Digital disruption – It’s here, it’s real

Disruptive innovation is an innovation that creates a new market and value network. It eventually disrupts an existing market and value network, displacing established market leaders and alliances.

Disruption innovation enabled by easy access to broadband and the markets facilitated by the internet is referred to as Digital Disruption. Digital Disruption is the topic of the moment. Every conference on the 2016 New Zealand calendar seems to have digital disruption as the lead topic or at the least a significant theme within the subject matter. The reason for this is that business models are being impacted at an ever-increasing speed and an ever-increasing scale by ease of access and the increasing capabilities on internet applications.

The most commonly cited examples:

When the concept of Digital Disruption is discussed, most people focus on a number of high profile case studies or industry sectors that demonstrate the sheer scale and speed of adoption of digitally based economic models. Among the frequently cited examples are:

Uber – The world’s largest taxi company

In just a few short years, Uber has grown to become a ubiquitous app used in cities around the world that allows consumers to order taxis via their mobile devices. The San Francisco-headquartered company is estimated to be worth between US$40bn and US$50bn. If valued at US$40bn, it gives it the same capitalisation as Salesforce.com, Delta Airlines and Kraft Foods.

Airbnb – The world’s largest accommodation provider

Established in a San Francisco apartment by a group of friends who had the idea of creating a B&B using their only asset, an air mattress. Airbnb has taken the accommodation world by storm by enabling house and apartment owners to generate additional income by renting out their properties for nights and weekends. Valued at US$25.5bn, Airbnb is estimated to be worth more than hotel giants Marriott ($20.90bn), Starwood ($14bn), and Wyndham ($10.01bn).

Skype, WhatsApp, Facebook Messenger, Viber – The largest communications companies

While traditional fixed and mobile operators have invested in the underlying infrastructure to make broadband over computers and smartphones almost ubiquitous, the reality is consumers are using this infrastructure to make calls and send messages using services from Facebook, WhatsApp and others. Known as over-the-top (OTT) platform providers, services like Facebook Messenger, WhatsApp and Skype are upstaging telecom providers all over the world who are struggling with the digital disruption that they laid the groundwork for. These services effectively allow consumers to make voice and video calls for free. As of September 2015, WhatsApp had over 900m users while Skype has over 660m users. Meanwhile, voice and SMS revenues of telecom operators are steadily declining.

Alibaba- The world’s most valuable retailer

Alibaba was formed in 1999. By 2012, the site was handling more than US$170bn worth of sales and by 2015, when the company went public on the New York Stock Exchange, it netted $25bn in the biggest IPO in history. Unlike traditional retail chains, Alibaba doesn’t have retail premises and nor does it carry any inventory, rather it simply facilitates the exchange of goods for money.

The fastest-growing banks

Among the many fintech trends emerging is the rise of peer-to-peer lending, where companies like Australian set-up SocietyOne allowing savvy investors to connect with credit-worthy borrowers in a way that is cheaper, faster and more efficient for digital natives. In the UK, the first peer-to-peer loan provider was Zopa, which by September 2015 had issued loans amounting to £500m to more than 500,000 customers. Assetz Capital, which started lending in 2013, has made the largest peer-to-peer loan in the UK to date, having made a £1.5m loan available for the development of student accommodation in Nottingham.

Netflix- The world’s largest movie house

The old format of linear TV has been turned on its head by the onset of services like Netflix, Sky Go and YouTube; and even music has been transformed by streaming services like Spotify, Pandora and Apple Music. Netflix, which began as a postal DVD service, has developed into a fully-fledged streaming service with over 69.1m subscribers worldwide, including more than 43m in the US.

What’s really happening?

When you analyse what the Internet facilitates and what in effect the Digital Economy is, it’s a contraction of the existing value network. Those business most at risk are those that offer a service that bring two parties together to facilitate a transaction, or those organisations that sell or supply a product that lends itself to digitisation.

As the digital economy expands we can expect to see an ever-increasing impact on the business landscape. We are already witnessing the significant pressure that the traditional retail business are experiencing, with many family owned high street retailers disappearing over the past five years. However, the effects over the coming five years will likely be even greater. Soon you will be unlikely to find a video store or a travel agent on high street or in the mall. Both business models are under significant pressure. Video stores are being replaced by on-demand movie suppliers like Netflix and Neon. While travel services are under pressure from growing use of online travel agents such as WebJet and Skyscanner. Webjet’s financial results, as shown below, may not be on the scale of Uber or Airbnb but they show an increasing confidence on the part of consumers for using online services and an understanding of the value of being able to access a broader range of suppliers. Webjet often provides pricing for carriers that the high street travel agent does not appear to have access to.

The impact that digital channels can have is far reaching and raises questions about the future of a large number of traditional business models.

It’s expected that the education sector will experience significant change in the coming years. Online learning, together with the ability to sit exams at a time and place chosen by the student could completely disrupt the existing education model. The current practice of attending a physical location to be schooled and being streamed by age rather than ability could all change. Students could be schooled online, learn at their own pace and sit exams when they felt they were ready. This could not only impact schools but have a significant impact on society.

The finance sector, the Government sector, retail, media, health, manufacturing and professional services will all be impacted by the expansion of the digital economy. Every organisation needs to be thinking about how digital disruption could affect them.

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