the emergence of competitors by acquiring or crushing them. They have absorbed at least 329 small businesses over the last five years.255 There appears to be a “kill zone” surrounding Alphabet and Facebook where startups cannot survive. Industry analysts make a forecast. A veritable alphabet soup of consumer, privacy, and media regulators will gradually ensnare big tech companies. Simultaneously, antitrust regulators (the Department of Justice and the FTC’s competition division) will make it more difficult for the big five companies to acquire smaller ones. Additionally, they will seek to enact mechanisms that ensure the safe transfer of data and customers between large incumbent technology firms and potential competitors, allowing newcomers to thrive. US Lawmakers go after Facebook: The charges leveled against the world’s largest social networking site are grave. The proliferation of false news and conspiracy theories on the platform and the site’s use by authoritarian governments have prompted authorities and lawmakers to act decisively. “By using its vast troves of data and money, Facebook has squashed or hindered what the company perceived as potential threats. They’ve reduced consumers’ choices, stifled innovation, and degraded privacy protections for millions of Americans,” thundered New York Attorney General. The lawsuits against Facebook are centered on its acquisitions. It’s been argued by both parties that the company maintained its monopoly in personal social networking by systematically purchasing prospective competitors—notably Instagram in 2012 and WhatsApp in 2014. In 2013, the firm said that Facebook bought Israeli company Onavo to safeguard user data. Competitor app popularity was monitored, and acquisition candidates were identified with the help of Onavo. According to the lawsuit, competitor app developers were denied access to the platform. The cases provide a new argument, given the difficulties of proving customer damage

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America’s antitrust apparatus prepares to act against big tech, The Economist, April 28, 2018. Bloomberg in A Formidable Alliance Takes on Facebook, The Economist, 12 Dec 2020.

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from big tech’s mainly free products: users’ privacy is violated, and marketers’ choices are restricted. Social media, according to Facebook, is a more expansive and competitive business sector than social networking. TikTok (currently prohibited in the United States) has surpassed Instagram’s popularity among teenagers in America. There is no evidence of a sluggish monopolist in the internal Facebook communications used to prove the case. The internal communication reveals that many competitive risks worry Zuckerberg and his team. In addition, Facebook may claim that it is almost not possible to dismantle. Since last year, Instagram, Messenger, and WhatsApp have been integrated more thoroughly. This lawsuit makes no mention that the FTC approved the Instagram and WhatsApp agreements.256 Legislation backed by Democrats and some Republicans in Congress aims to restrict the market dominance of the biggest technology firms. Legislators praise the Justice Department’s and the FTC’s antitrust probes, which may compel these corporations to abandon government-approved acquisitions.257 ,258 President Biden has chosen antitrust fighter Lina Khan (a fierce critic of big tech) to head the FTC “Federal Trade Commission” shows exactly how much Silicon Valley has fallen out of favor in the nation’s capital. The contrast between US and EU antitrust strategies: The EU has unveiled two draft digital service laws to establish a broad regulatory framework to rein in Silicon Valley. The federal government of the United States of America has charged Facebook and Google with antitrust violations. The EU’s policy is broad and forward-looking, contrasting the US’s restrictive and backward-looking approach. More emphasis is placed on government regulation in this country, and there are no indigenous IT giants to deal with. In certain instances, large technological firms may be recognized as “gatekeepers” and be subject to responsibilities involving data, content, and how they treat other enterprises that utilize their platforms, which will be systemically significant.259 EU’s plans to rein in big tech: Europe was heralded as a technological, regulatory superpower a year ago. The GDPR, the EU’s stringent new privacy legislation, has been adopted by countries across the globe, but the US government has made little effort to exercise control over a fast-moving sector. The European Court of Justice reversed an EU competition commission order requiring Apple to repay Ireland $14 billion in taxes. It was a significant setback for the bloc’s regulation of large technology companies. And America has discovered a new mission. Congress released a lengthy report outlining recommendations

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A Formidable Alliance Takes on Facebook, The Economist, 12 Dec 2020. Lobbyists for Silicon Valley Giants Like Facebook Find Glory Days Are Over, The Wall Street Journal, June 17, 2021. 258 US Federal lobbying filings in America and Europe clamp down on big tech, The Economist, 19 December 2020. 259 America and Europe clamp down on big tech, The Economist, 19 December 2020. 257

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for modernizing competition law. Later, the Department of Justice launched a case against Google, alleging monopolistic tactics in search advertising. Facebook was also sued in December by the FTC and 46 different states for anticompetitive social networking activities. Europe wishes to regain its position at the forefront. The European Commission unveiled new legislation aiming at limiting the power of big technology platforms. It would be a major shift in European policy toward the internet and the companies that populate it if the DSA (“Digital Services Act”) and the DMA (“Digital Markets Act”) are enacted (see Footnote 260). These digital spaces will be organized for decades, given their importance in society and democracy. As opposed to conventional “ex-post” litigation based on past actions, both proposals support “ex-ante” regulations which limit major digital corporations upfront rather than the lengthy “ex-post” method. The combined scope of the twin laws is astonishingly broad. The DSA addresses illegal services, goods, content, platform abuse, advertisement, and algorithm openness. The DMA developed a new “gatekeeper” platform, preventing companies from participating in anticompetitive behavior. The internet companies could no longer prefer their goods above those of third-party merchants on their platforms or prohibit customers from removing pre-installed software. The one major and controversial issue of technology policy that has been left unaddressed is how internet companies pay taxes (recently, G-7 countries have adopted a resolution to impose a minimum global digital tax) (see Footnote 260). Both laws take unabashed aim at the industry’s titans. In market capitalization terms, the majority of affected companies are American. As opposed to GDPR, which applies equally to big and small companies alike (and is widely considered to have benefited large groups possessed of greater resources to pay for compliance, at the expense of minnows). Only companies having an existing customer of 45 million or one-tenth of the EU’s population are covered by the DSA. A company has deemed a gatekeeper if it manages a “core platform service” with a reach of 45 million users and a market value of at least e65 billion. Notably, SAP, a German software firm, is the only one in Europe to fulfill the value requirement. On the other hand, Amazon, Google, Microsoft, Facebook, and Apple easily satisfy both criteria (see Footnote 260). Sanctions are severe. DSA rules violations may result in a penalty of up to 6% of global yearly turnover. Amazon and Apple could be hit with fines totaling nearly 28 billion dollars if they violate the DMA. Serial lawbreakers may be dismantled. But despite the companies’ efforts, the regulations have been greeted with opposition from eurocrats and legislators who think the internet titans have become “too big to care” (see Footnote 260). The new regulations place a greater responsibility on big corporations to exchange data with smaller ones and to guarantee that their software and hardware are interoperable than they now are. According to the new rules, Google and Amazon will have to disclose their searches with competing search engines, which

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may jeopardize their intellectual property. However, Europe will not compete with FAAMA, or the Chinese giants based only on this initiative.260 Social media agree to comply with EU laws: Facebook, Twitter, and other social media sites have consented to follow stricter European Union guidelines for monitoring online postings, providing a glimpse of the kinds of regulations that major internet companies may be subject to under an upcoming law on digital content. The EU’s new misinformation code of conduct attempts to stop advertisements from being displayed next to content regarded as purposefully false or misleading. Officials stated that under the new law, the Digital Services Act, they want to make some new codes mandatory for significant platforms (see Footnote 263). Social media platforms will be required to take action to prevent advertising from appearing alongside what policymakers define as purposefully incorrect or misleading content under the new code, which was agreed to by various corporations, including TikTok and Google. Additionally, platforms will be expected to give users greater resources for finding this online information. Early next year, platforms agreeing to follow the new code before some of its provisions become mandatory must submit a first report outlining how they have done so. The new code of conduct is part of a larger EU initiative to limit the influence of powerful digital corporations, including how they handle user data, interact with rivals, and handle potentially harmful content. Digital content has received a lot of attention—and discussion. Policymakers claim there is a flood of false information about anything from Covid-19 to the Ukraine conflict. They add that this information may be magnified through social media platforms, so Europe attempts to take the lead in combating it (see Footnote 263). However, it can be challenging to identify damaging falsehoods and decide what to do about them. In 2021, some EU officials voiced alarm over the removal of then-President Donald Trump from social media sites, including Twitter and Facebook. Officials claim that the new Digital Services Act, which mandates that businesses have effective appeals systems to dispute material removals, addresses these difficulties (see Footnote 263). Several significant tech companies expressed their support for the new EU rules. The business, Meta, which also runs Instagram, declared that it would keep using technology and research to stop the spread of incorrect information. Twitter reaffirmed its commitment to addressing the problem by implementing the new EU legislation. Google referred to the code as a crucial tool in the fight against intentionally incorrect and misleading content. “The global pandemic and the war in Ukraine have shown that people need accurate information more than ever, and we remain committed to making the Code of Practice a success.”261 When the new rule goes into effect, the biggest platforms, those with more than 45 million users in the EU, could face fines of up to 6% of their global annual sales

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The EU unveils its plan to rein in big tech, The Economist, 15 Dec 2020. Google in Facebook, Twitter Agree to New European Rules on Online Posts, The Wall Street Journal, June 16, 2022.

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for repeatedly breaking the code and failing to manage threats adequately. “We now have very significant commitments to reduce the impact of disinformation online and much more robust tools to measure how these are implemented across the EU in all countries and all its languages.”262 The EU stated that one of the new code of conduct goals is to reduce financial incentives for willfully disseminating misleading information by making it more difficult for those who disseminate the content to earn from associated advertising income. Companies are also encouraged to demonstrate their efforts to combat phony accounts and give users the means to identify and report material that has been purposefully misrepresented. A new task force of representatives of regulators and civil society organizations will monitor and assess businesses’ compliance.263 Big tech pushes back: In a show of their might, big tech splurged $36 million on Ads to wreck the Antitrust Bill Legislation in the US that would block Google, Amazon, Apple, and Facebook from encouraging their products. The surfeit TV and internet ads strongly oppose the antitrust legislation. The outlay indicates the largest ad campaigns by the formidable big tech in recent times and its anxiety about the destructive potential of stiffer antitrust laws (see Footnote 265). The ads try to persuade voters that slackening the antitrust safeguards would spark inflation, undermine US’s hand in its geo-combat with China or harm retail consumers and small firms by dislocating common online services such as Google Maps or Amazon Prime (see Footnote 265). The big tech firms insist that it is only fair for app stores and search engines to appropriate their innovations. “We’re confronted with these big tech companies spending millions of dollars on ads and front groups to spread falsehoods about our bill.” They want to protect the status quo, which allows them to expand their influence,” said a US Senator.264 Small businesses, including some smaller tech firms, aver the platforms’ predominant position gives them unbridled power to control the fate of their businesses and creates an uneven playing field. The antitrust legislation would create an even playing field.265

7.5.3.1 China’s Crackdown China’s rulers desire greater control over big tech: It is clear that China’s rulers desire greater control over big tech. And it is cracking the whip. Pony Ma has called for tighter regulation of Tencent, his $700 billion online empire. Simon Hu,

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EU in Facebook, Twitter Agree to New European Rules on Online Posts, The Wall Street Journal, June 16, 2022. 263 Facebook, Twitter Agree to New European Rules on Online Posts, The Wall Street Journal, June 16, 2022. 264 Senator Grassley, USA in Big Tech Has Spent $36 Million on Ads to Torpedo Antitrust Bill, The Wall Street Journal, June 9, 2022. 265 Big Tech Has Spent $36 Million on Ads to Torpedo Antitrust Bill, The Wall Street Journal, June 9, 2022.

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a rising star, resigned as CEO of Ant Group, a massive financial technology company linked with Alibaba. Colin Huang resigned as chairman of Pinduoduo shortly afterward, rattling investors still celebrating his startup e-emporium’s announcement that it had surpassed Alibaba in shopper volume. Jack Ma, Alibaba’s outspoken co-founder and China’s most well-known entrepreneur was largely absent from public appearances in recent months, save for a video in which he discusses the country’s education system. Additionally, their companies’ stocks have been behaving strangely. After increasing their combined market capitalization by $1.2 trillion since 2016, Tencent, Alibaba, and Pinduoduo have seen their stock prices fall in recent weeks (see chart 1266 ). Ant’s unlisted value is estimated to be $200 billion, down from more than $300 billion in October. The big Chinese technology companies lost an additional $700 billion in shareholder value. An innovative and lucrative industry on the planet will be reshaped as part of China’s big new technology master plan. After years of tolerating big tech’s unbridled growth, the central government is rewriting the rules, some implicit, some explicit, governing how billionaires should behave, the extent to which the state exercises overt control over data, and who owns the company’s other assets, and stakes in other businesses. Chinese tech moguls enjoy a halo effect among ordinary Chinese, who regard them as embodiments of the “Chinese Dream” of increasing prosperity, which propagandists promote on banners throughout the country. Too glistening, it appears now, for the Communist Party under President Xi Jinping is becoming increasingly opposed to anything that could undermine its authority. This includes being overshadowed by celebrity bosses (see Footnote 268). Jack Ma’s comparison of Chinese state lenders to pawn stores during a public event in October was the initial affront that precipitated the tech crackdown. A month later, China’s stock market regulator suspended Ant’s $37 billion IPO in Hong Kong and Shanghai, which would have been the world’s largest ever. Since then, authorities have compelled Ant to transform into a financial holding firm, undercutting its profitable business strategy of connecting customers with lenders. This de-tycoonification is critical, as investors’ perceptions of firms are inextricably linked to their visionary founders. The second group of questions relates to the government’s plans for businesses’ most important resource—data. Its goal is to pool data and impose a greater degree of state ownership and control, eventually equating to nationalization. Digital companies have developed some of the world’s biggest and most sophisticated databases, which analyze everything from customers’ loan repayments to their social networks, travel history, and spending patterns. Ant alone has data on over a billion people, comparable to Facebook and Google. Chinese technology stocks have been dragged down by the uncertainty surrounding the kinds of data that will be shared, how they will be shared, and with whom. Credit scoring is at the forefront of the fight with the govt over data

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Bloomberg in China’s rulers want more control of big tech, The Economist, 8 April 2021.

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ownership. The People’s Bank of China has made weak efforts to establish a centralized scoring system over the years. Now, it seems as though the central bank has decided to increase its control over the systems of technology firms. The technology industry has resisted, and for a good reason. The scheme would erode the “information advantage” currently enjoyed by Tencent and Alibaba, which control the lion’s share of relevant data. Finally, there is uncertainty regarding the government’s strategies for the titans’ remaining assets. The largest businesses are conglomerates that offer diverse products and services. Tencent and Alibaba have also become some of China’s largest venture investors over the past decade (see chart 2267 ), providing clout in the digital economy beyond their operational interests. Ant and Alibaba Group have amassed assets in media, health care, logistics, and finance under Ma’s leadership. Tencent is a significant shareholder in other e-commerce behemoths, JD.com, Pinduoduo, and Meituan. Tencent and Alibaba both own stakes in Didi Chuxing, a ride-hailing company that plans to go public this year at a $100 billion valuation. Alibaba and Tencent’s combined investment portfolios are worth approximately $300 billion, placing them among the world’s largest technology investors and two of the largest technology firms (see Footnote 268). China’s digital darlings and investors and founders are likely to escape doom, as the firms provide vitality and prestige and grow through innovation instead of financial engineering. However, such a doomsday scenario is no longer inconceivable.268 In addition, China is limiting the capacity of the country’s internet behemoths to utilize big data for lending, money management, and other activities, putting an end to a period of fast development that officials warned presented a risk to the financial system. China’s central bank and other authorities have ordered 13 companies, including many of the world’s largest names in technology, to comply with significantly stricter data and lending regulations. Their stated objective is to rein in a revolutionary economic model that has enabled China’s big tech to create and exploit sophisticated payment applications and other data on millions of customers. These internet behemoths, armed with vast amounts of data, deep pockets, and sway over virtually every aspect of Chinese life, have increasingly become a national security concern for Beijing. According to regulators, Ant’s business model jeopardizes data security and introduces major dangers to a financial sector already beset by mounting debt. This is partially due to a large portion of the risk of borrowers failing has been shifted to commercial banks that collaborate with these technology companies, which contribute little of their capital to loan funding but benefit handsomely as intermediaries between banks and borrowers.269

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Bernstein, Refinitiv Datastream in China’s rulers want more control of big tech, The Economist, 8 April 2021. 268 China’s rulers want more control of big tech, The Economist, 8 April 2021. 269 China Warns Large Tech Firms as Industry Faces Rising Oversight, The Wall Street Journal, April 29, 2021.

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China’s government is taking a hard line against fintech: China’s government is taking a hard line against fintech. What is it seeking? The state is attempting to establish a position at the industry’s epicenter. According to a former deputy governor of China’s central bank, financial technologies “create havoc when unregulated” but “perish once regulated,” China’s central bank. This is a good summary of the situation in which the country’s regulators find themselves. Over the last decade, innovation has swept through its financial markets, and it gave birth to some of the most valuable technology companies globally, such as Ant Group. Regulators are on the lookout for fintech. However, what are they hoping to accomplish? Fintech’s meteoric rise in China has been unmatched elsewhere. Cities have largely abandoned cash in favor of mobile and QR-code payments. In the first nine months of 2020, technology companies processed 210 trillion yuan ($32 trillion) in payments, more than double the amount processed in 2016. Consumers frequently manage their wealth products and purchase insurance via their smartphones; borrowing money to shop at virtual malls has never been easier. Last year, technology firms facilitated trillions of yuan in microloans. This rapid expansion far exceeded regulatory capacity. A significant portion of oversight fell to provincial watchdogs who were simply outmatched. A former Chongqing mayor complained that Ant repeatedly exploited the authority to securitize 3 billion yuan in debts to raise over 300 billion yuan (see Footnote 271). The state is working to rectify this. Its efforts may have far-reaching consequences. Consider peer-to-peer lending, which attracted regulators’ attention in 2016 due to widespread fraud and billion-dollar scandals. The industry was largely eliminated. Loans outstanding from approximately 7000 platforms decreased from about 1 trillion yuan in May 2018 to less than half that amount by 2019 (see chart270 ). By November of last year, regulators reported that all platforms had been shut down. Certain households have been devastated by losses. Numerous cities have established regulatory “sandboxes” to evaluate new technologies before widespread adoption. The state appears to be destined to dominate these. According to Plenum, a consultancy, banks have introduced most of the 60 initiatives in the sandboxes, with several big state lenders participating. Additionally, the central bank is conducting a test on digital currency.271 The so-called “ECNY” offers the state greater control over payments and a more complete picture of cash flows throughout the economy. The currency can challenge mobile payment companies like Tencent and Ant, and it is even intended to be used offline, giving the govt an advantage against fintech companies. Without informing the authorities, no online platform can raise billions of yuan. The state anticipates that developing its financial technology would result in less mayhem, and private-sector businesses may take a contrary position.

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CEIC, Moody’s Investors Service, National statistics in China’s government is cracking down on fintech. What does it want? The Economist, 13 March 2021. 271 China’s government is cracking down on fintech. What does it want? The Economist, 13 March 2021.

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An attack on technology will alter China’s trajectory: Among all of China’s accomplishments over the last two decades, the rise of its technology industry is one of the most impressive. Alibaba is home to twice the amount of e-commerce activity as Amazon. Tencent owns the world’s most famous super applications, with 1.2 billion users. China’s technological revolution has also aided in the transformation of the country’s long-term economic prospects, allowing the country to expand beyond manufacturing into new areas like artificial intelligence and digital health care. Along with advancing China’s wealth, a dazzling technology sector may also serve as the basis for a challenge to American dominance.272 That is why President “Xi Jinping’s” attack on China’s $4 trillion technology sector is startling. Over fifty regulatory actions have been brought against dozens of companies for various alleged offenses, ranging from antitrust violations to data abuses. Govt prohibitions and penalties have impacted stock values, costing approximately $1 trillion. However, the Communist Party’s ultimate goal is to restructure the economy as per its plan. China’s autocrats want to hone their country’s technical advantage while simultaneously increasing competition and benefiting users. Geopolitics might also be motivating them. Restrictions on access to components manufactured using American technology have convinced China to increase its self-sufficiency in critical sectors such as semiconductors. Such “hard tech” companies may gain if the crackdown on social networking companies, gaming companies, and the like directs bright engineers and developers in their direction. Nevertheless, the attack is a massive wager that may wreak havoc on enterprise and economic growth in the long run. China did not appear to be on the verge of a technological miracle twenty years ago. Silicon Valley rejected pioneers like Alibaba as imitations until they surpassed it in e-commerce and digital payments. Currently, seventy-three Chinese digital companies are valued at more than $10 billion. The majority are backed by Western investors and led by foreign-educated executives. A vibrant venture capital ecosystem is constantly producing new stars. Half of China’s 160 unicorns are artificial intelligence, robotics, and big data (see Footnote 272). China’s crackdown is motivated by the monopolization of digital markets and the fact that tech companies hoard data, exploit workers, exploit suppliers, and weaken public morality. Increased policing was long overdue. When China opened, the party maintained a stranglehold on finance, telecommunications, and energy while allowing technology to flourish. Its digital pioneers took advantage of an almost total lack of regulation to develop at an astounding rate. Didi, which provides transportation, has more users than the population of America. However, the large digital platforms have also used their independence to trample on smaller businesses. They prohibit vendors from selling on multiple platforms. They deny

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Xi Jinping’s assault on tech will change China’s trajectory, The Economist, 14 August 2021.

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basic benefits to food delivery as well as other gig workers. The party is committed to putting an end to such behavior. This is an ambition shared by a large number of investors as well. How to do it is the question? China is on the verge of becoming a policy laboratory, where an unaccountable state battles the world’s largest corporations to control the twenty-first century’s critical infrastructure. Certain data, which the govt refers to as a “factor of production,” such as land or labor, may become public property. The state may compel platform interoperability (in such a case, WeChat could not continue to block competitors). Addictive algorithms could be more strictly regulated. All of this will erode profits but might improve market functioning (see Footnote 272). China’s authorities have effectively defied Western teachings on liberal economics for decades. They may view their crackdown on the technology sector as a refinement of their state capitalism policy—a plan for balancing prosperity and control to maintain China’s stability and the party’s hold on power. Indeed, as the population of China declines, the party seeks to boost productivity via state intervention, including through factory automation and the formation of urban mega clusters. Nonetheless, attempts to reshape Chinese technology have the potential to go wrong. It is likely to generate suspicion abroad, undermining the country’s aspirations to sell services and establish global technology standards in the twenty-first century, much like America was in the twentieth. Any slowdown in development will have repercussions far beyond the borders of China.273 A greater danger is that the crackdown will stifle China’s innovative spirit. Spontaneous risk-taking will become more important as the economy shifts from manufacturing and services, backed by sophisticated capital markets. China’s most powerful technology tycoons have withdrawn from their businesses and public life. Wannabes will pause before attempting to imitate them, not least since the crackdown has increased capital costs. Economic progress is largely defined by creative destruction. China’s leaders have demonstrated their ability to manage destruction. Whether this technological upheaval will also foster creativity remains an open question. China has become a test-bed for regulating technology companies: Chinese tech giants have dominated the market for two decades, with international rivals like Google and Facebook banned. Internet millionaires are being reminded who is in control by the Chinese Communist Party. President Xi Jinping has authorized an unprecedented campaign of repression. Last year, Ant Group’s planned IPO (“Initial Public Offering”), a behemoth in internet finance, was abruptly halted. In July, China’s internet regulator ordered Didi, a ride-hailing firm, to stop new user registrations and remove its applications from mobile app stores two days after the company went public in New York. The video game industry is being forced to scan the faces of its customers to impose a three-hour limit on the amount of

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Xi Jinping’s assault on tech will change China’s trajectory, The Economist, 14 August 2021.

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time youngsters may spend playing online games each week. Technocrats, who have been frustrated for years by businesses’ refusal to comply with appropriate, reasonable regulations, are empowered (see Footnote 275). The party’s goals go beyond simple cosmetic changes. The government has passed a series of new rules and regulations to force technology firms to change their behavior and products. As a result of the new regulations, tech firms will be required to develop code for their platforms that promotes content that the government approves of and restrict what it doesn’t. Controlling what Chinese people view and do on the internet seems to be the government’s goal. In the past month alone, Chinese legislators have approved at least four new rules and regulations that, when applied over the next three months, have the potential to transform the Chinese internet. China’s new ones are much tougher and more thorough than the previous regulations. It is expected that the technology companies will protect public safety and order. For example, the GDPR (“General Data Protection Regulation”) in Europe mandates that companies get their customers’ permission before processing their personal data. China’s first privacy law, the “Personal Information Protection Law” (PIPL), takes effect. Years into development, the final product is less comprehensive than the GDPR, which triggered the idea in the first place. The law is left intentionally vague. This enables regulation to keep up with rapidly evolving technology, and it also gives the government broad discretion to interpret and enforce the regulations as it sees appropriate. A new set of regulations penalized Didi for providing digital services deemed essential infrastructure, and these requirements were amended to cover international listings as the company sought to float on a major global stock exchange (see Footnote 275). Not all new laws will cause investors the same level of concern as those used to prosecute Didi, and some are concerned with issues that affect the West. The Cyberspace Administration of China (CAC) is preparing to publish a set of regulations governing the use of recommendation algorithms. Short-video applications like TikTok utilize this kind of software to assess what viewers enjoy and how much they should receive. Companies like Amazon and Alibaba use it to suggest goods based on a customer’s purchasing history. According to the proposed rules, companies would be required to reveal the terms they’ve used to identify their customers and enable them to remove those keywords. As a result, Chinese internet users will no longer be inundated with ads for refrigerators that a recommendation algorithm thinks they’d like. Algorithms that direct users toward “addiction or high-value consumption” would be prohibited. Algorithms that dispatch employees, like Didi’s driver management system, are required to “ensure workers’ rights and interests.” These new algorithm regulations mark how Chinese technology laws surpass those in Europe (only California has such rules in the United States).274

274

Trivium in China has become a laboratory for the regulation of digital technology, The Economist, 11 September 2021.

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Many of these changes, data protection experts assert, will be beneficial. Internet users in China are constantly bombarded with phone calls and spam messages. The Ministry of Public Security’s app, released in March and promising to filter fake calls and texts, has quickly become one of China’s most popular downloads. The Chinese press is replete with reports of individuals’ data being stolen. An aspiring student named Xu Yuyu tragically passed away from a heart attack in 2016 after handing over her life savings to scammers who had cheated her into thinking they were affiliated with her institution using stolen personal data from the black market. Defending citizens against such predators will bolster the party’s underdog image. Citizens in China now have more rights against corporations than citizens in any other country. However, they provide Chinese web users with no enforceable privacy rights against the government.275 Recently, the education-technology sector has been singled out for attack. Any firm that teaches courses on the school syllabus is now prohibited from listing abroad, attracting foreign investors, or earning profits. Nobody should become wealthy by teaching schoolchildren, and it would appear. China’s preferences now appear to be crystal clear. It desires capital raised on its exchanges, within inside jurisdiction, and on its terms. The ramifications for financial markets are likely to be long-lasting. If Chinese competitors are stymied by red tape, this is all to benefit big tech in the United States.276 China goes after Alibaba: A brief announcement regarding an alleged monopoly investigation was all that was required to bring China’s mightiest internet giant, Alibaba, down to size. Even the subsequent announcement of an additional $6 billion in share buybacks three days later did not affect the company’s market value decline. It had fallen by 13% or $91 billion within a week. In recent weeks, investors yawned as American regulators unveiled detailed charges against tech behemoths like Google and Facebook. Alibaba is the first investigation of its type into Chinese e-commerce. It’s the timing—a month after authorities abruptly halted Alibaba’s fintech affiliate, Ant Group’s $37 billion IPO, and only days before authorities directed Ant to curtail lending along with wealth management activities. The investigation raises concerns about the effervescent but also increasingly concentrated online economy. The complaint against Alibaba requires retailers or brands to sign exclusive contracts to sell products on its marketplace. Those who conduct business on competing marketplaces risk having web traffic diverted away from their online storefronts on Alibaba’s Tmall marketplace.

275

China has become a laboratory for the regulation of digital technology, The Economist, 11 September 2021. 276 China’s crackdown on the online-education business marks a turning-point, The Economist, 31 July 2021.

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China’s newfound zeal is reflected in the increased capacity for trustbusting provided to investigative agencies.277 Chinese trustbusters have long opposed impeding widely regarded world-beating firms such as Alibaba. As is the case in the West, they are concerned that a few companies are gaining control of critical services such as messaging, social media, food delivery, ride-hailing, payments, logistics, and e-commerce. When the top three companies control over 90% of the market, common practices like offering products below cost to attract consumers appear more troubling than in a less concentrated sector. According to the government, charging shoppers differently based on their purchasing power as determined by user data would be illegal (see Footnote 277). Didi’s removal from China’s app stores is the latest in a series of crackdowns: Within 48 h of the Chinese ride-hailing giant’s initial public offering (IPO), which valued it at around $70 billion, Beijing’s cyber-regulators ruined the party. China’s Cyberspace Administration (CAC) announced that it had launched an investigation into the company, which immediately brought down its share price by 5%. Two days later, the regulator ordered Didi’s mobile application to be removed from Chinese app stores, effectively shutting down the service to new customers (existing users can still hail taxis). According to the CAC, Didi was unlawfully collecting and using personal data. Didi stated that it would “strive to resolve any issues” but warned of “adverse revenue impact in China.” As expected, it also had a detrimental effect on its market value. When markets in the United States reopened on July 6th, Didi immediately sold more than a fifth of it. The CAC’s decision is the latest escalation in China’s crackdown on large technology companies (see Footnote 278). The ramifications will be even more far-reaching than the regulators’ surprise halt of Ant Group’s $37 billion initial public offering in November, just two days before its shares were scheduled to start trading in Hong Kong and Shanghai. At the time, the suspension effectively punished those who had already invested in Ant. Private investors in the firm, including Western firms such as Silver Lake and Warburg Pincus, could not liquidate their positions. Observers noted that things could have been much worse had regulators clamped down on Ant following its initial public offering.278 The actions will dampen enthusiasm for Chinese technology stocks across the globe, not just in the United States. The day after Didi’s ban, the four largest technology companies with Hong Kong and mainland China listings—Tencent, Alibaba, Meituan, and Kuaishou—lost $60 billion in market capitalization. The long-term consequences for some of the world’s most innovative and valuecreating companies over the last decade appear to be becoming increasingly uncertain. Most of them will have negative repercussions.

277

Chinese trustbusters’ pursuit of Alibaba is only the start, The Economist, 2 Jan 2021. Didi’s removal from China’s app stores marks a growing crackdown, The Economist, 5 July 2021.

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References Allnutt, L. (2012, April 11). Pictures at a revolution. Foreign Policy. Australia Competition and Consumer Commission. (2018). Digital platforms inquiry. Preliminary report. Competition and Consumer Commission, Canberra. Barnes, N. G., & Andonian, J. (2011). The 2011 fortune 500 and social media adoption: Have America’s largest companies reached a social media plateau? University of Massachusetts, Dartmouth, Center for Marketing Research, Charlton College of Business. Beardsley, S., Johnson, B. C., & Manyika, J. (2006, May). Competitive advantage from better interactions. The McKinsey Quarterly. Bessen, J. (2017). Information technology and industry concentration. Law & economics paper no. 17–41. Boston University School of Law, Boston, MA. Bieli´nski, T. (2018). Competition between Chinese and United States companies in the Internet market. Interdisciplinary Political and Cultural Journal, 22(1), 137–152. Blair, R., Blattman, C., & Hartman, A. (2011). Patterns of conflict and cooperation in Liberia (Part 2): Prospects for conflict forecasting and early warning. Yale University and Innovations for Poverty Action. Bloomberg. (2019, July 16). The economist in calls to rein in the tech titans are getting louder. The Economist. Bloomberg. (2021, July 3). Magna, economist in is Facebook a monopolist? The Economist. Bloomberg. (2022a, January 3). Canalys in Apple briefly tops $3 trillion market cap. The Wall Street Journal. Bloomberg. (2022b, October 24). Economist in the end of Apple’s affair with China. The Economist. Bollen, J., Mao, H., & Zeng, X. (2011). Twitter mood predicts the stock market. Journal of Computational Science, 2. Bresnahan, T. F., & Trajtenberg, M. (1995). General purpose technologies: ‘Engines of growth’? Journal of Econometrics, 65(1), 83–108. Brynjolfsson, E., Hu, Y. (J.), & Smith, M. D. (2003). Consumer surplus in the digital economy: Estimating the value of increased product variety at online booksellers. Management Science, 49(11), 1580–1596. Brynjolfsson, E., Eggers, F., & Gannamaneni, A. (2018). Using massive online choice experiments to measure changes in well-being. NBER working paper 24514. CBInsights. (2018). Android of the auto industry? How Baidu may race ahead of Google, Tesla, and others in autonomous vehicles. Available at: https://www.cbinsights.com/research/baiduchina-autonomous-vehicles/ Cheng, E. (2016, September 23). Amazon climbs into list of top five largest US stocks by market cap. CNBC. Chui, M., Manyika, J., Bughin, J., Dobbs, R., Roxburgh, C., Sarrazin, H., Sands, G., & Westergren, M. (2012). The social economy: Unlocking value and productivity through social technologies. McKinsey Global Institute. Chunara, R., Andrews, J. R., & Brownstein, J. S. (2012). Social and news media enable estimation of epidemiological patterns early in the 2010 Haitian cholera outbreak. American Journal of Tropical Medicine and Hygiene, 86(1). Correa, T., & Hinsley, A. W. (2009). Who interacts on the web?: The intersection of users’ personality and social media use. Computers in Human Behavior, 26(2), 247–253. https://doi.org/10. 1016/j.chb.2009.09.003 Cosenza, V. (2018). World map of social networks. Vincos blog. Available at: http://vincos.it/worldmap-of-socialnetworks/ Court, D., Elzinga, D., Mulder, S., & Vetvik, O. J. (2009, June). The consumer decision journey. The McKinsey Quarterly. Daraius. (2012, February 9). What is the economic impact of Facebook, Twitter, and all those social media applications? Towson University.

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Dutch Transformation Forum. (2018). Unlocking the value of the platform economy: Mastering the good, the bad and the ugly. Available at: https://dutchitchannel.nl/612528/dutch-transform ation-platform-economy-paper-kpmg.pdf eMarketer. (2019). Digital ad spending 2019. Global. Available at: https://www.emarketer.com/con tent/global-digitalad-spending-2019 Evans, P., & Gawer, A. (2016). The rise of the platform enterprise: A global survey. In The Emerging Platform Economy Series, 1. The Centre for Global Enterprise. Farrell, J., & Klemperer, P. (2007). Coordination and lock-in: Competition with switching costs and network effects. In M. Armstrong & R. Porter (Eds.), Handbook of industrial organization (Vol. 3, pp. 1967–2072). Elsevier (North Holland Publishing Co). Field, M. (2019, December 29). The techlash that never was: Facebook and Google unbowed after year of challenges. The Daily Telegraph. Retrieved May 14, 2020. Florida, R. (2010, October 27). Is social media driving the economy? The Atlantic. Foroohar, R. (2018a, January 21). Big tech should hit the reset button (registration required). Financial Times. Retrieved March 15, 2018. Foroohar, R. (2018b, December 16). Year in a word: Techlash (registration required). Financial Times. Retrieved May 14, 2020. Gallagher, B. (2018, February 16). Copycat: How Facebook tried to squash Snapchat. Wired. Goodwin, T. (2015, March 3). The battle is for the customer interface. TechCrunch (blog). Available at: http://social.techcrunch.com/2015/03/03/in-the-age-of-disintermediation-the-battle-isall-for-the-customer-interface/ Howard, P. N. (2018, July 16). Our data, ourselves. Foreign Policy. Available at: https://foreignpo licy.com/2018/07/16/our-data-ourselves-democracy-technology-algorithms/ International Telecommunication Union. (2011). ICT facts and figures. Internet Society. (2019). 2019 Internet society global Internet report: Consolidation in the Internet economy. Geneva. Available at: https://future.internetsociety.org/2019/wp-content/uploads/ sites/2/2019/04/InternetSociety-GlobalInternetReport-ConsolidationintheInternetEconomy. pdf Ipeirotis, P. G. (2010). Analyzing the Amazon Mechanical Turk marketplace. XRDS: Crossroads, The ACM Magazine for Students, 17(2). Jargon, J. (2019, June 19). How 13 became the internet’s age of adulthood. The Wall Street Journal. Jovanovic, B., & Rousseau, P. L. (2005). General purpose technologies. Working paper no. 11093. NBER, Cambridge, MA. Kenney, M., & Zysman, J. (2019). Unicorns, Cheshire cats, and the new dilemmas of entrepreneurial finance. Venture Capital, 21(1), 35–50. Khan, L. M. (2017). Amazon’s antitrust paradox. Yale Law Journal, 126(3), 564–907. Available at: https://ssrn.com/abstract=2911742 Lee, K.-F. (2018). AI superpowers: China, Silicon Valley, and the new world order. Houghton Mifflin Harcourt. Lucas, L. (2017, September 21). Beijing’s battle to control its homegrown tech groups (registration required). Financial Times. Retrieved March 23, 2018. Mayer-Schönberger, V., & Ramge, T. (2018). Reinventing capitalism in the age of big data. John Murray. Nahles, A. (2018, August 13). Die Tech-Riesen des Silicon Valleys gefährden den fairen Wettbewerb. Handelsblatt. Available at: https://www.handelsblatt.com/meinung/gastbeitraege/gas tkommentar-die-tech-riesen-des-siliconvalleys-gefaehrden-den-fairen-wettbewerb/22900656. html Nicas, J. (2020, August 19). Apple reaches $2 trillion, punctuating big tech’s grip. The New York Times. Patchin, J. W., & Hinduja, S. (2020). Tween cyberbullying in 2020. Cartoon Network. Archived from the original on 2020-10-20. PwC. (2018). Global top 100 companies by market capitalisation (31 March update). Available at: https://www.pwc.com/gx/en/audit-services/assets/pdf/global-top-100-companies-2018-rep ort.pdf

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Ritholtz, B. (2017, October 31). The big four of technology. Bloomberg. Archived from the original on June 26, 2019. Salinas, S. (2018, August 2). Apple just hit a $1 trillion market cap. CNBC. Shirky, C. (2010). Cognitive surplus: Creativity and generosity in a connected age. Penguin Press. Simpson, P. (2016). The secrets behind Amazon’s success. Supply Chain Technology. Available at: https://www.cips.org/en/supply-management/analysis/2016a/february/the-secrets-beh ind-amazons-success/ Skarda, E. (2011, June 9). How social media is changing disaster response. Time. Statista. (2021, October 7). Economist in TikTok’s rapid growth shows the potency of video. The Economist. Streitfeld, D., & Kantor, J. (2015, August 17). Jeff Bezos and Amazon employees join debate over its culture. The New York Times. ISSN 0362-4331. Thun, E., & Sturgeon, T. (2017). When global technology meets local standards: Reassessing the China’s mobile telecom policy in the age of platform innovation. In L. Brandt & T. Rawski (eds.) The impact of industrial policy and regulation on upgrading and innovation in Chinese industry. Cambridge University Press. Vargas, C. (2019, October 25). Cloud market share 2019: AWS vs Azure vs Google—who’s winning? Skyhigh Networks (McAfee). Vogel, E. A., Rose, J. P., Okdie, B. M., Eckles, K., & Franz, B. (2015). Who compares and despairs? The effect of social comparison orientation on social media use and its outcomes. Personality and Individual Differences, 86, 249–256. https://doi.org/10.1016/j.paid.2015.06.026 Weigel, M. (2017, October 31). Coders of the world, unite: Can Silicon Valley workers curb the power of big tech? The Guardian. Retrieved March 15, 2018. Yglesias, M. (2019, May 3). The push to break up big tech, explained.

8

Digital Hotspots

8.1

Digital Hotspots

The internet, mobile technology, and big data have profoundly impacted business and society in the last two decades. While the world is witnessing unprecedented digitization, specific “digital hotspots” are doing the heavy lifting and becoming crucibles of digitization.1 The bulk of innovation in technology development and commercialization occurs in large cities or metropolitan regions (‘digital hotspots’). What gives? • presence of world-class universities conducting cutting-edge research and producing specialist talent • supportive venture capital financial resources • well-developed communication and physical infrastructure • public policies that encourage and fund local innovation and entrepreneurship. The explosive progress in high-growth digital sectors like machine learning and artificial intelligence, computer vision, virtual and augmented realities, robotics, and blockchain technology has the world in a digital vice grip. These characteristics make large cities attractive locations for emerging technology startups and large companies seeking to acquire similar capabilities (Mulas et al., 2015). Using plentiful venture capital availability, several cities have demonstrated significant scale (number of deals) and rapid growth (increase in the number of deals). Apart from Silicon Valley, where it all began, the digital pecking order reveals Beijing

1

Scott Stern, MIT Sloan School.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 V. Kumar, The Economic Value of Digital Disruption, Management for Professionals, https://doi.org/10.1007/978-981-19-8148-7_8

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Fig. 8.1 Percentage of people who think center of innovation will move from Silicon Valley. Source KPMG, Technology Innovation Hubs, 2020

as the undisputed leader; Bangalore is now a serious contender to be among the world’s elite group.2 Which global hotspots are fueling digital innovation? Where are these agents of change growing in numbers? What motivates these hotspots? Silicon Valley is no longer the undisputed innovation center, as China and upstarts like Bangalore have challenged it. Which cities have the potential to challenge today’s technology innovation powerhouses for leadership? Several cities have made significant strides to become digital hotspots in recent times. Bengaluru was rated eighteenth a year ago but has now risen to ninth place. Bengaluru benefits from India’s continuous growth in the Global Innovation Index, which has risen from 81 to 46 in 2021. These cities all have vital innovation ecosystems, but they may have benefitted from being outside the technology slugfest between the US and China. Notwithstanding, Silicon Valley will remain the world’s innovation hub for years. Only 37% believe that the world’s technology center will likely relocate out of Silicon Valley in four years. The previous year 58% felt it would move out, strengthening the belief that Silicon Valley is here to stay (Fig. 8.1). Why this shift in perspective? One reason stems from the US government’s ongoing attempts to protect and promote critical new technology. Technology and intellectual property (IP) are not moving freely across borders as they once did as tariffs, trade agreements are renegotiated, foreign acquisitions are prohibited, and sanctions are applied in national security. By retaining more proprietary knowledge and intellectual property in the United States, it will be considerably more difficult

2

Uncovering tomorrow’s innovation hotspots: The cities striving for emerging technology leadership, The Economist Intelligence Unit Limited 2019.

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for a city outside of the United States to surpass Silicon Valley as the innovation hub in the next four years. The increasing tendency for technological micro-hubs contributes to Silicon Valley’s ongoing supremacy. Rather than directly compete with global centers for market share, many smaller communities increasingly concentrate on a particular industry or technology. They do it by taking advantage of reduced living expenses, a higher quality of life, and specialized skill pools. The goal is to keep some of the economic advantages of a creative economy. Several examples include: • Huntsville, Alabama (United States), has developed a specialized market that serves the defense and aerospace industries. • Eindhoven, Netherlands, is well-known as an electronics and hardware design hotspot. • Taiwan’s Hsinchu has developed into a semiconductor manufacturing center. Why do 37% of technology leaders believe the world’s innovation center will relocate from Silicon Valley? Their main arguments are that infrastructures in other cities are catching up to Silicon Valley’s and that collaborative tools allow individuals to work when and wherever they choose. Another factor is that there is a fear of skill scarcity. Between 2016 and 2019, Santa Clara and San Mateo counties experienced negative population migration, with over 70% of residents moving outside the Bay Area (see Footnote 3). Cost and quality of life were also mentioned but to a lesser extent. Median house prices in Silicon Valley are above $1 million, and more than 100,000 workers travel for more than three hours for work each day.3 With China now facing potential innovation headwinds and US policies encouraging more technology workers to return to or remain in India, India’s innovation future seems bright. This is reinforced even more by urbanization, rising demographic trends among the younger generation, and India’s recent surge in venture capital funding.4 Unicorns stoke fires of digital hotspots. Venture capitalist Aileen Lee, and Cowboy Ventures co-founder, came up with the term “unicorn” in 2013 to refer to a then-rare, mythical species: privately held startups valued at $1 billion or more. Regardless of their magical properties, they are commonplace today—and growing in popularity—and almost all are concentrated in the three digital hotspots of Silicon Valley, China, and India. Consumers, who stand to benefit from a slew of novel, frequently inexpensive products, and services, can anticipate a pleasant ride. Investors betting on the unicorn race, on the other hand, should exercise caution. The world’s unicorn population is growing at a more rabbit-like rate. Such businesses have increased from a dozen eight years ago to over 750 today, with a combined value of $2.4 trillion. Technology startups raised nearly $300 billion in

3 4

2020 Silicon Valley Index (Joint Venture Silicon Valley/Institute for Regional Studies). KPMG, Technology Innovation Hubs, 2020.

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Fig. 8.2 New pastures, startup funding, $bn. Source CB Insights in Will Silicon Valley face up to its diversity problem? The Economist, Jun 20, 2020

the first six months of 2021, nearly as much as they did in 2020. This funding aided in creating 136 new unicorns between April and June alone, a quarterly record, according to data provider CB Insights. Compared with the previous year’s same period, the funding rounds exceeding $100 million more than tripled, reaching 390. Much of this has aided in fattening the herd’s older members: All but four of the 34 companies with a market capitalization of $10 billion or more have received new investments since 2020 (see Footnote 5). The latest technology darlings are no longer exclusively marketplaces akin to Uber for connecting services with consumers. Rather than that, they frequently offer or develop sophisticated products in more niche markets. Around 25% of funding went to financial technology firms in the second quarter, with significant amounts also going to artificial intelligence, digital health, and cyber-security (Fig. 8.2). The beneficiaries of investors’ generosity are also becoming more global. While American and Chinese startups continue to dominate fund-raising rankings, the share of startups outside the two largest markets increased from around 25% in 2016 to 40% in the last quarter (Fig. 8.3). Flipkart, an Indian e-commerce company, raised $3.6 billion in July in a round valued at $38 billion. Grab, which aspires to be Southeast Asia’s answer to China’s super-apps, is planning to be public in New York this year on a $40 billion valuation. Two factors can be attributed to the cash flood. The first is a divestment spree by early venture capital (VC) investors. These stakes fetch premium prices from investors hungry for exposure to the pandemic-era digitization wave. Globally, exits via public listings and acquisitions increased by more than two years to nearly 3000. The proceeds are being reinvested in new venture capital funds, which have raised $74 billion in the United States alone this year, closing in on the record $81 billion raised in 2020 in half the time (see Footnote 5). Venture capitalists are unable to spend the money quickly enough. Tiger Global, a particularly aggressive

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Fig. 8.3 Startup funding, $bn. Source CB Insights in Will Silicon Valley face up to its diversity problem? The Economist, Jun 20, 2020

New York investment firm, made an average of 1.3 deals per business day in the three months to June. The second reason for rising valuations is increased investor competition. Pension funds, sovereign wealth funds, and family offices are encroaching on the private markets previously dominated by venture capital firms based on Sand Hill Road in Palo Alto. In the last quarter, “non-traditional” investors in America participated in nearly 1800 transactions totaling $57 billion. Many may have been encouraged by the success of earlier forays into venture capital by dabblers from outside the venture capital world. Annual returns on their exited investments in the first round of financing have averaged 30% over the last decade, according to another data firm, PitchBook. This is more than double the 10–15% rate for seasoned venture capitalists. This winning streak could still come to an end in tears. That is precisely what happened two years ago when highly valued companies with questionable business models either failed to materialize following their initial public offerings (such as Uber and Lyft, two ride-hailing rivals) or never did (WeWork, an office-rental firm whose flotation was shelved after investors got cold feet). Numerous newly listed unicorns continue to lose money. According to The Economist, those that went public in 2021 lost a combined $25 billion in their most recent fiscal year (see Footnote 5). Assessing whether the remaining ones are worth their exorbitant prices appear more difficult than ever. They, like their predecessors, do not disclose financial information. At the same time, extrapolating from earlier unicorns, which tended to pursue growth at all costs in winner-take-all markets, is insufficient, as today’s lot frequently seek to maximize margins through the sale of truly unique technology. This may be a more sustainable strategy—if the technology proves to be viable. However, it is more difficult for non-experts to evaluate, mainly when

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working with a prototype. Nikola and Lordstown, two electric vehicle companies that went public in 2020 via reverse mergers with special-purpose acquisition companies (SPACS), are being investigated by American authorities for allegedly exaggerating their technology’s viability. Politics pose another danger. Authorities worldwide are growing wary of allowing technology firms to become too large or to enter regulated markets such as finance or health care. China’s government recently sabotaged Didi’s operations as part of a broader crackdown on big tech firms by banning its app from Chinese app stores days after its $68 billion initial public offering in New York, ostensibly over data misuse (see Footnote 5). These moves have dampened investors’ appetite for Chinese startups, which have seen funding decline in the last two quarters. The Securities and Exchange Commission of the United States of America has begun to investigate the use of cryptocurrencies. Numerous crypto exchanges accelerated investors’ pulses during last year’s bitcoin frenzy. Coinbase’s market capitalization, one of the largest, has fallen by half, or $56 billion, since its April listing. Therefore, investors should exercise caution. For the rest of humanity, the unicorn stampede is a blessing.5 Due to the high proportion of equity in venture capital investments and the low proportion of debt in venture capital investments, even flops like WeWork or cautionary tales like Didi pose little risk to the financial system. As long as venture capital funds loss-making startups that offer subsidized services or develop innovative new products, consumers have no reason to look the gift-horned horse in the mouth. But there’s a twist in the tale. Take, for example, Didi, which ought to have been dead. Days after its $4.4 billion IPO in NY, China barred Didi from taking on any new customers and opened a cyber-security probe into its operation. It was forced to delist from the US. That the company survived such lethal blows is a testament to its intrinsic business model. Its continued survival and other big tech firms are at the mercy of the Communist Party. Didi’s revival and better-thanexpected quarterly results of the big tech companies portend that things could return to normal. Yet, it could be a new normal for tech companies. Growth has been slow. Room to grow beyond their core business has disappeared. Executives talk about stopping their industry’s “reckless expansion.” And state enterprises are now taking stakes in tech firms. In a remarkable turnaround, global investors who once shunned state ownership are coming to terms with the idea, and it is the mantra for survival. Companies must be aligned with the Communist Party’s glorious plan of “common prosperity” to stay afloat.6

5 6

Technology unicorns are growing at a record clip, The Economist, 19 July 2021. The Communist Party resuscitates Didi Global, The Economist, June 6, 2022.

8.2 Silicon Valley Is Aging

8.2

695

Silicon Valley Is Aging

The Valley’s role as a technology hub is ebbing. That is a frequent description of life in Silicon Valley. The technology capital of America wields a disproportionate amount of influence over the global economy, stock markets, and culture. This slight stretch of land between San Jose and San Francisco acts as a home for three of the wealthiest companies. Google, Facebook, Apple, Netflix, and trailblazers like Airbnb, Tesla, and Uber, all major companies, have claimed the Valley to be their home and birthplace. Bay Area has the 19th largest economy globally, surpassing Switzerland and Saudi Arabia.7 Look at its other high points: • The San Jose Metropolitan Area ranks third in the world in terms of GDP per capita, behind Norway, Oslo, Switzerland, and Zurich. • Nearly 1/3rd of the United States’ venture capital investments are made in Silicon Valley. • Silicon Valley boasts the largest concentration of high-tech employees of any city in the United States, accounting for 286 of every 1000 private sector employees. Silicon Valley has the highest average high-tech wage in the US, at $144,800. • Valley businesses employ fewer people than brick-and-mortar businesses. For every $1 billion in sales, Alphabet employs 962 individuals, while for every $1 billion in revenue, Ford employs 1427 people. • Nearly 56% of Silicon Valley STEM employees and more than 70% of its technologists were born in foreign countries. The Valley is more than just a place on the map. It is an inspiration. It has been associated with invention and inventiveness since Bill Hewlett and David Packard established the business almost 80 years ago in a garage. Personal computers, silicon chips, internet services, and software have all been at the heart of many Schumpeterian cycles of regeneration and destruction. Several of its creations have been ludicrous, including teapots connected to the internet and a coin-selling app used at laundromats. However, there are other world-beaters: The Valley is the birthplace of microprocessor chips, databases, and smartphones (see Footnote 7). Moreover, the Valley has the highest concentration of unicorns (Fig. 8.4). Despite many efforts, replicating the Valley has proved difficult because of its unique technical skills, flourishing business networks, a vast pool of capital, risktaking culture, and excellent universities. There is no serious competitor to its position as its leading innovation hub. However, there are signs that the Valley’s clout is reaching its pinnacle. If this were just a sign of far greater innovation happening elsewhere, it would be a reason for excitement. The reality is much more depressing.

7

Why Startups are leaving Silicon Valley, The Economist, August 30, 2018.

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Fig. 8.4 World’s unicorn companies. Source Howmuch.net in The new geography of innovation, The Economist, Sept 1, 2018

To begin with, there is proof that many things are changing. The previous year, more Americans departed San Francisco County than entered. According to the latest poll, 46% of respondents want to leave the Bay Area in the next several years, up from 34% in 2016. Because many startups are expanding beyond Silicon Valley, the trend has been dubbed “Off Silicon Valleying.” One among them raising the ante is Peter Thiel, the Valley’s most famous venture investor. Those who remain have expanded their horizons: In 2013, Silicon Valley investors put half of their money into non-Bay Area companies; today, it’s close to two-thirds (see Footnote 9). There are various reasons for this change, but one of the most important is the Valley’s high cost. The cost of living is prohibitive and is among the world’s highest. According to one entrepreneur, operating in the Bay Area costs at least four times as much as most other American states. This is without even addressing the more horrific elements of Bay Area living, such as traffic jams, abandoned needles, and startling inequity. Synthetic biology and quantum computing, for instance, have smaller profit margins than internet services, which makes cash management even more critical for companies in those areas. As a consequence, other cities are becoming more significant. The “Miami-Fort Lauderdale” region is rated #1 in America for startup activities based on startups density and new entrepreneurs.8 Mr. Thiel has relocated to Los Angeles, a city with

8

Kauffman Foundation in The new geography of innovation, The Economist, Sept 1, 2018.

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a thriving technological scene. Pittsburgh and Phoenix have developed into a hub for Autonomous vehicles; New York has developed into a hub for media startups; London has developed into a hub for fintech; and Shenzhen has developed into a hub for hardware. None of these locations can compete with Silicon Valley on its own, but, when considered together, they hint at a more dispersed world of invention. It is to be applauded if brilliant ideas can thrive in new places. There are many reasons to think that the innovation playing field is leveling. Capital is becoming more readily accessible to brilliant minds worldwide, not just in California: Investors of tech companies are increasingly combing the globe for more ideas. There are fewer reasons for a single spot to be the world’s technology hub. Thanks to the technologies created by Valley companies, such as cellphones, video conferences, and messaging applications, teams can communicate efficiently across offices and locations. One result might be an equal income distribution, while another could be more intellectual. The Valley is great at many things, but it’s becoming a monoculture of white male geeks. Last year, women-owned companies got fewer than 2% of venture capital financing. The problem is that the playing innovation field is being leveled as well. The predominance of tech behemoths is one problem. Under the shadows of Facebook, Apple, and Alphabet, startups, especially those in the consumer internet industry, increasingly find it harder to attract funding. The number of first funding rounds in the United States fell by around 22% in 2017 compared to 2012. Because Alphabet and Facebook compensate their workers so generously, entrepreneurs have difficulty attracting top talent ($240,000 median salary of Facebook’s) (see Footnote 9). When the chances of success for startups grow even more uncertain and the payoffs are similar to those of stable employment at one of the big companies, dynamism suffers and not just in Silicon Valley. In Alibaba, China, Tencent, and Baidu together account for almost 50% of domestic investment in venture capital, giving the giants considerable influence over prospective rivals’ destinies. The West’s increasingly hostile policies are the second-way innovation that is hindered. Anti-immigrant sentiment is rising, and stricter immigration restrictions have impacted the economy: Entrepreneurs coming from foreign countries account for approximately 25% of new firms in the United States.9 As a result of government handouts, Silicon Valley blossomed in large part. However, state funding for public universities in Europe and North America has decreased significantly since the 2007–08 financial crisis. Essential research funding is insufficient—the federal government spends 0.6 GDP percentage on research and development, which was less than a third of what was spent in 1964, and is since trending in the opposite direction. If the relative decline of Silicon Valley is matched by a commensurate rise of a global web of thriving, competing technology hubs, then it is worth raising a toast.

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The new geography of innovation, The Economist, Sept 1, 2018.

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Fig. 8.5 Silicon Valley—the crucible of innovation. Source US Census Bureau in Silicon Valley is changing, and its lead over other tech hubs narrowing, The Economist, Sept 1, 2020

Silicon Valley’s lead over other tech hubs is narrowing. A small two-bedroom house in Sunnyvale sold for $2 million, 40% above its asking price, a new record for the neighborhood within two days of listing. This equates to a $2358 per square foot price. Investors are rhetorically asking, “How are you supposed to have a startup in a garage if the garage costs millions of dollars?” The San Francisco Bay Area, which includes Silicon Valley, has the highest living costs (and highest income tax) in the US because of the huge success of its technological sector. A median-priced house costs $940,000, almost four and a half times the national average. A family earning less than $120,000 in San Francisco is considered low income by the Department of Housing and Urban Development (see Footnote 12). The Bay Area of Silicon Valley is the undisputed crucible of the world’s innovation (Fig. 8.5). Consequently, an area that once drew people is now driving them away. Americans are emigrating from the Valley quicker than they the inflow into the Valley. Several counties had their most significant total domestic outflows in almost a decade. Nearly half of Bay Area residents say they want to depart in the “next few years,” up from 34%.10 Silicon Valley remains a location where fresh ideas can thrive, fortunes can be created, and products that will improve the lives of millions of people will be imagined and brought to market. However, it is no longer the ferment it once was due to its previous success, and it is doubtful that it will ever again dominate the

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Bay Area Council in Silicon Valley is changing, and its lead over other tech hubs narrowing, The Economist, Sept 1, 2020.

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world of technology in the way it has done for decades. The predominance of the companies that created the present riches will change the pathways to success for those who stay. People will continue to flee as the cost of living and running a company rises. Additionally, unfavorable government policies will stifle the Valley’s dynamism (see Footnote 12). To add to the woes, Silicon Valley’s goods and services make it simpler to get started anywhere while staying linked to the Silicon Valley culture via texting, online collaboration, and video conferencing. By changing the way companies function, this technology makes it easier to keep a presence in the Valley while moving the majority of the staff. In today’s increasingly scattered globe, no other technological center will ever reach the scale of Silicon Valley. However, it will lose ground to a rising pack of rivals. Silicon Valley, known for its strong expert networks, world-class colleges, deeppocketed investors, risk-taking culture, and a history of helping companies develop into giants is a stellar benchmark against which all others judge themselves. From the 1960s through the 1990s, Silicon Valley was the hub of semiconductor innovation (therefore the name Silicon Valley) when it made significant investments in the internet, which it controlled by the 2000s. Since then, its businesses have created operating systems that run on more than 95% of all cellphones. Venture capitalists spent $168 billion on the Bay Area companies between 2010 and this year, amounting to almost a third of their entire investment in the USA. There is no other area that even comes close (Fig. 8.6). Three of the world’s five most valuable businesses were headquartered in the Valley: Facebook, Alphabet, and Apple, collectively worth more than $6 trillion by 2022. Alphabet and Apple were founded in garages in Menlo Park and Los Altos, respectively. While still a baby, Facebook moved into slightly more opulent quarters. It is home to more than 100 unicorns, including Uber and Airbnb (see Footnote 12). The Valley has always been home to large corporations. The current crop is behemoths—but they can also make better use of their size. Large companies may

Fig. 8.6 Venture capital investment, US top three cities, $bn. Source Pitchbook in Silicon Valley is changing, and its lead over other tech hubs narrowing, The Economist, Sept 1, 2020

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grasp innovation nearly as fast as startups—and with much more vigor. A big internet firm could penetrate new markets far more rapidly than a large semiconductor manufacturer. Young startups have found it more challenging to survive and develop into big corporations. They are duplicated, destroyed, or acquired when they are still in their infancy. Few have spoken of a “kill zone” surrounding large corporations, where startups cannot operate. Without young blood, innovation is stifled. The pay-packets of big tech are another hurdle for the young wannabes. Facebook, Apple, and Alphabet paid $16.2 billion in stock-based compensation. Even middle management earns a lot of money: The typical salary at Facebook is $240,000, while Alphabet pays about $200,000. Advanced artificial intelligence degree holders may make between $5 and $10 million each year. People argue that it has spoiled employees and has undermined the industry’s work ethic, with workers concentrating on free lunches and other privileges. Others draw parallels with Wall Street, where greed has made a new distinction. Additionally, the Valley, like Hollywood and Wall Street, has its share of toxic masculinity and entrenched sexism. Last year, female founders received less than 2% of venture capital funding (see Footnote 12). Companies like Uber and Airbnb, who have raised substantial funds, can compete in this cash-strapped environment. Young companies are finding it more challenging to do so. Given the low odds of success, starting a company makes little actuarial sense in most instances. However, there was a continuous flow of dreamers ready to risk when office space, houses, and top personnel were cheap. The spate has slowed with current prices. In the Bay Area, starting a company costs at least 4 times as much as it does in other American metropolises. Things do not always become simpler when startups grow up. Numerous startups in Silicon Valley are 15% behind on their year-end hiring goals. This jeopardizes their chances of survival. In San Francisco, the cost of running a startup with 500 employees with 7000 m2 of office space is $62.4 million per year, higher than anywhere else in Canada or America (Fig. 8.7). That’s 49% and 47% more costly than starting a business in Atlanta and Portland, respectively, and more than twice as much as Toronto and Vancouver.11 Although a Silicon Valley company may still grow, fewer first-time entrepreneurs succeed. Consider cloud computing’s continuing development, a profitable industry for Microsoft and Amazon. Suppose one of the companies succeeds in making a cloud computing platform as popular as Windows was during the PC era. In that case, it may push even more activity to Seattle, where both firms are based and which is already a thriving tech center with much lower living and working costs. Other innovations that can potentially displace the stronghold of Silicon Valley include blockchains and quantum computing. By definition, blockchains are decentralized; quantum computing can orient the technological world toward China.

11

Pitchbook in Silicon Valley is changing, and its lead over other tech hubs narrowing, The Economist, Sept 1, 2020.

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Fig. 8.7 Office rents, $ per square ft. Source CBRE in Silicon Valley is changing, and its lead over other tech hubs narrowing, The Economist, Sept 1, 2020

The worldwide distribution of unicorns is becoming more secular, although the US (Silicon Valley plus other cities in the US) still accounts for half the world’s unicorns (Fig. 8.8). Over half of the largest technology companies in the United States are owned by immigrants or the next generation. Despite urging by technology giants, the US has enacted rules severely limiting the number of foreigners eligible for work visas. Certain technological companies are encountering 18 months of delay in bringing in hires from foreign countries (with the pandemic, those delays are worsening). Students that have come to the US for education are increasingly returning home afterward, whether voluntarily or involuntarily. “If you ask me ten years from now why Silicon Valley failed, it will be because we screwed up immigration.”12 San Francisco is endowed with numerous attractions; however, it is not healthy. When people regularly come home late at night to their expensive flats in San Francisco, they encounter human excrement, used drug needles, and sidewalks teeming with homeless people. They have serious thoughts of moving elsewhere. This startup dispersion embodies a profound irony. Technology disrupting almost every sector is now on the road to self-destruction. Virtual workspaces and communication tools pioneered by Silicon Valley firms enable teams to collaborate across time zones and cities productively without having to meet in-person. Silicon Valley will continue to be the world’s most vibrant innovation ecosystem, but its importance will diminish relative to other regions.13 As per a research firm, the investors of Silicon Valley invested roughly 50% of their capital in startups outside of the Bay Area; that share has increased to 62% year to date.14 This trend has mirrored the geographic distribution of “unicorns”: Just 16% of them

12

Kleiner Perkins in Silicon Valley is changing, and its lead over other tech hubs narrowing, The Economist, Sept 1, 2020. 13 Silicon Valley is changing, and its lead over other tech hubs narrowing, The Economist, Sept 1, 2020. 14 CB Insights in Will Silicon Valley face up to its diversity problem? The Economist, Jun 20, 2020.

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Fig. 8.8 Distribution of unicorns, worldwide, %. Source CB Insights in Will Silicon Valley face up to its diversity problem? The Economist, Jun 20, 2020

currently reside in the Valley, whereas 35% are now in China (Fig. 8.9). Even the most conservative venture capitalists in Silicon Valley have now come to terms with the reality of deepened geographic diversity. Around one in every fifty venture capital partners is black, and venture capitalists fund one in every 100 entrepreneurs. African-Americans make up 3% of employees at America’s five most prominent technology companies (Fig. 8.10), probably less at smaller firms. Silicon Valley has a chronic diversity problem. As a result of pressure from a left-leaning workforce, big tech now frequently takes an activist stance on critical issues ranging from immigration to pandemics. Companies donated to race-related charities, established funds to finance startups founded by non-white founders, ceased selling controversial technologies such as facial recognition, and pledged to remove racist language from their software. Apple

Fig. 8.9 Silicon Valley-based venture capital investment, %. Source CB Insights in Will Silicon Valley face up to its diversity problem? The Economist, Jun 20, 2020

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Fig. 8.10 Diversity at Silicon Valley. Source The Economist in Will Silicon Valley face up to its diversity problem? The Economist, Jun 20, 2020

and YouTube pledged $100 million to combat racism through educational initiatives and financial support for black artists. Google stated that it would increase the percentage of “underrepresented groups” in leadership positions by 30% by 2025 (see Footnote 15). On the other hand, corporate activism will be ineffective unless technology companies and financiers fundamentally alter their business models. Businesses must make a more significant effort to promote and retain minority workers. VC firms must examine why they frequently reject minority entrepreneurs’ pitches; a simple “I am not excited about this” no longer suffices.15 Since gender diversity, in particular, became a hot topic in the technology industry a few years ago, progress has been slow. The chief diversity officer at Facebook now has to report to Sheryl Sandberg directly, her second-in-command (though not to its boss, as some would like). Alexis Ohanian, a white co-founder of Reddit, resigned from the board of directors to make way for a black replacement. Apple announced the appointment of a new diversity chief (chart16 ). Thanks to smartphones, whites can now see how black people are treated, and they want it to stop. Then there is bias in innovation. Even today, Silicon Valley, the world’s most forward-thinking area, continues to integrate old-school prejudice into innovation. The Valley is poor at designing products for women. Tailors have known that women and men have different forms for a long time. Nonetheless, in many other areas of design, this message has been widely disregarded. Car seat belts,

15

Will Silicon Valley face up to its diversity problem? The Economist, Jun 20, 2020. Bloomberg Businessweek, June 29, 2020. Data: Chris Benner, University of California at Santa Cruz.

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for instance, are still designed for males, who sit farther back than women while driving, even though car belts have been in existence since the 1880s. The bulk of work-related safety gear is made for men’s bodies. Take VR headsets as an example. Because 90% of women have pupils closer than the default setting on a standard headset, they are much more likely than males to feel nausea when wearing them. This is not a one-off occurrence. Most smartphones and video game controllers are too large to fit an average woman’s hand comfortably. The fact that males control most of the Valley’s firms (firms led by males get 82% of venture capital financing) and entrepreneurs (mostly male) often develops products to solve issues that affect them personally. Male employers and business owners may be ignorant about women’s problems. During their investigation, they may miss apparent red flags or fail to ask the appropriate questions (e.g., menstrual cycle monitoring was not initially included in Apple’s wristwatch or the iPhone’s Health app) (see Footnote 17). After an idea has been approved, it will be handled by engineering and product design teams, primarily men. These teams frequently make decisions based on data, but they may miss trends based on gender differences by grouping all users. Algorithms can also be biased due to their dependency on historical data and the scarcity of underrepresented groups. Amazon removed a persistently sexist hiring algorithm, and Apple is being investigated for its new credit card, which has lower credit limits for women. Then there is testing. Designers naturally test prototypes on their target consumers, but they may not get enough input from a broad range of people. There’s also the possibility of confirmation bias, in which designers listen to what they want to hear and ignore unfavorable feedback from specific user groups. The design bias in technology must be addressed for safety, ethical, and other business reasons. As author Caroline Criado Perez puts it, the ethical necessity is self-evident: It is unacceptably tricky for women to adjust to a “one-size-fitsmen” society. Regulators may address this in terms of safety by clamping down on products harmful to women due to poor design, such as seat belts. However, there’s a solid commercial argument for avoiding design bias since it leads to missed opportunities. Women make up about half of the population and are responsible for 70–80% of worldwide consumer purchasing choices. This implies they have direct influence over more than $40 trillion in annual spending (see Footnote 17). Change may be on the way. Female voices were difficult for the early voice recognition algorithms to comprehend but must now do. Women are being recruited by technology and venture capital companies.17 Consumers will be happier and safer if goods are readily available to all customers. For businesses that get it right, this translates into increased profits. By the end of this year, “Femtech”

17

Silicon Valley is bad at making products that suit women. That is a missed opportunity, The Economist, Nov 23, 2019.

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startups in the Silicon Valley focused on women’s health and well-being might increase to $1 billion.

8.2.1

The Resurgence of Silicon Valley

If it is for real, the “Sultanate of Silicon Valley” would be one of the world’s wealthiest nations. The Valley’s output, estimated by the “Federal Bureau of Economic Analysis” at $275 billion, exceeds Finland’s. California’s tech belt residents generate an annual gross domestic product (GDP) of $128,308 per capita, outperforming most nations. Qatar has the world’s highest GDP per capita per the World Bank, at $128,647. The per-capita production of Silicon Valley, more specifically, the San Jose metro region, exceeds Qatar’s on some measures, putting the Valley in the same league as Macau, a peninsula in China, has an estimated $115,367 per-capita GDP. Luxembourg, a sumptuously medieval place in Europe, has an estimated per-capita GDP of $107,641 (see Footnote 18). Silicon Valley is home to half of the world’s technological billionaires, with the San Francisco Bay Area accounting for most of the rest. Stanford University, Palo Alto, the headquarters of Apple in Cupertino, and the headquarters of Google in Mountain View are all located in the San Jose metro region, which has over 2 million people. San Francisco, Oakland, and its suburbs produce $89,978 per capita, making them America’s third most productive metro region, placing it alongside Singapore and Brunei. According to a more progressive measure, the Human Development Index, Silicon Valley is the most developed area.18 Deal flow and valuations in technology startups are at all-time highs as a flood of cheap cash fuels efforts to identify the industry’s following big winners, from software to social media. This year’s first quarter saw startups in the United States raise $69 billion from investors. The average valuation, across all stages, of startups also increased to a new high and more than tripled to $1.6 billion for late-stage organizations (see Footnote 19). According to venture capitalists, dealmakers, and founders, investors are increasingly willing to give companies five times—or more—the amount of money they seek, and transactions that used to take months are now completed in days. Startups are raising capital every month rather than on a biannual basis, and valuations are increasing with each new check. Several innovative social applications utilize video, audio, and text to link strangers and acquaintances, fans and celebrities, and chat services that allow users to broadcast their programs successfully. Others are built on a self-described creators’ industry, searching for new ways to self-publish material and make money.

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If Silicon Valley were a country, it would be among the richest on Earth, The Guardian, 30 April 2019.

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Clubhouse, which has taken center stage, is an audio-based social media application with immense potential. Audio platforms, it is widely believed, will be the next consumer platform. While Facebook’s market capitalization (which is launching a slew of audio and social media apps) is nearly a trillion dollars, a significant portion of that will be audio; thus, the value of being a live audio platform is in the tens of billions of dollars. Additionally, Twitter is launching its live audio feature, dubbed Spaces. The frenzied activity demonstrates how live audio’s simplicity makes it vulnerable to competitors; some of them have created and released audio products in weeks. The epidemic has heightened an already hectic venture capital climate over the past year.19 Interest rates remained low due to the health crisis, which boosted expenditure, encouraged corporate and consumer adoption of new technology, and rendered industries such as airlines and cruise ships unsuitable investments. Deals are closing at breakneck speed, and bids continue to rise. People who experienced the dot-com bubble of the 2000s do have a feeling of déjà vu. Because entrepreneurs and investors connect through Zoom instead of traveling, deal-making has quickened, and investors send offers to companies even before seeing them in-person. This raises concerns among some that values are rising faster than the quality of the businesses because of the high pace of investment and competition. Numerous technology startups are eager to go public during a pandemic. Amid frenzied fund-raising, Initial Public Offerings are back in Silicon Valley. This year, America’s technology startups have raised $10 billion (refer to chart 120 ), and there are more coming in. Airbnb had a blockbuster IPO. So did Snowflake Computing, a developer of software for cloud computing. DoorDash, a food delivery firm, had a smashing public listing. Palantir, a cryptographic data-management firm planning, did a successful listing. Billions of dollars’ worth of new technology stocks will soon trade publicly, even if just a fraction of their shares is floated. This flurry of activity isn’t quite up to the levels seen during the dot-com boom at the turn of the century, when dozens of companies were launched each month. However, there is an undercurrent of “irrational exuberance.” BigCommerce, an e-commerce platform that went public a week ago, saw its shares “pop” by more than 200%. Duck Creek, an insurance technology company, closed nearly 50% higher after going public (see Footnote 21). The S&P 500 index of major American corporations has reached an all-time high, never mind the pandemic continues to rage, investors’ rationality is undoubtedly questionable. However, many companies’ desire to go public is entirely reasonable for two reasons. The first one has to do with the financial sector of the economy. Before the epidemic, venture investors poured billions of dollars into unlisted businesses. They

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Silicon Valley’s Deal Machine Is Cranking: ‘I’ve Never Seen It This Frenzied’, The Wall Street Journal, April 21, 2021. 20 Dealogic in Initial public offerings are back in Silicon Valley, The Economist, 22 Aug 2020.

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began to temper their enthusiasm for frothy startups after disappointing unicorn listings (Uber and Lyft) or other collapsed companies (WeWork). Simultaneously, public money is being forced to seek returns due to historically low-interest rates. So, investors will put up with inflated prices. Startups are eager to quench it before it evaporates. Therefore, numerous businesses are reviving listing plans shelved after the ride-hailing fiasco and WeWork snafu. The pandemic bolsters their case and has benefited many technology companies, which is a secondary reason for listing lust of startups. As self-isolating customers spend more time and money online, the five leading platforms—Alphabet’s Amazon, Google, Facebook, Apple, and Microsoft—have flourished. At the same time, businesses have invested in cloud computing to enable remote work. Apple became the first American company to surpass a $3 trillion market capitalization. Not-so-large tech outfits have also benefited, including several companies that recently went public. The trend toward digitization has been further accentuated with the advent of the epidemic. The financial markets agree. The Renaissance IPO Index, which covers the most recent IPOs and is heavily weighted toward technology, is up more than 40% year to date (Fig. 8.11). There have been fourfold increases in the share price of Zoom since its IPO; the company had a peak valuation of $78 billion. The valuation of CrowdStrike, a cyber-security company that went public, has more than quadrupled (see Footnote 21). Due to the existing IPO procedure, entrepreneurs and venture capital companies have become more unhappy. It costs a lot of time, effort, and money. Additionally, because it’s so pricey, many people think it’s inappropriate for Wall Street. A typical initial public offering generates 4–7% fees for investment banks alone, not counting legal and other advisors. Startups cite big first-day pops, and venture Fig. 8.11 Growth of Tech IPOs. Source Datastream from Refinitiv in Initial public offerings are back in Silicon Valley, The Economist, 22 Aug 2020

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capital companies prove that offers are underpriced to give large investors a fast return (see Footnote 21). Some companies are looking at alternatives to the IPO process because they are dissatisfied and because public offerings are once again popular. First, there’s “direct listing.” This is something that music-streaming provider Spotify and messaging platform Slack successfully listed by taking this route. Direct listings leverage the stock exchange’s electronic auction to secure startups a more favorable price for their shares than investment bankers might. However, they prohibit companies from raising additional capital. Consequently, they are a choice only for companies with a lot of cash. The special-purpose acquisition corporation is another standard option. SPACS is shell companies that go public, committing to buy one or more private firms using the proceeds of the IPO. The private company then uses a reverse merger to fill the listed shell and become listed themselves. SPACS has a shady track record, with many underperforming the broader stock market. However, the most recent batch claims to fix the problems, with sixty SPACS going public between January and early August 2020, generating $22.5 billion in total (see Footnote 21). It is not clear whether Silicon Valley will enthusiastically embrace SPACS. Nikola, a secretive zero-emission truck startup with a market capitalization of approximately $16 billion, is the largest tech firm that has used SPAC.21 Many entrepreneurs and their backers would object to their businesses being absorbed into a shell. Though less lucrative, direct listings and SPACS are acceptable in the IPO business. As long as startups desire to profit, which they all want to do eventually, they’ll have to be steered by Wall Street. The largest American technology companies may emerge as winners from the global pandemic. Individuals and companies that have been put under lockdown have flocked to their internet services in droves. However, many startups in the heartland of technology are struggling. Almost no day goes by without news of additional layoffs and business closures. Despite the doom-mongering, venture capital (VC) companies and entrepreneurs are already doing what they consider their specialty: using crystal balls to predict the future. Silicon Valley firms and their investors were among the first in the nation to recognize the danger posed by the coronavirus. Some venture capitalists started refusing to shake hands at the beginning of February and were mocked for it. Additionally, the moneymen moved quickly to “triage” their portfolio companies, categorizing them according to their likelihood of survival and what appropriate action would be needed. This primarily entailed letting people go. Definitive figures are scarce. When large corporations make cuts, it makes headlines. Uber and Airbnb announced recent layoffs of 3700 and 1900 employees, respectively. Since mid-March, according to Layoffs.fyi, a website that tracks layoffs in the Valley, approximately 17,600 jobs have been lost. However, this does not account for numerous layoffs at smaller startups. According to some venture

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Initial public offerings are back in Silicon Valley, The Economist, 22 Aug 2020.

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capitalists, the workforce will shrink by 15%, amounting to a total job loss of more than 125,000 (see Footnote 22). However, Silicon Valley’s inhabitants aren’t concentrating on the bad. Venture capitalists hunt for potential companies with low values that need further funding. According to data provider PitchBook, investments in America are only down 25% from prepandemic levels. For startups with cash on hand, this is an opportunity to acquire weaker competitors. A dwindling ride-hailing business with a booming meal delivery section and $9 billion with cash on hand, Uber is looking to buy Grub Hub, a food delivery firm. A few days ago, Uber led a $170 million financing round in Lime, an ailing company that leases electric bicycles and scooters (see Footnote 22). Expect more of these agreements and increasing accusations that firms like Uber use the epidemic to thwart competition and dominate markets. Silicon Valley’s leading venture capital firms are also looking for new opportunities. Numerous observers believe that the tech industry’s sweet spots shift from consumer-facing offerings involving physical worlds, such as electric scooters and online ticketing, to specialist web-based digital and software infrastructure. Businesses want to transfer money quickly, and individuals trapped at home want to improve their living quarters, increasing the demand for local services. Much of the recent venture capital investment has gone to highly technical companies, such as Confluent, which handles corporate data. The company raised $250 million in April. Startups in online education and telemedicine are also doing well. Additionally, some businesses that seemed to be more vulnerable to the infection are doing better (see Footnote 22). In terms of the future, today’s focus is on how the epidemic will impact Silicon Valley—and, by extension, much of the technological sector. The crisis will exacerbate current tendencies. The Valley will continue to spread out. An exodus had begun even before the virus arrived. Startups have been relocating or becoming “fully distributed,” with only the most critical employees in San Francisco and the remainder distributed globally. This dispersion is likely to accelerate if working remotely becomes the norm due to Covid-19.22 Until mid-2022, employees at prominent Silicon Valley firms like Facebook and Google may work from home. Twitter claims they have the right to do so indefinitely. Another issue is whether Silicon Valley’s lifeblood, venture finance, will become virtual and dispersed. Some believe the crisis will shake up the sagging venture capital sector. Venture capitalists have developed an online tool that allows companies to submit all the material investors need, including business plans and founder biographies, and get a financing decision in as little as nine days. As companies move to less costly areas with fewer distractions, Silicon Valley might no longer be the only suitable location.

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Silicon Valley in the pandemic, The Economist, May 16, 2020.

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Notwithstanding the turbulent economic conditions, Silicon Valley remains strong. When it comes to economic productivity and creativity, the region around Silicon Valley leads the world. Other cities worldwide have coined “the Silicon Valley of … insert location here” (Europe, India, China, etc.). While unemployment rates are at their lowest level in over two decades, home prices in Silicon Valley are at their highest point, creating a wide income gap. This makes the region difficult to enter. Silicon Valley produced record levels of venture capital and IPO activity in 2021. While unemployment rates are at their lowest level in over two decades, home prices in Silicon Valley are at their highest point, creating a wide income gap. This makes the region difficult to enter (see Footnote 23). Silicon Valley has served as a pillar and created an economic halo effect across the United States. Economic expansion in the Valley is the longest on record. An examination of yield curves and economic indicators shows a modestly expanding economy without any signs of an impending recession. While most data reflect economic strength, there are signs of job and population growth slowing. There has been a notable decrease in homebuilding activity when most are required to serve the increasing workforce. The Bay Area continues to be the nation’s technology capital. It’s home to the nation’s most active high-end software innovation and development center. As a result, the top 15 schools in Silicon Valley are closely linked to software developer applications and social media. In the United States, it receives almost half of all venture capital investment (Fig. 8.12). Nobody has a crystal ball, but there is consensus that growth rates cannot continue at their present levels forever. The region’s main problems, such as the recent wildfires, are a drag on the economy, exacerbated by housing and homelessness issues. What’s more, California has the nation’s highest individual income tax rate, an exorbitant cost of living, and a decreasing industrial supply. As a result, the area

Fig. 8.12 Silicon Valley is the fastest. Source JLL in The Silicon Valley economy today and tomorrow, Alexander Quinn, Director of Research, JLL, Dec 18, 2019

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is at risk of being poached from states with a lower cost of living.23 These risks would almost definitely mean doom in any other place, but Silicon Valley is an exception in this respect. For the last several decades, Silicon Valley has constantly been reinventing itself and proving that it can pivot effortlessly between new sectors. The next downturn next will stress the region’s shortcomings and strengths. According to experts, California is afflicted by the “tech curse,” a play on the “resource curse,” which holds that nations with plenty of natural resources and endowed countries frequently have poor economies and dishonest political systems. It appears plausible at first sight. The tech sector in California has recently generated astounding wealth. Additionally, the state is dysfunctional in many ways. Downtown San Francisco has areas that resemble an outdoor drug den. Many of the state’s public schools appear more interested in discussing social justice than instructing students. On average, one Californian out of every 100 moves to another state yearly (see Footnote 24). However, the story has two sides. Consider the advantages provided by the tech sector in California first. Technology has made the state a growth superstar rather than a backwater. California’s state-level GDP has increased by 18% over the last five years, the fourth-fastest rate in the nation and a better result than either Florida or Texas. Studies show that California’s growth was above average even after excluding tech. Manufacturing chemicals, an unfashionable industry, has performed well in recent years (see Footnote 24). Although a large portion of the growth’s profits went toward massive mansions in Atherton and Los Altos, they also greatly flowed down. The median household income in California was 7% more than the typical American household income just over ten years ago. Their income has increased by 15% since then. Compared to the national average, the unemployment rate has decreased (see Footnote 24)— likewise, poverty. Furthermore, there is little evidence to show that the drop in poverty or unemployment results from impoverished people leaving the state. It is also difficult to attribute California’s housing market to technology. Big Tech has a lot of negative aspects, yet it is not as bad as some experts think.24 Compared to the middle of the 2000s, California’s average home price is substantially lower than the national average. Meanwhile, not Mark Zuckerberg and Elon Musk but the ecological movement of the 1970s gave rise to California’s antibuilding regulations, which are to blame for sky-high prices.

23

The Silicon Valley economy today and tomorrow, Alexander Quinn, Director of Research, JLL, Dec 18, 2019. 24 Peter Thiel says California suffers from a “tech curse”. Is he right? The Economist, 22 September 2022.

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Fig. 8.13 The awesome might of China. Source Bernstein in The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021

8.3

The Awesome Might of China

GDP estimates put China’s economy at $18 trillion in 2021, making it the secondbiggest (Kollewe, 2011). When measured by purchasing power parity, China’s GDP overtook the United States eight years ago to become the largest economy in the world.25 Chinese economic growth is also the quickest among the world’s major economies growing at an annual rate of more than 6% since economic reforms began in 1978.26 China has nearly one billion internet users, three times the US (Fig. 8.13). Most of them have smartphones. With such a humungous smart base, China has successfully built internet services such as e-commerce, digital payments, etc. Chinese manufacturing has surpassed all other countries in terms of output since 2010 (Maddison, 2007). China is the world’s second-largest retail market (Shane, 2019). More than half of the worldwide e-commerce market is accounted for by China (Lipsman, 2019). Fifty percent of all plug-in electric cars sold globally are made or purchased in China. China is the world’s biggest manufacturer of batteries.27 China owns more than 40% of the world’s solar capacity.28 Chinese kids have already overtaken students from the United States and the United Kingdom as the world’s brightest.29 ,30 China has the largest sources of research and development personnel in the world. Since the 1990s, the number

25

“GDP PPP (World Bank)”. World Bank. 2018. Retrieved 18 February 2019. “GDP growth (annual %)—China”. World Bank. Retrieved 25 May 2018. 27 “China Dominates the Global Lithium Battery Market”. Institute for Energy Research. 9 September 2020. Retrieved 28 March 2021. 28 “China Installs 44.3 Gigawatts Of Solar In 2018”. CleanTechnica. 23 January 2019. Retrieved 18 February 2019. 29 “PISA 2018 Insights and Interpretations” (PDF). 30 “Which countries have the smartest kids?”. World Economic Forum. Retrieved May 10, 2020. 26

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of doctoral degrees awarded in science and engineering has increased tenfold.31 Over 50,000 PhDs were awarded, and as many as 500,000 BSc graduates took the degree in STEM, more than in any other country.32 China’s economic transformation strategy is to transition from “Made in China” to “Designed in China” and increase the manufacturing value chain with higher profitability.33 In 2017, China surpassed the United States with the most scientific publications (Tollefson, 2018). China surpassed the UK to publish the most-cited journals and stands behind the US in this prestigious list (Clarivate, 2019).34 In chemistry, engineering technology, and material science, Chinese researchers’ publications received the most citations worldwide in the past decade.35 Artificial intelligence in China will be worth 1 trillion yuan by 2030, making it the world’s leading nation in the field (Kharpal, 2017). Beijing has set a goal to become the world leader in AI by 2030.36 Among the major economies, China is the only country to grow in 2020. In addition to increasing its role in global commerce and strengthening its status as the world’s manufacturing floor, it has quickly recovered from Covid-19. China marches on while the United States and Europe struggle to vaccinate their citizens (Fig. 8.14). Despite years of American attempts to persuade companies to relocate their investments elsewhere, China has expanded its role in global trade. As a result of its quick recovery from Covid-19, China’s consumer sector is becoming a more critical driver of global companies’ profits. With a record number of IPOs and secondary listings in 2020, substantial capital inflows into stock and bond markets, and indexes that have outpaced even the excellent performance of the United States, China is a financial powerhouse. As a consequence, China has become even more critical to global development (Fig. 8.15). When inflation is dovetailed, China’s economy accounted for 16.8% of world GDP in 2020, as opposed to US’s 22.2%. In 2020, China’s GDP share rose by 1.1 percentage points, the most since the 1970s. As a result of these achievements, China has become difficult to dislodge as a manufacturing hub, even though global CEOs want to diversify their supply networks (the China + 1 strategy). As China has become a dependable supply source, businesses must balance the costs of losing the network effect of an excellent ecosystem of ancillaries and the risks

31

“Archived copy” (PDF). Archived from the original (PDF) on September 23, 2015. Retrieved June 28, 2015. 32 Forbes in “China tops U.S, Japan to become top patent filer”. Reuters. December 21, 2011. 33 “China tops U.S, Japan to become top patent filer”. Reuters. December 21, 2011. 34 Web of Science. 35 “China now No 2 in cited scientific papers—Chinadaily.com.cn”. global.chinadaily.com.cn. Retrieved May 10, 2020. 36 “China Outlines Ambitions to Become World Leader in AI by 2025—Caixin Global”. Caixin Global. Retrieved July 24, 2017.

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Fig. 8.14 Two giants. Source Moody’s analytics in China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021

Fig. 8.15 China’s share of global exports of goods. Source China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021

of moving into a new country. It’s no surprise that over the next two years, 75% of companies, including 70% of US firms, anticipate expanding their supply chain footprint in China.37

37

HSBC holdings in China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021.

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Fig. 8.16 China’s consumer spending is more than US. Source Euromonitor in China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021

China’s success has a double-edged sword for the rest of the world. Businesses that export to China, particularly commodity producers, automakers, and luxury goods manufacturers, have benefited from its high demand; these sectors have seen their sales decline elsewhere (above chart38 ). The resurgence of China’s economy has increased firms’ exposure to a nation whose authorities have made it explicit that they aim to decrease China’s dependence on foreign enterprises in favor of developing its own companies. The tariffs imposed on China by the Trump administration were intended to address global economic imbalances and level out the unfairness. Instead, China’s most significant current account surplus was recorded in 2020. The current account is the most comprehensive indicator of international trade. On the other hand, China’s economy has remained resilient since Covid-19 emerged, reinforcing the belief of Beijing’s authorities that their system is a more solid alternative to the democratic capitalism of the West. The United States of America remains the world’s biggest economy, with the most significant consumer market, a considerably better quality of life, and a currency that dwarfs the Chinese yuan into insignificance. The US GDP is 50% greater than that of China. Chinese also spend more than Americans. From 2010 to 2020, Chinese consumer spending grew by 171.2%, while the US had a more moderate growth of 35.2% (Fig. 8.16). China’s position as the world’s factory floor has been threatened for years by increasing labor costs, mounting debt, and diminishing productivity. The trade conflict and rising taxes are eroding China’s advantages. However, China’s share of global goods exports grows by 15.4%. China’s primary competitive advantage is an extensive and tightly knit supply chain network that no other country can match.

38

Oxford Economics, The Wall Street Journal in China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021.

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Fig. 8.17 Chinese stocks outperform US stocks. Source Datastream from Refinitiv in China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021

The other positive development was that China’s consumer spending had recovered after the fall. Despite a 20% worldwide market decline, China’s personal luxury goods industry will increase by 7.6% in 2020.39 In contrast, the rest of the world ceased spending, and the Chinese have continued strongly (see Footnote 39). While foreign direct investment into the United States and Europe decreased significantly in the first half of 2020, it remained relatively stable in China.40 The MSCI China Index (Fig. 8.17), which includes both domestically and internationally listed Chinese companies, increased by 27% in dollar terms last year, while MSCI’s US index is up 19%.41 In spite of the challenging environment in China, multinational firms are finding it hard to let go of China. A recent zero-Covid policy (just rescinded by China) disrupted supply lines, led to sporadic local lockdowns, and rendered the nation unwelcoming to international managers. The problems are made worse by a discordant staff. At Apple’s primary facility in China, where the iPhones are made, a riot broke out over salaries and working conditions. Sixty percent of members of the European firms in China said that the business environment has grown more difficult in recent times.

39

Euromonitor International in China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021. 40 China’s Ministry of Commerce in China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021. 41 China’s Economy Powers Ahead While the Rest of the World Reels, The Wall Street Journal, Jan 13, 2021.

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Fig. 8.18 China is a gigantic market. Source Euromonitor; Off-highway Research; Daxue Consulting; Chemdata International; IC Insights; Bloomberg; The Economist

Reducing reliance on China for manufacturing is one option for multinational corporations. Businesses like Apple and the toymaker Hasbro have moved production to Vietnam and India to take advantage of lower salaries and less migraine-inducing working environments. Clothing manufacturers are growing increasingly interested in Bangladesh and Malaysia (see Footnote 44). However, for many international corporations, China represents more than just a low-cost manufacturing location but a gigantic market; therein lies a less manageable issue. A quarter of worldwide sales of clothing, over a third of jewelry and handbag sales, about two-fifths of automobile sales, as well as a sizable portion of packaged food, cosmetic products, pharmaceuticals, electronics, and other goods are now accounted for by China’s 1.4 billion rising-affluent citizens (Fig. 8.18). Its massive industrial sector makes it the greatest market in the world for chemicals and machine tools, and its construction industry has long been the largest purchaser of construction equipment. However, the overall exposure of the worldwide firm to China appears to be low. China only represents 4% of sales for all publicly traded American companies. The percentages are 6 and 8 for Japanese and European businesses.42 However, there is a group of companies for which China has been significantly more significant. The $700 billion earned there by the 200 largest corporations in the US, Europe, and Japan last year, or 13% of their global sales, is an increase

42

Morgan Stanley in Multinational firms are finding it hard to let go of China, The Economist, 24 November 2022.

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from $413 billion, or 10% of sales, five years ago. Thirty percent of the $700 billion was generated by companies that manufacture technology devices, 26% by companies that cater to consumers, and 22% by industrial enterprises, together with commodities producers and carmakers, who also played a significant role. Thirteen international corporations, including Apple, BMW, Intel, Siemens, Tesla, and Walmart, record annual sales in China of over $10 billion.43 An unlucky set of global companies doing business in China has already been caught up in the geopolitical fray. Twenty-two of the companies belong to the semiconductor industry. The United States’ restriction on exporting advanced semiconductors and chip manufacturing machinery to China will hurt many businesses sales. When China accounts for 30% of revenue on average, it will be a difficult adjustment. Foreign businesses are compelled to deal with the uncomfortable issue of where they will operate in the long run. One of three options—divest, disconnect, or double-down—will need to be taken. Some firms have the opportunity to divest. After more than 20 years in China, the French supermarket operator Carrefour sold 80% of its operations to a Chinese retailer in 2019 (see Footnote 44). The American clothing giant Gap announced that it would transfer its Chinese operations to a regional e-commerce firm. The preferred course of action for businesses that have lost their competitive edge over local rivals and have the financial means to operate without China would be to throw in the towel while the company still has some value. The second option is decoupling. Yum! Brands, the owner of KFC and other fast-food franchises, separated their China operations in 2016 to enable the division to respond more quickly to local circumstances. The next year, McDonald’s followed suit. The tactic has the extra benefit of streamlining any divorce proceedings brought on by geopolitical turbulence while still giving the local company access to the parent company’s brands and other intellectual property. The third choice is to double-down. German industrial firm Siemens has disclosed increasing investment and moving a sizable portion of its R&D to China to “beat the local champions.” To create a joint venture for autonomous driving with Horizon Robotics, a Chinese company, VW declared it would invest $2.5 billion (see Footnote 44). The most frequent occurrence of such difficult-to-reverse commitments will be in sectors where maintaining a strong position in China is essential for global competitiveness. Automakers worry that ceding territory to regional leaders—many already at the forefront of software and electric vehicles—would offer them a springboard into other sizable markets. Doubling down could be successful if relations between China and the West remain positive. If they get worse, things might easily go apart for the global business geopolitical betters.44

43

Euromonitor; Off-highway Research; Daxue Consulting; Chemdata International; IC Insights; Bloomberg; The Economist. 44 Multinational firms are finding it hard to let go of China, The Economist, 24 November 2022.

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Fig. 8.19 China has eliminated poverty (almost). Source World Bank (2021)

Extreme poverty is non-existent in China. China’s population has increased by 800 million during the past four decades. China announced in early December 2020 that it had eliminated severe poverty from its territory. This is a massive achievement in the grand scheme of things. It is also a triumph for the ages. Throughout the country’s history, poverty has never come close to being eradicated. Skeptics are justified in questioning whether China manipulated its numbers to win what it refers to as the “battle against poverty.” Of course, there are still rare instances of extreme poverty. China has set a high standard for itself. The official poverty line has steadily risen due to this policy, which now stands at approximately $2.30 per day at 2011 prices. By comparison, about one-tenth of the world’s population earns less than $1.90 per day, considered exceptionally poor by the World Bank. In developed countries, poverty lines are much higher: In America, a similar line was about $72 per day for a four-person family in 2020. When Mao died in 1978, almost 99% of rural Chinese lived in abysmal poverty by today’s standards. By 2016, that percentage had dwindled to only 5% (Fig. 8.19) (see Footnote 45). The government made the most significant contribution by withdrawing from central planning and allowing individuals to make money. It de-collectivized agriculture, thereby incentivizing farmers to increase output. It facilitated individuals’ mobility within the country in search of work. It increased entrepreneurs’ flexibility.45 It aided the development process by constructing roads, investing in education, and attracting foreign investors. It also stimulated the economy; eradicating poverty was a delightful side effect. China is entirely justified in being proud of its triumph over abject poverty.

45

Extreme poverty is history in China, officials say, The Economist, 2 Jan 2021.

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Fig. 8.20 Differential growth in China. Source Wind in China’s regional gap is worsening, The Economist, 23 Jan 2021

Entrepreneurship intensity is not secular in China and primarily prospers in the south. “Do not invest beyond Shanhaiguan” is a well-known Chinese adage, talking about the Great Wall leading to the rust region of northern China. The maxim has been modernized by internet commentators to “do not invest outside the Southern Song,” referring to an approximately 750-year-old dynasty that ruled the southern part of present-day China until it was overthrown. The joke contains a kernel of truth: China’s southern provinces outperform the country’s northern counterparts in nearly every economic metric. However, the north–south divide is likely to deteriorate further. The south’s GDP share is nearly 70% (Fig. 8.20). Northern officials have made a concerted effort to stifle growth, mainly to the detriment of the region. In 2013, at the height of China’s construction boom, investment in infrastructure hit a staggering 66% of GDP in the south, compared to just 51% in the north. Officials in the South have been more facilitating. The south of China is home to two of the most dynamic regions anchored by Shanghai and Shenzhen. Additionally, the south generates global demand for smartphones and sofas. Last year, it had a foreign-trade surplus of roughly 7% GDP. The north incurred a 2% deficit. The northern hemisphere is isolated and exposed to the elements.46 Can India Capitalize on China’s Manufacturing Woes? The Indian economy might make a great leap forward with only one tiny move for Apple. The company just revealed that the flagship iPhone 14 would be produced in southern India. It will mark the first time Apple has developed a cutting-edge phone in the nation before

46

China’s regional gap is worsening, The Economist, 23 Jan 2021.

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its release. The government has interpreted Apple’s decision as a support for Prime Minister Narendra Modi’s initiatives to advance industrialization through increased tariffs and production-based subsidies. India needs to get manufacturing correctly. No large country has never emerged from poverty into wealth without a strong industrial sector. The success of India’s software services exports, which totaled $172 billion last year, produced significant foreign exchange (see Footnote 48). Optimists think India’s time may have finally arrived. The Apple news was announced simultaneously as optimistic economic forecasts for the nation. By 2025, JP Morgan predicts that Apple will produce 25% of its iPhones in India, up from the current 5%. India will become the third-largest economy in the world by 2027, according to a recent report from Morgan Stanley (see Footnote 48). By 2031, manufacturing’s contribution to GDP is expected to rise from 15.6 to 21%, and India’s share of worldwide exports will more than double. Global happenings might lend a helping hand. India stands to gain from the reorganization of the world’s supply networks that China’s blunders—intensified geopolitical conflict with the U.S., a ridiculous and draconian zero-Covid policy, and heavy-handed government meddling in the economy—have sparked. India, which will surpass China as the world’s most populous country next year, presents a potentially sizable market for businesses looking for new places for their manufacturing operations. The democratic West and its Asian allies have solid relations with New Delhi, lowering the possibility that the United States will implement regulations doing business with India more difficult. India’s manufacturing strategy is based on paying companies to exceed production goals and increasing custom tariffs to deter imports. The federal government will award enterprises that meet goals in 14 economic sectors, including semiconductor, auto, and solar panel production, up to $24.3 billion over nearly five years. According to government projections, these incentives might generate $365 billion in economic activity over the next five years and six million additional employment (see Footnote 48). Some people view Apple’s most recent announcement as evidence that this tactic is effective. Incentives for smartphone manufacturers have already generated almost 100,000 jobs.47 According to the government, exports of mobile phones are anticipated to increase from $5.8 billion last year to at least $8.5 billion this year. This amounts to 30 times what India exported in mobile phones five years ago. The world, fed up with China’s shenanigans, wants India to be successful in its manufacturing.48

47

Rajeev Chandrasekhar, minister for electronics and information technology in Can India Capitalize on China’s Manufacturing Woes?, The Wall Street Journal, Dec 8, 2022. 48 Can India Capitalize on China’s Manufacturing Woes?, The Wall Street Journal, Dec 8, 2022.

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The Technical Prowess of China

China’s Chang’e-4 spacecraft showed that successfully landing on the Moon was no longer a pinnacle of accomplishment, and the US had already done it. Instead, landing Chang’e-4 on the moon’s far side in the Von Kármán crater was a unique achievement. The spacecraft is inaccessible to both radio and telescope. Landing there and then recovering data is possible only because of a cleverly prepositioned relay satellite. Several nations have considered similar missions, but none have ever succeeded. China has done it. As an enthusiastic Weibo follower crooned after Chang’e-4’s landing, “China has made history! Half of the Moon will be ours” (see Footnote 52). Can China become a scientific powerhouse? China is eager on such signals of fame and ready to put in whatever is required. They yearn for the kind of science that will enable China to project its power and address the specific needs of its citizens. They desire new sources of clean energy and an end to resource scarcity. And with the country’s increasing scientific proficiency, such ambitions appear attainable. China’s immense hopes for science have resulted in enormous spending. In fifteen years since the start of the century, Chinese R&D expenditure has quadrupled (Fig. 8.21). This open chequebook has amassed an impressive collection of glitzy memorabilia. Secretly, China is ticking off scientific status markers as they are developed. Going to the Moon and back? Tick. Massive genome sequencing facilities? Tick. A research ship fleet? Tick. The radio telescope is the world’s largest. Tick. Climate scientists are drilling cores into the Antarctic ice cap. Tick. The fastest supercomputer in the world? Tick (when the United States retook the lead, the count was reset, but watch out). Dark matter detectors underground neutrino? Continue ticking. Particle accelerator, which is the biggest in the world? The pencil is perched on the edge of the page.

Fig. 8.21 China is the biggest R&D spender. Source Datastream from Refinitiv, UNESCO, IMF, SIPRI in Can China create a world-beating AI industry? The Economist, 22 Jan 2022

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The rampage bears striking similarities to post-war America’s golden age of “big science.” Between 1957 and 1993, the United States government intensely invested in scientific pursuits. American science grew worldwide, from discovering quarks to gene cloning to garnering Nobel awards. For four decades, America and Europe were doing things that had never been done before. In contrast, China has imported approaches and ideas. The resulting structure exhibits the ricketiness frequently associated with structures constructed from the top rather than grounds up. It’s essential to keep this in mind when looking at the remarkable rise in the number of articles published by Chinese scientists. In terms of absolute numbers, China overtook the United States in 2016.49 However, some of the content is of mediocre quality. Having a bad reputation for doing shoddy or fraudulent research is dangerous, and the Chinese government is fully aware of these risks. The government is cracking down on shoddy journals, particularly those that charge researchers for publication. The belief is that raising the bar in this way will positively impact research while attracting the best and the brightest. Graduate study abroad became more popular among Chinese students after Deng Xiaoping came to power in 1978. Many returned, as intended, brimming with knowledge that was not available at home. Using financial incentives and laboratory space, the government launched the Thousand Talents program in 2008 to lure these exiles home. While many Chinese have not gone back, some have. Because they are thought to have returned to their birth beach to lay their eggs, as turtles do, these returnees have been dubbed haigui, the Chinese term for sea turtle. Only one Nobel Prize has been awarded to Chinese scientists working in China. Aside from the development of the antimalarial medicine artemisinin, China has yet to make a Nobel-worthy scientific advance (see Footnote 52). With its vast and often centrally supported power, Chinese science is like an agile monster, capable of flinging itself into any new promising area. Yet, much of Chinese science has improved recently, particularly in applied research. China has produced more high-impact research articles than the United States in 23 of the 30 hot research areas with significant technology implications.50 Apart from rocketry, the world’s biggest particle accelerator is being built as part of China’s most ambitious scientific endeavor. Other branches of physics are also cutting edge. For example, quantum computing and cryptography are two areas where China is a world leader; it was the first country to send a quantumencrypted message over satellites. Though it lacks a semiconductor industry on par with those in the US, it excels in various fields, including artificial intelligence. It has few peers in computer science.

49

National Science Foundation in Can China create a world-beating AI industry? The Economist, 22 Jan 2022. 50 Elsevier and Japanese news agency Nikkei in Can China create a world-beating AI industry? The Economist, 22 Jan 2022.

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Fig. 8.22 Cutting-edge. Source Elsevier in Can China create a world-beating AI industry? The Economist, 22 Jan 2022

The same holds for trendy branches of biology. China pioneered the use of CRISPR-Cas9 for editing human embryo DNA. Chinese scientists have dominated this area of gene editing since 2012. China publishes nearly twenty-five percent of the most-cited papers in gene editing, more than half of what the United States publishes51 (Fig. 8.22). China is also investing heavily in stem cell research. Emphysema is a significant health issue in China, where smoking is still common and often polluted. Chinese researchers are working to find a way to restore damaged lungs. Although higher than the average for European countries, China’s R&D spending still falls short of the levels seen in either Germany, France, or the US. It’s much lower than in the Asian “catch-up” states: Japan and South Korea, which may be the most natural comparators.52 With such resources at its command and scientific workers in millions, the relentless Chinese journey into the scientific hall of fame is unstoppable (see Footnote 52). “South of the Huai river, through the rain and snow, a few geese can be seen” is an ancient piece of poetry from classical Chinese. This line composed by AI is tonally and metrically identical to ancient poetry. The majority of the people who try to spot the difference between the two have failed. The West is concerned about China’s less benign uses of AI like warfighting and surveillance, although the business opportunity attracts investors. AI deployment is widespread in China. JD.Com operates a highly developed automated warehouse, Baidu (Google’s counterpart in China) has launched driverless cabs, and SenseTime’s AI system has been deployed in more than one hundred smart cities. China has the maximum number of AI-assisted industrial robots globally, and in 2020, it overtook the US

51

Nikkei and Elsevier in Can China create a world-beating AI industry? The Economist, 22 Jan 2022. 52 Can China become a scientific superpower? The Economist, 12 Jan 2019.

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Fig. 8.23 Private investment in AI, 2020, $bn. Source Stanford University, Pitchbook, Refinitiv Datastream in Can China create a world-beating AI industry? The Economist, 22 Jan 2022

in terms of journal citations in the field. The five biggest listed Chinese AI companies are collectively worth more than $120 billion. SenseTime is confident that by 2025, revenues from AI-assisted image recognition and computer vision software could exceed $16 billion.53 Will China lead AI development? The state strongly supports AI initiatives and invests directly in AI firms. The central and state governments have both established AI funds. The coastal metropolis, Tianjin, has been administering a $16 billion AI fund since 2018 (Fig. 8.23). Despite the strong stimulus, China AI lags behind the US in peer-reviewed papers. It also lags behind India in terms of experienced AI coders per capita. For three reasons, these inadequacies will persist. One, the capital may be suboptimally allocated.54 Second, China’s inability to recruit high-end AI engineers will continue to hamper its progress in AI. Finally, China cannot concentrate on critical curated high-end AI chips because of the American embargo. With these seemingly insurmountable hurdles, China’s AI ambition will likely be thwarted. Chinese tech firms are truly global. Google has departed. Facebook has been disabled. Amazon is having difficulty gaining traction. And, if additional evidence were needed that China’s tech market is a world apart, Uber left. For many, the lessons are self-evident. China is a remote technological island, a distinct and isolated environment conducive to the growth of indigenous firms. Government regulation and the Great Firewall shield Chinese firms from external competition. And because of that, they’re not forced to innovate and may prosper by emulating

53 54

SenseTime in Can China create a world-beating AI industry? The Economist, 22 Jan 2022. Can China create a world-beating AI industry? The Economist, 22 Jan 2022.

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successful Western companies. In a nutshell, the Chinese economy is closed, its companies are spoiled, and the country’s most honed skill is copying. However, upon closer examination, a more upbeat picture emerges, not just for Didi but for all of China’s IT companies (see Footnote 55). China is Apple’s largest market. Neither are Chinese technology behemoths isolating themselves from the rest of the world. For example, they’ve put money into American startups like Lyft and Snapchat and bought gaming businesses like Playtika in Israel and Supercell in Finland. Being on the Chinese market is excellent, but it’s useless if you are stopped from doing business, the argument goes. This undervalues China’s technology leaders. As with many other online businesses, ride-hailing is cutthroat; Didi is the product of a 2015 merger between two local companies. The battle against Uber was won. After five years in business, end of 2015, Uber accomplished its billionth worldwide ride, while Didi finished 1.4 billion rides in only China. Uber has failed to gain a market share greater than 10% in China. Didi understood the local culture, improved its integration with social media platforms, and earned the trust of taxi drivers by including them in the design of the app from the very beginning. The authorities essentially terminated an already lost fight for the American company by banning subsidies (see Footnote 55). Similarly, nothing comes close to WeChat’s feature-set outside China, no matter how the Great Firewall is set up. In addition to chat and phone conversations, the service also includes browsing, games, and payments. It may be used to pay parking fines, make medical appointments, place food orders, and buy coffee, among other things. Chinese smartphone users spend almost one-third of their online time on WeChat, making it an operating system instead of a simple app. Western apps seem hopelessly antiquated to Chinese users. When countering the widely held misconception that Chinese internet businesses are incapable of innovation, WeChat stands out as a shining example of Chinese ingenuity. This isn’t the only time it’s happened. Using an innovative strategy of keeping money in escrow, Alibaba helped establish trust between customers and sellers in Chinese e-commerce. Since then, it has expanded its offerings to include credit scoring, digital marketing, screening visa applications, and users of online dating services. New features like on-demand bus services and the option to arrange a test drive in a new vehicle are part of Didi’s ride-hailing app’s appeal. Twitter’s Chinese counterpart, Sina Weibo, features an integrated payment system and premium content, which Twitter lacks (see Footnote 55). Aside from relying on payments, virtual goods, and games for income, Chinese internet companies are also less dependent on online advertising than their Western rivals. A Chinese success story shapes Western consumers’ perceptions of the mobile internet. That means there is now a bidirectional flow of ideas from China to the West. For a peek into the future of mobile commerce, go outside of Silicon Valley and across the Pacific. Policymakers should also research China. Look no further to discover more about the benefits and drawbacks of digital marketplaces that reward the winners. User convenience is greatly enhanced by using one primary application containing

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Fig. 8.24 Techtonic shift. Source China’s tech industry is catching up with Silicon Valley, The Economist, 16 Feb 2018

a payment mechanism, such as WeChat. However, monopolies, on the other hand, may also be hazardous.55 Didi has a 90% market share with no significant rivals, which means riders should pay more, and drivers can earn less. Regulators have a new problem in the digital age: balancing convenience with dominance. One thing is clear: Didi and WeChat’s growth was aided by their fierce competition. The competition will ally China’s IT pioneers to become genuine global winners. Keep a close eye on the world. The Western stereotype of Chinese internet companies requires a reboot. Americans frequently reassure themselves about its relative decline. Silicon Valley’s global superiority may not last much longer. Its roads, airports, and schools may be in bad shape, but its technological prowess over China will keep it ahead for decades. Defense, prestigious colleges and universities, business, and technology are frequently cited examples by the US. Never mind, exports to China may have dropped to 2007 levels, manufacturing has continued to lag, and the U.S. will lose its absolute GDP advantage by 2030. But the die-hard US votaries say that Silicon Valley remains a magnet for the brightest minds, the wealthiest investors, and the most ambitious entrepreneurs (Fig. 8.24). Is that correct? How does Chinese technology stack up with American technology? In the last two decades, the U.S. has gone through many phases of denial

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China’s tech trailblazers, The Economist, Aug 6, 2016.

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about Chinese technology. Chinese companies were first seen as unimportant and even copycats or indulged in industrial espionage. As a technological Galapagos, China has been depicted as home to endangered animals that will never leave the country’s boundaries. Fear that China will soon achieve parity with the United States has ushered in the fourth stage (see Footnote 56). China’s technology leaders enjoy visiting and investing in California but are no longer intimidated by it. Alibaba and Tencent, the Middle Kingdom’s colossi, are on a par with Alphabet and Facebook in market capitalization. Even though China’s online commerce revenue is twice as much as America’s, mobile money transfers from mainland China to the United States are 11 times higher than the US that still uses paper cheques. Venture capital (VC) is booming. American visitors are astounded by the entrepreneurial spirit in Beijing, Hangzhou, and Shenzhen. China’s government declared last year that it would lead the world in AI by 2030. The plan includes creating smart cities and self-driving vehicles and setting global technological standards, among other things. As in the 1960s, private Chinese companies take this “administrative direction” very seriously, similar to their Japanese counterparts. America has reaped the benefits of being a global technology hegemon. The $180 billion of overseas profits that US firms earn is greater than the world’s reserve currency advantage (see Footnote 56). Technology firms support seven million jobs at home that pay double the average salary. Greater acceptance and productivity of new technologies help other sectors: Non-technology firms in the United States are 50% more “digitized” than in Europe. America establishes numerous standards, such as the design of USB ports and guidelines for online content, which the rest of the world follows. It would be costly and demoralizing to lose these spoils. Begin with China’s technological shortfalls. China’s total market value is only 32% of the US. While there are a few big businesses and a slew of smaller ones, very few companies are in the range of $50–$200 billion. China has a minimal role when it comes to semiconductors and business-facing software. Tech products have not yet penetrated the industrial sector: Non-tech companies in China are still primitive, and only 26% are as digitally savvy as those in the US (see Footnote 56). Chinese tech spends less than a third of what American tech does in terms of investment. And it remains small abroad, with overseas revenue accounting for only 18% of the total that US companies make. Outside of the United States, Apple generates more revenue in three days than Tencent does in a whole year. America has become the world’s largest consumer of money. However, the disparity narrows significantly when considering the most dynamic technology industry sectors. Based on the current price, Chinese firms are 53% larger than American firms in e-commerce and the internet. The market value of Chinese unicorns, a symbol for the next generation of giants, is 70% of the US’s. The country’s venture capital activity is 85% that of the US’s, based on investments since 2016. Alibaba and Tencent, who seed almost a quarter of venture capital transactions and government-backed funds-of-funds, have created a flourishing environment for venture capital companies.

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China is making progress in terms of “breakthrough” innovations. Consider artificial intelligence. The number of Chinese AI experts is still a puny six percent of the size of the US’s, while many of the world’s best thinkers continue to be employed in the United States. However, Chinese scientists’ AI-cited publications have already reached nearly 90% of America’s. China has a wealth of data and notable AI companies, such as Face++ for facial recognition and iFlytek for speech (see Footnote 56). If current trends continue, China’s technological sector will take 10–15 years to overtake the United States. This would boost the nation’s production and provide new opportunities in the technological industry. However, the real prize is making significantly greater profits abroad and setting global standards. Some nations may be hesitant to depend on Chinese technology companies because of the active involvement played by the government in this sector. The US-China slugfest has meant that the tech companies in each country are closed to each other. It is time for Silicon Valley to become paranoid. From a Chinese perspective, many of the country’s large firms have developed into comfortable monopolists. Americans had to just step out of their doors to see frontier technology work in the olden days. They’ll now have to go to China as well.56 In the US-China one-upmanship, the oft-heard question is, “Can China win this race?” has not been answered. However, a recent report answers with an emphatic yes. The report predicts China will be a global leader in core technologies—semiconductors, AI, 5G, green energy, quantum science, and biotechnology. It has already occupied the top spot in several of them.57 The progress that China has made is telling. China produced half of the world’s mobile phones and computers compared to six percent of the US. China manufactured seventy solar panels for everyone produced in the US, four times as many EVs, has nine times 5G base stations, and five times network speeds than is available in the US. In one critical area of AI, which has the greatest influence on security and economics, China will surpass the US by 2030.58 While the number of PhDs in AI-related fields has stagnated in the US since 1990, China is set to graduate STEM PhDs, twice as many as the US by 2025. China is already ahead of the US in voice recognition, financial technology, and facial recognition. The US hold on semiconductors for 50 years is about to be breeched in two areas by China—chip design and semiconductor fabrication (see Footnote 59). The ratio of semiconductor manufacturing has already tilted in favor of China by 12–15%.59

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How does Chinese tech stack up against American tech? The Economist, 15 Feb 2018. Harvard’s Belfer Center in China Will Soon Lead the U.S. in Tech, The Wall Street Journal, Dec 7, 2021. 58 National Security Commission in China Will Soon Lead the U.S. in Tech, The Wall Street Journal, Dec 7, 2021. 59 China Will Soon Lead the U.S. in Tech, The Wall Street Journal, Dec 7, 2021. 57

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Fig. 8.25 China, the world’s factory. Source United Nations Statistics division in Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible, The Wall Street Journal, Aug 21, 2019

China’s 5G leadership is clear, with 950,000 base stations against 100,000 in the US. In 2021, 150 million Chinese were using 5G phones with speeds of 300 Mbps, while only 6 million in the US had the privilege of using 5G with speeds less than 60 Mbps.60 The much-touted “Made in China 2025” initiative of the Communist Party of China vows to establish global leadership in AI, 5G, and EVs. China also intends to be the leader in robotics to sustain the sobriquet “Factory of the world.” Xi Jinping has stated unambiguously, “technological innovation has become the primary battleground of the global playing field, and competition for technological dominance will intensify to unprecedented levels” (see Footnote 59). In summary, while the US continues its lead in critical fields such as nanotechnology, medicine, high-end chip design, and aeronautics, China will continuously be close on the heels of the US as a serious rival. China has established itself as a serious competitor to lead the world in several critical races, including aeronautics, medicine, and nanotechnology. There is no alternative (TINA) for manufacturing yet. The world is stuck with China at least for now. The cliched saying is that China is the world’s factory (Fig. 8.25). Because of its specialized supply networks, China has become a manufacturing powerhouse for cellphones, aluminum ladders, vacuum cleaners, and dining tables. Factories with safety certifications geared toward the United States and capital-intensive machinery are harder. China is 15 years ahead of schedule. Leaders of the world’s two biggest economies say they are preparing for a long war. While few businesses plan to leave China’s manufacturing sector altogether, those that do are rushing to diversify. “China + 1” refers to a strategy in which companies try to move part of their operations out of China. Those who have

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Pentagon’s Defense Innovation Board in Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible, The Wall Street Journal, Aug 21, 2019.

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placed large orders are trying to convince their Chinese suppliers to move their production facilities outside China (see Footnote 62). A new global industrial environment is starting to form as a consequence, according to company leaders. A part of China’s industrial production is being hived off to emerging nations like India and South Africa; a small bit is going back to America. China’s supply chains are likely to be reorganized to retain a sizable but diminished share of the pie. It will take time to create new industrial clusters. Even though Vietnam’s population of 100 million is tiny compared to China’s 1.3 billion, its highways and ports are already crowded, making it an unattractive location for businesses. India has a large labor population, but the skill levels are low, and the government restrictions are very onerous compared to elsewhere. Everyone’s asking is: “Where should we go?”61 The answer is not self-evident. Due to its emphasis on having suppliers located near to one another, China’s manufacturing model has flourished over the past two decades. Fragmented operations increase the risk of rising costs and longer delivery times and expose companies to different tax and labor regimes. Global companies are actively seeking alternative locations for their operations but will discover that even promising countries such as Vietnam do not meet the criteria.62 Chinese technology is booming, but the path to global dominance will not be easy. It is safe to say that China was the most technologically sophisticated nation throughout a significant portion of human history. The blast furnace and cast iron were conceived, designed, and developed in China. Porcelain and paper were also developed during this period. The compass was born in China. Its gunpowder pushed the first military rockets farther than an arrow could fly (see Footnote 64). China’s success is largely because the state props up Chinese tech. Until the Middle Ages, Europe could not match Chinese creativity and skill in these areas. When European mechanical industries grew and foreign empires expanded in the eighteenth century, Westerners became China’s competitors. The opium wars over the next few centuries decimated China’s economy, harmed by its stifling education system, resulting in public upheaval, which transformed “Made in China” into an insult associated with cheap fakes. The nation was relegated to technical obscurity after the revolution. Triumphantly, China is back, bringing an impressive trail of cellphones, highspeed trains, stealth planes, bitcoin miners, and other high-tech accouterments of life. As recently as 2015, the country’s top officials unveiled “Made in China 2025,” a ten-year, $300 billion strategy to boost Chinese sectors such as semiconductors, electric vehicles, and artificial intelligence to be on par with any other country in the world (see Footnote 64). China’s statement started a fresh wave of hostility between the world’s two biggest economies; China was no longer content

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Control Risks in Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible, The Wall Street Journal, Aug 21, 2019. 62 Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible, The Wall Street Journal, Aug 21, 2019.

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to serve as a factory for American high-tech goods. This dispute is heating up just as the plan reaches its midway point. China has shown its ability to nurture new technologies and control the supply chains and standards. Still, this disjointed narrative offers little insight into the country’s capabilities. A more critical issue is not what technologies China presently has access to but how it obtained those technologies and developed its potential for nurturing newer ones. No government in the world has more control over its economy than China. About 20 million people are employed by about 51,000 state-owned companies, which have a combined value of $29 trillion.63 The Communist Party has unlimited resources to guarantee effective technological implementation. It’s the state’s job to reduce risk, eliminate naysayers, and fund new construction. However, these days, China’s technical advancement is fueled less by sheer state might and more by market forces. For instance, many of the world’s most significant supply networks pass through its businesses, which provides them with easy access to a wide variety of technological know-how. China is the world’s workshop, producing parts for almost anything, knowing how to put them together, and being well-organized to assemble the appropriate parts quickly. China dominates the consumer drone market because drones are essentially smartphones with rotors. Their success has resulted in expanding new markets based on comparable components (see Footnote 64). Second, the size and unique characteristics of the Chinese market have become self-sustainable catalysts for innovation. Due to the absence of payment cards in China, payment apps like WeChat and Alipay, which utilize QR codes to make purchases using phones, have arisen and gained popularity. As a consequence, cities in the country are becoming cashless. Machine learning technology for security services has received special attention because of the Communist Party’s goal for societal control.64 A government can influence and disregard public opinion to achieve things that other governments do not. Nuclear energy and genetically engineered creatures will be available to Chinese technocrats if they wish. Specific trends are more subtle. China has fallen behind in critical sectors like internal combustion engines, civil aircraft, and semiconductors despite its best efforts. Even a robust economy like China’s is struggling to catch up, which should cause us to reflect on the possibilities for innovation elsewhere. China leads the world in AI because of its massive labeling infrastructure. China is known for its face identification technology. Face-printing cameras are widespread in major Chinese cities like Guangzhou and Shenzhen. You can pay for a cup of fresh orange juice squeezed by a robot at airport vending machines that scans your face. Everyone wishing to get a telecom account in China after

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OECD in With the state’s help, Chinese technology is booming, The Economist, 2 Jan 2020. With the state’s help, Chinese technology is booming, The Economist, 2 Jan 2020.

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December 1, 2020, will be required to submit a facial scan (see Footnote 65). Previously, proof of identity was required, but firms will now be able to verify users’ identities in real time via smartphone cameras with the possession of face prints. As a result of the repressive uses of this technology in Muslim-majority regions of northern China, it would be incorrect to call China’s fast adoption of it anything other than a technological success. Another reason to be cautious before proclaiming a Chinese triumph in technology warfare is the overlooked reality that businesses making rapid progress in the area depend more on skillfully deployed low-wage labor. However, it’s interesting to learn how China developed facial recognition technology and thrived. Megvii and SenseTime, Chinese artificial intelligence (AI) firms, are two of the world’s most valuable startups, with valuations of $4 billion and $7.5 billion, respectively (see Footnote 65). Their software product is one of the most frequently used applications of AI in the world. China is strong in the AI triad—software, powerful computers, and data. Megvii and SenseTime, like the majority of companies developing intelligent software, rely on ML technology. They don’t put their programmers in charge of creating guidelines for computers to discriminate against different faces. Rather, programmers feed computers vast quantities of data, usually pictures, about people’s faces and then build software that sifts through those photographs looking for patterns that can consistently identify one unique face from another (an example of deep learning). Face recognition rules developed by learning software are more accurate than those developed by human coders and less expensive. Face recognition is a human skill, but machines can improve substantially with the proper tools. China’s great advantage lies in the third category—data. A nation of 1.4 billion has a humungous amount of data (see Footnote 65). However, its advantage is more subtle. Data alone are insufficient for developing AI software. They have to be marked (labeled) first. Therefore, the data collection must include contextual information that enables computers to learn statistical connections between its components and their implications for humans. First, pictures with proper animal labels are presented to the computer to differentiate between dogs and cats. A computer must be taught what a face is via labeled data before being taught how to discriminate between cheekbones and eyebrows through human labeling. Only with a sufficient number of labeled instructions will it be capable of recognizing faces without human assistance. Chinese AI businesses develop and brand AI software and services atop a data supply chain built by low-wage Chinese labor at unknown Chinese data factories. It is similar to how Apple adds its brand to phones made mainly by low-wage Chinese laborers. Underpinning companies such as SenseTime and Megvii is a straggling digital infrastructure that collects, cleans, and labels data before sending it into the facial recognition machine learning program. Megvii has spent $31 million on tagged data in the past three and a half years. Algorithms contain information that can be easily accessed by any computer science graduate student in the world. But they would be nowhere without China’s unmatched data labeling infrastructure.

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One of China’s biggest data factories, MBH, has 30,000 workers working for them in some of the impoverished areas of China (see Footnote 65). A constant stream of data is sent to MBH’s data processors, which analyze it to create the syllabus from which machines learn. If they need to use the bathroom, they can turn it off, but that’s just about their control. Instead of giving them the choice of which data to classify, they are forced to label all of it. Each labeler tags medical images, cityscapes, and millions of faces and works for a minimum six-hour shift each day. MBH’s secret sauce is not its numbers but its methods of efficiently distributing labeling work to its employees. To begin with, data are gathered from the company’s labeling workers. The company keeps track of its employees’ gazes, mouse movements, and keystrokes. Additionally, it records the worker’s type of data labeling task, ranging from medical image labeling to text translation. MBH can identify employees who excel at certain activities by categorizing their performance based on the job type and channeling appropriate tasks to its workers. As MBH’s clients submit jobs to the firm, everything happens automatically. MBH claims that when these algorithms are fine-tuned, its army of employees can quickly categorize data on the fly. For TikTok, MBH’s data labelers are responsible for labeling data with images that TikTok’s automated system can’t certify if they are obscene. Thousands of workers are exposed to the purported pornographic content by MBH. The company then responds to TikTok with their aggregated response in less than a second. MBH workers make more than three times as much as the typical worker in China’s poorest areas, with a monthly payment of $425. MBH uses the internet to wage arbitrage between the richest and poorest regions. As a crowdsourcing platform that links labor supply and demand, MBH’s business is comparable to Uber. Unlike Uber, whose drivers are location-locked, MBH is not constrained. Workers from regions where a monthly wage of 3000 yuan is considered a good deal can happily label data for AI companies in Shenzhen, where it is not. Many provinces want MBH to locate in their area so that the company can generate much-needed employment. Every month, local governments pay MBH 50,000 yuan for employing 5000 people. Across all 300,000 employees, this equates to 3 million yuan ($425,000) in government funding each month (see Footnote 65). There is an increase in labeling requests for medical imaging from which software can learn to identify the illness. Additionally, there is an infinite number of streetscapes that, once labeled, can teach self-driving cars about the cities they’ll be driving through. These are admittedly more difficult labeling jobs. When it comes to faces, everyone knows what they look like, but not everyone knows what they look like when it comes to tumors. To properly label these ailments, you’ll need a lot of experience and training. As a result, MBH pays its labelers a higher wage for these high-end tasks. The labeling demands show the kinds of AI services likely to be widely deployed in China in several years. MBH has stated that it will increase its workforce by 50% next year.

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China would not have been a major AI powerhouse of its data labeling infrastructure. Data labeling services like MBH have enabled Alibaba to create an image-based product search like Taobao’s. An Alibaba shopper may take a picture of an item in a store display and immediately be guided to a website to buy it. Every day, Alibaba analyzes one billion pictures like this. Labeled data are also used to fuel the machine learning algorithms that run Hema’s retail chains. Cameras monitor shoppers’ movements throughout the flashy new supermarkets and their products from the shelves. Massive amounts of labeled data are beneficial for more than just developing powerful machine learning software. Microprocessor designers can develop more powerful new chips that are better suited to machine learning activities by digging into the inner workings of the software. As a consequence of China’s digital infrastructure, the country now boasts some of the world’s fastest such systems. These machines can now produce AI microchips on par with those in Silicon Valley.65 Without the infrastructure for data labeling and AI services, China’s prowess in AI would be stifled.

8.3.2

China Sets Standards in E-commerce

Four hundred sixty million online consumers spent RMB 5.2 trillion in China last year, making it the world’s biggest e-commerce market. Online retail sales in China reached US $1.7 trillion in 2021, more than tripling their 2017 level. Online retail penetration is expected to reach 25% in 2021, owing to (1) “FastMoving Consumer Goods” (FMCG) expansion into lower-tier categories due to improved logistics infrastructure over the past two years and a growing omnichannel retail strategy (online + offline); (2) continued online growth in established categories like clothing and electronics in lower-tier cities and rural areas, aided by technology (live streaming, potential for AR/VR in online shopping); and (3) additional room for growth in the number of online shoppers which is expected to add 200 million (Sachs, 2017). The great wall (mall) of China. Why should retailers throughout the world look to China? Because that’s where they see e-commerce going in the future. Over the past ten months, most people in the developed world have taken part in the most significant retail revolution in the West since malls and supermarkets took over suburbia 50 years ago. The epidemic has intensified online shopping, accelerating the five-year shift from brick-and-mortar shops. Employees at Amazon and Walmart have put in superhuman efforts to fulfill online purchases, and their investors have reaped the benefits of Wall Street’s belief that Western commerce is at the leading edge. Forget the chimney; Christmas presented in 2020 will be delivered via letterbox or left on the doorstep.

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China’s success at AI has relied on good data, The Economist, 2 Jan 2020.

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Yet, Chinese e-commerce is the future, not Western e-commerce. Technology companies are melding e-commerce with social networking with razzle-dazzle to build an online retail mall for 850 million digital customers in this market, which is bigger and more creative. From scanning barcodes on Wrigley’s gum in the 1970s to keeping up with the Kardashians’ consumption habits in the 2010s, consumer companies across the globe have turned to the United States for new trends. Instead of gazing west, they should now be concentrating on East (see Footnote 66). It’s not like China’s e-commerce hegemony is something fresh. Due to a lack of physical shop space, China’s customers and merchants embraced the digital world, and in 2013, their market exceeded that of the United States. It was the world’s biggest IPO ever when Alibaba went public in 2014. In the current year, the e-commerce industry in China was valued at 2 trillion dollars, more than the combined markets of America and Europe. However, it now distinguishes itself from the past and Western industry in several critical ways beyond its sheer size. To begin with, it is more dynamic. The market capitalization share of Alibaba in the Chinese e-commerce sector had dropped from 81% when it was listed to 55% now, suggesting intense competition (see Footnote 66). New competitors, such as Meituan and Pinduoduo, have emerged with effervescent business models. Point-and-click purchasing has disappeared from Chinese culture; online shopping platforms now integrate digital payments, group deals, social media, gaming, instant messaging, short-form videos, and live-streaming celebrities. Additionally, e-commerce and other technology companies have eliminated the differences between various standard services in Western countries that are still in vogue. The obvious, multitrillion-dollar question is whether China’s e-commerce model will spread globally. As they have for decades, Silicon Valley behemoths continue to undervalue China. Because of the protectionism on both sides, there are limited links between the American and Chinese e-commerce sectors (Yahoo disposed of a significant portion of its Alibaba holdings in 2012, much too early). Additionally, Western corporations have been structured into comfortable, predictable compartments since time immemorial. As a result, Visa concentrates on payments, Amazon concentrates on e-commerce, Facebook concentrates on social media, and Google concentrates on search. More than 30 major physical retailers went out of business in the United States in 2020, and it’s unclear whether or not a select handful, like Walmart and Target, can effectively shift to the internet world (see Footnote 66). Although Western e-commerce may seem safe and segregated, it is unlikely to become the primary method of buying throughout the globe. Outside wealthy nations, China’s strategy is already gaining momentum. Southeast Asia’s Grab and Sea, India’s Jio, and Mexico’s Mercado Libre have all adopted China’s “super-app” business model, which offers a comprehensive variety of services from noodle delivery to financial planning. Through transcontinental consumer product firms, Chinese concepts and business methods may find their way into Western markets. Companies like Unilever, L’Oréal, and Adidas make more money in Asia than in the United States. It is Asia that their executives turn to for cutting-edge branding, digital marketing, and logistics.

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Western shopping centers are already displaying Chinese features due to the pandemic. Silos are collapsing as businesses diversify. Social commerce activities like live streaming and the usage of WhatsApp for merchant-shopper contact are now being promoted by Facebook on its social networks. Recently, Walmart conducted its first-ever live shopping event on TikTok, the Chinese video platform that the retail giant is eyeing for an investment. Vova, an e-commerce app associated with Pinduoduo’s founder, was the sixth-most-downloaded e-commerce app in France over the last quarter. And newcomers may finally be making headway in America—more than $140 billion has been invested in Shopify, an e-commerce platform for non-Amazon fans and small companies (see Footnote 66). This shift toward a more Chinese-style global economy bodes well for customers. As China has seen a wave of aggressive discounting by rival firms, prices would be lower. Choice and innovation would almost certainly increase. Nonetheless, Chinese e-commerce is not without flaws. Fraud is more prevalent in a Wild West environment. Trustbusters in the United States and Europe have failed to rein in big tech despite a rush of litigation and proposed legislation. Antitrust regulators in China are likewise keen to see more competition. The only way to make this work is to ensure that all e-commerce platforms are interoperable, allowing payment services to operate seamlessly across platforms.66 The goal is to prevent internet retailers from being penalized for selling their goods in numerous places. To better grasp the industry’s direction and react, they also need to research China. The way the West views Chinese innovation follows a pattern. Today, advancements in Chinese manufacturing in various fields, such as solar and electronics panels, have been dismissed or ignored as plagiarism. The Chinese consumer’s preferences and habits are making their way worldwide. WeChat—one-stop-shop. WeChat offers various features, including free video calls, quick group conversations, news updates, and the ability to share big multimedia files effortlessly. Essentially, it’s a business-oriented version of Slack. With a few touches, customers can do anything from online shopping to paying for products in real shops to paying utility bills and splitting dinner expenses with pals. With WeChat, users can easily schedule and pay for cabs, dumping deliveries, theater tickets, medical appointments, and even foreign holidays without ever leaving the app. According to one American venture capitalist, WeChat is present “at every point of your daily contact with the world, from morning until night.” Silicon Valley companies carefully monitor WeChat because of its role as a central node for internet activity and a platform through which users may access other services. Their envy is understandable. Many people who straddle between China and the West feel that giving up WeChat is the same as going back in time.

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Why retailers everywhere should look to China, The Economist, 2 Jan 2021.

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Onlookers are particularly impressed by the promise of a cashless economy, a recurrent fantasy of the digital era. Chinese consumers can now get through their days without ever spending cash or pulling out the plastic. It is the clearest example of how China reshapes the mobile internet’s future for consumers worldwide. That is entirely appropriate, given that China manufactures and deploys more smartphones than any other country. Chinese citizens access the internet more frequently than Americans, Brazilians, and Indonesians combined. Many young people skipped the personal computer and went straight from the preweb era to the mobile internet. Mobile phones account for almost half of all purchases made through the internet in China, compared to about a third of all sales in the United States. As a result, WeChat had everything it needed to be successful: new technology, business models focused on mobile phones, and eager adventurous clients willing to experiment. WeChat accounts for more than a third of mainlanders’ mobile internet time. It’s one of the most widely used messaging applications globally, with over a billion users. An average user goes back to WeChat more than ten times every day (see Footnote 68). WeChat has made a concerted effort to make its product enjoyable to use. The app can detect the current show for TV scrolling and enable users to communicate by waving it in front of the TV screen. When it comes to meeting new people, shaking the phone has been a popular route. Notably, it’s estimated that more than half of WeChat’s active users have been encouraged to link their bank cards to the app. This is quite an achievement given China’s skeptical culture and the free-for-all nature of cybercrime, malware, and scams on the internet. As a result of its trusted brand and implementation of solid identification and password authentication, Tencent, the owner of WeChat, was able to win over the public. In contrast, western businesses like Snapchat and WhatsApp have struggled to persuade customers to entrust them with their financial information and personal data. How did Tencent enable WeChat to leapfrog its competitors? The answer lies in part in the market’s peculiarities. In contrast to Westerners, many Chinese have a variety of mobile devices but use an app to create a single digital identity. Basic mobile phone plans with SMS messaging were a solid competition to messaging applications in the United States. However, in China, text messages were prohibitively expensive, and consumers rushed to adopt the free messaging app. Mail never really took off on the mainland the way it has elsewhere, primarily since the internet was introduced much later than elsewhere, leaving a gap for messaging applications like WhatsApp and Facebook Messenger (see Footnote 68). The larger reason for WeChat’s success was Tencent’s capacity to innovate. Two years ago, the “red packet” marketing effort provided an alternative for users (who traditionally sent cash in a red envelope) to give digital money to friends and family for the Chinese New Year. It was a clever move on the company’s part to transform obligatory gift-giving into a fun game. Additionally, it encouraged users to form groups to send money, frequently in random amounts (sending 3000 RMB to 30 friends may not result in each recipient receiving

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100 RMB; WeChat was in charge of determining how much). As a consequence, group conversations proliferated. During the holiday reveling, more than 400 million users (individually and collectively) distributed 32 billion packets of digital currency (see Footnote 68). WeChat users’ enthusiastic acceptance of the platform makes it invaluable to Tencent in ways that competitors can only dream of. WeChat’s parent, Tencent, is finally making a healthy profit after years of patient investment. WeChat is worth more than $70 bn—more than the three biggest Chinese banks. E-commerce is a factor that contributes significantly to Tencent’s revenues. Over half of its revenue is generated by online games, an area in which Tencent, the world’s largest gaming company, is impregnable. When customers use the app to purchase from one of the over 10 million merchants (including several celebrities), a commission is paid by the firm. Users who connect their bank cards to WeChat’s wallet go on monthly buying binges more than people in the United States do while using plastic. In 2013, the number of WeChat users making regular e-commerce transactions directly via the app was very few, but now a third of its users make frequent e-commerce transactions. The bazaar is in a positive feedback loop as more brands and merchants open official accounts, increasing the bazaar’s buzz and attractiveness. Few companies are better positioned to capitalize on the rise of mobile social advertising than WeChat. Users’ reliance on the portal provides information about their preferences and transgressions. As a result, advertisers who want to reach customers with pinpoint accuracy will find WeChat an increasingly valuable tool.67 The first such ad to display on WeChat Moments pages (similar to a Facebook feed) of chosen WeChat users was published by BMW; rather than a backlash against the commercial intrusion, people demanded to know why they hadn’t received the advertisement! Even though Tencent has carefully introduced targeted advertisements on Moments pages for users, its official corporate accounts enjoy millions of daily feedback (see Footnote 68). Consumers and marketers will generously reward firms who address the many problems afflicting the mobile internet, and this is the most instructional lesson for Western businesses from WeChat’s success. Despite their unique capabilities, smartphones may be a hassle to use. Much of the world suffers from an excess of obtrusive alerts and updates, and the sheer number of apps can be befuddling. WeChat addresses these problems. There is little doubt, even among specialists, that the Western mobile environment is unique, and duplicating WeChat’s popularity and prominence in customers’ eyes would be tough. It spread like wildfire in China well before the app ecosystem became entrenched (now in Europe and the US). Consumers in the West use several apps to access the internet rather than just one. It would take a lot of nudges to get people to utilize a single main hub.

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Goldman Sachs in WeChat’s world, The Economist, 6 Aug 2016.

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Fig. 8.26 China drives global e-commerce. Source Ecommerce Europe, Fitch Ratings, US Census Bureau in The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021

Faced with fierce competition, WeChat has already shown its prowess. Many of China’s champions have risen to prominence due to the government’s efforts to suppress internal competition while prohibiting international participation.68 This is another area where Tencent defies convention. Alibaba, the behemoth, has often tried to dethrone WeChat but has not prevailed. WeChat’s success may be attributed to purely business factors: Users’ issues are solved, and fresh and unexpected products are delivered to excite them. Everyone’s mobile internet experience will have a makeover—even those outside China, as US and American firms attempt to catch up with WeChat (Fig. 8.26). Chinese e-commerce has a real life of its own. A new shopping phenomenon has emerged, and its origins are in China. To modern-day shopping, Chinese apps are what American malls were to the previous century’s retail industry. Small entrepreneurs have aided in the explosion of e-commerce in China (Fig. 8.27). China’s cyber-bazaar is nearly twice the size of those in the United States, the United Kingdom, Japan, Germany, and South Korea combined—and growing faster. Chinese technology firms are investing vast sums in rapidly growing new ventures. To keep buyers and sellers on the platforms, some of the money is promptly returned in the form of subsidies, which may not be sustainable in the long run. Crystal gazers need not look beyond China.69 The contrast between Chinese commerce’s bottom-up “consumer-centric” vitality and the West’s “tech-driven” top-down approach is pretty stark. Certain Western technology executives dismiss the Chinese experience as a result of structural forces rather than creativity and enterprise. They point to

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WeChat’s world, The Economist, 6 Aug 2016. Nestle in The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021.

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Fig. 8.27 Mobile share of e-commerce, %. Source Bernstein in The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021

China’s higher mobile e-commerce penetration—90% compared to 43% in the United States (Fig. 8.28). Others point to the highly oligopolistic market where the top three companies, Alibaba, JD.com, and Pinduoduo, control over 90% of the total digital goods sales, which has alarmed Chinese trustbusters, who announced an investigation into Alibaba separately. Amazon and its two main competitors, Shopify and eBay, accounted for less than half the online commerce market (see Footnote 72). Despite this, a look into Chinese e-commerce shows that it has a real life of its own. Pinduoduo has captured 14% of the market in a few years, making it possible to cut Alibaba’s market share from 67 to 60% while also getting the behemoth to decrease its fees for vendors selling on its platforms by 20% or more. Alibaba is not the only one on the run. Non-digital players such as Meituan, which started in food delivery, and ByteDance, which controls TikTok and its Chinese short-video

Fig. 8.28 Top three e-commerce firms market share, %. Source Bernstein in The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021

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cousin, Douyin, are gate-crashing. The online newcomers to China are infusing a vigor reminiscent of the 1950s and 1960s that typified the US consumer explosion. While radio and television played a role through advertising, Western retail has been (and continues to be) underpinned by bricks and mortar. The physical retail space in the United States is 3.3 times more than in China, and its 330 million people have 30 times the number of malls as 1.4 billion Chinese do (see Footnote 72). The most upscale stores in the West are as dazzling as placing an order on Amazon is dull. There is thus no incentive for the merchants nor the customers to shun them. Aside from that, merchants are wary of writing off their legacy investments. In China, this is not the case. Like the rest of the world, the Chinese continue to make most of their purchases in physical stores. However, many of these are run-down, particularly outside major cities. Fake products are rampant. Online purchasing is more lucrative and easier for China’s growing middle class equipped with smartphones and high-speed internet. Consumers benefit from a high population density because it reduces the cost of delivery. The result is a motley potpourri of American-style malls with retail and entertainment options, including food courts and arcades; for those who prefer online shopping, the internet is omnipresent anyway. Videos show how something is made by hand. Promoters draw emphasis on the product’s intended purpose. On social media, friends recommend it (or do not recommend it). Customers pool their resources with other internet users to save money on bulk purchases. Live broadcasts turn the whole thing into an adventure. And the purchases are fulfilled through a network of physical stores. Logically, there is no distinction in people’s minds between social networking and online buying in China. Typically, WeChat, with its 1.2 billion users, is an example of an anchor cyber-tenant. Tencent, China’s most significant internet business, owns it and sends visitors to JD.com and Pinduoduo, both controlled by Tencent. It’s a massive hit with customers. Even after the pandemic-induced stampede online, e-commerce is expected to account for nearly a quarter of all retail sales in China, roughly twice the share in the United States.70 The first pillar of this new retail structure is “social commerce.” Short-form video, live streaming, and social networking are all used in tandem to make this happen (Fig. 8.29). The biggest live streamer is Alibaba’s Taobao Live. For China’s equivalent of Black Friday, Singles Day, presales generated sales of $7.5 billion in just 30 min, almost equal to what Amazon sold on its “Prime Day” (which lasted 48 h). Fitch, a credit rating agency, believes that the market for live- stream retail approached 1 trillion yuan ($153 billion) in 2020, more than doubling the previous year’s figure.71

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Bernstein in The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021. 71 Fitch Ratings in The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021.

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Fig. 8.29 China, live streaming and short-video online sales, yuan trn. Source Fitch Ratings in The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021

Western merchants refer to China’s vast digital mall’s second pillar as “omnichannel.” Just as in the case of online retail, it has exploded in popularity during pandemic lockdowns and store closures. The largest “e-emporia” platforms operate their supermarket chains in China, such as JD.com’s 7Fresh and Alibaba’s Freshippo. The “new markets” division of JD.com includes joint ventures with some of China’s 6.8 million independent supermarkets. It ships them branded goods, distributes what they currently have on their shelves, and shovels data to help them enhance their operations. Westerners were bemused with social commerce and hybrid buying before 2020. Covid-19 prompted an immediate reappraisal. Many physical shops were ordered closed by authorities, and as a result, the social network which serves 160 million companies shifted online (see Footnote 72). George Lee, Facebook’s director of products, describes the epidemic as a “call to action.” Facebook Shops, a new feature introduced in May, allows companies to establish a single online shop on Instagram. Reels and Shop, two new tabs on Instagram’s main page (redesigned for the first time in many years), promote short films and online shopping. Facebook’s messenger applications, such as WhatsApp, may interact with companies on the company’s platforms and will ultimately be used for sales. Amazon is a market leader in omnichannel sales and most other aspects of e-commerce. The company owns nearly 500 Whole Foods Market stores (see Footnote 72). Many Amazon Fresh groceries have opened in the United States, offering free same-day delivery to certain Prime members who sign up for the service. Bigbox retailers such as Walmart and Target have made significant strides by offering in-store pickup on online purchases, proven popular with Covid-averse shoppers fearful of crowded aisles. Not everyone believes that America will follow China’s lead. While social commerce has made strides recently, it still represents a considerably lower portion of overall retail sales in the United States than it does in China. Consumers in the

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United States desire a variety of items at various times. Occasionally, they simply want to purchase items quickly and inexpensively, not to be wowed by celebrities. America will chart its course in other ways. According to some observers, because of the sheer scale of the American retail market, combining offline and online buying is more cost-effective, leading to the adoption of more hybrid shopping models in America.72 The higher cost of labor in the United States compared to China may result in faster automation of online fulfillment. Consumers’ desire to share their purchasing habits with friends on social media may be dampened by privacy concerns. The siloed America has been slow to emulate the Chinese model, but the coming together of core businesses (e-commerce, social media, or supermarkets) is unmistakable. As Facebook put it, “China, you are the light that will show us the way.” Can China still lead without a new Jack Ma? That’s a question everyone is asking after Jack Ma was “eliminated” by the Chinese government. China has whittled down its global technology leaders by cracking down on antitrust violations and excessive risk-taking. However, Beijing’s heavy-handed approach may backfire by suffocating the entrepreneurial spirit that has been critical to the country’s rapid economic growth. Several technology companies have been investigated for allegedly engaging in monopolistic behavior or violating other consumer rights in recent months. The value of the world’s largest technology companies has been wiped off by more than $600 billion in recent months. Several of China’s most successful entrepreneurs have resigned from high-ranking positions amid the turmoil. Meanwhile, Alibaba co-founder and China’s most famous technology entrepreneur, Jack Ma, has largely faded from public view (see Footnote 74). “The atmosphere hovering over China’s tech landscape has grown increasingly toxic.”73 However, challenging the system is critical for private enterprise, which has been instrumental in China’s transformation from a developing country to one of the world’s most significant economic and technological powers over the last few decades. Losing that dynamic would jeopardize some of those accomplishments and make it much more difficult for China to achieve its lofty goal of leading the world in the future technologies. Beijing’s desire to exert greater control over private enterprise stems from the government’s conviction that a state-managed planned economy is more effective and, more importantly, more likely to allow the Party to retain power than a free market economy. Beijing’s strategy is risky by definition. China’s long economic miracle and meteoric rise to prominence as a technology leader began with Beijing’s foresighted decision in the late 1970s to relinquish some economic control and embrace a free market approach in many sectors. China’s technology sector, for example, was free to raise capital outside the country. Investors may lose interest in investing in private Chinese firms if they fear unwelcome government interference, especially given the long time required to

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The next big thing in retail comes with Chinese characteristics, The Economist, 2 Jan 2021. Alex Capri, visiting senior fellow at National University of Singapore.

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develop some technology projects. Restoring a high level of state control may limit these private companies’ ability to innovate and compete against major global competitors. And there is evidence that this is already occurring. Since Ant Group’s November IPO was canceled, Alibaba’s market capitalization has fallen by more than $240 billion. Tencent has lost $173 billion in market value since January’s peak. Meanwhile, Pinduoduo, JD.com, and food delivery giant Meituan have lost $231 billion since February’s peaks (see Footnote 74). China’s policymakers do not wish to eliminate the private sector, which accounts for nearly two-thirds of GDP and employs more than 80% of the workforce. However, it is abundantly clear that Xi wishes for the state sector to lead, with private companies assisting. The Covid-19 pandemic has convinced China that the best way to run the country is through a primarily planned economy with strict regulation of many facets of life.74 Last year, the country implemented some of the most stringent virus containment measures globally. As a result, it became the only developed economy to avoid recession, outperforming its Western counterparts.

8.3.3

The China-US Slugfest

A showdown looks inevitable between China and the US. A market-oriented manufacturing foundation connected to global supply networks, overseen by an authoritarian state, has enabled China’s unparalleled technical development. That does not mean it is invincible or world-beating. However, the possibility of providing a decisive advantage in technologies critical to the West’s success in the twenty-first century makes the West nervous (Fig. 8.30). The United States is particularly concerned about China’s development of technical capabilities that may threaten its global supremacy. However, despite their genuine worries about Chinese intellectual property theft and corporate fraud, American lawmakers are worried that China’s technological development strategy may provide outcomes that the market-driven model of the United States would be unable to deliver (see Footnote 75). Undoubtedly, China has shown that a focused state can significantly speed up new and foreign technology adoption, dissemination, development, and large-scale application in China. America is comforted with the thought that China lags in semiconductors. Given that China is unlikely to capture a sizable portion of the semiconductor manufacturing pie in a while and considering how important semiconductors will be in driving future economic development, manufacturing them now becomes strategically important. Taiwan, which China claims as its territory and over which the United States has significant sway to impose export restrictions, further complicates things. Both American and Chinese businesses rely on Taiwan to supply

74

Can China still lead the world in tech without a new Jack Ma? CNN, June 8, 2021.

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Fig. 8.30 Stranglehold of China on global trade. Source IMF in Technological progress in China could still lead to fireworks, The Economist, 2 Jan 2020

chips, increasing the likelihood of conflict. In case tensions between the United States and China’s military buildup continues, Taiwan may come under increasing pressure from both the United States and China to cut off its supply to the other. Any intervention can disrupt the delicate equilibrium, sending things dangerously off course. The danger presented by a Chinese Communist Party with cutting-edge technical capabilities is genuine.75 The global trade split between the US and China continues to be heavily favored by China (Fig. 8.31). The United States is in the process of forming a “tech alliance” against China. To stop the biggest chipmaker in China from buying Dutch-made semiconductor production equipment, the United States and the Netherlands started working closely together. It plans to keep up these efforts while working with allies to preserve the West’s technical advantage in sectors vital to national security and economic development in the following decades. Can the US arrest China’s technological progress? The United States may have woken up late. Beijing unveiled its “Made in China 2025” strategy in 2015, describing it as a concerted effort to boost China’s competitiveness by “advancing China’s position in the global manufacturing value chain, leapfrogging into emerging technologies, and reducing reliance on foreign

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Technological progress in China could still lead to fireworks, The Economist, 2 Jan 2020.

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Fig. 8.31 Global trade split between China and the US, %. Source IMF in Technological progress in China could still lead to fireworks, The Economist, 2 Jan 2020

firms.” Though foreign technology and knowledge bridge gaps, local innovation will power future development and productivity (see Footnote 78). New information technology, computerized machinery, sophisticated ships, and biopharma are among the ten areas covered by China’s strategy. By the end of 2018, the Chinese government had allocated hundreds of billions of yuan to domestic R&D in these and related areas. The United States appears to be immobile. As late as 2001, the United States’ investment in R&D exceeded China’s by more than $300 billion annually. However, Chinese investment surpassed the United States for the first time in 2020.76 Over the past two decades, China’s R&D spending has nearly quadrupled as a proportion of GDP. There are additional signs that the US is slipping. Over the last two decades, bachelor’s degrees awarded in China have tripled in the last decade, surpassing those in the US, EU, and Japan combined. Although the US grants more PhDs graduating every year in engineering and science, the difference between the United States and other countries has decreased considerably. Twenty years ago, American scientists and engineers penned four times as many peer-reviewed journal papers as their Chinese counterparts. Two decades ago, China got less than 20,000 patents, but by 2018, the number had risen to 450,000 (and filed a record of 1.4 million in 2020), exceeding the yearly patent award in the United States by more than 100,000. In 2007, the number of Fortune 500 firms in the United States was six times more than in China; by 2018, China’s had an equal number (see Footnote 78).

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American Academy of Arts and Sciences in Stepping Up the Tech Fight Against China, The Wall Street Journal, March 2, 2021.

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The relative loss of position in science and technology of the United States has reached a tipping point.77 If America does not step up its game, it risks losing its position as its dominant military and economic power. The US may hamper China’s foreign technology and industrial capacity acquisition but is in no position to deter the successful domestic programs that have ignited their rise. Improved roads, bridges, tunnels, ports, and airports would help the US remain competitive and provide universal high-speed broadband access. However, unless advancements in science, engineering, and technology are made, the United States will continue to lag. R&D expenditure will rise by 0.5% of GDP—or about $100 billion—every year for the next four years to keep pace with inflation (see Footnote 78). A large part of the additional funding will be allocated to fundamental research, which private business is unlikely to fund. Universities conduct basic research and benefit from patent and licensing agreements through intellectual property ownership. To strengthen the pipeline of researchers, the federal government funding for STEM graduate students will rise.78 The government intends to give 10,000 full scholarships each year to American citizens in return for a promise to teach STEM in a public school for five years after graduation to improve public school education in these areas and boost the number of students pursuing STEM degrees. In recent decades, the United States has persistently underinvested in the country’s future. Washington is now attempting to regain lost ground before it is too late. The US battle against Huawei may backfire. Huawei is in peril. From September 2020, the Chinese technology giant has been deprived of critical semiconductor supplies. Without chips, it will be hard to manufacture the smartphones and mobile network equipment critical to its business. America’s most recent rules prohibit companies from selling chips to Huawei if manufactured using American chipmaking equipment. American semiconductor companies, which have benefited handsomely from Huawei’s business, have pleaded with their government to extend the deadline. A complete reprieve appears improbable. Even a crippled Huawei may not be enough to satisfy America. By default, the Department of Commerce denies permits. This would force the Chinese firm to take more desperate measures to manufacture its chips using older technology sourced from non-American supply chains. Huawei is expected to complete this task within the next 12 months. Huawei is feigning bravery. It hopes to diversify its revenue streams and make them less susceptible to American attacks.79 It says it will invest more than $20 billion in research and development this year, $5.8 billion more than in the previous year and roughly on par with Amazon, a company with double the revenue. When microchips were invented in 1958, they found their first significant market in nuclear missiles. Today, approximately a trillion chips are manufactured

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American Academy in Stepping Up the Tech Fight Against China, The Wall Street Journal, March 2, 2021. 78 Stepping Up the Tech Fight Against China, The Wall Street Journal, March 2, 2021. 79 How America’s war on Huawei may boost Chinese technology, Sept 12, 2020.

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annually, or 128 for each person. Semiconductors are used in many devices and machines: An electric car may contain over 3000 of them. New forms of computation, such as artificial intelligence and data crunching, are exploding. As more industrial machines become connected and equipped with sensors, demand has intensified. The world will witness a debilitating chip war. For decades, a vast network of chip manufacturers has collaborated and competed to meet this growing demand; they now generate $450 billion in annual revenue (see Footnote 80). No other industry combines such a high degree of hard science, capital intensity, and complexity. Additionally, its broader impact is enormous. When a supply chain fails, economic activity can come to a grinding halt. Recently, a temporary shortage of chips forced the global auto industry to halt production. And no other sector is as volatile. America has maintained a tightening embargo on China for several years, which imports more than $300 billion worth of chips each year due to a lack of manufacturing capacity. New stress in the chip industry is separating geopolitical fault lines. America is losing its manufacturing ground, production is shifting to East Asia, and China is pursuing self-sufficiency. The world’s most significant economic choke point will be silicon etched in a few South Korean and Taiwanese technology parks. The number of manufacturers on the cutting edge of the industry has decreased from over 25 in 2000 to three. The other significant industry rupture is occurring in China. As America has lost ground in the chip manufacturing industry, it has sought to ensure that China also falls behind. The American technology embargo began as a targeted campaign against Huawei over national security concerns but has since expanded to include at least 60 firms, many of which are involved in chip manufacturing. SMIC, China’s chipmaker, and Xiaomi, a smartphone maker, were recently blocked. These measures’ cumulative effect is beginning to bite. TSMC’s sales to Chinese customers fell by 72% in the final quarter of 2020 (see Footnote 80). Although government plans have figured semiconductor chips since the 1950s, they are still five to ten years behind. China is responding by revving up its state-capitalist machine to achieve chip self-sufficiency faster. A $100 billion-plus subsidy fund is being spent furiously: last year, over 50,000 firms registered as having a chip-related business and thus being eligible. Leading universities have bolstered their chip programs. If the era of advanced chip manufacturing in America is drawing to a close, the era of chip manufacturing in China may be just getting started. How concerned is America? It is difficult to overlook the dangers. The chip industry is on the verge of mutually assured disruption, with both America and China capable of short-circuiting the economies of the other.80 If America abandons advanced manufacturing while China continues to pour resources into it, the White House will be tempted to tighten the embargo further to deter China’s

80

The struggle over chips enters a new phase, The Economist, Jan 23, 2021.

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development. This could have explosive ramifications and be destined to result in an alarming concentration of production. The manufacturing duopoly may begin to exercise its pricing leverage. A fifth of all chip manufacturing and possibly half of the cutting-edge capacity is located in Taiwan, which China considers a renegade state. Like nearly everything else in modern life—cars, banks to harvesters need computers to function. As a result, the chipmaking business is booming right now. The market capitalization of publicly listed semiconductor firms across the globe is now well over $4 trillion, quadrupled in the last five years (Bloomberg, 2021). During the Covid-19 epidemic, chipmaker stock prices have grown substantially because of the transfer in work to online mode and consumers’ increased use of streaming and video games. So, no wonder Taiwan remains a flashpoint. In January 2021, Taiwan Semiconductor Manufacturing Company (TSMC) stunned the world. In anticipation of high demand, it increased its anticipated 2021 capital expenditure from $17.2 to $28 billion. That’s the biggest budget set aside by a private company. Ever-increasing chip designs are now feeding a shrinking number of fabrication units due to escalating expenses of keeping up with technological advances. Only three companies in the world can manufacture advanced processors: Intel, TSMC, headquartered on an earthquake-prone island claimed by China, and Samsung of South Korea, which is bordered in the north by a tyrannical nuclear-armed state. Asia now accounts for 80% of global chip manufacturing capacity.81 And whereas designing chips used to imply manufacturing them as well, that is no longer the case. Nowadays, most chip designers use TSMC to manufacture their products, streamlining the process and significantly reducing costs. High-tech “fabs,” as chip manufacturers are known, have seen their costs increase continuously, with no indication of a slowdown in sight.82 Five-nanometer chips represent today’s state-of-the-art (though the word “5 nm” does not relate to transistor size). Beginning in 2020, TSMC and Samsung will put them into wide distribution. Their 3 nm counterparts will come in 2022, and 2 nm will follow a few years later. TSMC spent $19.5 billion on its 3 nm factory in southern Taiwan, which opened in 2020. The company is already considering a second for 2 nm chips (see Footnote 83). And demand for these is expected to increase as silicon is integrated into everything from thermostats to tractors as part of the uber-connected “Internet of Things.” Amazon, Apple, Nvidia, Google, and Qualcomm are just a few of the high-tech firms that TSMC and Samsung service together, and, if rumors are to be believed, Intel as well. As things like automobiles become more computerized and electrified, the chips that power them will also advance. Tesla depends on TSMC for its 7 nm self-driving processors.

81

Semiconductor Industry Association of USA in Chipmaking is being redesigned. Effects will be far-reaching, The Economist, Jan 21, 2021. 82 Future Horizons in Chipmaking is being redesigned. Effects will be far-reaching, The Economist, Jan 21, 2021.

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Samsung and TSMC remain strong rivals in the Asia–Pacific nanoscale duopoly, keeping the other on their toes. Since 2005, when fifteen other companies were at the forefront of technology, the Taiwanese firm’s operating margins have remained relatively stable (see Footnote 83). However, as manufacturing prices increase, it’s safe to assume that TSMC will be the only sophisticated fab left standing. An industry veteran observed that technology executives largely ignored the issue for many years, hoping that it would resolve itself. That has not happened. The history of the chip industry indicates that prospective entrants to the fab business will face nearly impossible barriers.83 The industry’s growing political clout exacerbates these concerns. As part of its trade battle with China, the United States has tried to deny Chinese companies the opportunity to construct cuttingedge semiconductor facilities. China has prioritized semiconductors as part of a multibillion-dollar effort to achieve self-sufficiency in critical technologies by 2025—all the more so now that American sanctions have restricted some of its imports. Increased concentration is here to stay due to geopolitical issues. Fearful of losing access to the most advanced factories, America has subsidized TSMC in exchange for a facility in Arizona. The US fears that China may catch up to the United States in chip technology amidst worldwide scarcity; with this backdrop, President Biden’s ambitious infrastructure plan, including $50 billion for the American semiconductor sector, makes sense. The plan is intended to act as a bulwark against China, investing heavily in chip manufacturing capacity and jeopardizing American dominance in cutting-edge microchip technology. The plan’s goal is to encourage indigenous semiconductor production and research. Funding for a National Semiconductor Technology Center (NSTC) will be provided via the $50 billion stimulus package. Numerous automobile systems are controlled by chips-automated braking, engine management, and self-driving assistance. The chips in video games and laptop computers, and data centers have made them essential for remote work and distant study, among other things. Increasing the local production of semiconductors may also help the US achieve its strategic goals. Reliance on Chinese and Taiwanese manufacturers, according to the Defense Department, puts the nation’s vital infrastructure in danger since microelectronic devices are so widely used in the United States. Emerging technologies, like artificial intelligence, need more complex components, which increases the danger. Supporters argue that the initiative could help the United States reclaim its lost ground in semiconductor manufacturing to Japan, South Korea, China, and Taiwan. Because of government subsidies to global rivals, the United States’ share in worldwide semiconductor production has fallen to 13% from 37% in 1990, making new construction more challenging to attract (see Footnote 81). Chipmakers have also expanded their operations outside the United States; as the supply chain grows, so does the need for competent engineers to run the costly

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Chipmaking is being redesigned. Effects will be far-reaching, The Economist, Jan 21, 2021.

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production equipment.84 The United States thinks that semiconductors are vital to the country’s economy and employment development, national security, and critical infrastructure. US legislators’ attention is increasingly focused on the chip manufacturing industry, who are equally aware that China is also in the race. Federal incentives would pay for the construction of new facilities and the expansion of existing ones, expected to cost over $10 billion.

8.3.4

China’s Quest for Self-reliance

China’s leaders raised the stakes in their technology race with the United States, declaring a five-year goal of accelerating cutting-edge technology development, from semiconductors to quantum computing and artificial intelligence. The Chinese government’s five-year economic plan calls for more significant expenditure and loans to help fund cutting-edge technology development. China is specifically targeting AI and chips in the tech race with the US. Government officials stated intentions are to boost R&D expenditure by more than 7% each year over the five years to 2025 (see Footnote 88). Compared to the previous five years, this will account for a larger share of gross domestic output. China will make laws and policies easier for VC money to flow into companies, loosen bank lending restrictions, and increase tax incentives for R&D. Chinese officials’ focus on frontier technology and innovation is noteworthy. Additionally, in 2035, the government expects its goals to have “significant breakthroughs on core technologies and seeks to be among the most innovative nations globally.” Chinese authorities are trying to keep pace with their American counterparts in sophisticated technology and manufacturing for the first time in decades. After the Trump administration’s recent restrictions on Chinese firms like Huawei, access to specific key components has been effectively cut off. The Chinese government is committed to increasing essential research spending by 10.6% this year and developing a decade-long action plan (see Footnote 88). Primary research—the branch of science that results in new knowledge breakthroughs and is viewed as critical to technological advancements—is one area where China has historically lagged behind the United States. The five-year plan identifies seven critical strategic areas for “national security and overall development.” AI, integrated circuits, quantum computing, biotechnology, genetic research, aerospace, and neuroscience are covered. China intends to establish national laboratories and strengthen academic programs to foster and support these technologies. Additionally, vaccines, deep-sea exploration, and voice recognition are being developed. “Leading in AI and computing enables China to

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Biden Calls for $50 Billion to Boost U.S. Chip Industry, The Wall Street Journal, March 31, 2021.

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reap huge benefits in hybrid warfare and intelligence gathering.”85 Other cuttingedge technologies will enable the country to strengthen its military capabilities in the Indo-Pacific, take a leadership role in militarizing space, digital trade, and commerce, and work on a digital currency ecosystem. China’s influence is already expanding. The country recently surpassed the United States in journal citations on artificial intelligence.86 Compared to the 50,000 5G base stations now operating in the United States, China has 690,000.87 The latest five-year plan aims to increase China’s 5G user base to more than 50% and to lay the groundwork for 6G networks. America continues to outperform China in terms of basic research and R&D funding. China’s five-year plan anticipates that basic research will account for 8% of total R&D spending by 2025. Last year, China invested $23 billion in fundamental research. The US spent $97 billion on basic research in 2018 itself, accounting for 17% of total R&D spending in 2020. China also lags behind the United States in many other critical technologies (see Footnote 88). The blueprint reaffirms China’s goal of becoming a strong manufacturing nation to boost aircraft development, robotics, and alternative energy vehicles. China’s first commercial airliner, the C919 narrow-body plane, remains uncertified by its regulators despite its 2017 unveiling. According to the plan, the critical components of supply chains are to remain within the country.88 Establishing world-class domestic chip manufacturers has become more critical for China in light of the United States’ restrictions on Chinese chipmakers. China’s authoritarian government wields a disproportionate amount of economic power, and therefore such plans carry considerable weight. Local government ministries and public and private companies frequently structure their development policies and expansion plans around five-year plans. China has made a concerted effort to become self-sufficient in semiconductors, and state-owned chip companies have raised massive sums. However, Beijing’s chip ambitions will ultimately be determined by the country’s thriving private sector. Chinese leaders have identified advanced semiconductors as one of the core technologies they view as vulnerable to foreign pressure, as the Huawei saga has demonstrated. China is incapable of producing high-performance chips and cannot do so without American technologies, particularly in chip manufacturing equipment and design software.

85

National University of Singapore in China Targets AI, Chips Among Seven Battlefronts in Tech Race With U.S., The Wall Street Journal, March 7, 2021. 86 Stanford University in China Targets AI, Chips Among Seven Battlefronts in Tech Race With U.S., The Wall Street Journal, March 7, 2021. 87 International Business Strategies Inc in China Targets AI, Chips Among Seven Battlefronts in Tech Race With U.S., The Wall Street Journal, March 7, 2021. 88 China Targets AI, Chips Among Seven Battlefronts in Tech Race With U.S., The Wall Street Journal, March 7, 2021.

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The government has invested billions in the sector, established national chip funds, and subsidized semiconductor companies. In 2020, China registered over 50,000 new semiconductor-related companies, more than tripling the number in 2015. China’s largest chipmaker, Semiconductor Manufacturing, announced that it would invest $2.4 billion in Shenzhen to build a foundry (see Footnote 89). One consequence is that a great deal of capital is being squandered. A recent example: Hongxin, a rising star in Wuhan with government backing, has run out of money. Numerous Chinese firms will face similar fates, but a few will likely achieve breakthroughs, as they did in solar panels and electric vehicles. Given that critical technologies are firmly established outside the country, it will almost certainly take much longer for the country to catch up in chip technology. Notably, the effort is not being led by lumbering state firms. Private companies that purchase large chips also incentivize domestic suppliers as geopolitical tensions rise. China’s tech giants are increasingly attempting to design their chips, mirroring the trend in the United States. For example, ByteDance is currently hiring engineers to design ARM-based server chips. Alibaba and Baidu both have their chip design teams. Huawei previously designed its chips in-house through its subsidiary HiSilicon, but it can no longer procure them due to US sanctions. In 2020, there were 403 venture capital and private equity investments in semiconductor-related companies, a 47% increase over the previous year (Fig. 8.32). Baidu’s in-house chip unit was valued at $2 billion during a funding round recently that included several private equity funds.89 Much of the committed capital is being used for chip design rather than manufacturing, which requires a higher initial investment but yields a slower and more uncertain return. However, continued difficulties obtaining semiconductors may compel Chinese companies to invest in domestic manufacturing. China may still need time to develop its supply chain for advanced semiconductors, but private companies can expedite the process. Going up the microprocessing value chain: China is gradually moving up the value chain of microprocessing; however, mastering design is more arduous than mastering manufacturing. The Chinese government is putting a great deal of effort (via a privately owned semiconductor manufacturer called SMIC has settled numerous lawsuits alleging intellectual property theft). In October, the government raised $29 billion for domestic chipmaking efforts from state-owned firms, the finance ministry, and local governments. This is in addition to the 139 billion yuan raised in 2014 (see Footnote 91). The problem here is that the government’s chip program improves the wrong goals. China’s huge market requirements are not being met by invigorating the local chip sector; instead, money is being spent competing with international chip firms such as Intel. Chips are a critical product for China because they are necessary for future technology-led growth and weapon manufacturing. The global chip market will grow at a rate of 4.6% per year, reaching $575 billion in 2022, owing to the

89

China’s Tech Giants Have Chip Ambitions, Too, The Wall Street Journal, March 29, 2021.

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Fig. 8.32 Number of venture capital deals with semiconductor-related firms in China. Source ChinaVenture in China’s Tech Giants Have Chip Ambitions, Too, The Wall Street Journal, March 29, 2021

demands of automobiles, artificial intelligence systems, and communications networks.90 A significant part of this market value goes through China but is not seized. The 418 billion chips imported by the country cost $312 billion, more than a quarter of the amount spent on crude oil imports. Controlling chip manufacturing would also give China indirect influence over other sectors, from social networking to personal computing, and catching a more lucrative part of the value chain of chip design and manufacturing (see Footnote 91). State-led initiatives have mostly failed. SMIC is currently manufacturing chips at levels of complexity that Intel reached a decade ago. The $3.4 billion sales of SMIC translates to 10% of its Taiwanese competitor TSMC’s sales. SMIC’s quality and reliability aren’t well-known on a worldwide scale yet. Even while Chinese companies are still trailing behind in chip production, they have lately succeeded with semiconductor design for artificial intelligence purposes. Silicon Valley AI experts praised Hanguang’s performance, saying that it surpassed all other chips in its class, even though Alibaba hired TSMC fab in Taiwan to build the chips. This was unexpected since Chinese chipmakers were decades behind their American counterparts. The most current MLPerf findings have been published, a widely used industry standard for evaluating artificial intelligence processors. Hanguang 800 outperformed Intel’s newly launched processor 13 times on a typical machine learning test (Fig. 8.33). The Hanguang 800 was also four times quicker than Nvidia’s bigger Titan RTX processor. While the comparison is valid, Alibaba’s chip occupies

90

PWC in China is slowly moving up the micro processing value chain, The Economist, Jan 4, 2020.

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Fig. 8.33 Number of images selected chips can process per second, 2020. Source MLPerf in China is slowly moving up the micro processing value chain, The Economist, Jan 4, 2020

more real estate than Intel’s, implying more energy usage to execute computations faster than the Intel chip. There are additional caveats too. Only one of the five tests was carried out by Alibaba. Unsatisfactory performance in the other areas would point to an overly specialized processor. However, even in the worst-case situation, it’s still remarkable. That China has created an artificial intelligence processor that outperforms, if not excels, Western rivals should alert American politicians and entrepreneurs to China’s development in this sector. Even more impressive is Alibaba’s achievement in creating a chip. The design mainly evolved out of the extensive machine learning systems that Alibaba has deployed across Taobao online operations and Hema shops. As part of its daily operations, the company processes billions of images and has tutored its machine learning software to be accurate and potent. The Hanguang 800’s creators spent a lot of time conversing with the algorithms’ programmers. As a result, their time learning from engineers who had written highperformance algorithms seems to have paid off handsomely. Given that Alibaba’s and Taobao offline shops are nearby, Hanguang chip designers may better optimize the chip for AI-related activities. Indeed, the data labeling grunt work that goes into making the exceptional performance of Alibaba’s ML algorithms manifests in the performance of the new chip. At the bottom of the AI supply chain, China’s strength in data labeling is translating into top-level design strength. The situation is less rosy in other segments of the semiconductor supply chain. Hanguang 800 may be impressive, and its design work is much less capitalintensive and less complex than chip manufacturing (which, in Hanguang’s case, was still done in Taiwan). The stimulus had been misdirected to catch up with Western titans like Intel and TSMC (see Footnote 91). The chip market is undergoing rapid change. If catching up with internal combustion engines, conventional semiconductor manufacturing will be herculean. Rather than focusing on high-end chips, the government would be better off

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designing and manufacturing chips for new markets like the internet of things and artificial intelligence.91 No new technology is arriving to help China’s desire to catch up with the rest of the world. Designing chips for IoT and AI may enable China to leapfrog and pay dividends, but not as much as that provided by electric vehicles. In this scenario, the country’s size and wealth (and patience) would probably secure its businesses a prominent place in the global semiconductor supply chain. For years, officials have emphasized the importance of China becoming more innovative and resilient. To some extent, this occurred naturally due to the country’s rapid economic development. However, as tensions with America have risen, these objectives have become urgent. As a result of the United States’ export constraints on critical components such as semiconductors, China’s industrial capabilities have been spotlighted. Xi Jinping, China’s president, has said that building local supply chains is essential for the country’s security. China is seeking to reduce its dependence on the US. Enter China’s newest major economic policy initiative: the “dual-circulation” strategy. At its most fundamental level, it refers to continuing trade with international markets (“Great International Circulation”) while strengthening its domestic market (“Great Domestic Circulation”). The Chinese government has frequently vowed to boost consumption as a growth driver inside the country. Exports have decreased as a percentage of GDP— from 36% in 2006 to 18% in 2020. As a result, industry experts have shifted their focus to domestic circulation. When the global economy is in turmoil, China will stand firmly behind the high-tech industries. These businesses will get tax breaks as well as financial help. About a third of the country’s chips are made in the country (Fig. 8.34). By 2025, its goal is to achieve 70%. There’s also a focus on environmentally friendly technologies and renewable energy sources. As a bonus, China has announced that it will reduce its carbon emissions by 30% by 2030. China’s demand for imported oil may be curbed by investing in such companies.92 China’s regulatory crackdown on superstar companies such as Alibaba, Tencent, and Didi must appear suicidal to Western investors. What better way to stifle growth than to cripple some of the world’s most successful technology firms? President Xi Jinping would take a contrary position. According to him, technology is divided into two categories: nice and necessary. While social media, e-commerce, and other consumer internet companies are desirable, he believes national greatness does not require the world’s best group chats or ride-sharing services. China wants manufacturing, not the internet, to lead the economy in a reversal of strategy. By contrast, Mr. Xi believes the country requires advanced semiconductors, electric vehicle batteries, commercial aircraft, and telecommunications equipment

91

China is slowly moving up the micro processing value chain, The Economist, Jan 4, 2020. China’s “dual-circulation” strategy means relying less on foreigners, The Economist, 7 Nov 2020.

92

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Fig. 8.34 China’s imports as % of domestic consumption. Source The Economist (2020)

to maintain China’s manufacturing prowess, avoid deindustrialization, and achieve independence from foreign suppliers. Thus, even as the Chinese Communist Party launches a multipronged regulatory assault on consumer internet companies, it continues to shower manufacturers with subsidies, protection, and “buy Chinese” mandates. Mr. Xi acknowledged the growth of the online economy and stated that China “must accelerate the development of the digital economy, digital society, and digital government.” At the same time, it is necessary to recognize that the real economy is the bedrock and that the various manufacturing industries cannot be abandoned (see Footnote 93). As most countries develop, manufacturing supplants agriculture, which is then supplanted by services. Manufacturing’s share of gross domestic product in the most advanced economies has declined in recent decades, particularly in the United States and the United Kingdom, where large swaths of factory employment have migrated overseas, particularly to China. While manufacturing’s share of GDP in China has declined, it remains the highest of any major economy at 26%. The Chinese government wants it to remain there—insisting that China will not follow other developed economies down the path of deindustrialization (Fig. 8.35). Globally, politicians fetishize manufacturing; investors do not. Most manufacturing is fiercely competitive and requires massive capital and labor, hurting profits. A consumer internet company with a dominant platform can generate massive cash with little incremental investment. That is why Facebook is worth 11 times as much as Micron Technology’s, even though Facebook employs only half as many people. Before the recent selloff, Alibaba was valued at 20 times as much as SMIC, China’s heavily subsidized “national champion” chipmaker (see Footnote 93). However, in the opinion of Chinese leaders, consumer internet companies impose costs on society that are not reflected in private market values. Companies like Ant jeopardize the financial system’s stability, online education exacerbates social anxiety, and online games like Tencent’s are an “opium for the mind,” as one state-owned publication put it. On the other hand, according to Chinese authorities, the production of goods has social advantages that are not reflected

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Fig. 8.35 Manufacturing value-added share of GDP. Source World Bank in China Wants Manufacturing—Not the Internet—to Lead the Economy, The Wall Street Journal, August 4, 2021

in market prices.93 Due to its prominence, the nation has generated employment, boosted production, and disseminated critical skills and know-how for decades. They believe that to achieve parity with the West, they opine that China must create the most advanced technology through subsidies, protectionism, and forced technology transfers. American leaders can empathize: they, too, are concerned that big tech suffocates competition, violates personal privacy, spreads misinformation, and promotes online addiction. They are prepared to follow China’s lead in subsidizing manufacturers critical to national security. However, in the United States, the government takes a back seat to private markets regarding capital allocation. In China, the situation is the inverse. This is not to say that China is correct. Allocating capital to industries deemed necessary for national development generated substantial returns when the economy was still lagging. Returns have decreased as China has caught up, and Chinese industries are frequently awash in excess capacity and debt. Additionally, China’s domestic market cannot absorb everything its factories produce; the surplus must be exported. By retaining such a high manufacturing share of GDP, China effectively forces other countries to accept a lower share, perpetuating trade friction. Whether or not the Communist Party’s priorities make sense in the long run, recent volatility in Chinese stocks demonstrates that they can make or break a company’s future in the short run. Finally, China wants to weaponize its currency to counter the US dollar. China wants to free the global financial system from the grip of the US currency and take back control of how people spend their money. Both are expected to be delivered

93

China Wants Manufacturing—Not the Internet—to Lead the Economy, The Wall Street Journal, August 4, 2021.

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via digital money.94 Earlier this year, China launched a large-scale trial of a digital version of the yuan, following years of preparation. Pilots have already been established in four Chinese cities, with over 2 billion yuan transaction volume. China has been the only major economy to provide a national digital currency, and if it is implemented nationally, it will surpass the European Central Bank’s upcoming digital version of the euro. Regulators in China have also indicated that widespread use of the digital yuan might help them achieve a far more ambitious goal: eliminating the US dollar’s monopoly and increasing the yuan’s worldwide impact.

8.4

Digitized India

India is a beehive of activity. By purchasing power parity (PPP), it is the world’s third-largest economy.95 Since the beginning of the twenty-first century, India’s GDP has grown at 7% annually, making it the world’s fastest-growing major economy, overtaking China.96 For more than two millennia, from the first to the nineteenth century, India was the largest economy in the world (Maddison, 2007). Nearly 60% of India’s GDP comes from domestic consumption, and the nation is still the world’s sixth-largest market for consumer goods.97 With 500 million workers, India has the world’s second-largest labor force and one of the highest concentrations of billionaires. According to PricewaterhouseCoopers (PwC), if India’s GDP grows at the same rate as the US, it may overtake it by 2050.98 The service sector generates fifty percent of GDP, the fastest-growing part of the economy. In terms of market capitalization, the National Stock Exchange is one of the top 10 stock exchanges in the world.99 India is the sixth-largest manufacturer globally, employing more than 57 million people.100 It holds the fourth-largest foreign exchange reserves globally, valued at more than $650 billion. As the biggest generic medicine producer, India provides more than half of global vaccines through its pharmaceutical units.101 With a turnover of $191 billion and a workforce of over four million, the Indian IT sector is a major exporter of IT services (see Footnote 101). India has the world’s second-largest

94

China wants to weaponize its currency. A digital version could help, Analysis by Laura He, CNN Business, December 5, 2020. 95 https://www.investopedia.com/insights/worlds-top-economies/#:~:text=India%20is%20the% 20fastest%2Dgrowing,the%20United%20Kingdom%20and%20France. 96 “World Economic Outlook October 2018: Report for Selected Countries and Subjects”. International Monetary Fund (IMF). Retrieved 7 July 2019. 97 “Future of Consumption in Fast-Growth Consumer Markets: INDIA” (PDF). World Economic Forum. Retrieved 20 January 2019. 98 “PricewaterhouseCoopers, February 2017, p. 68” (PDF). PricewaterhouseCoopers. 99 “Monthly Reports—World Federation of Exchanges”. WFE. 100 “Global manufacturing scorecard: How the US compares to 18 other nations”. Brookings Institution. Retrieved 10 July 2018. 101 “Indian Pharmaceutical Industry”. ibef.org. Retrieved 22 June 2019.

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telecom industry when measured by smartphone, mobile phone, and internet users. It is one of the world’s fastest-growing e-commerce sectors, with a retail industry worth $1.2 trillion and accounting for more than 10% of India’s GDP.102 India has the third-highest number of digital consumers. India is the world’s second-largest market for internet subscriptions.103 Similarly, India is second only to China in instant messaging services; the country has the largest number of social media users globally. Aadhaar, India’s one-of-a-kind digital identity program, serves over 1.3 billion Indian citizens.104 India’s per-capita monthly mobile data consumption is 8.3 GB, higher than China’s 5.5 GB and comparable to digital giants like South Korea’s 8.5 GB per person.105 ,106 India will become the world’s most populous country in 2023, while China suffers from a demographic slump, thanks to its one-child policy. According to UN predictions, India’s population will overtake China’s in April 2023. India will eventually catch up despite China’s economy being roughly six times larger because of its expanding population. Between now and 2050, India is anticipated to contribute more than a sixth of the increase in the global working-age population (15–64). China’s population, on the other hand, is anticipated to fall drastically (Fig. 8.36). Chinese workers reached their peak ten years ago. The country’s median age will increase by 12 years to 51 by 2050. India can now benefit from its demographic dividend thanks to a median age of 28 and a growing working-age population. Its economy recently overtook Britain’s as the fifth-largest in the world, and it will take third place by 2029.107 The advent of India as a superpower on its borders would likely be the most painful development for China.108 The Indian government launched Digital India to foster a more inclusive society and to ensure government services are accessible, empowering citizens. Rural areas have been connected via a backbone of a high-speed internet network. Digital India comprises three pillars: creating a safe and reliable digital infrastructure, delivering government services digitally, and ensuring everyone has access to digital tools. In 2021, India had 1.29 billion Aadhaar digital biometric identity cards for a population of 1.3 billion, 1.5 billion mobile phones, 800 million smartphones, and

102

“Retail industry in India”. ibef.org. Retrieved 22 June 2019. Indian telecom services performance indicators, Telecom Regulatory Authority of India, as of December 2013, September 2018 and March 2018; Analysys Mason, as of January 09, 2019. 104 Aadhaar dashboard, UIDAI, as of April 18, 2018. 105 Indian telecom services performance indicators, Telecom Regulatory Authority of India, as of September 2018, and June 2016. 106 India’s Trillion Dollar Digital Opportunity, Ministry of Electronics and Information Technology, Government of India, February 2019. 107 State Bank of India in India will become the world’s most populous country in 2023, The Economist, Nov 14, 2023. 108 India will become the world’s most populous country in 2023, The Economist, Nov 14, 2023. 103

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Fig. 8.36 Population by age group, bn. Source UN (2023)

internet users.109 India is now adding approximately 10 million daily active internet users per month, the highest rate in the world’s internet community (Reporter,

109

“The Internet and Mobile Association of India”. www.iamai.in. Archived from the original on 27 June 2018. Retrieved 3 May 2018.

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2018). Multiple countries, including the United States, Japan, South Korea, the United Kingdom, Australia, Canada, Singapore, Malaysia, Vietnam, and Uzbekistan, have supported the Digital India initiative.110 At the Digital India launch ceremony, top CEOs from India and abroad committed to investing US $3.1 trillion in the initiative.111 Over $20 billion in investment flew into India’s technology sector in 2020, most originating from the United States. Since 2020, about $17 billion has been invested in India by the most prominent Silicon Valley firms. Amazon made a $1 billion promise in early 2020, Facebook almost $6 billion in late April, and Google made a $10 billion commitment in July 2020 (see Footnote 112). While India has long been a significant market for US technology companies, the shrinking possibilities for technological collaboration with China and new challenges to their foothold in locations like Hong Kong are reemphasizing the significance of the Indian market to the United States. China has been off-limits for Silicon Valley because of the draconian censorship imposed by mainland China, dubbed the Great Firewall. Hong Kong, the island province of mainland China, remains out of bounds for Silicon Valley companies. With over 800 million internet users and another half a billion expected in the next several years, India’s digital economy is just too big a prize for Big Tech to ignore for long. Moreover, people have come to appreciate the moral hazard of doing business with China. This move would only help enhance relations between the United States and the Indian subcontinent. In response to demands for a boycott of Chinese goods after the border confrontation between the two nations, the Indian government banned dozens of Chinese applications, including TikTok; even though Chinese cellphones continue to dominate the Indian market, a good number of India’s startups have received substantial Chinese funding. With hundreds of Indian engineers working in Silicon Valley and Indian CEOs driving Microsoft, Google, IBM, Twitter, and other US firms, India and the United States have a longstanding association in the tech industry (see Footnote 112). As a result of the epidemic, Indian homes expanded their use of the internet to socialize, work from home, and learn, creating a natural synergy between the United States and India. This has added to India’s market appeal. Simultaneously with US technology firms eyeing India, Asia’s richest man has acted as a willing gatekeeper in many ways. The majority of this year’s technology investment in India—including Facebook and almost half of Google has gone into Jio platforms, controlled by Indian billionaire Mukesh Ambani. Since late April, companies, venture capitalists, and sovereign wealth funds have invested over $20 billion in Jio, the digital arm of Ambani’s conglomerate Reliance, to enter India’s vast digital economy (see Footnote 112).

110

“Vietnam may emulate Digital India, seeks cooperation on e-governance,” Hindustan Times, 28 March 2017. 111 “Digital India: Top CEOs commit to invest Rs 4.5 trillion.”

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In 2016, Jio began operating a mobile network, and it has since expanded to include over 400 million customers. Ambani seems to be trying to turn the business into an Indian ecosystem through digital payments, streaming services, and even JioMeet (like Zoom in video conferencing).112 Silicon Valley wants a piece of action of Jio. It is also free of many data storage and e-commerce restrictions that have hindered Facebook, Google, and Amazon. Silicon Valley will look for new markets as the US government further separates its economy from the rest of the globe. India is ripe for the picking. India is on the verge of becoming a digitally advanced nation on several fronts.113 However, even though only around 40% of the population has an internet connection, it digitizes activities faster than the United States.114 ,115 As the cost and availability of smartphones and high-speed connections have come down, societal digitization has hastened. India will account for approximately 14% (30.5 billion) of the world’s 218 billion app installs. India’s growth rate of app downloads (28% year on year) is four times the global average.116 Except for China, Indians download more apps than any other country. Social media users spend more time on the platforms than their counterparts in China and the United States (17 h a week on average).117 Over 332 million individuals established mobile-based bank accounts via the government’s “Jan Dhan Yojana” mass financial inclusion initiative, more than doubling the percentage of Indian adults having at least one digital bank account to 80%.118 The Indian government is developing its social network, Koo, amid a protracted standoff with Twitter last year to chart its course. Since its launch, it has been eagerly embraced by several government employees and departments. Koo has been downloaded 3.3 million times so far, which is encouraging for the young business, but they fall short of Twitter’s 4.22 million Indian downloads in the same period. The government has increased its pressure on global technology companies over the last couple of years. Less than a year after banning dozens of Chinese apps, including TikTok and WeChat, it recently increased restrictions on Facebook, Twitter, and YouTube. Koo doesn’t dispute that the government’s war with Twitter has helped it and other Indian apps, arguing that local apps understand the Indian market better and fill in where big global technology companies fall short.

112

Why Silicon Valley’s biggest companies are investing billions in India, CNN, July 20, 2020. India’s Trillion Dollar Digital Opportunity, Ministry of Electronics and Information Technology, Government of India, February 2019. 114 Digital India: Technology to transform a connected nation, McKinsey, 2019. 115 Priori Data, January 2019; Strategy Analytics, 2018; TRAI, September 30, 2018; UIDAI, April 2018; We Are Social, January 2019; McKinsey Global Institute analysis. 116 InMobi in Koo in India is trying to build its own internet, CNN, March 9, 2021. 117 We Are Social, Digital in 2018: Southern Asia, January 2018. 118 Pradhan Mantri Jan Dhan Yojana, November 20, 2018, pmjdy.gov.in/account; Asli DemirgüçKunt et al., The Global Findex Database 2017: Measuring financial inclusion and the fintech revolution, World Bank, April 2018. 113

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“A lot of the global tech giants have India as a part of their roadmap as far as growth is concerned, but they’re also a little worried about making big changes to a very stable global product to cater to a market like that,” chipped in the cofounder of Koo. “We have the talent, and we have the resources, some of us have the experience, there’s funding available for fulfilling dreams like these. And these are pretty large dreams, and we’re talking about creating products that are very relevant to the second-largest internet population in the world.”119 India’s digital marketplace is giving rise to splinternet—a phenomenon which indicates how the internet may change if countries create their applications instead of relying on the global and open nature of the internet. It also serves as a message to social media giants like Facebook and Twitter not to take India’s enormous opportunity for granted. However, as a democratically elected government with close links to the United States much greater than China’s, India is unlikely to completely shut down its internet and expel America’s largest technology companies anytime soon.120 Digital India ecosystem may expand at a rate far above GDP; by the year 2025, value add is expected to be between $200 and $250 billion for IT-BPM, $100 and $130 billion in the electronics industry, and another $50 and $55 billion in digital communications.121 In 2025, the aggregate value expectation between $355 and 435 billion amounts to 8–10% of India’s GDP (see Footnote 114). India can add value to the already-digitized industries by fostering new and growing digital ecosystems in education, agriculture, financial services, energy, logistics, and health care. Each of these newly digitized industries is already reaping the advantages of digital applications. Real-time truck tracking, for example, has allowed shippers to reduce logistics fleet turnaround times by 50–70%. Supply chains that use digital technology could save inventories by 20%. Using soil data to decrease the usage of fertilizers and other inputs may save crop production expenses by 15–20% for growers (see Footnote 122). By 2025, India’s newly digitizing sectors will generate significant economic value: financial services between $130 and $170 billion, including digital payments; agribusiness between $50 and 65 billion; retail and e-commerce, logistics, and transportation between $25 and 35 billion; and energy and health care between $10 and 15 billion (Exhibit 5). An increase in the digitization of government services and welfare transfers may create between $20 and $40 billion in economic value, while the potential value of the digital job market and skill-training platforms is upward of $70 billion.122 China continues to be the world’s biggest app economy in terms of use and revenue, but India’s App Economy has seen the fastest growth over the past two

119

Koo in India is trying to build its own internet, CNN, March 9, 2021. India is trying to build its own internet, CNN, March 9, 2021. 121 McKinsey in India’s App Economy: The Opportunity is Huge. The Time is Now, Elad Natanson, Forbes, Nov 13, 2018. 122 Digital India: Technology to transform a connected nation, McKinsey Global Institute Report, 2019. 120

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years. While India’s app economy is still in its infancy, it is developing fast, that every professional app marketer developer must now be aware of it. The figures are staggering: • With 12.1 billion app downloads last year, India surpassed the United States as the world’s second-largest market. • By 2022, India’s app market will have grown to 37.2 billion downloads per year, a growth rate of 207%—making it the world’s fastest-growing app market by far.123 • India has surpassed the United States with the most non-organic app installs and usage per month. • The average monthly data consumption per subscriber has increased by 2500% to 1.6 GB. The last data point is maybe the most revealing. The Indian app industry has expanded in the past two years due to two factors: 4G data subsidization and a flood of low-cost Chinese smartphones. Jio, an upstart entrant to the mobile industry promoted by Reliance Industries, kicked off the 4G revolution in 2016. Reliance offers unlimited 4G data. In less than 18 months, Jio grew to 177 million mind-boggling users. In the process, Jio is upending the mobile telecom market, plunging incumbents Airtel, Idea, and Vodaphone into a pricing war. Consequently, 4G is available to over 200 million people, mainly in India’s cities. India’s 20 biggest cities have more than 80% 4G connectivity.124 Simultaneously, Xiaomi, Oppo, and Vivo, all Chinese mid-tier smartphone manufacturers, have inundated the market with affordable models with many features such as Apple and Samsung’s premium offerings. As a result of this perfect storm, India’s 337 million smartphone users enjoy the rich app experiences that high-speed internet can offer for the first time. Three hundred thirty-seven million is only 25% of the market! Simultaneously, just 19% of today’s app market originates from nations other than India and China. This opens up a world of possibilities for Western app marketers and developers. Even though app use has exploded in the past two years, India’s app economy is still in its infancy in terms of revenue. Despite being the world leader in app downloads, India was ranked 29th globally, with combined revenue of $47 million from iOS and Google Play, a pittance compared to the US’s $3.2 billion (see Footnote 126). The most popular app category is video/streamed entertainment, which makes sense given that many users lack access to wired broadband. Netflix is one of India’s most popular subscription-based apps. Tinder, Facebook, and WhatsApp are more well-known western applications pretty popular in India. E-commerce

123

App Annie in India’s App Economy: The Opportunity is Huge. The Time is Now, Elad Natanson, Forbes, Nov 13, 2018. 124 Open Signal, Dazeinfo in India’s App Economy: The Opportunity is Huge. The Time is Now, Elad Natanson, Forbes, Nov 13, 2018.

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(retail, travel, banking, and payments) and games, in addition to entertainment and social media, are categories with significant growth potential, especially as the market grows to include more rural consumers, many of whom will be exposed to such services for the first time on a mobile platform. One sign of the market’s fast development is the growth of non-organic installations. A new user in India would be faced with nearly 2 million applications. Consequently, sponsored installations are in high demand, with non-organic installations more than tripling in the past year. Spending on mobile advertising is expected to rise from $800 million to $1.7 billion by 2022.125 The overwhelming majority of impressions—86% occur in app rather than on the mobile web, making this an ideal chance for applications that acquire momentum. India’s app market is comparable to “Game of Thrones.” While the cost per install is now cheap and advertising is affordable in India, there are still significant hurdles. App retention rates are low, as one would anticipate from new users who are still in the “experimental” stage, ranging from 4.2% (non-organic) to 8.5% (organic) at 30 days.126 However, the number of apps uninstalls is even more challenging: a rate of 32% after 30 days. This is because India’s low-cost smartphones have limited storage, and users are forced to remove applications to create new ones. This is expected to change as phones acquire storage capacity, but for the time being, this remains the case. In conclusion, India currently has a more significant installed base of users than the United States but is still in the early stages of developing an app economy. The good news is that many of the world’s largest advertising platforms now have well-established operations in India, which can serve as an excellent entry point for new entrants. India flexes its muscles: The way American tech companies conduct business in India is changing due to the deluge of regulations that the South Asian country is preparing for. India chose not to participate in trade negotiations with a group of Asian nations led by the United States, claiming that the benefits of trade obligations relating to labor, environmental, and digital trade issues are unclear. It further stated that it was hardening its own digital environment and rules, notably those about data and privacy. Thus, India became the sole member of the 14-nation Indo-Pacific Economic Framework to reject the group’s trade negotiating track. India, a nation of 1.4 billion people, wants to take the lead in how it allows international internet and technology companies to operate within its borders. India is poised to introduce a new privacy law over the coming months, a new Digital India Act to replace its antiquated Information Technology Act, and a revised competition statute to tighten control on multinational technology companies by requesting greater jurisdiction over their acquisitions (see Footnote 128).

125

eMarketer in India’s App Economy: The Opportunity is Huge. The Time is Now, Elad Natanson, Forbes, Nov 13, 2018. 126 India’s App Economy: The Opportunity is Huge. The Time is Now, Elad Natanson, Forbes, Nov 13, 2018.

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Twitter and WhatsApp, both owned by Meta Platforms, are already involved in legal battles with the government over alleged invasions of privacy and censorship. Amazon and Google are currently the subjects of an antitrust probe in India. In August, India pulled a privacy bill from the parliament that called for strict controls on international data transfers, regarded social media sites like publishers, and granted the Indian government the authority to demand user data from businesses. Large technology corporations were concerned that India would set a precedent that would affect other countries. Although the specifics of the new legislation that will replace it are unknown, American IT companies are not expected to find it particularly benevolent. India’s stance on American technology is consistent with that of many other nations, but its newly found assurance results from being the second-largest internet market in the world by user base, after China. The nation’s digital industry has boomed in recent years due to inexpensive data and rising smartphone adoption, making it a crucial market for global technology titans. Its significance is increased because, even with the new laws, it will continue to be much more open and globally connected than China’s internet market (see Footnote 128). India currently has 640 million internet users, roughly twice the size of the United States, and is projected to reach one billion by 2026.127 Influence naturally comes with a size like that.128 India aims to develop an Amazon-killing public utility. The plans of U.S. Big Tech to expand abroad would be inherently threatened by success—or even by a passable attempt. It might also serve as a model for other developing countries that want to use the possibilities of digital payments, e-commerce, and other internet services without giving the reins to a select group of powerful technology companies. The Open Network for Digital Commerce, or ONDC, of the Indian government, went live in Bengaluru, the nation’s technological center, a little more than a month ago. An interoperable network called ONDC aims to assist small retailers in expanding their reach on private e-commerce platforms, thereby weakening the hold that Amazon and Walmart have on Flipkart. It will make it possible for goods and services from all participating e-commerce sites to be displayed in search results for all networked apps. This occurs as India vigorously pursues antitrust cases against significant American tech firms like Meta, Google, and Amazon. How successful ONDC will be is still up in the air. However, the network’s opening sends a clear message about how India, which has the world’s secondlargest population of internet users, intends to develop its internet economy: It would prefer a competitive, decentralized model based on digital public goods. That contrasts sharply with the American model, which is based on natural monopolies and frequently relies on advertising revenue, and China’s heavily controlled and protected models.

127

Bain & Co. in American Tech Can’t Catch a Break in India, The Wall Street Journal, September 12, 2022. 128 American Tech Can’t Catch a Break in India, The Wall Street Journal, September 12, 2022.

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According to Morgan Stanley, ONDC might seriously threaten well-known companies and platforms in industries like ride-hailing and food delivery. The bank claims that more than 30 businesses, including Reliance Retail, Paytm, and Google, are in active talks to align with ONDC. This idea is based on India Stack, a collection of software tools created by nonprofits and governmental organizations to enable safe identity verification, ecommerce, and payments for the general public. One illustration: According to the Indian government, over 90% of the country’s citizens have now registered for Aadhaar, the biometric identity verification system that is a crucial part of India Stack. According to the International Monetary Fund, by 2019, around half have connected their bank account to their ID, allowing them to use India Stack’s Unified Payments Interface (UPI) to conduct digital payments (see Footnote 129). The IMF points out that this has aided in the growth of new businesses like Jio, a telecommunications provider that has greatly increased data availability throughout India. The Open Credit Enablement Network, one of the other components of the India Stack, attempts to codify a set of credit criteria that can be used by borrowers, lenders, and fintech intermediaries. Undoubtedly, there are many difficulties in developing a successful open architecture for e-commerce. People shop on websites like Amazon because the company makes investments to ensure its things are real, will arrive in good condition, and will be delivered on time. Customers have several options for remedies, including the courts, when things go wrong. It may be challenging to incorporate that level of responsibility and dependability into an open-access, decentralized network. Success, however, would pose a serious danger to the business models of powerful U.S.-backed digital commerce corporations like Amazon, especially if components of India Stack were later exported to other sizable developing countries fearful of the influence of American tech titans. IT investors and their detractors in domestic and international government and civil society should keep a close eye on India Stack and ONDC.129

8.4.1

India’s 100-Strong Unicorns

The startup scene in India is thriving, and the nation is now home to the world’s third-largest ecosystem of startups. Indian companies have raised over USD 50 billion in venture capital over the past six years, with over 40,000 startups launched. This ecosystem has already generated enormous value—there are around 100 unicorns here, making it the world’s third-largest population of unicorns. A new unicorn is born every five days. Ambitious entrepreneurs receive social and financial backing to expand and reach outlier outcomes in the backdrop of a sea shift

129

How India Plans to Reinvent E-Commerce, The Wall Street Journal, November 8, 2022.

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Fig. 8.37 Bangalore, the clear winner. Source Bangalore Innovation report, 2019, Karnataka Government

in the Indian cultural milieu. Bengaluru is the best example of how a generational change can alter a city. From now until 2035, the GDP of Bengaluru is projected to increase at an annual rate of 8.5% (Fig. 8.37). Between 2022 and 2035, 17 of the world’s 20 fastest-growing cities will be Indian, with Bengaluru leading the pack.130 After a decade of remarkable expansion, there are now 80,000 tech companies in India. The innovation clusters have created more than 10,000 new startups in the last two years, notably in Mumbai, Bengaluru, Pune, Hyderabad, and Chennai. India currently has 80,000 startups. In 2021, they raised $42 billion, a significant increase from over $11 billion in the previous year131 (Fig. 8.38). Compared to the US ($114 billion) and China ($34 billion), India’s VC activity is lower but higher than countries with more advanced economies like Germany and France. India is home to 100 unlisted “unicorns,” collectively worth more than $100 billion.132 Another 150 or more “soonicorns” are in waiting. They provide excitement, free cappuccinos, and financial fortunes for a select few. They have the power to reshape many sectors of the country’s economy. Brilliant engineers and managers aren’t content to work for global corporations, banks, or government-run businesses; they want to work for startups or venture capital investors. In the next ten years, Indian startups will triple the GDP.133

130

Bangalore Innovation report, 2019, Karnataka Government. Bain and company in India’s booming startup scene is showing signs of trouble, The Economist, 12 March 2020. 132 PitchBook in India’s booming startup scene is showing signs of trouble, The Economist, 12 March 2020. 133 Mohandas Pai, a VC based in India in India’s booming startup scene is showing signs of trouble, The Economist, 12 March 2020. 131

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Fig. 8.38 India’s VC investment, $bn. Source Bain and company in India’s booming startup scene is showing signs of trouble, The Economist, 12 March 2020

Tales of startup triumph enthrall India’s business press. Foreign venture capital firms have come in droves. They want to be as successful as Walmart’s acquisition of Flipkart for $16 billion in 2018. Venture finance in India has traversed a long way from being practically non-existent in 2005. Since then, several American venture firms such as Lightspeed, Accel, Matrix, Bessemer, and Norwest have opened operations in India. Also, Temasek and GIC in Singapore, China’s Alibaba and Tencent, and Japan’s SoftBank have all invested heavily in startups, thanks to their deep desire to get a piece of the Indian startup action (see Footnote 135). Many influential local companies, such as Blume Capital, have joined them. Major Indian conglomerates have established Tata, Mahindra, and Reliance venture capital arms. Annually, venture capitalists say they get more than 5000 proposals. Most of the funds have been invested in well-known platforms, including Byju’s (online education), Zoomcar (car rental), BigBasket (online grocers), Zomato, and Swiggy (food delivery), and Ola (ride-hailing). HighRadius, a 2020 unicorn company, provides “software-as-a-service” (SaaS), another proven business model that enables businesses to access cloud-based services such as accounting or customer support. This preference for known is understandable. And it works in India almost without requiring the country’s rickety physical infrastructure to be fixed. However, their expansion is restricted in a nation with a large population but little disposable money. And, as in the West, very few of them are profitable.134 This is because

134

Tracxn in India’s booming startup scene is showing signs of trouble, The Economist, 12 March 2020.

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acquiring new consumers and achieving scale requires substantial investment.135 India is not a bed of roses. There are infrastructural issues and bureaucratic hurdles. If India is to unleash its enormous startup potential, unfettered scaling must be facilitated. Entrepreneurs in India were in panic mode in early 2020. The government issued a quarantine for the entire population in an unprecedented move to combat the 2019 pandemic. A significant financial constraint, which would have limited their capacity to grow, pay employees, and even remain afloat, worried its founders. A year later, the mood has shifted dramatically, despite a brutal surge in coronavirus cases jeopardizing economic recovery. The startup community in India is enjoying unprecedented access to capital. In the first four months of 2021, 11 startup firms reached unicorn status. In April alone, five more companies reached that exalted status. Consequently, the number of ultra-rich technological executives in India is quickly increasing. India has more than 100 unicorns as of today. Not only are more businesses amassing this kind of money than ever before, but they are doing so at an unprecedented rate. The boom is fueled largely by megainvestors like SoftBank and Tiger Global; many investors can’t resist investing in India’s fast-expanding online companies. Flipkart, a subsidiary of Walmart, is contemplating listing on Indian bourses; Zomato had a successful IPO in 2021 (see Footnote 136). The investment frenzy is a result of India’s growing digital economy. More than 700 million people in the nation have access to the internet, with an additional half a billion waiting to join, creating enormous market potential. Meanwhile, people outside big cities are spending money online forced by the epidemic, speeding up digitalization and opening new tech entrepreneurs’ prospects. Fintech companies have reaped the most significant rewards. By the end of 2020, India had nearly fifty unicorns, most of which were in the fintech sector. Retailers and software-as-a-service providers have followed. The time required for startups to reach the unicorn level has reduced dramatically from 15 years in 2005 to less than two years in 2021.136 Recent unicorns include Mohalla Tech, an app developer, an investment company called Groww, and a messaging network called Gupshup. Over the last two decades, only a handful of Indian technology firms have been listed. However, some experts have begun to doubt the amount of money poured into the sector by large investment firms. Is there an exit plan if a unicorn company gets overfunded and implodes? Indian firms must consider initial public offerings sooner rather than later if a sustainable startup ecosystem is to be built. “We don’t have large tech acquirers, so you can’t wait for a Walmart to come and buy your

135

India’s booming startup scene is showing signs of trouble, The Economist, 12 March 2020. India is churning out billion-dollar startups. Now they need to start making money, CNN, April 23, 2021.

136

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biggest asset every time.137 India needs to unleash its tech firms on the public market; now, Indian citizens have hardly any exposure to the unicorn boom.” There’s a flourish of IPOs from online startups in India. The stock market in India is about to be upended entirely because of the internet. There will be a flood of Indian online startups entering the market in two years. Zomato, a perfect riposte to DoorDash, has been listed. Flipkart, the e-commerce leader from Walmart’s stable, is contemplating an IPO. The financial giant Paytm did an IPO recently. The online learning platform, Byju’s, is contemplating a US listing through a reverse merger with SPAC. All this could reshape India’s internet market, which is currently dominated by a small number of internet companies. While large technology companies are among the largest publicly traded companies in China and the United States, the Indian market is currently dominated by energy, financials, and IT outsourcing. The oil and gas giant Reliance Industries is investing in its technology subsidiary, Jio platforms, with participation from Facebook and Google. Jio is likely to float in 2022 (see Footnote 140). Several of India’s privately held technological companies may be among the country’s biggest firms. At a $25 billion valuation, Flipkart received $1.2 billion in funding from a Walmart-led investment group in 2017. Ant Group and SoftBank led a financing round in 2019 that valued Paytm’s parent firm at $16 billion. While the pandemic has taken a toll on India, the country’s stock market has soared. When these unicorns go public, a strong market will help them get their desired valuation. In India, the epidemic has helped internet platforms as much as worldwide. The yearly client acquisition expense of Indian internet businesses has decreased by 20–30%.138 This lays the groundwork for improved financial metrics in their initial public offerings. It will be possible for investors who have pumped money into IT firms in the previous years to exit profitably. Venture capital and private equity firms invested $93 billion, excluding infrastructure and real estate, between 2018 and 2020 in India.139 Particularly popular were the fields of technology and e-commerce. This is in addition to the over $10 billion invested in Reliance’s online platform, Jio. With a population of 1.35 billion and a fledgling internet industry, investors may believe India can replace China as the world’s largest economy. Only 3.6% of consumers were using e-commerce in 2018, signifying a large untapped market (see Footnote 138). The caveat is that India, too, faces numerous obstacles. Inadequate infrastructure may stymie e-commerce growth. There has always been a rift between international investors and the country’s often opaque economic climate, and the current surge in protectionism and nationalism may only aggravate it. The country’s financial sector was already troubled by bad debts before the disease outbreak, which could slow the country’s growth. Investors are likely to be thrilled about

137

Blume Ventures in Big Tech Is Going Public in India, The Wall Street Journal, June 10, 2021. Bernstein in Big Tech Is Going Public in India, The Wall Street Journal, June 10, 2021. 139 Ernst & Young in Big Tech Is Going Public in India, The Wall Street Journal, June 10, 2021. 138

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Fig. 8.39 Sectoral split of Indian unicorns by value. Source Credit Suisse in India’s 100-strong unicorn club drives radical change in the country’s corporate landscape, Credit Suisse, March 23, 2021

entering a new generation of Indian businesses on the stock market, but they should be prepared for potential obstacles.140 India’s 100-strong unicorn club is driving transformational change. India’s corporate landscape is undergoing a profound transformation due to a remarkable convergence of changes in the funding, regulatory, and business environments over the last two decades. Six-seven percent of new Indian businesses are startups, and this percentage has gradually increased over the past decade, with fresh startups making about 10% of newly formed companies. Credit Suisse research identified 100 unicorns in India across various industries, encompassing industries such as consumer and biotech/pharmaceuticals products enabled by technology, which have benefited from formalization and increased digital adoption. Fast-growing and innovative (unlisted) businesses are growing in new sectors and locations across India, rapidly scaling up as they capitalize on unique growth opportunities created by digital public infrastructure and partnerships141 (Fig. 8.39). While more than half of the BSE500 (Bombay Stock Exchange 500 index) companies were founded in Mumbai, Delhi, or Bengaluru, unicorns have distinctly expanded throughout the nation. Two-thirds of startups were founded after 2005, whereas only 13% of BSE500 firms were founded after 2000, and 36% of new companies were formed before 1975, which indicates that this process was slow

140

Big Tech Is Going Public in India, The Wall Street Journal, June 10, 2021. India’s 100-strong unicorn club drives radical change in the country’s corporate landscape, Credit Suisse, March 23, 2021.

141

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Fig. 8.40 Startups account for a larger share of new firms in India, %. Source VCCedge, MCA, Credit Suisse in India Is the New Hope for Tech Investors With Fund-Raising Blitz, Bloomberg, July 18, 2021

in pre-internet India.142 Bengaluru is the most dominant IT city, followed by Delhi NCR and Mumbai (see Footnote 141). Fintechs are the forerunners in India’s unicorn landscape. The profile of unicorns in India is quite diverse and spans sectors such as financial technology, e-commerce, food delivery, education technology, and mobility companies. Additionally, it’s no secret that the number of companies in many sectors is exploding. This includes software-as-a-service (SaaS), gaming, contemporary commerce, biotechnology, and pharmaceuticals. Even rapidly growing consumer brands have benefited from the increasing internet penetration and sectoral formalization. Meanwhile, as India’s listed equity market capitalization has grown, the country has risen from the eighth to the sixth most significant market globally. Over time, the country’s equity cult has attracted more active stock market participants thanks to supporting infrastructure and regulations and increased corporate listings on the bourses. Along with the economy’s rapid growth, India’s market capitalization of listed equities has sharply gone up, making India the world’s eighth-largest securities market. Unicorns in India have an aggregate valuation of US $90 billion, with India being home to the world’s third-largest cohort, behind the United States and China. Fintechs, including e-commerce, account for 30% of the Indian unicorn ecosystem; these two are the most valuable sectors that have raised $10 billion in the Indian unicorn space (Fig. 8.40). Digital payments are at the forefront of the evolution of Indian startups. In the past five years, digital payments have increased more than ten times to reach an annual payment run-rate of $450 billion; the payments go through India’s public

142

VCCedge, MCA, Credit Suisse in India Is the New Hope for Tech Investors With Fund-Raising Blitz, Bloomberg, July 18, 2021.

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payment infrastructure, the Unified Payments Interface (UPI), accounting for 30% of retail transactions. This rapid payment digitalization is being driven mainly by UPI because it enabled large technology companies to access an interoperable payment network.143 India has about 5 million conventional point-of-sale (POS) terminals, while the usage of digital payments has grown to over 200 million active users, with acceptance at over 30 million merchant locations. Additionally, it demonstrates that the Fintech sector has been the second-largest recipient of private equity/venture capital funding over the last decade, with payment firms raising US $4.2 billion and digital lenders raising US $2.5 billion (see Footnote 141). “Covid-19 has accelerated the pace of digitization globally across communication, shopping, and payments space. While part of this shift should gradually recover, as we come out of the pandemic, there is widespread consensus that it has brought a structural change in categories such as shopping and payments” (see Footnote 143). An examination of consumer credit card purchasing patterns reveals that the pandemic increased the growth rate of the digital-spending share by almost ten percentage points in just nine months, from 44 to 53% (see Footnote 141). Additionally, it demonstrated a significant shift in consumer trends online from offline. Fintechs are expanding their offerings beyond digital payments. By capitalizing on the growth of digital payments, India Stack,144 and embedded offerings, Fintechs are diversifying their revenue streams beyond their core/initial offerings. While most Fintechs operate in partnership with incumbent banks and NonBank Financial Companies (NBFCs) in the liability, lending, and fee businesses, the Fintech phenomenon has spread to other financial segments such as insurance, e-commerce, and wealth management. With more than 150 million user bases, Fintech companies have started providing small-ticket personal loans and shortterm credit to monetize their user base. POS terminal value-added services like merchant loans and customer finance have boosted the digital wallet share. Digital lenders have grown to a market capitalization of US $10 billion; with the growing trust in their underwriting processes, these lenders now account for more than 40% of new personal and consumer durable loan volume (see Footnote 141). Digitization has aided incumbent banks in driving new business acquisition, cross-selling, and customer service channels through proprietary digital platforms and partnerships with Fintechs. Additionally, Fintechs and banks have formed joint ventures to combine financial services such as lending, investing, and insurance.

143

Credit Suisse in India’s 100-strong unicorn club drives radical change in the country’s corporate landscape, Credit Suisse, March 23, 2021. 144 “India Stack” refers to the trinity of higher banking penetration through Jan Dhan accounts, Aadhaar-based unique identification and authentication, and increased internet (mobile) penetration. These three together create public infrastructure, which enables paperless, instantaneous, and cost-effective customer authentication and on-boarding.

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While these partnerships add new revenue streams and increase user engagement, they also allow established banks to grow their customer base and increase their portion of digital revenue. The bigger private sector banks and the largest public sector bank, State Bank of India, have created unique digital platforms that source 60–70% of new retail clients, 60–80% of retail fixed deposits, 75% of new credit card users, and 50–60% of new home/micro-, small, and medium business loans (see Footnote 141). India remains the beacon of hope for tech investors. July 2021 was a watershed moment for Indian technology startups; a record round of funding turned investors’ attention to the world’s second-largest market at a time when investors were concerned about China’s crackdown on internet firms. Zomato, a meal delivery service, became the country’s first unicorn to go public, raising $1.3 billion. Paytm’s parent firm submitted a draft prospectus for what may be India’s biggest IPO at a $2.2 billion valuation. In comparison, retailer Flipkart received $3.6 billion at a $38 billion valuation, a record financing round for an Indian business (see Footnote 149). For over a decade, during that period, Indian entrepreneurs have been quietly developing startups; the country’s internet infrastructure has substantially improved, and technology equities have significant worldwide demand. “Investors are beginning to see the huge upside, and they expect India to be a China.”145 Many of India’s 625 million internet users are just getting started with video streaming, social networking, and e-commerce compared to China, where online use is considerably more mature. Because e-commerce accounts for less than 3% of retail transactions, online shopping possibilities are alluring. In India, technology startups develop supply chains and logistics, the backbone of e-commerce operations. The population of India is projected to exceed that of China this decade, and investors’ moods could not be more dissimilar. China is restraining its technology companies, slashing market valuations by more than $800 billion from a February high and slashing the net worth of some of the country’s most famous entrepreneurs by billions. Didi was suddenly pulled from app stores by the government this month, months after authorities pushed Ant Group, owned by Jack Ma, to postpone a blockbuster initial public offering at the last minute. As authorities rein in internet firms’ dominance and take control of user data back, the crackdown is likely to continue. Indian technology companies can attract global investors who have been bitten badly by Chinese technology companies. A successful list of a few loss-making startups may lead to the rerating of many established companies, thereby boosting the market.146 In the second quarter of 2020, while investment in Chinese startups

145

GGV Capital in India Is the New Hope for Tech Investors With Fund-Raising Blitz, Bloomberg, July 18, 2021. 146 Kotak Mahindra Asset Management Co. in India Is the New Hope for Tech Investors With Fund-Raising Blitz, Bloomberg, July 18, 2021.

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dropped 18% from a high of $27.7 billion in the fourth quarter of 2020, India witnessed a record $6.3 billion in funding and deals for technology startups.147 Flipkart, a dominant e-commerce retailer, and Amazon are one of a slew of startups, including an insurance marketplace, a logistics provider, and a ride-hailing service that plans to go public in the next 24 months. Through Initial Public offerings, retail investors will buy shares in companies that were previously exclusively accessible only to global private investors. In recent months, India has been creating companies worth $1 billion or more at an unprecedented pace in those private markets. Half a dozen unicorns were created in four days in April, and many startup funding rounds have been reduced to weeks. “$1 billion is the new $100 million, and global investors see the potential upside in India’s huge, under-penetrated market, and capital flows have multiplied ten times.”148 India’s optimism is tempered by the fact that one of the world’s worst coronavirus outbreaks, with more than 31 million cases and over 400,000 deaths, threatens to erode decades of economic gains. And then there are political risks. Additionally, as the administration clamps down on foreign merchants, social media giants, and streaming firms, technology entrepreneurs confront an increasingly restricted regulatory environment. The government is likely to propose a law on data ownership and storage, which would place restrictions on handling user information. New ventures, which face expensive real estate expenses and often suffer from broken distribution chains and complicated structures, have a competitive advantage over traditional businesses. Because of these constraints, many retail, financial, and healthcare companies have yet to grow in smaller cities, let alone the millions of people who reside in distant rural hinterlands. Because of the widespread use of cell phones and the internet, digital entrepreneurs have been able to pioneer new business models to reach the country’s most distant areas. Additionally, big investors’ promise of high returns may encourage additional funding rounds when startups expand the number of public stock offerings. For instance, SoftBank, which exited Flipkart for a profit three years ago, returned to investing in last week’s round. “India’s consumer internet companies have come of age,” said Infosys Chairman Nandan Nilekani, whose initial public offering in 1993 exposed investors to an information technology services sector that today has a revenue of $14 billion and has made its founders millionaires. “When these new startups convert their pole position to earnings and cash flow, their future is assured,” Nilekani said.149 Half a dozen Indian companies have become unicorns after raising $1.6 billion in four days of April 2021, completing a record-breaking week of financing

147

CB Insights in India Is the New Hope for Tech Investors With Fund-Raising Blitz, Bloomberg, July 18, 2021. 148 Krishnan Ganesh, a serial entrepreneur in India Is the New Hope for Tech Investors With FundRaising Blitz, Bloomberg, July 18, 2021. 149 India Is the New Hope for Tech Investors With Fund-Raising Blitz, Bloomberg, July 18, 2021.

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in the national new-age internet sector. Although just 12 unicorns were born in 2020, it was the most significant number ever recorded in India for a single year. In India, ten startup unicorns were already born in 2021. Last week, six deals were announced across various industries, including social commerce, health care, fintech, content, and social platforms. Investors have changed the criteria for evaluating companies’ terminal value in a world of zero-cost money. Consumer companies with winner-take-all qualities and SaaS enterprises with highly sticky and increasing revenue streams seem much more valuable today. “Indian startups have performed admirably in the pandemic. In a lot of spaces, winners are emerging even more now. It is these companies that are becoming unicorns faster.”150 The average deal size has risen substantially because financing rounds have been completed at record speed, and companies have received more money than expected. According to a joint study by IT sector advocacy organizations, India will produce more than 50 startup unicorns by 2021.151 ,152 India’s SaaS industry is worth $1 trillion: More than two decades ago, India started its transition into a worldwide IT powerhouse, ushering in a period of unparalleled riches and employment growth. SaaS remains one of the most popular areas for Indian startups. Now, Asia’s third-largest economy is preparing to enter the next big technical frontier: creating a new generation of software companies on the scale of Slack or Zoom. Businesses all around the globe have been forced to spend significantly on digital infrastructure as a result of the Covid-19 epidemic, extending the influence of software-as-a-service (SaaS) providers. SaaS firms offer web-based programs that handle anything from software security to performance. The world’s most well-known SaaS businesses include SAP, Zoom, and Salesforce, the American giant that owns Slack’s workplace messaging software. Companies spent an extra $15 billion each week on technology to establish secure remote working environments.153 India’s software-as-a-service sector may be worth $1 trillion by 2030 and create almost half a million new employment.154 There are nearly 1000 such firms in India; ten are unicorns. Six of India’s ten SaaS unicorns achieved that milestone in 2020, and investors worldwide are taking notice. Investors invested $1.5 billion in Indian SaaS companies last year, four times the amount invested in 2018 or

150

India Quotient in 4 days, 6 unicorns, $1.55 billion—A week like none other for Indian startups, The Economic Times, April 12, 2021. 151 NASSCOM, Zinnov in 4 days, 6 unicorns, $1.55 billion—A week like none other for Indian startups, The Economic Times, April 12, 2021. 152 4 days, 6 unicorns, $1.55 billion—A week like none other for Indian startups, The Economic Times, April 12, 2021. 153 KPMG in India’s got the next big thing in tech, and it could be worth $1 trillion, CNN, 9 September 2021. 154 SaaSBoomi and McKinsey & Co in India’s got the next big thing in tech, and it could be worth $1 trillion, CNN, 9 September 2021.

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2019. Investors are excited about SaaS due to the software’s “massive adoption” over the last decade.155 On the other hand, SaaS companies are much better positioned to expand globally than e-commerce companies like India’s Flipkart. They write software once, create an intangible IP, and then reuse and monetize it many times.156

Bangalore, the beacon of IT progress in India, stands in a class of its own. India’s Karnataka state (Bangalore is its capital) has developed into a significant economic pillar.157 Karnataka leads all Indian states in revenue generated by software exports. Bangalore will be one of the world’s largest IT hubs and export powerhouse for software. Karnataka’s software exports exceeded US $45 billion, accounting for nearly a third of India’s software exports. This accomplishment has earned Bangalore, the capital city of Karnataka, the moniker of India’s Silicon Valley.158 The upcoming IT park on the outskirts of Bangalore is the site of a massive $22 billion, 12,000-acre (49 km2 ) infrastructure project, one of the largest in the world. By 2030, this endeavor is expected to generate four million additional

155

Sequoia Capital India in India’s got the next big thing in tech, and it could be worth $1 trillion, CNN, 9 September 2021. 156 India’s got the next big thing in tech, and it could be worth $1 trillion, CNN, 9 September 2021. 157 NASSCOM India’s got the next big thing in tech, and it could be worth $1 trillion, CNN, 9 September 2021. 158 Industry watchers reject this moniker. They insist that Bengaluru is a class of its own—the latest alias for Bengaluru is TechHalli, literally translates in the local language Kannada to Tech village.

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jobs. An estimated PPP GDP of $45–$83 billion has been attributed to the Bangalore metropolitan region, making it India’s 4th most productive city.159 Bangalore accounts for 38% of India’s total information technology exports, with revenues of US $45 billion.160 A total of 4.5 million Indians work for IT companies in Bengaluru.161 According to the World Bank, at a 10.3% annual growth rate, Bangalore is India’s fastest-growing major city and the country’s fourth-biggest “Fast-Moving Consumer Goods (FMCG)” sector. Forbes validates Bangalore’s claim that it is one of the “The Next Decade’s Fastest-Growing Cities” (Kotkin, 2010; see Footnote 161).162 More than 10,000 billionaires live in the city, making it the third-biggest high-net-worth center in the country and 60,000 ultra-wealthy residents boasting investment surpluses of US $630,900 and US $70,100, respectively.163 Bangalore is India’s biotechnology sector center, housing nearly half of India’s 265 biotech companies (Chatterjee, 2007; John, 2006). Bengaluru’s thriving startup milieu has maintained a strong growth trajectory due to its startup environment being among the biggest in the world. India has the world’s third-biggest ecosystem for new ventures, of which Bengaluru captures the lion’s share. Nearly USD 50 billion has been raised by Indian startups in the past six years, with over 40,000 startups launched. This ecosystem has already generated enormous value—there are around 30 unicorns in Bangalore, making it the world’s third-largest population of unicorns. Bengaluru is the world’s fourth-largest technology cluster. Over 2 million software engineers live in the city, accounting for nearly 16% of the total population. And no city better exemplifies the generational shift’s transformative power than Bengaluru. Bengaluru was a crucial city in India’s rise to global IT leadership, with a long history of world-class R&D facilities, academic institutions, and companies serving the public sector. The country now has three of the world’s top five and five of its top ten IT firms. “Bangalored” has become a slang word describing the impact of a concentration of highly qualified employees servicing worldwide markets. Among the world’s 780 major cities, 17 of the 20 fastest-growing cities between 2019 and 2035 will be Indian, with Bengaluru, Hyderabad, and Chennai among the strongest performers (see Footnote 130).

159 “Global city GDP 2014”. Brookings Institution. 22 January 2015. Archived from the original on 25 May 2017. Retrieved 4 March 2017. 160 Bureau, Our. “Bangalore will become the world’s largest IT cluster by 2020.” @businessline. 161 Surat, fastest growing city Archived 3 April 2008 at the Wayback Machine. Rediff.com. 29 January 2008. 162 “Bangalore most affluent market.” Archived 7 March 2008 at the Wayback Machine. 2006. Rediff.com. 23 August 2006. 163 “Bangalore third richest city in country.” Archived 30 April 2007 at the Wayback Machine. 2007. The Times of India. Times of India. 1 April 2007.

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Aadhaar—The Non-pareil Digital Identity

Few innovations in recent years have had the same effect as Aadhaar, India’s government-owned digital identification system. It is the world’s largest national identification effort. The goal was to help the state allocate welfare payments appropriately to eligible individuals. However, Aadhaar has evolved beyond its original purpose of assisting subsidy distribution. It enabled India to build a more inclusive society by facilitating rural residents with bank accounts. It is freely accessible to third parties and is frequently used for authenticating individual profiles. Aadhaar is used by commercial institutions like insurance offices, mobile phone dealers, banks, and other sellers of regulated goods, resulting in substantial time savings for their customers and reducing a small forest’s worth of paper. Aadhaar’s economic benefits are evident already. The government has claimed billions in savings due to Aadhaar, which significantly improved targeted subsidies and eliminated intermediaries. Aadhaar’s multiplier effect is astounding. “With the use of Aadhar, the Indian government has saved about $9 billion by eliminating fraud in beneficiary lists,” avers Nandan Nilekani, the architect who created Aadhaar. Aadhaar is a 12-digit unique identification that Indian citizens and passport holders may freely acquire based on their demographic and biometric data. The most comprehensive biometric identification system globally, Aadhaar, is being emulated by several countries. Aadhaar has been described as “the most sophisticated ID program globally” by former World Bank Chief Economist Paul Romer.164 Because Aadhaar is proof of residency rather than citizenship, it does not bestow any domicile rights in India.165 The societal benefits of Aadhaar for a country like India are undisputed. The finance minister of India averred, “If we can realize the government’s JAM-Jan Dhan (bank account), Aadhaar, Mobile vision, we can ensure that money goes directly and more quickly into the pockets of the poor and from the savings we achieve, we can put even more money for the poor.”166 ,167 As of July 2020, nearly 1.29 billion Indians, representing 99% of the population, have their biometric data entered into Aadhaar,168 resolving the debate over whether a project this large could be sustained.169 The program goes hand in hand with other government efforts, such as Digital India, to improve people’s access to public services.

164

“‘Aadhaar’ most sophisticated ID programme in the world: World Bank.” Daiji World. Retrieved 17 March 2017. 165 “Aadhaar Card not proof of citizenship: Calcutta HC.” Retrieved 4 March 2017. 166 “Need reforms backed by growth to end poverty.” Deccan Herald. 6 July 2015. Retrieved 6 July 2015. 167 “Modi for expanding ambit of direct benefits, Aadhaar applications.” Business Line. 18 June 2015. Retrieved 7 July 2015. 168 “Aadhaar Dashboard.” UIDAI. Retrieved 19 August 2020. 169 “World Population Prospects: The 2018 Revision” (custom data acquired via website). United Nations. Archived from the original on 19 September 2016. Retrieved 22 July 2018.

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Aadhaar, the world’s largest digital ID identity: Numerous new services have been made possible because of Aadhaar, the world’s most comprehensive digital identity scheme. Before the advent of Aadhar in 2009, most Indians used basic physical documents like the “ration card” given for food subsidies to establish their identity; estimates indicate that about 15% of the population did not have ration cards.170 Aadhaar has become a significant driver of India’s digital adoption (see Footnote 114). Aadhaar is connected to an open “Application Program Interfaces” (APIs) suite. For instance, The Unified Payments Interface (UPI) platform combines various payment systems into a single mobile application that allows people, companies, and government organizations to make fast, simple, and low-cost payments. Users may generate and validate digital documents using DigiLocker, removing the need for paper documents. The IDs were designed to offer all Indian citizens a high level of security, oneof-a-kind, digitally verifiable means of establishing their identity. A significant benefit is the potential to reduce theft, loss, and fraud in government benefit programs by allowing benefits to be transferred directly to bank accounts. This usage has aided in the adoption of digital services by consumers. By February 2018, Aadhaar had been connected to almost 870 million bank accounts.171 Aadhaar is now connected to 82% of government benefits distribution accounts.172 Aadhaar is a tremendous achievement in policy, design, technology, and practical application. Over the past decade, India’s biometrically secure Aadhaar national identification system has allowed millions of people to engage in the country’s economic life. Today, over 1.2 billion Indians have access to the world’s “most sophisticated ID scheme.”173 A billion identities are digitized. Aadhaar was provided to everyone, from globally connected cities to remote villages, which usually have footpaths rather than roads. A workaround was devised when it became clear that older people with cloudy eyes would not have their irises scanned. When manual laborers could not be fingerprinted due to their smoothed hands, Aadhaar’s implementers devised a workaround. As a consequence of Aadhaar, many individuals have access to long-overdue government services. Banks and mobile phone providers have registered previously writtenoff customers as unviable, cost-prohibitive customers. With Aadhaar, India has surpassed the developed world’s identification systems. Aadhaar impacts almost every aspect of business, society, and government. In the absence of Aadhar, India was supporting a “ghost country.” Historically, 30–50% of government subsidies were diverted and siphoned off. According to some estimates, more than two-thirds

170

Unique Identification Authority of India, April 2018 in Ronald Abraham et al., State of Aadhaar report 2017–18, IDinsight, May 2018. 171 UIDAI; IDinsight in Ronald Abraham et al., State of Aadhaar report 2017–18, IDinsight, May 2018. 172 Ronald Abraham et al., State of Aadhaar report 2017–18, IDinsight, May 2018. 173 World Bank head economist Paul Romer in Ronald Abraham et al., State of Aadhaar report 2017–18, IDinsight, May 2018.

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of resources earmarked for poor assistance were diverted. The late Prime Minister of India, Rajiv Gandhi, remarked in 1985 that only 15% of government allocation reached the poor. Aadhaar changed all that (see Footnote 174). The fundamental design choice was to request only two biometric pieces of information—fingerprints and iris scan. Additionally, this focused approach enabled a massive project to be completed relatively inexpensively and quickly. It is estimated that the cost per person was less than $10. It was highly cost-effective because it was executed using a decentralized approach without substantial governmental infrastructure. Professionals who spent most of their lives working in leading software companies developed and implemented Aadhaar. They recognized and appreciated the streamlined simplicity of establishing identity using only a number and biometric data. With over 1.2 billion mobile phones, India is the world’s second-largest mobile phone market, behind China. The government created Jan Dhan accounts in 2014 to offer financial services to the underprivileged via public sector banks. There are currently has over 200 million Jan Dhan accounts. Furthermore, the private sector has created digital wallets for mobile phones that allow financial payments and transfers. This was aided by Aadhaar’s quick and low-cost digital identification verification.174 ,175 When India’s sudden Covid lockdown forced millions of migrant workers to return to their homes from the cities where they worked, deep societal stress was anticipated. However, Aadhaar, the country’s first biometric identification system, came to the rescue. Through a 2014 income program for farmers that would have been unthinkable to implement without Aadhaar, $1.5 billion was paid digitally and promptly into the bank accounts of 30 million individuals, with minimal waste or fraud and virtually no distribution expense. The success of Aadhaar has inspired many countries to adopt a similar digital identity. India channeled the aid with exceptional efficiency because 1 billion accounts were connected to people’s Aadhaar identification numbers. In contrast, 90 million paper cheques were painstakingly sent via the mail in the United States, each accompanied by a signed letter from the president (see Footnote 176). Covid has a knack for exposing society’s weak spots while catalyzing change. Rich nations that do not have national digital identification systems can get along owing to the plethora of other ways citizens can prove their identity—driver’s license, credit cards, and social security numbers, to name a few. However, obtaining Covid help for its most vulnerable people is made much more difficult for developing nations when they have no idea who they are or what services they are entitled to, such as income support and health care. Around the world, 1 billion people lack formal identification. More than 80% of them reside in sub-Saharan Africa and poor Asian countries. African children

174

Yale insights, March 27, 2020. Aadhaar Card has saved Rs 1.8 lakh crore in govt schemes, Yatish Rajawat, Moneycontrol.com, August 10, 2021.

175

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under the age of five have less than half of their births registered. The poorest women and those who live in remote regions are the ones who have the least formal identification. A vaccination registry, which tracks who has gotten and who has not received a vaccine, is easy to put up if you have a foundational digital ID system to construct it but considerably more complex if you don’t. Nandan Nilekani, the co-founder of Infosys, the driving force behind Aadhaar, thinks the system will be crucial for verifying digital certificates used as evidence of immunization. The success of Aadhaar has enthused several countries in Africa and Asia. It has streamlined service delivery and payment processing, reduced corruption, increased financial inclusion, and resulted in a substantial rise in India’s digital economy involvement. Countries including Morocco, the Philippines, and Myanmar had requested India’s help before the Covid outbreak, prompted by the World Bank’s ID4D program (“Identification for Development”). However, there is now a renewed sense of urgency. But Aadhaar is a sophisticated system with its own set of application programming interfaces (API), popularly called India Stack, that cannot be readily replicated. With the hindsight of Aadhaar’s experience, Mr. Nilekani suggested a new strategy: creating a free and open-source fundamental ID technology that any nation could use. The outcome is MOSIP, which stands for “Modular Open-Source Identity Platform.” With World Bank funding, Morocco and the Philippines are developing national ID systems based on MOSIP. Early next year, the plans will go live. Three additional countries—Guinea, Ethiopia, and Sri Lanka—are developing pilots. Numerous other countries, including Togo, Ivory Coast, and Tunisia, have implemented MOSIP. There are also plans to create a shared interoperable ID platform for West Africa’s countries, allowing for cross-border authentication. MOSIPbased digital ID platforms will be deployed in at least ten countries by 2023, and the technology will become an international standard due to each country’s deployments (see Footnote 176). The number of nations waiting at MOSIP’s door is growing due to the Covid issue. The Omidyar Network, the Bill and Melinda Gates Foundation, and Tata Trusts have all contributed $16 million to the MOSIP project. Its goal was to create a basis for developing a cost-effective foundational identification system that was basically “Aadhaar in a box” for nations with considerably less IT capability than India. Choosing Bangalore as MOSIP’s headquarters was a no-brainer as it could leverage technical expertise from Mr. Nilekani’s original Aadhaar team, which was still largely intact in the city. The MOSIP group was unambiguous on two points from the start. The first was that MOSIP should be used as an “acceptable” digital identity model. It needed to be developed in a “citizen-centered” way that guaranteed safety (inclusiveness while protecting individual privacy) and accountability (policies to restrict use cases to those that benefit the general public and cannot be abused for political objectives) (see Footnote 176).

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Countries interested in joining MOSIP must show their governing executive committee that they have the adequate digital infrastructure or the funds to develop it, benign objectives to develop the system, and a solid regulatory framework. The second condition was that MOSIP should be open source, enabling all of its protocols to be collaboratively examined, created, and improved. MOSIP’s goal is to evolve into a flourishing open-source project with a community of developers and system integrators contributing to the platform’s long-term development and maintenance. Implementing countries needed to retain ownership of the underlying identification platform, including the software that supports it, while still requiring the services of a professional systems integrator. Because national digital ID systems are inherently monopolistic, a critical requirement for the countries was to avoid getting tied into a single proprietary technology. MOSIP allows them to work with a variety of application providers while yet retaining overall system management (see Footnote 176). MOSIP’s modular architecture (which separates each program’s functions into independent and replaceable components) and configurability (which allows for adaptable solutions to real-world issues while also streamlining deployment and maintenance) allow it to be modified to various nation settings, regulations, and levels of digital infrastructure, considerably easier. Ease of customization enables countries to choose which features to purchase “off the shelf” and which to develop bespoke. They may, for example, choose from a variety of authentication techniques, such as biometrics and mobile one-time passwords. Another critical choice MOSIP defers to its customers is whether the platform should be hosted onpremises or in the cloud, which is faster and more scalable. Governments will own all of their data rather than a third-party organization in either case. Over the next year, the MOSIP team will focus on “handholding” implementing countries, learning what works (and doesn’t), and expanding the architecture to interact with various commercial software providers while avoiding vendor lock-in. As the number of nations wanting to utilize MOSIP grows, the capability of local IT expertise to expand the platform and build the data application layers required for interoperability with national registries and services will become a significant future issue. This will require the training of local providers and systems integrators and the formation of a small community of developers who may be sent to solve particular issues. Those initiatives will stagnate without financial support from charitable donors, the World Bank, and support from digital titans like Google and Amazon. Covid has acted as a catalyst in motivating countries to improve the efficiency of their health care and welfare systems and to view digital ID systems as a critical platform for doing so. Chris Yiu, the technology, and policy director of the Tony Blair Institute for Global Change, is enthusiastic about the possibilities of digital ID in low-income countries and the role of MOSIP. The institute is tasked with the responsibility of establishing vaccination registries throughout Africa. Additionally, this can result in positive outcomes. Effective digital ID systems are critical for establishing trust in government-to-citizen and citizen-to-citizen

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transactions. These are critical drivers of social capital (the networks and relationships that underpin thriving societies) and economic development.176

8.4.3

UPI—The Best in the World

In India, Fintechs payments are more integrated with banks than in other countries. Many countries have seen a surge in digital payments; in India, it seems like a revolution since it used to take more than two weeks for a cheque to clear. All of India is switching to digital payments. Government initiatives have influenced it, albeit more by accident than by design. Prime Minister Narendra Modi, who took office in 2014, pressured bankers to create accounts for everyone. A total of 360 million “Jan Dhan” (people’s wealth) accounts were established, bringing in 243 million rupees. However, many remained empty or contained only a few rupees deposited by banks in response to pressure from the government to limit the number of zero-balance accounts (see Footnote 178). Two subsequent developments provided a rationale for those unused accounts. The first was the Unified Payments Interface (UPI) launch in 2016, a system for interbank money transfers. The second was later that year’s “demonetization,” mentioned earlier, in which 86% of banknotes in circulation were recalled. This wreaked havoc on the economy and galvanized support for digital payments. In the last two years, digital transaction value has increased more than 50 fold, with many smaller payments.177 Paytm now has 371 million users. PhonePe, a subsidiary of Flipkart, claims over 150 million users, while BHIM, a government-led bank cooperative, claims 46 million. Even the three-wheeled auto-rickshaw drivers in Mumbai have started taking payments to their new bank accounts through UPI.178 The number of monthly transactions currently exceeds 5.4 billion, and the value of UPI transactions crossed the trillion-dollar mark during 2021–2022. The value of transactions on UPI has been steadily increasing; in October 2022, it topped $150 billion (Fig. 8.41). Dubbed the “future of digital money,” cryptocurrencies only interact with the regulated financial system when bought and sold. WeChat and Alipay, China’s two most prominent payment apps, utilize an authorized clearinghouse to move money between their digital wallets. India’s pioneers, on the other hand, who started with digital wallets, quickly integrated UPI, a service that transfers money directly between bank accounts. As a result, the system is well integrated with the banking system and sufficiently flexible to improve customer service (see Footnote 178).

176

Covid-19 spurs national plans to give citizens digital identities, The Economist, 7 Dec 2020. National Payments Corporation of India in Indians are switching to digital payments in droves, The Economist, June 8, 2019. 178 Indians are switching to digital payments in droves, The Economist, June 8, 2019. 177

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Fig. 8.41 Transactions on UPI zooms. Source National Payments Corporation of India in Indians are switching to digital payments in droves, The Economist, June 8, 2019

Regulators are pleased with the system because it protects deposits, increases financial inclusion, and lowers tax evasion by reducing unreported cash transactions.179 Banks also profit because fine-grained transaction data are obtained, which may be utilized for credit research and product customization. Global technology behemoths, meanwhile, like the look of it. Google Pay is already available in India, and Amazon Pay has followed soon. WhatsApp, which claims 300 million Indian users, launched its full-fledged payment service in June 2021. Other popular chat applications that have moved into payments, such as Kakao Pay in South Korea and WeChat Pay in China, have proven to be successful, indicating that when the green signal is given for WhatsApp to launch its payment feature, it will succeed. India’s deployment of a direct cash transfer scheme and other similar social welfare programs is a “logistical marvel,” the International Monetary Fund (IMF) said. IMF representatives praised India’s direct cash transfer program, stating that it is a logical wonder how these programs, which aim to assist those at low-income levels, can reach hundreds of millions of people. “From India, there is a lot to learn. There is a lot to learn from some other examples around the world. We have examples from pretty much every continent and every level of income. If I look at the case of India, it is quite impressive.”180

179

BCG quoted in Indians are switching to digital payments in droves, The Economist, June 8, 2019. 180 Quote from IMF in “Logistical Marvel”: IMF Lauds India’s Direct Cash Transfer Scheme, NDTV.Com/PTI, October 13, 2022.

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“Just because of the sheer size of the country, it is a logistical marvel how these programs that seek to help people at low-income levels reach hundreds of millions of people” (see Footnote 180). Praising India, IMF stated that there are initiatives that are expressly geared toward women. Aging populations and farmers are the targets of certain programs. Perhaps the interesting part is that there is a lot of technological innovation in these examples. “In the case of India, one thing that is striking is the use of the unique identification system, the Aadhaar” (see Footnotes 180 and 181). “But in other countries, also, there is greater use of sending money through mobile banking to people who do not have a whole lot of money, but they have a cell phone.” “So being somewhat innovative in identifying people, in processing their applications for transfers through digital means, deploying funds through, again, mobile banking. This is something that countries can learn from each other. We also try to be a convening place where people can compare these experiences” (see Footnotes 180 and 181). Against the backdrop of IMF’s collaboration with India on the application of new technologies, India is “one of the most inspiring examples of the application of technology to solve very complicated issues of targeting support to the people who need it most” (see Footnote 180).181 “India’s success in creating a unique digital payments ecosystem is simply stunning. Leaders always find new and different pathways; the rest of the world follows …”182 (Fig. 8.42). Will digital payments such as UPI end the Visa-Mastercard monopoly? The US retailers hate the pair. Many businesses detest the interchange system, under which banks and credit card companies charge merchants for processing payments. Fees are the second-largest expense for retailers after wages, totaling $138 billion annually.183 Additionally, consumers are less likely to feel strongly about the system since they are largely ignorant, but they suffer due to higher sticker costs (see Footnote 185). The highest interchange fees of any developed country are found in the United States; expenses there are by a factor of ten more than in China and Europe. That mostly benefits Visa and MasterCard, which handle more than 75% of all credit card transactions in the US. As a result, they are now two of the most lucrative businesses in the entire globe, with net margins of 51% and 46%, respectively, for the previous year. Four companies consistently rank in the top 20 when all companies in the S&P 500 index (apart from real estate investment trusts) are ranked according to their average net profit margins from the previous year, five

181

“Logistical Marvel”: IMF Lauds India’s Direct Cash Transfer Scheme, NDTV.Com/PTI, October 13, 2022. 182 Mahindra Group quoted in “Logistical Marvel”: IMF Lauds India’s Direct Cash Transfer Scheme, NDTV.Com/PTI, October 13, 2022. 183 National Retail Federation cited in Can the Visa-Mastercard duopoly be broken? The Economist, 17 August 2022.

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Fig. 8.42 How consumers “pay” around the world. Source Bernstein

years ago, and ten years ago. Visa and MasterCard each comprise two of the four (Fig. 8.43). Their situation initially seems overwhelming. Already in the lead, the businesses have recently benefited from an increase in internet buying brought on by Covid. In 2016, 45% of American consumers utilized credit or debit cards for purchases; by 2021, that number had increased to 57%. However, two dangers lurk. The first is from Washington, where lawmakers want to loosen the pair’s control over payments. The subsequent one is digital. In Brazil, China, and Indonesia, affordable, practical app-based payment choices from internet titans like Mercado Pago, Ant Group, Tencent, and Grab have revolutionized payments. The UPI in India is making waves. After a protracted wait, new competitors appear poised to disrupt the American market (see Footnote 185). MasterCard and Visa establish these costs, but they are collected by banks, who take a cut and use it to pay for incentives like insurance and frequent flier miles to attract clients. Banks pay astronomical fees to use the transaction-processing services provided by card networks. As a result, people pay exorbitant prices for their benefits while usually staying unaware of the fleecing. Retailers hike prices at the registers by 1.4%, passing interchange costs on to consumers.184

184

Federal Reserve Bank of Boston cited in Can the Visa-Mastercard duopoly be broken? The Economist, 17 August 2022.

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Fig. 8.43 Profit margins, %, of leading payment firms. Source Economist (2022)

The two payment goliaths meticulously built a powerful and enduring house of cards. However, it is now under serious threat from the new digital payment systems such as UPI.185 UPI-Credit Card Linking Could disrupt Visa and MasterCard Markets. Linking credit cards to Unified Payments Interface (UPI) will significantly strengthen the digital payments platform as the number of credit cards in the system is growing quickly. In August 2022, there were 22% more credit cards outstanding in India than in the previous month. The Reserve Bank of India (RBI) had already proposed to permit public credit card connection on UPI networks. According to experts, credit on UPI can displace Visa and MasterCard as well as all other providers of payment schemes in the long term (see Footnote 188). The UPI payments are also increasing quickly. The platform reached 6 billion transactions in July 2022, the most since 2016. It boasts 50 million merchants and more than 260 million unique users. The use and issuance of physical cards would decline, and customers will choose to use their credit card on UPI rather than swiping it. With a volume drop, the physical layer of the card management sector will be affected.186

185

Can the Visa-Mastercard duopoly be broken? The Economist, 17 August 2022. Grant Thornton cited in UPI-Credit Card Linking Has Potential To Disrupt Visa, MasterCard Markets, News18.com, Sept 29, 2022.

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Credit on UPI has the potential to eventually displace Visa and MasterCard as well as all other issuers of payment schemes. It is anticipated that as UPI infrastructure becomes more optimized in comparison with other payment networks, credit card payment costs may also decrease (see Footnote 186). “Just as we saw a significant increase in the use of digital payments due to UPI and the fintech industry’s adoption, bringing credit cards to UPI will have a similar effect.”187 With more than 20 million QRs available for UPI transactions, the same technology will be utilized for credit card purchases, increasing acceptability in Tier-2 and Tier-3 cities throughout India. To support UPI, the RBI has also announced a platform-based interoperable cardless cash withdrawal option accessible through bank ATM networks. Customers of a bank can currently only make cash withdrawals without a card using their ATMs. In India, an inclusive Fintech revolution is in the works.188 India’s Account aggregator. One of the defining landmarks of India’s digital payment evolution was the introduction of the interoperable Universal Payment Interface (UPI), which provided the facility for one hundred fifty million people in India to pay digitally. UPI is now almost universally adopted by all financial firms and merchants in India; as a result, three billion transactions pass through UPI every month. UPI is now endorsed by international giants such as Facebook and Google and large domestic players including CRED, PhonePe, and Paytm. Banks are moving to the center stage for shepherding the next act—Account Aggregator (AA). Select Indian banks are launching AA to help bank customers consolidate their financial transactions in one place. The consolidation helps insurers, banks, and tax authorities profile the customers better and make informed decisions. A credit rating for each customer can be generated based on the consolidated information. Formal credit rating of businesses and individuals will make it easier to determine their creditworthiness more accurately.189 “When properly utilized and empowered by consumers using their data, digital footprints enable small businesses’ massive amount of credit. It can potentially result in the democratization of credit.” “Digital footprints, when properly used, empowered by consumers using their data, enable a huge amount of credit to small businesses. It can lead to the democratization of credit.”190

187

In-Solutions Global quoted in UPI-Credit Card Linking Has Potential To Disrupt Visa, MasterCard Markets, News18.com, Sept 29, 2022. 188 UPI-Credit Card Linking Has Potential To Disrupt Visa, MasterCard Markets, News18.com, Sept 29, 2022. 189 India launches Account Aggregator to extend financial services to millions, Techcrunch, September 2, 2021. 190 Nandan Nilekani, adviser to the Account Aggregate project quoted in India launches Account Aggregator to extend financial services to millions, Techcrunch, September 2, 2021.

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Financial advocates are excited about India. It is only second to China regarding the number of people without bank or mobile money accounts, of whom an estimated 100 million possess smartphones. India is becoming an important battlefield for financial inclusion. India’s successive governments have actively promoted bank account opening and the expansion of digital money. Nandan Nilekani, the creator of Aadhaar, feels that the government is even more enthusiastic about the project. Governments have recognized that this is the “only way to achieve widespread financial inclusion,” he says. In some ways, he continues, “we have leapfrogged the rich world.” Account customers do not even need a phone to access their money. Thumbprint readers are available at certain stores. Aadhaar is part of the “India Stack,” a network of linked digital platforms that allows for smooth transfers across bank accounts via a “Universal Payments Interface” (UPI). A UPI address may be connected to a bank account, allowing immediate payment between accounts. It got off to a good start in 2016, the year of its launch. By March, it had processed approximately 178 million transactions worth approximately $3.6 billion, achieving a higher volume in 18 months than credit cards had in 18 years in India (see Footnote 191). The success will ultimately determine the success of Aadhaar it has with small businesses. As the system becomes more established, it is anticipated that an increasing number of them will begin accepting QR code-based payments. Global behemoths are now vying for the opportunity to develop applications for this interface. Tez (Hindi for “fast”) is an app from Google. Tez (now known as Google Pay) quickly grew to 100 million monthly active users, and over 500,000 businesses today accept it as a form of payment. It also enables “proximity payments,” in which two adjacent phones may be linked by an ultrasonic signal (“audio QR”), and money is transferred without revealing phone numbers or other personal information, which is a comfort for many women. WhatsApp has also been developing a UPI-based payment system (see Footnote 191). Google Pay and PhonePe combined have a 60% market share of Indian UPI payments (Fig. 8.44).191 Mobile payments significantly boosted when India’s prime minister, Narendra Modi, suddenly announced the removal of high-value banknotes, accounting for 86% of the rupees in circulation. This may be seen as a step in India’s payment revolution in hindsight. An ultimate goal is to eliminate the need for cash.

191

India’s digital platforms, The Economist, 4 May 2018.

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Digital Hotspots

Fig. 8.44 Google Pay has the highest share of the Indian UPI, 2020. Source Bernstein cited in India’s digital platforms, The Economist, 4 May 2018

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