The Rise of Digital Capitalism

15. 3. 2017

What’s happening in the global economy? Two different visions of economic transformation reshape the world as digitalization revolutionizes business.

Today, digitalization of the economy already seems to be almost ubiquitous. According to current plans or predictions, interconnected microrobots will enter almost every sphere of peoples’ work and private lives (internet of things), production processes are supposed to become increasingly efficient through the implementation of information and communication technology (ICT), and smart products and services are expected to make consumers’ lives more convenient and pleasurable.

At the same time, there is an ongoing, lively debate about the risks of digitalization. Will robots be doing most people’s jobs in the near future, leading to a rise in social inequality? Are platform business models systematically downgrading labor, putting a large part of middle class employment at risk? Will the near future resemble a world where information does not free people from oppression but manages to integrate them into ever tighter networks of consumption, in which the Googles and Amazons of the world know your every desire and promise to fulfill them before you even know what you wish for?

To address these questions and gain an idea of what the rising digital capitalism will look like, we first need to know two things. Is there anything new about the digitalization of the economy; in other words, is there actually something that differs from what we know already? And if there is something new and different involved in digitalization, what visions of economic and social transformation does it entail?

What Is New about Digitalization?

In highly developed economies digitalization has been ongoing for several decades now. Since the 1960s, ICT has been significantly transforming office work just like manufacturing. 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, ICT was used mainly to raise productivity by rationalizing labor.

However, roughly since the beginning of the new millennium, giant digital economy corporations like Google, Amazon, Apple, Microsoft, or Facebook have developed new business models which do not mainly engage in 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 around with us all day are, from an economic point of view, warehouses in our pockets. Consumers can purchase goods using retail shopping apps or app stores without spending any time in shopping malls. This is supposed to raise efficiency in consumption as people who would otherwise lack time for shop- ping can now buy anything they need, everywhere they are. Yet digital consumption networks are only a real alternative to stationary retail stores if people can access their purchases more or less immediately. This is why the Amazons of the world have made a huge effort to rationalize their distribution systems (from ordering to supply to warehouses to delivery) and why they are obsessed with the idea of same-day delivery. Google’s or Apple’s app stores, in turn, are new systems for the efficient distribution of digital products that you can access right after purchase everywhere, 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 rise of methods for targeting individual consumers. Roughly since the 1970s, consumer markets for standardized products in most developed economies have become increasingly saturated, reducing mass producers’ profits. The solution to this problem was supposed to be the individualization of production. Nowadays, when purchasing a new car or running shoes, you can customize almost every detail from the color of window frames and shoe soles to the upper material of your sneaker or your car’s paneling. No two products are supposed to be equal, offering consumers more opportunities for marking social distinction. However, to sell increasingly individualized products, companies need to be able to directly access growing numbers of specific groups of consumers with advertising—a service that companies like Google or Facebook, who gain about 95 percent of their revenues from advertising, have perfected in recent years.

Rationalization of consumption aims to establish more efficient ways for consumers to access goods they would not otherwise buy. Even though there have been historical predecessors to these modes of rationalizing consumption (the big department store, for example), the implementation of new technologies in businesses was usually focused on increasing the productivity of labor rather than consumption. The quality and intensity of the current dynamic makes it unique in business history. Boosting consumption and indeed creating new demand through digital technology is the implicit promise of digital capitalism.

Two Visions of Digital Capitalism

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 startup companies who follow the lead of the digital giants and have themselves sometimes become major economic players. This is due to a unique economic environment in which huge amounts of capital meet a specific ideology of innovation, risk-taking entrepreneurs, and a technologically highly-skilled labor force.

The rise of companies like Airbnb (valued at $30 billion) or Uber ($66 billion) in recent years has only been possible due to large sums of venture capital, which is the predominant form the investment capital takes in the Bay Area’s digital economy. Venture capital in the startup world has developed a specific economic logic of its own. According to what has become conventional wisdom in this area, nine out of ten startups fail before they create any revenue. For venture capitalists, this means that one out of ten investments must create revenues that exceed the losses of the other nine. For this to be possible, a startup has to become a real superstar that dominates a lucrative market.

The operational term for this kind of process is disruptive innovation. A new company develops a product that changes the rules of the game fundamentally and takes over an entire market: a search engine revolutionizes the access to information (Google), a new mobile digital device is used for a large portion of the operations previously done with personal computers or laptops (iPhone), a digital platform connects customers to individuals who offer chauffeur services in their private vehicles, cutting out traditional taxi companies (Uber).

Most disruptive innovations that have appeared in recent years assume the organizational form of digital platforms. Digital platforms have been described as two-sided markets that create value by connecting supply and demand. Such platforms entail network effects, which means that they become more useful to customers as more users join. Successful platforms therefore have a tendency to become quasi-monopolies. These platforms are usually privately owned markets. Once a company dominates or rather owns a market, its customers are supposed to become so dependent on it that the firm can set its margins more or less as it pleases. This is why digital platforms usually try to grow at all costs.

The platform model of Silicon-Valley-style digital capitalism comes, of course, at a social price. There has been much debate about growing social inequality in the Bay Area. A class of highly skilled technological experts clearly profits from the digital economy boom. Nevertheless, a big part of the population is left out. Furthermore, it seems that the success of many digital platforms is based on social polarization and devaluation of certain middle class jobs. On the one hand, platforms usually have a very small core of regular staff with decent, highly paid jobs, but also large peripheries with people who live from the platform, even though they do not formally work for it. Uber drivers or people offering their labor via crowdsourcing platforms are self-employed. Before these platforms were implemented in their respective field of work, their jobs were often found in highly regulated branches (like the taxi business) and in big organizations that had specific mechanisms for representing employees’ interests. The platforms’ ace in the hole, of course, is the implementation of dumping prices, which come at the expense of employees.

However, recently, 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 digitalization of the country’s industrial complex. Industry 4.0 refers to both 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 behind these developments. This would seem to imply a dynamic of digital innovation that entails incremental changes in traditional business models instead of radical disruption. The important (emerging) market for mobility services is a good example of this kind of process and the underlying social coalitions to which it is linked. Uber never became a major force in the German market, in spite of its massive investments. German courts ruled in 2015 that UberPop (the app that connected customers to private, non-licensed drivers) violated German law, a ruling that has been confirmed in the interim by courts on several levels of jurisdiction. At the same time, Daimler with its app mytaxi became the market leader in Germany for connecting with 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 all-or-nothing competition for market domination, corporations have even at times joined forces, for example, when Audi, Daimler, and BMW together bought the map provider Here from Nokia in 2015. Here offers technology that is essential to the development of autonomous driving. In the future, Here’s services are supposed to remain available to other companies, much like Google’s Google Maps service. In this case, teaming up with competitors is part of a strategy to create new standards for global industry and maintain control over software components together with manufacturers, rather than handing over this lucrative field of business to the 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.

Philipp Staab

Sociologist, Research staff member of the Hamburg Institute for Social Research.

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