Digitization Enables the Deep Transformation of Our Society

The most invisible revolution in history, the Digital Revolution, is taking place all around us. Unlike the Industrial Revolution that made a bold physical impact with its mushrooming of factories and urban centers, what weve termed the "fifth techno-economic revolution" is happening out of sight and behind the scenes.

Picking up speed now, it has been unfolding at a slow, yet relentless pace for decades.1 As such, it has also been following the evolutionary path of most technologies, from precious, to widely available, to inexpensive, and ultimately, to a throwaway commodity.

Specifically, expensive mainframe computers gave way to the dawn of the personal computer, which led to the linking of inexpensive computers via the Internet, and which is now bringing us to the coming fourth stage, where computing will disappear into the cloud, and where landfills will be filled with discarded, outmoded computer chips.

Information technology is already embedded in our lives, and as the revolution progresses, it will only increase. Today, for example, checking in at the airport for a flight is as easy as tapping a few keys and buttons at a kiosk. What we dont see are the many connections the kiosk makes and the conversations it initiates with other computers related to the flight, including passenger confirmation, flight status, seat choice, travel history, passport issues, and even aircraft weight distribution. This all takes place without the intervention of a human.

Another example of digitization is how supply chain management is being accomplished more and more by scanning and conversations between servers, and less and less by human action.

Looking into the future, the day may come when driverless cars will maintain a safe flow of traffic via conversations taking place between cars and sensors in the road beneath them. This type of task, as well as a myriad of other daily, automatic interactions in our lives, will be accomplished through the addition of billions of sensors and devices into our surroundings. [We will explore this in greater detail in our analysis of the 50 billion Internet Devices trend.]

These examples illustrate where this revolution is headed and how it can be defined. It will be a world where a growing number of tasks that were once handled by humans will be performed by conversations between remotely located servers. It will be a virtual, digital economy that receives input regarding events and processes in the physical economy, processes that information, and then delivers information and commands back to the physical economy. In short, the digital realm will sense occurrences in the physical realm and offer what are designed to be beneficial responses.

Even today, complicated exchanges are taking place in a matter of seconds, as servers, switches, routers, and other Internet and telecommunications devices share information back and forth. In those few seconds, data is queried, checked off, and updated, followed by the formulation of appropriate feedback.

W. Brian Arthur of the Santa Fe Institute goes so far as to call this emerging virtual economy the "second economy."2 This second economy is made up of the digitized business processes that are silently growing next to the physical economy it supports. Although it does not produce any tangible goods, it is already enabling a great deal of the physical economy, with widespread benefits. Virtually every industry imaginable is touched in some way as digital technologies are used to perform such tasks as designing buildings, tracking sales and inventory, transporting goods, executing trades, controlling manufacturing equipment, billing, navigating, diagnosing patients, and guiding surgery.

It is a vast and unseen interconnected system that operates concurrently and autonomously, in an always-on, endlessly configurable state.

Other characteristics reveal a system that is strikingly similar to a living, intelligent organism. According to biologists, such an organism senses outside stimuli, makes a change to its internal state, and then reacts. In this way, our digital infrastructure is becoming a huge neural layer or net for the economy that can serve us by sensing needs and quickly providing calculated reactions that fulfill those needs.

This system is also like a living organism in the way it is growing, because it is self-configuring, self-organizing, and even self-healing.

But the real engine behind its growth is how it is becoming integrated into the physical world it serves. It is not taking over companies or operations, nor are companies simply adopting new technology. Either of these scenarios would create a certain level of resistance. Instead, when companies encounter it, they look for ways to profit from the structure. Herein lies the power of its growth. Instead of being resisted, the digital economy is being propagated by thousands upon thousands of mutually beneficial relationships throughout all of the advanced world economies.

The profits for this sector have been steady, with an average growth of 5 percent annually since 2002.3 However, as this economy has evolved, the profits have migrated between the various players involved. They have shifted toward those segments closest to consumers, and away from those farthest from them. Specifically, they have moved to equipment providers and their software, Internet software and services, and devices, and away from content and service providers. In terms of numbers, in the last decade:

- Content providers lost both overall revenue ? from $66 billion to $61 billion ? and share of the profit, dropping from 13 percent to 8 percent.

- Devices grew from $25 billion to $78 billion in revenue and also gained in share of the overall profit, moving from 5 percent to 11 percent.

One explanation for this move is the emergence of Web 2.0. While it increased the ability of companies to organize the Web, it also multiplied the ability of consumers to receive and also create content, which enabled them to compete with content providers. This progress represents the effects of a steadily growing network ? the expansion of the digital net.

Based on this trend, consider the following three forecasts:

First, the Digital Revolution will be the biggest change since the Industrial Revolution.

It is a profound shift that is taking place already, and will provide an almost unlimited ability for knowledge to be leveraged to deliver intelligent, automatic responses to the economy. This silent revolution is slowly, yet steadily ushering us into a new world brimming with opportunities for those who develop the right strategies.

Second, within 20 years, the digital economy will grow to the same size as the physical economy.

These two parallel economies, one virtual, one physical, will work in tandem to produce new levels of overall economic results. This unseen economy will provide much of our growth and prosperity as it expands and matures throughout this century and beyond ? and it will generate whole new categories of jobs, as individuals and companies devise ways to leverage its capabilities.

Third, there will be governmental attempts to prop up companies and industries that cant cope with the creative destruction created by this trend.

As has always been the case with disruptive innovations, expect certain old technologies to become a protected and subsidized class. Much will be made of jobs that have been lost to new technology, such as the lament weve heard recently that ATMs have eliminated bank jobs. These kinds of charges reveal a lack of economic understanding that although new technology and industries may cause certain jobs to disappear, they create many more in the exchange. The Industrial Revolution offers many examples, such as the cotton gin. While it did eliminate thousands of low-paying, labor-intensive jobs, it replaced them with higher-skilled jobs in the fabric and garment industries when it caused the price of cotton to drop. Whether its cotton or connections, the same principles apply, and therefore the Digital Revolution has the potential to create an explosion of jobs, as did the Industrial Revolution.

References List :
1. McKinsey Quarterly, October 2011, “The Second Economy,” by W. Brian Arthur. ⓒ Copyright 2011 by McKinsey and Company. All rights reserved. http://www.mckinseyquarterly.com 2. Ibid. 3. To access the Standridge-Pencavel report “Profit Migration in the Digital Economy,” visit the Booz & Company website at: http://www.booz.com