The Rising Journey of Digital Capitalism

Academician, economy expert, ex-Minister


By Anastas Angjeli

There is no stopping for therising journey of digital capitalism. Now the digitalization of the economy seems to be almost ubiquitous. The fourth industrial revolution, the technological one, is happening. But it seems that in the global economy, two different visions of economic transformation are reshaping the world, while digitalization is revolutionizing business.

What Is New about Digitalization?

In highly developed economies, digitalization has been ongoing for several decades now. The personal computer became a dominant force in white-collar work in the 1980s and 1990s.

Economic globalization—the rise of transnational value chains and production processes—became possible only through intensive use of digital network technologies. In both cases, information technology was used mainly to raise productivity by rationalizing labor.

However, around the beginning of the new millennium, digital economy corporation giants such as Google, Amazon, Apple, Microsoft or Facebook have developed new business models, which do not primarily deal with the rationalization of production, but instead aim to intensify consumption.

Restructuring of sales, distribution and advertising is at the core of the recent digital transformation. For example, the smartphones we carry with us, from an economic point of view, are “warehouses” in our pockets.

Consumers can purchase goods using retail shopping apps or app stores without spending any time in shopping malls. Google or Apple App Stores, on the other hand, are new systems for efficient distribution of digital products, which you can use immediately after purchase anywhere, without delay on your mobile device (remember when you had to go to shops and buy CDs to get new software).

Closely connected to the rationalization of sales and distribution is the transformation of advertising, namely the establishment of methods for targeting individual customers.

Two Visions of Digital Capitalization

So far, Silicon Valley companies have set the rhythm of digital transformation. Not only are digital capitalism’s leading companies all from the Bay Area or, like Amazon (with its main office in Seattle), from other places on the American West Coast. Silicon Valley has become a dynamic ecosystem for start-up companies who follow the lead of digital giants and have sometimes become major economic players. This is due to a unique economic environment, in which large amounts of capital meet a specific ideology of innovation, risk-taking entrepreneurs and a technologically highly skilled workforce.

The rise of companies like Airbnb (estimated at USD 30 billion) or Uber (USD 66 billion) in recent years has been possible only because of the large amounts of venture capital, which is the predominant form that investment capital takes in the digital economy of Bay Area. Entrepreneurial capital in the start-up world has developed a specific economic logic of its own. According to what has become conventional wisdom in this area, nine out of ten start-ups fail before generating any income. For venture capitalists this means that one in ten investments must create revenues that exceeds the losses of the other nine. For this to be possible, a start-up must become a true superstar who dominates a lucrative market. The operational term for this type of process is disruptive innovation.

A new company develops a product that radically changes the rules of the game and conquers an entire market: a search engine revolutionizes access to information (Google), a new digital mobile device is used for a large part of the operations previously done with personal computers or laptops (iPhones), a digital platform connecting customers to individuals who offer chauffer services in their private vehicles, cutting out traditional taxi companies (Uber). Such platforms bring network effects, which means they become more useful to customers as more users join. Therefore, successful platforms have a tendency to become quasi-monopolies. These platforms are usually privately owned markets.

The Silicon Valley-style digital capitalism platform model comes, of course, at a social price. There has been a lot of debate about increasing social inequality in the Gulf Area. A class of highly skilled technological experts clearly benefits from the boom of the digital economy. However, a big part of the population has been left out. For example, Uber drivers or people who offer their jobs through crowdsourcing platforms are self-employed. Before these platforms were implemented in their respective field of work, their jobs were often located in highly regulated branches (such as the taxi business) and in big organizations that had specific mechanisms for representing the interests of employees.

Recently, however, a second vision of digital capitalism seems to be taking shape. In Germany, a large coalition of corporations, publicly and privately funded research institutions, and labor unions has adopted the term “Industry 4.0” to label the digitization of the country’s industrial complex.

Industry 4.0 refers to rather traditional uses of digital technology for automation in production and the implementation of more recently developed digital services in manufacturing, such as cloud-based software services, new tools for integrating consumers into the production process, or new applications for traditional products, for example BMW’s or Daimler’s car sharing programs.

Venture capital rather than production capital is the driving force of these developments. This seems to imply a dynamic of digital innovation that involves increasing changes in traditional business models instead of radical disruption.

The important (emerging) market for mobility services is a good example of this type of process and the underlying social coalitions to which it is linked. Uber never became a major force in the German market, despite its massive investments. German courts ruled in 2015 that UberPop (an application that linked clients to private, unlicensed drivers) violated German law, a decision that has since been confirmed by courts at several levels of jurisdiction. At the same time, Daimler with its application “mytaxi” became the market leader in Germany for the connection of regular, licensed taxis and both Daimler and BMW have expanded their car sharing branches. These business models not only preserve specific market regulations, as in the taxi business, instead of creating radical market dependence for workers. They also seem to have the potential to keep new jobs in the companies’ digital branches close to their highly regulated core, thus bypassing the kind of wage dumping and polarization developments that have been typical of Silicon-Valley- style platforms.

Instead of competing all or nothing for market dominance, corporations have even sometimes joined forces, for example, when Audi, Daimler and BMW jointly bought the map provider from Nokia in 2015. In this way a technology was provided that is essential for the development of autonomous driving. In this case, teaming up with competitors is part of a strategy to set new standards for the global industry and maintain control over software components alongside manufacturers, rather than handing over this lucrative business to Internet giants.

While digital capitalism so far is about the rise of intermediaries (digital platforms) that mainly aim to rationalize consumption and seem to foster social polarization, industry 4.0 appears to address the viability of traditional producers and how they can integrate the logic of digital platforms into their existing business models. The future will tell which way digital capitalism will go from here.

(*Academician, economy expert, ex-Minister, Panorama, August 5, 2021)

 

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