We're at the beginning of a digital revolution
Be prepared
Prelude
Part of the fun of investing in individual companies is the ability to make predictions about the future and watch your thesis play out over time. As investors, we have to constantly be thinking 5, 10, 20, even 50 years into the future in order to come up with new ideas that confirm/challenge our existing theses.
In this brief piece I’m going to discuss the digital revolution – where it started, the impact it’s had on our way of living so far, and its possible future direction of travel.
Intro
Digital platforms are changing the way we live our lives. Everything from buying food, watching television, dating, and many other aspects look significantly different from the norms of 10-20 years ago.
As computing power increases over the coming years, and more edge-case technologies such as cloud computing, Immersive Technology and 5G manage to breakthrough into the mainstream – we will likely see another seismic shift in the way we use digital tools to ‘enhance’ our everyday lives.
In reality, we are more-or-less at the beginning of a set of changes that will significantly alter our lives for decades to come. The exciting this is – it’s just getting started.
Some context
History
The digital transformation we are experiencing is known as a ‘general purpose technology’ which is defined as a technological change that “has the power to continually transform itself, progressively branching out and boosting productivity across all sectors and industries”.
There have only been 3 main advancements in ‘recent’ history which fall into this category – the steam engine, the electricity generator and the printing press. Each of these breakthroughs resulted in major technological innovation across multiple industries.
For example, the printing press meant ideas could be stored and shared on a larger scale than ever before possible. This, almost in itself, lead to the increase in published research papers and therefore more shared societal knowledge. This ability to share findings with a wider audience resulted in science taking massive leaps forward in the 16th and 17th centuries.
“When historian Elizabeth Eisenstein wrote her 1980 book about the impact of the printing press, she said that its biggest gift to science wasn’t necessarily the speed at which ideas could spread with printed books, but the accuracy with which the original data were copied. With printed formulas and mathematical tables in hand, scientists could trust the fidelity of existing data and devote more energy to breaking new ground.”
Similar examples go for both the steam engine and the electricity generator.
Disruption
These new technologies are inherently disruptive in nature. The extreme disruption occurs due to the new technology being more flexible and pervasive than the previous option.
A good example of this would be the impact digitization is having on traditional taxi companies. Companies like Uber are able to offer a more efficient, lower friction product only made possible by the introduction and now wide-spread adoption of the smartphone.
Lag
Part of the inherent nature of disruptive technology is the fact that there is often a lag between widespread adoption, and society adapting to the change. The current digital revolution is dependent on the widespread adoption of the personal computer, which is well underway but not 100% there. Because of these lags in adoption (e.g. replacing traditional printing with online publishing) it takes time before output growth accelerates.
That being said, it is evident in almost every industry that the digital revolution is full steam ahead. Banks are moving to digital, traditional taxis are being pushed out by Uber and Lyft, trucking is looking likely to become autonomous, dating almost always starts online, and linear TV is moving to online streaming.
Analogue to digital
The change from analogue to digital is a mega-trend spanning many different industries.
Over the past century, there has been a relatively slow shift from analogue to digital – with the crucial digital ‘switch-over’ happening mostly within the last 15 years. One example of this slowly evolving shift is the change from Analogue music streaming to digital music.
Lets go back to the beginning…
Pre 1850’s music had to be live. There was no way to record a musician’s work and play it back. In order to hear music, you would have had to physically travel. The outcome of this was longer performances.
The advent of new technologies in music from the 1850’s onwards led to new ways of consuming the same product. For example, the introduction of the record (vinyl) allowed people to listen to recorded music wherever they had access to a record player - bringing down the standard duration of songs to a maximum of 4 minutes. This constraint impacted the artists creation process – no longer could they make a song lasting 15 -20 minutes.
Development continued throughout the 19th, 20th and 21st century with inventions such as the radio broadcast (~1920), transistor radio (1950’s), CD (1982), iTunes library (2003) and more recently streaming (2008).
The above graph nicely visualizes how each added layer of technology builds on the previous, and how this has effected consumer spending habits and (more importantly) consumer behavior. For example, we can see the CD was the main driving factor in the monetization of audio – reaching a peak of just over $50 billion in 2000. The introduction of digital downloads/streaming services (iTunes/Spotify) in 2008 changed the dynamic of the industry, and companies like $SPOT are taking advantage of this and finding new ways to monetize based on the new consumer behavior.
Television
Similar to music streaming, television has been entrenched in a traditional model since its mainstream adoption somewhere around the 1930’s. We have been using a ‘Pay TV’ model for the majority of the past 50 years – paying for individual linear channels/bundles with Sky/Virgin/many more.
The introduction of Netflix (and other streaming services) since 2007 has seen a sharp decline in the number of people using the old model. The movie rental business in 2006 stood at about $5.5 billion, with blockbuster making up about half of that. Fast forward to 2021 and Netflix alone is a business worth about $25 billion in revenue. With the larger digital streaming market adding up to roughly $70 billion.
Similar to the above audio example, we are seeing a quick shift towards digital, which is adding both more value to the consumers and creating more economic value for the businesses involved.
Other Industries
The transition to digital has been accelerated over the past year due to the unfortunate circumstances surrounding Covid-19. This black swan event has put tremendous pressures on most businesses, forcing major pivots/innovations in order to stay alive. This has led to many other, typically entrenched, industries (such as healthcare) beginning to see a large surge in digital transformation (e.g. Teladoc).
“after a slow start, the pace of transformation continues to accelerate. The ubiquitous smartphone was inconceivable to the average person at the turn of the 21st century. Now, more than 4 billion people have access to handheld devices that possess more computing power than the US National Aeronautics and Space Administration used to send two people to the moon. And yet these tiny supercomputers are often used only as humble telephones, leaving vast computing resources idle.”
What’s next for digital?
4G to 5G will supercharge some industries
An order of magnitude quicker speeds for data transfer with greater bandwidth will push the boundaries of what is possible with most current hardware.
A good example of a sector that will benefit is immersive technology. This industry will likely see huge leaps in what is possible with the addition of 5G. Currently, remote use of AR/VR is limited due to the high amounts of data needed to be transferred with little-to-no delay (almost impossible at the moment). 5G will enable remote use-cases of these technologies.
Companies likely to benefit in this market include $FB, $MSFT, $VUZI, $SNAP (just to name a few).
Processing power will continue to increase, whilst size will decrease
Moore’s Law - the principle that processing power for computers will double every two years - has basically been playing out exactly as predicted by Moore.
How much longer can this continue? Much longer than we initially thought.
AI & Big Data (going somewhat hand-in-hand) will continue to become more important as computing power increases.
Everything we do online (which is more and more each day) leaves an extensive digital footprint - creating gigabytes of data for each user. With the emergence of AI, these large datasets are sifted through to spot patterns and create instructions that optimize search engines, target advertisements to individuals, and even offer real time directions (and much much more).
As data has become more prolific, AI has continued to learn and advance its capabilities. These increased capabilities will have key use-cases across many different industries. For example, the autonomous driving sector will be a huge beneficiary of the uptick in sophistication of AI/deep-learning systems. A stat from Tractica shows that “Machine learning is predicted to grow by 48% in the automotive industry”.
A proportion of the healthcare system will become remote due to new digital infrastructure
Healthcare is an example of an industry crying out for disruption – both structurally and politically. Companies such as DermTech & Teladoc are some of the first to really try to make receiving healthcare an easier/cheaper/quicker experience than the current model.
“Currently, telemedicine utilization rates remain below 10% in the U.S., but penetration is likely to grow as technology reduces costs and adds convenience.14 Further digitalization of health care will also enable new use cases for AI. Recent developments like AI-driven, real-time MRI interpretation could mean enhanced diagnoses and treatments across other health care verticals, in addition to its use in telemedicine as an AI chatbot for triage or basic medical advice”.
Genomics will be accelerated over the coming decade due to technological advancements.
“As genomic sequencing costs continue to fall, computing power has increased, and biotech research has continued to advance - precision medicine therefore transitioned from an idea to a reality. Developments like the CRISPR-Cas9 approach to gene-editing introduced new efficient and reliable ways to make precise, targeted changes to the genome of living cells. In practice, this means editing or removing portions of DNA that present health issues.
In 2019, such technology showed promise in treating blood disorders like sickle-cell and other genetic conditions like muscular dystrophy. According to some, CRISPR technology could correct up to 89% of disease-causing genetic variations in the future.
Advances in genomics could offer the first realistic opportunity to cure certain illnesses previously deemed fatal. As the medical and scientific communities’ understanding of gene expression and protein pathways improves and genomic sequencing costs continue to fall, we expect a vast increase in the number of tested and proven genomic therapies.”
Some major players include $BEAM $CRSP & $EDIT (there are many more - follow @NatHarooni on twitter for better insights than I could ever give on this topic).
Cloud & Edge computing
People typically stored data and software locally on desktop hard-disks or distributed to on-site servers. But as datasets grew more complex and faster network connections facilitated the rapid transfer of data over the internet, off-premises storage and web-based software programs became more desirable.
The continued decline of computing costs and improvements in network infrastructure and AI are key drivers of the emergence of edge computing.
Some technologies require instantaneous data interpretation and can’t rely on networks with higher latency. Autonomous vehicles, robotic surgery, gaming, and smart factories, for example, can require near simultaneous data transmission. Edge computing reduces latency to 5-10 milliseconds from 25-35 milliseconds for early deployed 5G devices. A study estimates the economic impact of edge computing to reach $4.1 trillion by 2030
…and many more
Closing thoughts
In some ways, the digitization of modern life has brought the human race closer together. We can speak to someone on the other side of the world ‘face-to-face’, businesses no longer have to be bound by location and we’re making certain aspects of modern life accessible to people for which it was previously not (banking). However, one could also argue that with this increase in ‘connectivity’, we are slowly becoming more and more detached from the people sitting closest to us.
One thing is for sure, we’ve chosen the direction of travel and there’s no turning back.
Digital technology will spread further, and efforts to ignore it or legislate against it will likely fail. Max Tegmark recently said that it’s “not whether you are for or against AI/digitisation - that’s like asking our ancestors if they were for or against fire”.
Current anxieties around mass job losses due to automation are a real worry, but it is something we need to figure out and overcome as a society. As history shows us, the human race are pretty good at solving problems under pressure.
Cheers,
Innovestor