Businesses are in a tearing hurry to get on the superhighway of digital economy. Those who fail to adapt may not survive. In an environment where 36 million Amazon purchases happen in a day, it’s suicidal for a business to stay away from this race. But is digital going to be less risky than traditional economy? No.
This article highlights three high impact risks that can jeopardise the digital economy. These are inherent in the digital model and originate from its strengths. Hence it’s easy to overlook them. More entrenched a company into digital, higher can be its exposure to such risks.
Hyper-connectivity
What can happen to a ride-sharing service if connectivity to the app goes down for a few hours? Apart from revenue loss, it would create unpleasant experiences for its customers. Repeat of such instances can also impact its brand.
Hence, overdependence of any business on hyper-connectivity can be risky.
Zurich Insurance and Atlantic Council has published a Risk Nexus report that indicates that “Most of the recent cybersecurity trends point to a darker future, with every year worse than the last: more data breaches, more disclosures of critical vulnerabilities, and more nations building and employing offensive cyber capabilities.”
There is a possible future state of the internet, which the report refers to as the Clockwork Orange Internet, the risks of being connected can outweigh the economic benefits derived out of it. The advantages of digital economy will vanish if this risk materialises in the future.
Future potential drives current valuation
Digital economy encourages valuation of a company based on its potential to capture monopoly profits in the future. According to Peter Thiel, billionaire co-founder of PayPal and Palantir, “the value of a business today is the sum of all the money it will make in the future”.
So a business can have disproportionately higher market capitalization than its yearly revenue. LinkedIn’s market capitalization is around USD 27.35 billion although its 2014 revenue was USD 2.21 billion. In 2012, Twitter lost money but when it went public in 2013 – its market capitalisation was more than 12 times that of the New York Times.
Why does it happen? It happens because investors look at a company’s projected cash flows on a longer term. So for many technology businesses, values are expected to come 10 to 15 years in But the biggest risk in this model is the uncertainty of the future. Catastrophic events, shifts in the world order, unexpected market regulations, dramatic changes in user needs and other factors may disrupt the future of such companies. If this happens to most of the businesses whose value lie in the future, the entire digital economy may burst like the infamous dot com bubble.
High focus on digital innovations
It takes around USD 2.6 billion to develop and bring out a new drug to the market. In contrast a software startup needs a much lesser amount of seed money. Hence investors are more interested to fund digital innovations than to fund ideas in analog businesses. But is digital technology enough to solve world’s most pressing problems?
Bill Gates, in an interview with Bloomberg Business, said – “When a kid gets diarrhea, no, there’s no website that relieves that. Certainly I’m a huge believer in the digital revolution. And connecting up primary healthcare centers, connecting up schools, those are good things. But no, those are not (enough), for the really low income countries, unless you directly say we’re going to do something about malaria.”
World Bank, in an overview of World Development Report 2016 on Digital Dividends, highlights the need to strengthen the analog foundations of the digital economy. Without sufficient innovations in the analog world, digital transformations cannot bring all the benefits. If most of the investments get directed only to digital technologies, new age economy will suffer.
Traditional economy is giving way to new age economy. Businesses that fail to undergo digital transformations may become extinct. But the strengths of digital economy can also turn out to be its biggest risks. Overdependence on hyper-connectivity or relying on future cash flows can adversely affect the resilience of a company. Also, too much of focus on digital innovations at the cost of having weak analog foundations can be destructive for the overall economy.
[Disclaimer: Views expressed by the author in this article are personal in nature and do not represent the views of any organisation]
By Pranab Chakraborty, Senior Manager at Wipro Limited.
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