Like most of you I am perplexed by stock market behavior, having been hit by a double whammy – the Covid19 pandemic and an economic free fall. I have always separated the stock market from the economy suggesting that decisions made in the stock market are predominantly emotional, while those same decisions made in our economy are made based upon facts and analysis. But even the stock market is affected by outcomes and estimates. So, what is going on, why is our economy more resilient than it was in the last great recession when over 20 million workers are unemployed, and a pandemic is wracking businesses and classic economic indicators continue to bounce?
My hypothesis is that the digital economy has come into its own and is the predominant factor keeping our general economy from total failure. But let me be clear, all of what I will define now does not explain or correct the misery that so many people find themselves in. And as usual the huge wealth gap continues, as misery for the middle class and those who have suffered under economic injustice only increases. But if the digital economy continues to increase, I believe that access by small business will level the playing field and result in benefits for all. Call me naive, but I believe that American ingenuity and desire for fair play will win out.
About 15 years ago there were three technological imperatives that came to be that transformed the technology infrastructure and began the digital economy and its growth to what it is now.
Three factors that altered tech infrastructure forever were – broadband, cloud (platforms and operating environment) and basic cyber-protection. They not only changed the architectural direction but changed the economics of IT, that then led to new commercial business models forever. These same factors also set in place the next part of the evolution – virtual robotics and AI.
After the last recession and the onset of Cloud, I noticed a major change in the relationship of technology and business. Till then, IT budgets were composed of a large fixed cost budget for hardware, software, networks, and services. When cloud technology came along with the upgrade of network speeds using broadband, a business could finally get out of the IT business and could subscribe to software, hardware, network and services and be billed based upon usage. The shift from fixed to variable costing resulted in a classical alignment often sought after by all businesses – align business costs closely to the ever-shifting market changes. More demand higher costs, lower volume, lower costs, instead of the same fixed cost cemented and increasing, regardless of market ups and downs.
The difference in costs, variable costs aggregated were substantially less, with data centers increasing dramatically for cloud providers and eliminated by businesses. Even more important single points of weakness and stress were eliminated by spreading the risk across private, hybrid and public clouds.
With so much data now physically outside of the business and in the cloud the issue of cyber security increased from basic protection (and introduction) to more sophisticated technologies.
So, what. Well, today we are seeing the benefit of have a cost buffer (fixed vs variable) that can sustain (albeit, at much lower levels of profit) the many large companies across the industries. The digital economy established a symbiotic relationship between technology and business. That is ‘on demand’ services keep the technology companies going, while pay as you use, keeps the businesses going.
Another aspect has been prevalent has businesses that purposely digitally transformed (at its basic level of paper and process elimination) resulting in greater dependence on clouds but benefitting each time from the economic gift of variable costs.
You can see the companies that had transformed prior to the pandemic now holding their own and even when all around them brick and mortar businesses declining or shut down.
Then the top ten technology companies now dominate the market caps of the stock market increasing in value every month and shifting the Fortune 500 dramatically towards companies driving the digital economy.
But the digital economy is not naturally inclusive. Until recently there were always barriers to entry for small business. The barrier was predominantly due to small scale or lower business volume. Additionally, small business was often operating on slim margins, low technology investments when cost for manual processing was competitive with automation. Nor did the volume justify large investments in technology. Nobody says economies digital or otherwise are fair, especially to those with little scale.
In the next post I will examine how the next phase, virtual work, could begin to impact small businesses in non-revenue generating roles or jobs.