Evolution of the Digital Economy: A sequence of subversions

I find myself consistently interested by the idea that for all the overt recent progress that we’ve experienced we are in fact in a lull, waiting for the next big thing to emerge. That’s made me think about the way in which the digital computing era has evolved over the last fifty years. This post sets out some thinking about how monopolies have formed and been broken in the Digital Economy to date as a precursor to further posts on future strategies and business models.

Four great computing platforms

The first Intel Microprocessor – the 4004 – was revealed to the world in November 1971. Although at the time few predicted its impact, the 4004 was the Big Bang event that launched the fifth great techno-economic revolution: the era of digital computing. Before the 4004 and the vast range of other microprocessors that followed it, computing power came at far too great a cost and complexity to be readily useful for the majority of everyday use cases. As we approach the fiftieth anniversary of the 4004, the world is saturated with uncountable digital computers, connected to each other by the internet and influencing life and business in massive and subtle ways.

Desktop microprocessors represented the first great computing platform. By distributing computer power away from the mainframe and into the workplace they enabled more sophisticated tracking and use of assets in business and government by freeing workers from the burden of book keeping and complex calculations. A full generation of software tools emerged to enable these functions of the platform.

In the early 1990’s the internet emerged as a second computing platform, trading raw performance for cost and connectivity, enabling distributed resources to be better allocated to tasks. The browser boom of the mid-‘90’s spawned the first generation of internet companies, who in turn have been wiped out by the rise of Google, Amazon, Facebook, Tencent and Alibaba. Further waves of innovation in the internet computing platform have resulted in the first practical artificial intelligence and machine learning software, installed on top of the distributed computing platform to bestow further advantage on that generation’s winners.

After the internet came mobile, which again traded performance for the incredible feature of location-specificity. Mobile step-changed allocation efficiency once again by greatly expanding the volume of nodes on the network and enabling physical assets to be more precisely identified. Winning and losing applications of the mobile computing platform are yet to be fully established, although players such as Uber have begun to establish early leadership in particular sectors.

Most recently the blockchain has emerged as a fourth wave computing platform. As with its predecessors, it once again trades performance for a new attribute: trust. The nature of the distributed ledger means that it is now possible to absolutely determine the state and ownership of any physical or digital asset in an effectively irrefutable manner. As blockchain is installed into the economic system, a further level of asset allocation efficiency should be achievable, triggering – and being triggered by – another wave of business model innovation.

A sequence of subversions

My particular focus in this post is how each wave of computing spawned its major competitor. The mainframe era was ultimately dominated by IBM, who were the most able to customise the multiple processes required in a computer architecture to serve each customer’s unique needs. Intel broke this monopoly by creating an architecture that anyone could use to make a powerful multipurpose computer.

The market that they spawned ultimately came to be dominated by Microsoft, whose software enabled users without specialist knowledge to get more out of computers. The internet arguably grew up out of hobbyists working together on science projects - software being one of them - working together to subvert big business by leveraging each other’s expertise without the formal framework of the Firm around them. From this subversion came Linux, which broke Microsoft’s dominance on the server market and ultimately enabled the mobile computing platform by providing the underpinning operating system kernel of the billions of devices that underpin the mobile computing revolution.

Microsoft’s monopoly on the computing market was decisively broken by this subversion. A new player ultimately emerged from the soup of internet companies to create a new monopoly. This player, Google, controlled access to information for a vast proportion of computer users. Moreover it was able to monetise this information.

That monopoly was in turn broken by the social media companies, most prominently Facebook. This was possible because (after some false starts) the personal nature of mobile is a perfect support for social platforms as information organising tools. One could call that breaking of the monopoly on access to information as a disruption. I don’t see it that way because it lacks the typical characteristics of a disruption, namely the targeting of the overserved with a ‘cheaper’, more targeted alternative. Instead I see this as a subversion - something that harnesses the social power of the network to develop something to break a monopoly.

And this has recently happened again. Blockchain has emerged from the soup of ideas in the developer community to challenge the primacy of firms themselves to control supply and demand. This is vital as in the network economy, firms have benefited directly from the time and effort that their customers have spend to build up the network. By adding trust to the computing platform, blockchain formally connects accretion of value in the network to those who worked to build it. This in turn subverts the monopolies that have formed in the mobile computing platform.

What we learn

Many businesses - many of my clients - are building business models that depend on the creation and exploitation of platforms and networks. Whether this is a good idea or not is open to debate. What they (and I) do not consider is the impact of creating an effective monopoly in  a layer of the market. Although in the short term it can seem like a good idea, in the longer term it can result in a more dangerous substitute emerging from within the network: a subversion that renders the competitive basis of the monopolist obsolete.

I’ll finish there. Not a fully-formed thought, but hopefully thought provoking!