Data Economy unfolding - Part II: bit economy

The digitalisation has created a brand new raw material: data.

The amount of data that is flowing over the Internet is staggering, and it keeps growing. Credit: Excelacom

I wrote a number of posts on the theme of the bit economy, about the boost it had in the last twenty years as result of the digitalisation of communications of media that in turns has resulted in digital media appearing as a class of itself that over time has took the upper hand, and about the tremendous growth in variety and number of sensors that have made possible the digitalisation of ... well, everything. This latter has resulted in a mirroring of atoms into bits and the subsequent creation of tools to work on bits, rather than on atoms. The advantage stems from the very risible cost of bits vs atoms.

I also remarked in several occasions that atoms and bits have some fundamental differences:

  • atoms are not exactly replicable. Any time you use atoms to mirror other atoms the replica is never the same as the original (although atoms are indistinguishable one from the other -provided they are atoms of the same element and same isotope). 
  • bits can and are replicated in an exact way, a replica is identical to the original version.
  • in order to replicate an atom you need another atom and you need to procure it. To replicate a bit you just state that you are replicating it. There is an unlimited reservoir of bits just waiting to be used. A corollary is that if I give you an atom I am an atom short, whilst I can give you a bit (a copy of my bit) and I still have my bit.
  • moving atoms from one place to another cost (and it may cost quite a bit...), however moving bits from one place to another has a risible cost (sometimes you don't even move the bits, you just tell the receiving point how to create a replica of the bits you have at the transmission point -this is what compression is all about.

These differences have created big disruptions that have affected the market and in the business to various degrees; the more "perfect" the transposition of atoms into bits the more dramatic the impact.  The media marketplace, as an example, has been completely disrupted whilst the car marketplace has only been affected but not disrupted.

These disruptions are consequence of:

  • the possibility to create an unlimited number of originals, turning at the same time the market into a commodity by having the offer potentially exceeding any demand (the offer demand balance is disrupted);
  • the risible cost of any single instance coupled with the risible cost of accessing the instance (bit) is driving the price to zero. Hence new biz models have to be and can be pursued. In other words, there is a value shift from the bits to something else, like the convenience in accessing the bits;
  • the easiness of creating bits has stimulated millions to create them, and many have decided to offer the result of their "skill and creativity" for free, thus further commoditising many things that used to have a sellable value;
  • the flexibility of bits (software) has shifted the production of objects towards an increasing softwarisation (objects composed by both atoms and bits) where the value is perceived mostly in the soft side (including the value of design, since the functionality has shifted to software, hence the hardware value resides more and more on design aspects than on its functional aspects);
  • the shift in business models drifting products towards services.

What I would like to point out in this post is the value of the bit economy. Surely we have seen a tremendous growth in terms of (software) companies and in terms of people employed by the bit economy. However, if we are looking at the global picture we see that there has also been an (increasing) depreciation of companies thriving on the atoms economy and of people employed by the atoms economy. Until few years ago the increase and the decrease seemed to compensate one another. In some cases it seemed that the bit economy was creating more jobs than the ones lost in the atoms economy.

However, in the last five years it has become clear that the bit economy in part is spawning something new (hence adding value and employment) but in a large part it is undermining the very existence of jobs and decreasing the value of objects.  The balance is no longer even, the overall economy value is shrinking: the bit economy is a negative economy.

The fundamental reason is that by moving to bits we are increasing the overall efficiency, which one would assume it is a good thing.

However, if you think about it, a lot of these "inefficiencies" are the reason for having people working. As you remove "inefficiencies" you are also removing "jobs". Sure, more efficient systems free money (you no longer need to pay for those jobs...) but that money not necessarily goes into creating more jobs opportunities.

This is the big challenge we are facing today, and it is a world wide challenge that is probably going to affect more those Countries where production was off-shored to leverage on lower wages, and, more generally, lower labour cost.

Germany is expecting to see an increase in jobs as result of robotisation of production (Industry 3 and 4.0) since that makes the labour cost irrelevant (or at least less significant) with resulting in-shoring of production. I am not convinced this will indeed be the case, but there is some substance to that reasoning. At the same time Countries like China will suffer from the in-shoring from Germany, and we are already seeing the dramatic effects that robotisation is having in some industries in China.

Overall the bit economy is largely about lowering transaction cost, hence it threats the present value chains, and about automatising processes (both production and supply/distribution chain).

Author - Roberto Saracco

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