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The economics of the Digital Transformation – I

The number of on line tours and experiences has grown faster than on line travel, a signal of the increasing value of micro activities. Image credit: Phocuswright

At the Digital Reality Initiative we are preparing our fourth White Paper, due this coming November, focussing on Digital Transformation.  I am working on highlighting the economics of the Digital Transformation and I will be sharing these thoughts here to get your feedback.

It is important to realise that the DX leads to higher system-wide efficiencies. This is, in absolute, a good thing but if one looks at the specific situations it is easy to notice that plenty of industries/commerce thrive on those inefficiencies.

On the other hand, it is this increased efficiency that motivates industries to pursue the Digital Transformation. This can also be seen as one of the reasons why, in general, the Public Administration –PA- is lagging behind: not having to face a competition that drives towards increased efficiencies, PA is slow in embracing the transformation.

However, if on the one hand private industry is eager to embrace the transformation to increase its efficiency, on the other hand there is also concern, and resistance, because this increased efficiency along the value chain leads to a shrinking of the overall market value and this affects, in different measures, all players in the value chain. One would assume that increased efficiency leads to lower prices and therefore higher market adoption that compensates the per unit price decrease. However,  in most cases, the price decline is so great (sometimes approaching zero) that the increased volume does not make up for it. We have already seen this happen in the music sector, in the part of the travel/tourism value chain, in the telecommunications sector.
It is a no brainer to say that those players that are most affected in terms of decreased revenues are the one resisting the most the transformation.

To make the point using an extreme case, let’s look at the Digital Transformation applied to the travel sector, an area where DT has already taken a stronghold. The DT is clearly decreasing the market value of the physical premises of travel agencies and that has led to the disappearance of many of them.
As the shift to the cyberspace squeezes the market value fewer players can survive and they tend to increase their market share, thus creating oligopolies (read Expedia, Booking, TripAdvisor, Airbnb). This is possible because business in the cyberspace scales gracefully and actually the cost per transaction decreases as their number increases. All these companies would have not existed without the Digital Transformation.

As the transaction cost decrease more people can access that market (it costs less to travel) and more players can enter the market to offer services (it cost less to develop and offer services plus, the offering can target a worldwide market, thus benefitting from scale). As an example, on TripAdvisor alone, a variety of players in 2017 added 30,000 “experiences”, a 50% increase on the previous year. The reason is clear: it cost very little to add one “experience” (what to do in a location) and this allows addressing niches, as well as generating interest and increasing customers, thus revenues. Expedia generated over 500 M$ out of selling experiences (things to do, meet the locals…).
Single individuals, with very limited capital but with something valuable to offer, like their knowledge of a place, can now jump onto the tourism bandwagon and offer their services.
The overall tourist market has become more efficient, there are fewer intermediaries needed, a tourist can get in touch directly with the local service provider. In this process travel agencies in developed countries (the one from where tourists originate) have mostly disappeared whilst developing countries have seen an increase of travel agencies delivering local experience (this of course applies to developed countries with an inflow of tourism). Clearly the marketplace has changed and so has the perception of value. As a tourist I want to touch base to my destination points, not to the origin, this represent quite a change from the past!

About Roberto Saracco

Roberto Saracco fell in love with technology and its implications long time ago. His background is in math and computer science. Until April 2017 he led the EIT Digital Italian Node and then was head of the Industrial Doctoral School of EIT Digital up to September 2018. Previously, up to December 2011 he was the Director of the Telecom Italia Future Centre in Venice, looking at the interplay of technology evolution, economics and society. At the turn of the century he led a World Bank-Infodev project to stimulate entrepreneurship in Latin America. He is a senior member of IEEE where he leads the New Initiative Committee and co-chairs the Digital Reality Initiative. He is a member of the IEEE in 2050 Ad Hoc Committee. He teaches a Master course on Technology Forecasting and Market impact at the University of Trento. He has published over 100 papers in journals and magazines and 14 books.