Amity Insight Digital Planet: a Brave New World for Business
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Amity Insight Digital Planet: A brave new world for business This is for professional advisers only. This material is not suitable for retail investors who should not rely upon it. Welcome to the Digital Planet By Thomas Fitzgerald, Investment Analyst, Ecclesiastical Investment Management Limited “By 2005 or so, it will become clear that the internet’s impact on the economy has been no greater than the fax machine’s.” Paul Krugman, Nobel Prize-winning American economist in 19981 Despite dire predictions, the internet has gone on to have a significantly greater impact than fax machines; indeed it could be argued that its impact in time will surpass that of the Industrial Revolution. The development and utilisation of digital technology is leading to wide-ranging structural changes in industries, companies and economies. As recently as the year 2000, 75% of the world’s technological information was in analogue form. But by 2007, 94% was preserved in a digital format, representing a near complete shift to a digital world in less than a decade2. In this, the first of our two-part Amity Insight, we examine: n the rapid shift from analogue to digital Tape (Analogue): The music itself n the catalysts for the digital revolution and its impact on several sectors exists in analogue form as a series n companies that have been digital pioneers, have transitioned to the new paradigm of sound waves or have failed to adapt Compact Disc (Digital): In contrast, n the challenges and opportunities raised by the adoption of digital technology a CD translates the sound into a digital within an ESG framework. form that is encoded onto a disc What is digital? The origins of digital technology can be traced back to the binary numerical system developed by Gottfried Wilhelm Leibniz in the 17th century. Digitalisation is the process of expressing a physical object or an abstract idea in numerical form, using a binary code consisting of zeros and ones. Each number in the system is referred to as a ‘bit’, the smallest element within the DNA of information. A string of bits is referred to as a byte, which simulates the object or idea in an electronic form for the purpose of translating, storing and processing by other forms of digital technology3. Prior to digital, information was limited to analogue format, which conveys data as a continuous stream of electronic signals with varying frequencies or amplitude. Digital information has the advantage of ease of storage and it can be copied, edited and manipulated without degrading the quality over time. 1. Red Herring http://web.archive.org/web/19980610100009/www.redherring.com/ mag/issue55/economics.html 2. Martin Hilbert and Priscila López ‘The World’s Technological Capacity to Store, Communicate and Compute Information’ Science, volume 332, pages 60-64, 2011 3. Nicholas Negroponte ‘Being Digital’ Coronet Books, New York, 1995 2 Amity Insight October 2014 The acceleration of the digital world Over the last 200 years, the world has witnessed several febrile periods that have bred new technologies, established new companies and galvanised expansion in economies. One of the first to have a profound impact on the planet was the Industrial Revolution, which spanned 150 years from 1750 to 1900. During this period, innovations in technology changed the way we live and work, Google buys Nest Labs mechanising processes that were previously labour-intensive, commercialising transportation that catered to the masses, and supplying electricity and sanitation Facebook buys WhatsApp to urbanised areas, dramatically improving living standards and health conditions iPad launched over time4. Nest Labs founded Beginning in the latter half of the twentieth century and significantly shorter in duration, 4G network the Digital Revolution is still currently M-PESA launched having a global impact. DAB radio Bitcoins Google founded App store launched eBay founded iPhone launched Amazon founded Wii game console 2G network Twitter founded ARPAnet – precursor WorldWideWeb Facebook founded to the internet 1st mobile phone – Motorola Skype founded Intel founded Microsoft Windows Android system Silicon chip 1st CD pressed Wikipedia founded 1st transistor 1G mobile network iPod launched 1st large-scale, Microsoft founded 3G network digital computer Z3 (1st programmable computer) Email ASOS founded 1940-69 1970-99 2000-14 Robotics for Digestible sensors Beyond... domestic use Virtual reality Artificial intelligence Smartwatch 4. Robert Gordon ‘Is US Economic Growth Over? Faltering Innovation Confronts Six Headwinds’ CEPR Policy Insight, number 63, September 2012 Amity Insight October 2014 3 Driving the shift: the three Ps Proliferation of communication devices The rapid adoption of these devices has been driven by the evolution of the mobile phone, with the smartphone becoming The proliferation of technologies has advanced at an the most popular default form of handset. This is coupled with extraordinary rate as connectivity and affordability continue the introduction of new product categories such as tablets, to improve at every level of society. In the first decade of all of which provide users with ubiquitous connectivity and the 21st century, the number of mobile phone subscriptions the ability to personalise their devices. Mobile phones are also across the world increased from 750 million to 5.3 billion. the preferred method of communication in emerging markets, It is now estimated to be above 6.5 billion. By the end where subscriptions have risen at a 20% compounded annual of 2014, due to multi-SIM ownership, the Cisco Visual growth rate since 20056, driven largely by falling hardware Networking Index predicts that the number of mobile- prices and rising incomes. connected devices will exceed global population5. Mobile phone subscriptions worldwide 7,000 140 Number of Mobile Phone Subscriptions 6,000 120 (millions) (LHS) 5,000 100 Global Mobile Phone 4,000 80 Subscribers per 100 Inhabitants (%) (RHS) 3,000 60 Developed World Mobile 2,000 40 Phone Subscribers per 100 Inhabitants (%) (RHS) 1,000 20 Emerging Market Mobile 0 0 Phone Subscribers per 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 100 Inhabitants (%) (RHS) Source: International Telecommunications Union Pace: increased openness content, with video now one of the fastest-growing categories and speed of networks on the internet. The Cisco Visual Networking Index forecasts that over two thirds of global mobile traffic will be video-based There is an on-going technological shift in the global by 20187. connection base, driven by the improving breadth and speed of networks. This is increasing the rate of adoption in digital Mobile broadband has a greater positive impact than fixed-line technologies within developed economies, such as Japan and broadband, particularly in emerging markets, and a 10% the US, where high-speed access is present. These higher increase in mobile broadband penetration yields a 1.4% speeds are transforming consumer demand for service and increase in GDP for low-to-middle income countries8. Average actual fixed-line residential broadband speeds (Mbps) 14 Japan 12 United States 10 UK 8 Germany 6 China 4 Brazil 2 India Actual fixed-line download speed in megabits per second megabits per in speed download fixed-line Actual 0 2008 2009 2010 2 011 2012 2013 Source: Akamai 4 Amity Insight October 2014 Penetration of the internet worldwide The rate at which the internet has been adopted as a common At the beginning of the millennium, global internet penetration form of technology is unprecedented. Radio had been in stood at 5%. By the end of 2013, over 34% of the world’s existence for 38 years before user numbers reached 50 million. population had regular access. It is estimated that, by 2030, Television took 13 years to achieve the same feat, and 16 years 50% of the global population will have access to the internet11. had passed before 50 million people were using the personal Thus far, the increasing levels of adoption have been driven computer (PC)9. The internet took just four years to surpass by developed markets, with penetration approaching 80%, that benchmark10 and the pace of adoption has since continued but the next wave of adoption will be led by emerging markets, at a tremendous rate. The resulting impact is that in one where penetration rates remain well below the global average. generation, the majority of the world’s population will have To further increase the competitiveness of their economies, the transitioned from having close to no access to unfiltered so-called BRIC countries (Brazil, Russia, India and China) will information, to having the ability to access all the information need to increase access to the internet for their populations. ever created digitally through a device that can fit in the palm of their hand. The world’s largest internet populations Country Internet Users Penetration % of Global Internet Users China 538.0m 40.1% 22.4% United States 245.2m 78.1% 10.2% India 137.0m 11.4% 5.7% Japan 101.2m 79.5% 4.2% Brazil 88.5m 45.6% 3.7% Russia 68.0m 47.7% 2.8% Germany 67.5m 83.0% 2.8% United Kingdom 52.7m 83.6% 2.2% France 52.2m 79.6% 2.2% Nigeria 48.4m 28.4% 2.0% Source: Internet World Stats. Data as at June 2012 For a given level of total mobile penetration, a 10% substitution from a 2G network to 3G network increases GDP per capita growth by 0.15 percentage points12. 5. Cisco, ‘Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 8. GSMA ‘The Mobile Economy 2014’ 2013-2018’ page 2 www.cisco.com/c/en/us/solutions/collateral/service-provider/ 9. Mary Meeker and Sharon Pearson, ‘Morgan Stanley U.S. Investment Research: Internet visual-networking-index-vni/white_paper_c11-520862.html 5 February 2014 Retail’ Morgan Stanley http://www2.ufp.pt/~lmbg/formacao/inetRetail1.pdf 28 May 1997 6.