The Digital Disruption & its Societal Impacts

Journal of Industry, Competition and Trade (JICT)Volume 15, Issue 1, March 2015ISSN: 1566-1679 (Print) 1573-7012 (Online); 6 articles in the issuehttp://link.springer.com/journal/10842/15/1

Special Martin Kenney (Univ. of California, Davis) issue Petri Rouvinen (ETLA)

editors: John Zysman (Univ. of California, Berkeley)

Executive summaryThis BRIE-ETLA Special Issue in the Journal of Industry, Competition & Trade concludes the 4th three-year round of BRIE-ETLA research collaboration generously supported by Nokia, the Federation of Finnish Technology Industries, and Tekes.

These slides summarize the issue.

Journal of Industry, Competition and TradeMar. 2015, 15(1), http://link.springer.com/journal/10842/15/1

Kenney, Rouvinen & Zysman: The Digital Disruption and Its Societal Impacts. JICT, Mar. 2015, vol. 15, iss. 1, pp. 1–4. http://dx.doi.org/10.1007/s10842-014-0187-z

Kushida, Murray & Zysman: Cloud Computing: From Scarcity to Abundance. JICT, Mar. 2015, vol. 15, iss. 1, pp. 5–19. http://dx.doi.org/10.1007/s10842-014-0188-y

Pon, Seppälä & Kenney: One Ring to Unite Them All: Convergence, the Smartphone, and the Cloud. JICT, Mar. 2015, vol. 15, iss. 1, pp. 21–33. http://dx.doi.org/10.1007/s10842-014-0189-x

Huberty: Awaiting the Second Big Data Revolution: From Digital Noise to Value Creation. JICT, Mar. 2015, vol. 15, iss. 1, pp. 35–47. http://dx.doi.org/10.1007/s10842-014-0190-4

Kushida: The Politics of Commoditization in Global ICT Industries: A Political Economy Explanation of the Rise of Apple, Google, and Industry Disruptors. JICT, Mar. 2015, vol. 15, iss. 1, pp. 49–67. http://dx.doi.org/10.1007/s10842-014-0191-3

Ali-Yrkkö & Rouvinen: Slicing Up Global Value Chains: A Micro View. JICT, Mar. 2015, vol. 15, iss. 1, pp. 69–85. http://dx.doi.org/10.1007/s10842-014-0192-2

Artic

les

Journal of Industry, Competition and TradeMar. 2015, 15(1), http://link.springer.com/journal/10842/15/1

Martin Kenney, Petri Rouvinen, John Zysman:

The Digital Disruption and Its Societal ImpactsJournal of Industry, Competition and Trade. March 2015, Volume 15, Issue 1, pp 1–4.DOI: http://dx.doi.org/10.1007/s10842-014-0187-zPDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0187-z.pdfAbstract: Deepening digitalization and globalization has induced an ongoing societal transformation that may ultimately prove to be as significant as the original industrial revolution. Even as the ICT industry is being restructured, global competition is being transformed. Previously dominant firms—including telecommunications carriers, equipment providers, and powerful legacy software firms—are under assault from the move to cloud computing, in the network center, and mobile computing, on the network periphery. This transformation of the computing and communication infrastructure has been occurring simultaneously with the spread of ever more complicated and sophisticated global value chains. The articles in this special issue explore a number of the key facets of this transformation in a comparative lens. The authors find that the social, legal, and economic arrangements will impact how these changes affect nation-states. For policy-makers there will be serious dilemmas, as they will have to simultaneously nurture and support many aspects of these changes, while also mitigating or channeling some of the outcomes so as to protect privacy, income equality, and fair taxation.

• Digitalization & globalization have induced an ongoing societal transformation, the benefits of which are many

• Yet previous leaders – in, e.g., Europe & Japan – have been challenged; key new aspects increasingly emerge from Silicon Valley & the US

Kenney, Rouvinen, Zysman: Issues

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0187-z.pdf

• Despite having the same digital building blocks worldwide, national policies & politics influence outcomes in complex ways. Many developed countries are caught in a commodity trap & are unable to command previous premiums

• The solution: to create distinctive high value added products & services securing lucrative positions in global value chains. Value increasingly resides the creation & control of relevant platforms & brands associated with them.

• Policymakers in a double bind: The transformation needs to be nurtured and supported as well as protected against. Tools include infra provision, strategic standards & smart procurement. Proactive debates require new ways of talking about societal objectives & economic value creation.

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0187-z.pdf

Kenney, Rouvinen, Zysman: Implications

Journal of Industry, Competition and TradeMar. 2015, 15(1), http://link.springer.com/journal/10842/15/1

Kenji E. Kushida, Jonathan Murray, John Zysman:

Cloud Computing: From Scarcity to AbundanceJournal of Industry, Competition and Trade. March 2015, Volume 15, Issue 1, pp 5–19.DOI: http://dx.doi.org/10.1007/s10842-014-0188-yPDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0188-y.pdf

Abstract: Cloud computing is a revolution in computing architecture, transforming not only the “where” (location) of computing, but also the “how” (the manner in which software is produced and the tools available for the automation of business processes). Cloud computing emerged as we transitioned from an era in which underlying computing resources were both scarce and expensive to an era in which the same resources were cheap and abundant. There are many ways to implement cloud architectures, and most people are familiar with public cloud services such as Gmail or Facebook. However, much of the impact of cloud computing on the economy will be driven by how large enterprises implement cloud architectures. Cloud is also poised to disrupt the Information Technology (IT) industry, broadly conceived, with a new wave of commoditization. Offerings optimized for high performance in an era of computing resource scarcity are giving way to loosely coupled, elastically managed architectures making use of cheap, abundant computing resources today.

Kushida, Murray, Zysman: Issues• How did we go from computing of

scarcity to abundant cloud computing?

• How is this transformation unfolding?

• What are the implications for industries and policies?

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0187-z.pdf

Three-Layer Model of Competition

Equipment ManufacturersProvides network infrastructure equipment, access devices, handsets

Network CarriersProvides network services, eg., telephony, broadband, mobile

Digital Service ProvidersProvides software, services, content

Value has been moving to the top layer, commoditizing those below

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0187-z.pdf

• As more devices are connected to the Internet, the architectures of cloud computing will become the underlying fabric of ICT-enabled services systems.

• Computing power & platforms are becoming more concentrated in a handful of large firms, but the competitive leverage points are shifting rapidly.

• Political & regulatory debates about antitrust, privacy, security, jurisdiction, liability & industrial promotion policies are poised to be reopened.

Kushida, Murray & Zysman: Implications

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0187-z.pdf

Journal of Industry, Competition and TradeMar. 2015, 15(1), http://link.springer.com/journal/10842/15/1

Bryan Pon, Timo Seppälä, Martin Kenney:

One Ring to Unite Them All: Convergence, the Smartphone, and the CloudJournal of Industry, Competition and Trade. March 2015, Volume 15, Issue 1, pp 21–33.DOI: http://dx.doi.org/10.1007/s10842-014-0189-xPDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0189-x.pdfAbstract: This paper examines how recent trends in the smartphone industry may be expanding previous conceptions of the industry and its boundaries. The increasing importance of Internet and cloud-based services—which in many ways lie outside the control of the physical device, operating system, and even the cellular network—seems to be changing the roles and strategies of key firms in the ecosystem. Using industry architecture and platform theory, we examine how the key firms seem to be reacting to these new changes. Our analysis indicates that the platform “bottleneck,” or key control point, is moving away from the device and into the cloud, where a new meta-platform based on the Internet may be emerging.

Pon, Seppälä, Kenney: Issue• Internet & cloud-based services, which largely reside

outside the device, its operating system & the cellular network, are changing corporate strategies.

• This study uses industry architecture & platform theory to examine key companies’ responses.

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0189-x.pdf

Complex platform marketMulti-dimensional business models– Hardware – Software licensing– Ads

Multiple, nested platforms– Dropbox– Facebook– Line, WeChat, What’s App?

advertisers

publishers

end-users

developers

Dropbox

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0189-x.pdf

PCs, video games

Handset

OS

Apps

Network

Services

Handset

OS

Apps

Network

Services

SmartphonesBottleneck is moving up the stack

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0189-x.pdf

Pon, Seppälä, Kenney: Implications• The platform bottleneck, or key control point, is moving away from

the device and into the cloud, where a new meta-platform based on the Internet is emerging.

• Controlling this environment as a gateway to the services that users care about is critical, and may be more important than controlling the operating system itself. Platform owners must determine which complementary assets will be key to profitability.

• To borrow from the Lord of the Rings, the cloud center is threatening to become the meta-platform that subsumes all of the devices. In this way, it becomes the one ring to bind and unite them all.

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0189-x.pdf

Journal of Industry, Competition and TradeMar. 2015, 15(1), http://link.springer.com/journal/10842/15/1

Mark Huberty:

Awaiting the Second Big Data Revolution: From Digital Noise to Value CreationJournal of Industry, Competition and Trade. March 2015, Volume 15, Issue 1, pp 35–47.DOI: http://dx.doi.org/10.1007/s10842-014-0190-4PDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0190-4.pdfAbstract: “Big data”—the collection of vast quantities of data about individual behavior via online, mobile, and other data-driven services—has been heralded as the agent of a third industrial revolution—one with raw materials measured in bits, rather than tons of steel or barrels of oil. Yet the industrial revolution transformed not just how firms made things, but the fundamental approach to value creation in industrial economies. To date, big data has not achieved this distinction. Instead, today’s successful big data business models largely use data to scale old modes of value creation, rather than invent new ones altogether. Moreover, today’s big data cannot deliver the promised revolution. In this way, today’s big data landscape resembles the early phases of the first industrial revolution, rather than the culmination of the second a century later. Realizing the second big data revolution will require fundamentally different kinds of data, different innovations, and different business models than those seen to date. That fact has profound consequences for the kinds of investments and innovations firms must seek, and the economic, political, and social consequences that those innovations portend.

• Big data has been heralded as the agent of the third industrial revolution. So why has this distinction not been achieved?

• The answer: Because the utopia of big data is based on several flawed assumptions.

Huberty: Issue

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0190-4.pdf

Huberty: Flawed assumptions• ”Big data is representative of all humanity.”

– Everyone we care about is not actually online.

• “Online behavior today is the same as tomorrow.”– In reality, we only know about new developments in online behaviour well after they have already become big.

Therefore, there is no way to know how biased a sample actually is.

• ”Online behavior is the same as offline behavior”– Research has consistently shown that individuals’

online identities vary widely from their offline selves.

• ”Social patterns today are the same as tomorrow.”– The way people express their identity is in a constant flux. The rules of technological

platforms and online systems also constantly evolve and change in unpredictable ways.

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0190-4.pdf

2rd order biz modelSell stuff (volume+profit)

1st order biz modelSpecific input & output

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0190-4.pdf

Huberty: Big data business models3rd order biz modelInfo Eyeballs Adds

• Big data has not lead to a disruptive change in business models (yet).

• Development has been incremental with centuries old business models applied in unprecedented scales.

Huberty: Implications

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0190-4.pdf

Journal of Industry, Competition and TradeMar. 2015, 15(1), http://link.springer.com/journal/10842/15/1

Kenji E. Kushida:The Politics of Commoditization in Global ICT Industries: A Political Economy Explanation of the Rise of Apple, Google, and Industry DisruptorsJournal of Industry, Competition and Trade. March 2015, Volume 15, Issue 1, pp 49–67.DOI: http://dx.doi.org/10.1007/s10842-014-0191-3PDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0191-3.pdfAbstract: The global Information and Communications Technologies industry has experienced a rapid, radical reorganization of industry leaders and business models—most recently in mobile. New players Apple and Google abruptly redefined the industry, bringing a wave of commoditization to carriers and equipment manufacturers. Technologies, corporate strategies, and industry structures are usually the first places to look when explaining these industry disruptions, but this paper argues that it was actually a set of political bargains during initial phases of telecommunications liberalization, which differed across countries, that set the trajectories of development in motion. This paper shows how different sets of winners and losers of domestic and regional commoditization battles emerged in various ICT industries around the world. Carriers won in Japan, equipment manufacturers in Europe, and eventually, computer services industry actors rather than communications firms emerged as winners in the US. These differences in industry winner outcomes was shaped by the relative political strength of incumbent communications monopolies and their will to remain industry leaders, given the political system and political dynamics they faced during initial liberalization. The US computer services industry, which developed independently of its telecommunications sector due to antitrust and government policy, eventually commoditized all others, both domestically and abroad. This paper contends that a political economy approach, tracing how politics and regulatory processes shaped industry structures, allows for a better understanding of the underlying path dependent processes that shape rapidly changing global technological and industry outcomes, with implications beyond ICT.

• Global competition often unfolds as actors shaped by particular national political economic contexts interact on a global stage.

• Global ICT competition was comprised essentially of multiple different domestic winners interacting on a global stage.

• Different sets of winners emerged out of telecommunications liberalization across countries, with carriers emerging dominant in Japan, equip. manufacturers in Europe, and eventually the computer industry in the US.

Kushida: Issue

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0191-3.pdf

• Global competition often unfolds as actors shaped by particular national political economic contexts interact on a global stage

• Global ICT competition was comprised essentially of multiple different domestic winners interacting on a global stage

• Different sets of winners emerged out of telecommunications liberalization across countries, with carriers emerging dominant in Japan, equipment manufacturers in Europe, and eventually the computer industry in the US

Kushida: Implications

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0191-3.pdf

Journal of Industry, Competition and TradeMar. 2015, 15(1), http://link.springer.com/journal/10842/15/1

Jyrki Ali-Yrkkö, Petri Rouvinen:

Slicing Up Global Value Chains: a Micro ViewJournal of Industry, Competition and Trade. March 2015, Volume 15, Issue 1, pp 69–85.DOI: http://dx.doi.org/10.1007/s10842-014-0192-2PDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0192-2.pdfAbstract: Global value chains, GVCs, have had a transformative impact on the world economy since the early 1990s. We study 45 specific GVCs with company-confidential invoice-level data. We find that the case companies’ headquartering functions capture a large share of the overall value added, 27 % on average. The value added shares of other functions are as follows: distribution 21 %, final assembly 16 %, and logistics 5 %. The remaining 30 % of the value added goes to vendors. Upon considering value added by country, we find that the home economy’s share is 47 % on average. This share is reduced with offshored—as opposed to Finnish—final assembly: 2 percentage points for a high-end smartphone, over ten percentage points for a low-end feature phone, and 27 percentage points for machinery and metal products. We attribute the latter large drop to co-location of non-assembly functions, intellectual property issues, transfer pricing, and profit allocation. We conclude that GVCs are complex and heterogeneous; value chains of basic products and services are not nearly as global as those of advanced ones; and the value added share of wholesaling and retail is large in consumer products. We nevertheless argue that value added is less tied to assembly—and other tangible aspects of GVCs—than conventional wisdom suggests; the intangible aspects—market and internal services, and creation and appropriation of intellectual property—are more important. The increasing presence of GVCs brings about several thorny policy issues that are yet to be addressed.

• Global value chains, GVCs, have had a transformative impact on the world economy since the early 1990s. Many of the insights with respect to GVCs relate to high-end electronics.

• The increasing geographic and organizational dispersion of production raises the question of where the value added is created and by whom?

• This article provides a micro view on GVCs in light of diverse company-confidential invoice-level data

Ali-Yrkkö, Rouvinen: Issue

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0192-2.pdf

• Headquartering functions capture a large share (27%) of the overall value added; distribution (21%) is also important. Final assembly captures 16%, which is influenced by co-location of non-assembly functions, intellectual property issues, transfer pricing & profit allocation.

• Value chains of basic products & services are not nearly as global as those of advanced ones. The value added share of wholesaling & retail is large in consumer products. Value added is less tied to assembly & other tangible aspects of GVCs than conventional wisdom suggests.

• The dispersion of global value is not reversing but it is becoming more smarter. If longer-term effects are consider, high-cost locations are often competitive.

• High-income European countries urgently need new strategies for retaining higher value-added activities & for capturing associated returns.

Ali-Yrkkö, Rouvinen: Implications

Journal of Industry, Competition and Tradehttp://link.springer.com/content/pdf/10.1007/s10842-014-0192-2.pdf