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Amity Insight July 2015 1
DIGITAL PLANET A brave new world for business
edentree investment management
PROFIT WITH PRINCIPLES
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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:
• the rapid shift from analogue to digital
• the catalysts for the digital revolution and its impact on several sectors
• companies that have been digital pioneers, have transitioned to the new paradigm or have failed to adapt
• the challenges and opportunities raised by the adoption of digital technology within an ESG framework.
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.
By Thomas Fitzgerald Investment Analyst, EdenTree Investment Management Limited
Tape (Analogue): The music itself exists in analogue form as a series of sound waves
Compact Disc (Digital): In contrast, a CD translates the sound into a digital form that is encoded onto a disc
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 4. Robert Gordon ‘Is US Economic Growth Over? Faltering Innovation
Confronts Six Headwinds’ CEPR Policy Insight, number 63, September 2012
WELCOME TO THE DIGITAL PLANET
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
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, mechanising processes that were previously labour-intensive, commercialising transportation that catered to the masses, and supplying electricity and sanitation to urbanised areas, dramatically improving living standards and health conditions over time.4
Beginning in the latter half of the 20th century and significantly shorter in duration, the digital revolution is still currently having a global impact.
Beyond... Robotics for domestic use Artificial intelligence Digestible sensors Virtual reality Smartwatch
ARPAnet – precursor to the internet
1st large-scale, digital computer Z3 (1st programmable
1st mobile phone – Motorola
1st CD pressed
1G mobile network
Google buys Nest Labs
Facebook buys WhatsApp
Nest Labs founded
App store launched
Wii game console
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DRIVING THE SHIFT: THE THREE Ps
Number of Mobile Phone Subscriptions (millions) (LHS)
Japan United States UK Germany China Brazil India
Global Mobile Phone Subscribers per 100 Inhabitants (%) (RHS) Developed World Mobile Phone Subscribers per 100 Inhabitants (%) (RHS) Emerging Market Mobile Phone Subscribers per 100 Inhabitants (%) (RHS)
PROLIFERATION OF COMMUNICATION DEVICES The proliferation of technologies has advanced at an extraordinary rate as connectivity and affordability continue to improve at every level of society. In the first decade of the 21st century, the number of mobile phone subscriptions across the world increased from 750 million to 5.3 billion. It is now estimated to be above 6.5 billion. By the end of 2014, due to multi-SIM ownership, the Cisco Visual Networking Index predicts that the number of mobile-connected devices will exceed global population.1 The rapid adoption of these
devices has been driven by the evolution of the mobile phone, with the smartphone becoming the most popular default form of handset. This is coupled with the introduction of new product categories such as tablets, all of which provide users with ubiquitous connectivity and the ability to personalise their devices. Mobile phones are also the preferred method of communication in emerging markets, where subscriptions have risen at a 20% compounded annual growth rate since 2005,2 driven largely by falling hardware prices and rising incomes.
PACE: INCREASED OPENNESS AND SPEED OF NETWORKS There is an on-going technological shift in the global connection base, driven by the improving breadth and speed of networks. This is increasing the rate of adoption in digital technologies within developed economies, such as Japan and the US, where high-speed access is present. These higher speeds are transforming consumer demand for service and content, with video now one of the fastest-
growing categories on the internet. The Cisco Visual Networking Index forecasts that over two thirds of global mobile traffic will be video-based by 2018.3
Mobile broadband has a greater positive impact than fixed-line broadband, particularly in emerging markets, and a 10% increase in mobile broadband penetration yields a 1.4% increase in GDP for low- to-middle income countries.4
MOBILE PHONE SUBSCRIPTIONS WORLDWIDE
AVERAGE ACTUAL FIXED-LINE RESIDENTIAL BROADBAND SPEEDS (MBPS)
2004 2005 2006 2007 20082000 2001 2002 2003 2009 2010 2011 2012 2013
2008 2009 2010 2011 2012 2013
1. Cisco, ‘Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2013-2018’ page 2 www.cisco.com/c/en/us/ solutions/collateral/service-provider/ visual-networking-index-vni/ white_paper_c11-520862.html 5 February 2014
2. International Telecommunications Union ‘Key ICT Statistics 2005-2014’ http://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx 2014
3. Cisco, ‘Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2013-2018’ page 3 www.cisco.com/c/en/us/ solutions/collateral/service-provider/ visual-networking-index-vni/ white_paper_c11-520862.html 5 February 2014
4. GSMA ‘The Mobile Economy 2014’
Source: International Telecommunications Union
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PENETRATION OF THE INTERNET WORLDWIDE The rate at which the internet has been adopted as a common form of technology is unprecedented. Radio had been in existence for 38 years before user numbers reached 50 million.
Television took 13 years to achieve the same feat, and 16 years had passed before 50 million people were using the personal computer (PC).5 The internet took just four years to surpass that benchmark6 and the pace of adoption has since continued at a tremendous rate. The resulting impact is that in one generation, the majority of the world’s population will have transitioned from having close to no access to unfiltered information, to having the ability to access all the information ever created digitally through a device that can fit in the palm of their hand.
At the beginning of the millennium, global internet