It’s easy to get lost in all the factors and phenomena emerging as digital and data technology transform industry after industry. As I have argued before, there are actually four things happening at once:
- Accelerating digital transformation and / or disruption. New digital tools and data technologies keep emerging. There’s big data and AI. There are smartphones, sensors, mobile payments and GPS. There’s the Internet of Things and increasingly digitized and interconnected business processes.
- The emergence of digital platform business models.
- The tech leapfrogging of China / Asia.
- The adoption of machine learning, AI factories and zero-human operations.
So every year or so, I like to make of the biggest and most powerful phenomena (in terms of competition). I call these superpowers because they give companies far superior abilities to incumbents and competitors. Here is an updated version of my 6 digital superpowers.
Digital Superpower #1: A dramatically improved user experience.
We are seeing this a lot on the consumer side in China and Asia. Using digital tools, companies are re-inventing services, products or business models. And this can make the existing service or product obsolete, often very quickly. I discussed this recently in my look at Sun Art Retail, which may make traditional hypermarkets obsolete.
Bike-sharing was another example of this. It wasn’t sharing. It wasn’t a platform. It wasn’t even that ground breaking. It was basic digital tools (GPS, smartphones, mobile payment) applied to bike rentals. And they dramatically improved the consumer experience. Almost overnight, it made traditional bike rentals (especially docked bicycles) obsolete. It also made selling bikes somewhat harder.
Making things more convenient and much cheaper is the common playbook here.
Some other examples:
- YouTube, Tudou and Netflix made watching videos much more convenient and cheap (basically free). Selling cable packages and DVDs got a lot harder.
- Steve Jobs launched iTunes and let you buy just the one song you wanted – and without leaving your home (again, super convenient and cheap). Suddenly selling an entire CD at a local retail store became impossible. Spotify later rebundled and disrupted iTunes.
- A counter example is the digitization of retail coffee (i.e., Luckin Coffee). Ordering a cup of coffee on your phone and picking up is helpful but it didn’t really transform the user experience dramatically. I consider it an upgrade but not a superpower.
Anyways, on a fairly regular basis, a company takes a product or service and uses digital tools to dramatically improve the user experience. It is often a game changer. And a digital superpower.
Note: This can be for non-consumer user groups. Such as merchants, content creators, advertisers, drivers and retailers.
Digital Superpower #2: Creates a digital platform.
Another superpower is the emergence of a platform business model in an industry that is traditionally vertically integrated (i.e., not a platform. A pipeline). It means adding a user group and creating value by enabling interactions. Uber and Didi did this to taxi companies. Airbnb did this to hotels. It can be brutal for incumbents. Maybe they get disrupted. Usually they get commoditized.
And platforms can have lots of softer advantages. In addition to network effects (Superpower #3), they can subsidize prices for one user group (e.g., Gmail is free because Google makes money on advertising). They can move horizontally into new industries (e.g., Alibaba jumping into entertainment). They can be protected by the chicken-and-egg situation. And all this can be devastating against sleepy, non-agile vertically integrated incumbents.
Digital Superpower #3: Captures network effects.
Most platforms claim to have a network effect. But many don’t. And all network effects are not created equal. Some are formidable (WeChat, Facebook). Some are easier to overcome (local ride-sharing, infrequently used services).
But some network effects can be a big deal and can get create a dramatically superior service relative to smaller competitors.
Note: This also includes standardization NE, which can happen with or without a multi-sided platform.
Digital Superpower #4: Creates other competitive advantages.
Most consumer products and services are blunt, crude instruments against human wants, needs and psychology. Sugar tastes good (and is addictive) so Coca-Cola really loads it up in a can. Physical attraction is pleasant and powerful so companies put pretty women (mostly) on cars and other random products. It’s all done fairly crudely.
It turns out digital and software are particularly sophisticated at addressing such needs and wants. Slot machines have always been good at appealing to people who like to play games (emotional, habit forming) and who like to gamble (very addictive). But digital slot machines have supercharged this. The software can very specifically target consumer psychology and behavior with variable rewards and other tricks. Digital slot machines get people to drop a lot more quarters in the machine.
If consumer products and services have traditionally been blunt instruments, digital is very precise. And it is often used to super-stimulate psychology. For example, Facebook and Instagram are currently wreaking havoc on the psyches of young women globally (look up the teen depression numbers). Online news and Twitter are keeping entire populations in a near-constant stage of outrage. And porn is dwarfing all other forms of entertainment.
A lot of the digital story is about software surgically targeting and then super-stimulating human wants, needs, impulses and behaviors. It is giving us what we want, like all consumer companies. But it is doing it with such sophistication and in such massive doses that the effects can be stunning. Next time you are on the subway, look around. Everyone will be glued to their smartphones for the entire trip.
And this is one of the big competitive advantages companies can create. A lot of consumer products and services are about creating habits (drinking coffee every day) and emotional impact (music makes you feel good, fashion makes you happy). Super-stimulating consumer behavior and creating habits is a digital superpower (for better or worse).
Another competitive advantage software is good at is building in switching costs. You see this on the consumer side but it’s usually stronger on the enterprise-side. Think Microsoft operating system and all the digital tools at your workplace. How hard would it be to switch to another operating system?
Another example is ride-sharing, where there is actually not much power on the consumer-side. But on the driver side, you can offer services that let drivers build small businesses on the platform. Didi is currently building out its drivers services (car financing, insurance, government services, etc.). This will create switching costs for the best drivers.
There are lots of other competitive advantages. But these two are common.
Digital Superpower #5: Virality and other powerful customer acquisition and/or retention mechanisms.
Virality is a powerful customer acquisition mechanism, where the very usage of the product or service brings new customers onboard. So this is you sending a payment to someone. And they need to sign up to PayPal to receive it. Or you doing a Zoom call with someone. And they need to sign-up to participate. Or Groupon and Pinduoduo, where group buying gets consumers to recruit their friends and make joint purchases.
Basically, virality turns users into sales agents for your company. And when you’re talking about millions of users, this can be very powerful.
There are other mechanisms for acquiring users rapidly and cheaply. And retaining them is also important. Most of these are short-term. But virality and a few others are particularly powerful.
Digital Superpower #6: Fast and low-cost scalability based on digital economics.
The last one is pretty simple. The economics of digital, of data, or things made of bits and bytes is just different. I have multiple podcasts and the strange but powerful economics of digital. One of the big results of this is the ability to scale very quickly, very extensively and at low cost.
For example, the physical versions of my books are very difficult to sell globally. It requires warehouses, stores and staff. But the digital versions of my books are all available online. I can make edits on my laptop and upload a new version in minutes. It is then available everywhere in the world. That kind of scalability is amazing. Companies like Google, Netflix and TikTok have greatly benefited from this.
That’s it for my updated list of 6 digital superpowers. I did have some runners-up. They are:
- Digital bundles
- Freemium (the power of free plus habit formation)
- Technology-based habit formation
- Adding social to anything (social+)
- Recurring revenue
- Pre-pay and negative working capital business models
- B2B criticality (Microsoft has).
- Recurring revenue bundles (“rundles”).
I write and speak about digital competition and China / Asia’s leading tech companies.
My book Moats and Marathons details how to measure competitive advantage in digital businesses.
I also run Asia Tech Strategy, a podcast and subscription newsletter on the strategies of China / Asia tech companies.
This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.