The digital economy in 2023 and BigTech’s search for digital renewal
The digital economy in 2023 and BigTech’s search for digital renewal
Written by Professor Alan Brown, Professor in Digital Economy, Exeter Business School
It’s always fun to look ahead at the start of a New Year to imagine what we’ll encounter. But it can also dangerous. Turn the clock back 12 months and we were so sure of what was to come. Despite the drastic impact of the pandemic, there was a great deal of hope that we had turned the corner in managing its impacts. Vaccines had been released in record time. Systems and supply chains were evolving to drive greater agility for businesses. Many adjustments in lifestyles and working practices has been accepted as “the new normal”. Consequently, despite the obvious challenges, there was a good deal of optimism for a fast-paced recovery on the road ahead.
In particular, many people were particularly bullish about the role that digital technologies had played in helping organizations and individuals to re-adjust to the challenges thrown up by the pandemic. We had not only survived: Many digitally transformed organizations had thrived. Due to the on-going digitization of core systems and services, large parts of our infrastructure were able to continue to function through a combination of hard work, distributed management, online service delivery, and remote collaboration. There was even talk of the state of a “golden age” for digital transformation.
However, in reality the past few months has revealed a much more complex digital transformation landscape. In practice, 2022 was very tough for the digital economy and many expect an equally challenging 2023. Undoubted successes in ensuring organizations could maintain high operational levels through the volatility we faced were largely overshadowed by fundamental concerns about the pace of digital adoption, our ability as a society to adjust to the consequences of a digital economy, and the effects of digital lifestyles on individuals and communities.
To compound matters further, many of the high-flying companies riding the digital technology wave are now suffering from significant declines in revenue, profitability, and market capitalization. Rapid growth in many digital technology providers has slowed. Those relying on digital technology to differentiate their solutions are struggling to maintain momentum and are not seeing sufficient returns on their investments. Expenses to acquire and keep customers are out of control.
Perhaps we should see this as an inevitable digital slowdown: A realization that the hard yards for digital transformation may still lie ahead of us. Or, more optimistically, can we view it as the beginning of a digital renewal and a chance to reset our digital compass? A focus on the current status and directions of the BigTech companies might give us some insights into the answer.
BigTech’s digital rut
It is easy to forget just how much the digital transformation revolution is driven by a handful of companies. Led by Amazon, Apple, Alphabet, Microsoft, and Meta, the technologies and services these companies offer are fundamental to the new architecture of systems and solutions powering much of what we now consider the “digital revolution”. By creating the engine room for digital delivery at prices that encourage innovation and growth, they have redefined the digital economy. Without them, it would be impossible to support the sustained scale of impact that we have seen.
However, these BigTech organizations are now facing considerable barriers. Their growth has declined, innovation in their products has stalled, and concerns about their negative influences, lack of governance, market dominance, and questionable financial practices have increased. This is sparking criticism of their strategies, debate about their role in society, and a raft of new regulations to constrain their actions. All this has had a big impact on them and caused ripples across much of the digital technology landscape. No surprise, then, that the past year has seen their stock prices drop significantly, high-tech markets such as the S&P500 record historic losses, and the personal wealth of their founders plummet. It has been described as “a $4.5 trillion bloodbath”.
This is not just a problem for the founders, venture capital speculators, and investors. Workers in these companies are also being directly affected. The recent announcements of largescale job losses may in part be due to over hiring and poor planning. However, it is also a sign that cost cutting and efficiencies are essential if these companies are going to be able to come close to the growth rates they have enjoyed in the past. Major restructuring of their businesses seems inevitable.
Of course, some of this devastation simply reflects the macroeconomic trends and uncertainties facing all organizations today. As individuals and organizations tighten their belts to cope with the difficult near-term financial outlook, there will be reactions and consequences of the downward directions for sales forecasts, product inventories, and production targets. Adjustments being made by all organizations to survive in a downturn. However, more significant changes may also be required.
Toward digital renewal
As BigTech looks to the future, the digital economy outlook for 2023 does not look great. But it also is not without hope. To address these concerns, two distinct strategies being followed by the BigTech companies are worth highlighting.
The first is increased targeting of industries ripe for digital renewal. The most obvious domains in their sights are large government agencies and healthcare provision. Both of these have similar characteristics from a digital perspective: They face enormous pressures to modernize their practices; They are perceived to have major inefficiencies in their operations models; They are large consumers of digital technologies; They have very large multi-year technology investment budgets.
Each of the BigTech companies has made announcements about acquisitions and investments to help them address these promising market opportunities. For example, Google has been making significant strides to offer personal fitness solutions through wearables and apps. Its investments in Google Health show that it believes that wellness management will be an important part of its future revenue. Similarly, in the past few years Apple has made no secret of its strategy to use its iPhone dominance to use personal data to revolutionize healthcare. Using its ability to monitor an individual’s health data, Apple is looking to deliver services that support early detection of diseases, improve diagnoses using AI techniques across its huge collection of data, and extend monitoring of patient outcomes using its widely available devices and app ecosystem.
In addition, by focusing on large government contracts, the BigTech companies are building a significant base for their products and services to generate on-going recurring revenues. For example, in recent weeks the US Department of Defence (DoD) announced a further $9B investment in cloud technologies to a consortium including Amazon, Google, Microsoft, and Oracle. This will act as an internal (closed) marketplace for cloud technologies across the DoD for all of their future investments in this area. A huge opportunity for the companies involved.
Secondly, BigTech organizations face additional challenges and opportunities as adoption of its solutions enters a new phase: From digitization to digital transformation. Simply “automating what we do” or “moving to the cloud” is not enough. Clients of digital platforms and services are looking much more carefully at where and how digital technology brings value and differentiation to their solutions.
Consider the banking sector as one of the major industries that has traditionally invested very large amounts into digital technology, relied significantly on digital platforms from the BigTech providers, and been a driver of digital innovation affecting many related areas. The latest McKinsey review of the future of banking concludes that the banking sector is at a key turning point. It cannot hope to continue operating as it has in the past. They believe that the complete restructuring of this sector is inevitable to allow them to compete effectively, adjust to changing customer needs, and offer different kinds of services to a new set of clients.
Inevitably, this transformation is enabled and supported by digital technologies. However, far from today’s digital investments to drive efficiencies in existing practices and markets, the goal will be to redesign banks for a different set of needs operating within much tighter margins against new kinds of competition. As a result, their relationships with BigTech providers will differ drastically from today’s transactional back-office arrangements. Perhaps we will also see BigTech take on the banks to replace their offerings, form joint ventures, or design completely new kinds of organizations with quite different roles, responsibilities, and business models to todays’ traditional financial institutions.
Reflection
The past few months have been sobering times for digital transformation advocates. We have been inundated with news of astounding technology advances in areas such as Artificial Intelligence (AI), Virtual Reality (VR), and quantum computing. Yet, at the same time there are troubling signs that we have made far more modest progress in overcoming barriers to address the difficult ethical dilemmas raised by replacing human decision making, reduce the gaps and inequalities across communities affected by digitally-driven changes, update legacy processes to take advantage of automation efficiencies, and adjust key aspects of our society to working patterns appropriate to people’s digital lifestyles.
It is clear that BigTech companies are at the heart of digital transformation. Their health and vitality is critical to success of the digital economy. Are they in a digital rut? Or will we see 2023 as the beginning of a much-needed digital renewal? Only time will tell.