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The economics of the Digital Transformation – VI

With Azure Digital Twins, environments of all types (offices, schools, hospitals, banks, stadiums, warehouses, factories, parking lots, streets, parks, etc.) can all become smarter, along with the electrical grids that connect them and the cities around them. Image credit: MS

Part of the Digital Transformation result is the creation of a “mirror” world in the cyberspace that can be used to conduct business at a lower cost and without the constraints imposed by the physical world.  This mirroring calls into play the concept of Digital Twins, software entities mixing data, processing and interactions with their siblings as well as with their corresponding physical entity and with other entities in the cyberspace. The Digital Twins derive from the adoption of computer aided design tools that create a digital model AND by the presence of sensors in products that can provide the operation data (the digital shadow). IoTs make sense as long as they generate data that are used, processed and this basically calls for a Digital Twin, hence explains the rapid growth of Digital Twins. Platform support like the one of Azure, MS, -see figure 6- and Mindsphere, Siemens, foster the adoption of Digital Twins and their leveraging for the creation of value. According to ResearchAndMarket by 2025 89% of IoT platforms will include some form of Digital Twin management since they will be an integral part of the Industry 4.0 evolution.

As Digital Twins grow, more supporting tools become available and the easier it becomes to use and leverage Digital Twins. Also, these tools foster the adoption in Digital Twins beyond their core market (manufacturing). They are now being considered in real estate management, in ERP, in smart cities, in healthcare and in education.

There is a whole ecosystem being developed on Digital Twins resulting in a market growing with a 28% CAGR over the next 5 years to reach 20B$ in 2025 (with the North American market expected to grow at a 34% CAGR). Most recent estimates taking into account the acceleration of the Digital Transformation resulting from the Covid-19 are pointing to a 45.4% CAGR in the next five years to reach a market value of 35.8 B$ in 2025.

The market size of the tools supporting creation, operation and exploitation of Digital Twins is just a part of the story, basically covering the cost companies have to sustain to deal with Digital Twins (cloud, data communications, data integration across different design, production, sales, operation/maintenance systems). Notice that these costs are an integral part of the new enterprise shifted in the cyberspace, so they should not be considered “on top” (in other words if a company chooses not to adopt Digital Twins but still to move to the cyberspace it will still sustain –most- of those cost).

The other, most important part from an economic standpoint is related to leveraging the Digital Twins to create and offer services.

This step is somewhat seamless for those companies that have been in the business of providing post-sales services like maintenance services. Using Digital Twins they can enhance those services through monitoring, analytics and deliver proactive maintenance. However, for most companies this is not the case. The sale of a product is part of a business model that does not include interaction with the end user (sales is through a delivery chain that disintermediates the end user from the manufacturer). Additionally, most companies are not in the business of services, they focus on products sale. In these cases a new business model, and supporting processes are required and this is a challenge to many companies.

A further step would be to consider the Digital Twin as a separate entity that can be leveraged on its own, independently from its physical twin (the product). Take the case of Telecom Operators. Even though they operate on bits, and bits are the raw material from which they generate revenues, their business models are stuck to the world of atoms, i.e. copper and fibre plus SIM cards.

Telecom Operators have not been able, so far, to leverage on the huge amount of data they have and transport. The concern is on keeping their neutrality (although sometimes they claim for a non-network neutrality to be able to deliver better quality –read: charge more some type of traffic-), not getting involved in what is being transported –no responsibility- focus their business on the tools rather than on the product (they have mostly abdicated to create services leaving this economic space to OTTs).

Yet embracing the Digital Twin bandwagon, something that they would be ideally positioned to do, would propel them into this growing economic space. They could offer identity services, tailored communication paradigm fitting Digital Twins specific needs, hosting and mirroring, monitoring and authorization services and so on. This transition is a difficult one since it means changing their mind-set that is still tied up to twisted pairs (the fibre is a seamless evolution of a twisted pair and the SIM is the equivalent for wireless communication – that is why most Operators hate the idea of a digital/virtual SIM!).

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 Industry Advisory Board within the Future Directions Committee and co-chairs the Digital Reality Initiative. 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.