When, and How Will "Digital Transformation" Show Up in Statistics?

Despite a massive wave of capital investment now underway to “digitize” most aspects of business, it is a fair question to ask how long it will take before tangible financial benefits are reaped, beyond a shift of market share from some suppliers to others. That will be quite tangible, and will show up in gross revenue changes. 

There are several problems. First, there is almost always a long lag between major waves of technology investment and tangible changes in productivity. Also, digital transformation can cannibalize a firm’s revenue. 

“In a recent survey we conducted, companies with digital transformations under way said that 17 percent of their market share from core products or services was cannibalized by their own digital products or services,” according to researchers at McKinsey. 

The point is that heavy information technology spending to “digitalize the enterprise” might not show especially tangible benefits in productivity, incremental new revenues and new products for quite some time.

source: McKinsey

What will happen is that firms will slow the rate of market share shift from attackers, while some attackers will gain market share. While that might not alter long-term productivity or growth rates in an economy as a whole or within an industry, it will tangibly affect gross revenue, profit margins and market share within an industry, amongst competitors. 

The telecom analogy is the business impact of switching to fiber-to-the-home or other access network platforms. At least in competitive markets, where telcos were facing competition from cable TV operators in every core service, the decision to invest in FTTH was actually not driven so much by an expectation of overall increased revenue or market share, but fundamentally by the effort to retain overall revenues in the face of share loss.

Basically, and colloquially, the advantage of FTTH was strategic: “you get to keep your business.” The logic was that new video subscription revenues would offset loss voice market share, while FTTH would allow telcos to keep pace with cable TV operators in internet access speeds. 

That might seem like an awful expensive proposition. Investing heavily to “stay where one is” is not a traditionally sound investment principle. But lost market share really does matter as well, and many new “digital enterprise” investments arguably are of that nature: invest to limit attacker market share gains. 

That is not to say there will be no non-quantifiable gains for legacy or established providers. Better customer satisfaction, lower operating costs, better marketing platforms and other effects hard to capture on financial reports are possible. But the impact visible on financial reports might, in the near and medium term (several years to 10 years), mostly only be captured in a negative sense (market share not lost; market share not lost as fast), rather than in a positive sense (market share gained). 

The impact for attackers might arguably be different: market share taken from existing competitors. That noted, eventually, we are going to see value in the traditional metrics of productivity growth. 

Non-traditional measures, though, likely are needed to capture the benefits of innovations and value with a zero price, or reflecting quality improvements impossible to capture with price metrics. 

Traditional metrics do not capture increases in well-being and consumer welfare provided by zero-price quality improvements or zero-price products that often as substitutes for positive price products.

Can Policymakers Create Many More Silicon Valleys?

Many policymakers understandably would prefer if high-wage, high-skill jobs could be created more broadly across a country, instead of clustering in a relative handful of locations. In other words, can workers and jobs be dispersed more broadly, instead of remaining concentrated spatially, in Silicon Valley or Mumbai or Shenzen.

Local policymakers--especially--might prefer that well-paid “cognitive non-routine” workers live and work in their dispersed communities, and not in a relatively few cities. 

Rise of the Rest, the venture capital firm that aims to fund seed stage companies located across the United States, but not in Silicon Valley, New York or Boston, is one example of a bet on overlooked CNR talent.

Indeed, the argument that “good broadband” is the underpinning of economic growth for rural areas, small towns and cities is an unexamined claim very similar in its assumptions. 

But a new study conducted for the Federal Reserve Bank of Richmond suggests the difficulty--or futility-- of such efforts. In fact, the researchers actually recommend that concentration be encouraged. “The concentration of CNR workers in a few ‘cognitive hubs’ should be encouraged, not scorned,” they say. 

Basically, they argue, it is not possible to create big CNR job concentrations in most locations. Instead, 

“Contrary to some previous literature and much of the public discourse, the economics of the problem suggest that, with the appropriate transfers, small industrial cities in the U.S. should attract non-CNR workers and not try to become the next San Jose,” the study lead by Esteban Rossi-Hansberg of Princeton University, Pierre-Daniel Sarte and Felipe Schwartzman of the Federal Reserve Bank of Richmond says. 

Arguments about high-quality broadband take the same general approach to causation: good broadband creates the foundation for economic growth. The general economic problem, though, is similar to the issue of dispersing CNR jobs. There appear to be externalities that mostly prevent big CNR clusters from emerging in most locations. 

Though policymakers are correct to worry about occupational and wage gaps, the Federal Reserve study suggests the near-futility of efforts to create many additional dispersed concentrations of CNR workers and jobs. 

Since the 1980s the U.S. economy has experienced increased skill and occupational polarization based on geography. Large cities increasingly have more highly educated workers in “cognitive non-routine” jobs that also are paid more than workers in non-cognitive roles.

At the same time, many medium and small cities have suffered an exodus of skilled workers and population. Income inequality between occupations arguably has grown. 

This growing gap between top and medium and small-sized cities has motivated policymakers and city governments to advocate policies to attract CNR workers to smaller towns. 

If that sounds like the arguments for investing in municipal broadband, it is precisely so. The argument is that quality broadband underpins economic growth. But there is not much evidence that broadband--in and of itself--actually causes such growth. Some might note the productivity paradox as well, the finding that advanced technology actually does not clearly seem to drive economic results. 

Neither is there clear evidence that broadband improves productivity. You would be hard pressed to find any evidence for the thesis that broadband clearly boosts firm productivity, even if we all seem to believe that is the case. Some studies that find some small benefit cannot separate broadband from the other information technology introduced at the same time. But most of the time, it is hard to identify a clear correlation, much less causality.

As a practical matter, governments and others will continue to argue that broadband service has to be improved, because, you know, productivity will improve and economic growth will be aided. And, as a practical matter, firms will continue to deploy, and customers will buy, better broadband.

Still, it is worth noting that there is scant proof that broadband improves productivity.

“We find that the average effect of UFB (ultra-fast broadband) adoption on employment and... productivity is insignificantly different from zero, even for firms in industries where we might expect the returns to UFB to be relatively high,” say researchers Richard Fabling and Arthur Grimes,

One study found no correlation between broadband and productivity, when looking at digital subscriber line deployments. Another study also found no causal link between broadband use and productivity.

Yet other studies suggest that firm using more information technology, including broadband, do raise productivity, though it is not clear whether it was the broadband or the other innovations that contributed.  

Some studies note that it is difficult to tell which came first: a firm’s ability to wring value out of information technology, or broadband enabling that for a firm.

“One view is that good firms with good managers do most things in a better way, including use new practices at the right time,” note researchers from Stockholm University. “This makes studies of the impact of innovation, new management practices, work organisation and ICT use meaningless, since the good firms are much better in many other ways which are and can not be measured.”

The point is that social engineering, even when motivated by legitimate concerns, is tough to impossible.

%G Priced Above, Even and Below 4G

Chinese mobile operators plan to price 5G internet access plans at rates less than 4G, according to analysts at New Street Research. That means 5G retail tariffs soon will be available at a premium to 4G, the same as 4G, or less than 4G, by different servies providers in different markets.  

source: New Street Research

In the U.S. market, pricing has been set at no premium or at a higher cost than 4G.

Is Coverage or Demand the Big Issue for U.S., Europe Internet Access?

When assessing the degree to which internet access is unavailable to consumers, it always makes a difference whether we are considering services consumed by location, or by the person. Fixed services represent the former, mobile phone services the latter. 

The difference is important. For any service consumed by location (homes or buildings), the number of people that are unserved is inaccurate. It is the number of unconnected locations that matters, since the service is consumed by “locations,” not “persons.”

source: Intelsat

In the United States, where Intelsat estimates that about one percent of the population does not have a single supplier of internet access, the number of “locations” not connected is far lower, perhaps in the area of four tenths of one percent, since the typical number of persons per home is 2.6. 

The far bigger issue is locations that are able to buy service, but choose not to, estimated by Intelsat to represent 26 percent of people, or perhaps 10 percent of U.S. homes. Many assume the issue is supply, but a stronger argument actually is demand. 

Some households simply choose not to buy the product, even when it is available, often preferring to use mobile broadband as a substitute. 

Even in the 4G era, 15 percent to 20 percent of U.S. households have become mobile-only for internet access, while in Canada perhaps 20 percent of households already rely exclusively on mobile networks for internet access. 

In some instances, as with younger, single-person households and lower-income households, reliance on mobile-only internet access is 10 percentage points to as much as 15 percentage points higher than that.

source: Deloitte

Some argue take rates sometimes are low because the service is deemed “too expensive.” That might sometimes be the case, despite the existence of subsidized services for low-income households, especially in remote areas where the only option is satellite access. But a good argument can be made that non-buyers are making rational choices. 

They either do not value using the internet or they use the internet other ways (mobile, primarily). 

Absolute lack of coverage (no terrestrial networks or service providers) is a major issue in parts of Africa and South Asia, however.

Why Nobody Can Predict What Happens in 5G Era

Few industry executives are too certain about what big new 5G innovations will develop, and we should not be at all surprised by that lack of clarity. 

The reason futurists and industry executives have been generally unable to accurately predict the development of new use cases, applications and business models in the era of 3G and 4G, and will similarly find the same task difficult in the 5G era is that each of those network generations might be considered complex systems. 

And one attribute of a complex system is that they are virtually impossible to model reliably, as chaos theory suggests. 

A complex system is composed of many components which may interact with each other, and where small initial changes can have very-large, unexpected outcomes (the butterfly effect). 

Examples of complex systems often are said to include Earth's global climate, organisms, the human brain, power grids, transportation or communication systems, social and economic organizations (cities). 

An often-used example is an ecosystem. And it is reasonable to describe the entire connectivity business (fixed, mobile, satellite, other networks) as now existing as part of a larger internet ecosystem. And if a single complex system is intrinsically difficult to model, an ecosystem of complex systems arguably is impossible to model accurately over time. 

In large part, uncertainty about 5G exists because all complex systems are inherently highly dynamic, where no single actor in the ecosystem can direct progress. Also, the connectivity business as a whole now is part of the internet ecosystem. 

It is easy enough to point out the differences between the connectivity function and the applications and services that take advantage of internet connectivity. But even those important distinctions do not fully capture the differences.

Ever since the global telecom industry decided that internet protocol was the next-generation network, the industry has had to adapt to a business ecosystem where the creation of services and apps can easily be conducted by third parties with no business relationship with any connectivity provider. 

source: Detecon

And that changes everything. Yesterday, telecom was a complex system of its own. Today, the whole connectivity function is part of the broader internet ecosystem. The fundamental change is that connectivity providers no longer control the scale or pace of business development of the whole ecosystem. 

source: Nokia Bell Labs

Where today the assumption is that system conflicts must be resolved and resolved centrally and uniformly, a complex system actually requires decentralized control. 

Where a complex system inherently features conflicting, unknowable, and diverse requirements, today’s assumption is that requirements can be known in advance,  and will change slowly. That leads to the assumption that tradeoff decisions will be stable. 

But complex systems have inherently unknowable behaviors. 

Where today’s notion is that system improvements can be, and are, introduced at discrete intervals, complex systems evolve continuously. Where it once was believed that the telecom industry could make changes where the effects could be predicted sufficiently well, complex systems do not support such certainty. 

Where it was believed that the configuration information for any specific change was accurate and could be tightly controlled, a complex system actually means changes happen in an inconsistent environment. 

All of that explains why nobody really can predict what will develop in the 5G and subsequent eras of mobility.

DOCSIS 4.0 or FTTH?

Though other options, such as fiber-to-the-premise, are likely going to be a bigger part of the story, U.S. cable TV operators also believe they can upgrade their hybrid fiber coax networks for symmetrical 10 Gbps operation in a couple different ways, using either DOCSIS 4.0 or FTTH. Much will hinge on the incremental cost. 

Many executives are going to prefer DOCSIS 4.0, assuming it continues to offer a lower capital investment profile than switching to full FTTH. 

“We did the DOCSIS 3.1 rollout over two-year period which took our capability from a couple of 100 megabits per customer up to one gig per customer everywhere. capital cost of about $9 for home passed,” said Tom Rutledge, Charter Communications CEO.

Small Cells are Small, and Getting Smaller, Lighter

Both mobile operator and cable TV firms looking to reduce costs of supplying internet access bandwidth will rely on small cells that supply additional bandwidth in areas of high demand, using a variety of spectrum assets, both licensed and unlicensed.

For some mobile virtual network operators--especially cable TV affiliated operations--small cells running on owned fixed networks also will lower operating costs by supplying access directly, on owned facilities, not using leased mobile spectrum.

Some, including Charter Communications, expect to use unlicensed spectrum available under the Citizens Broadband Radio Service, and might consider licensed CBRS as well. The advantage of unlicensed CBRS is, of course, no need to buy spectrum licenses.

Another obvious issue is the cost of creating small cells, in terms of radio infrastructure, real estate and power. Mobile operators often use light poles. Cable operators will likely prefer strand-mounted units, especially because they already have rights to attach network elements to their cables, and will not incur additional real estate costs.

Those cells are small, and getting smaller. Cable operators, for example, are looking to use strand-mounted small cells that literally hang on aerial coaxial cable, and do not need poles for mounting surfaces.