Dan Heaf: Placing your bets in the digital economy

“Progress is not the mere correction of evils. Progress is the constant replacing of the best there is with something still better” - Edward Filene

These are troubling times. In 2008 the bubble burst and the world came face to face with a global credit crunch. A quarter of a century of free-market zealotry used to justify asset stripping, hostile takeovers, abusive lending, excessive borrowing, and hedge fund secrecy has gone down in flames. But rather than dwell on what caused the crisis, I shall look to explore emerging opportunities in the UK’s digital economy and to examine how we might place careful bets to extract both commercial and public value.

I’m in no doubt that out of crisis comes great opportunity but for digital to really make good on a decade of promises we must let history guide forensically our attention, skills and wallets.

Today, as many of the world’s largest economies remain in a full-blown recession, governments and policymakers across the globe are devising and deploying strategies to lessen its impact. Their approaches to lessening the effects of economic crisis are broadly similar. Strengthen national and international financial regulation; prop up over-exposed banks and key financial institutions; slash interest rates; increase the money supply and embark on public spending to artificially stimulate the economy. All of this is to re-inflate the bubble.

Public investment in infrastructure has long been seen as a way to mitigate economic weakness by replacing the void left by private lending and investment in generating jobs and demand for materials and equipment. George W. Bush did the same when faced with the combination of the NASDAQ crash and the wake of September 11th 2001. However, the spending being promised today is unparalleled in scale, with Obama and Brown planning budget deficits to dwarf anything we’ve ever seen before.

As tempting as it is to use public spending to resuscitate parts of the dying economy, we must instead spend appropriately for the new era. The solution lies in massive institutional innovations, as bold and as extensive as those of the 1930s and 40s, responding this time not to the demands of mass consumption but to the needs and potential of a sustainable global knowledge economy (Perez , C., 2009).

So while renewing or increasing physical infrastructure like roads and hospitals is crucial, so is the need to expand internet access either with fibre to the home (which can – and should – be coupled with other physical infrastructure works) or with wireless. Thankfully, many governments have recognised the potential of digital services and technologies and have embarked or are planning on connecting everyone to high speed broadband networks.

The Obama-Biden Stimulus Package directs over $30 billion at telecommunications, photonics, and Information Technology with the specific remit to extend broadband to under-served rural and poor areas that have, until now, proven unprofitable to serve. The French Secretary of State for the Development of the Digital Economy, Eric Besson, has announced details of the government’s France NumErique 2012 policy that proposes 154 measures including moves to give all French inhabitants broadband access for less than €35 by 2012, up from 54 per cent today. Lord Carter’s Digital Britain envisages everyone having access to affordable broadband by 2012. But the Japanese and South Koreans are planning widespread access to the web at speeds many times greater than those planned for the UK, while Denmark, Finland, the Netherlands and Norway are already well ahead of the UK (Leadbeater, C., 2009).

The safe bets

Around the world politicians are making the same bold and enthusiastic claims for these plans. Building the actual physical infrastructure will create jobs. When the number of unemployed can affect elections, if you were looking for a good bet, you’d be foolish not to invest in those who supply the technology and expertise required to physically roll out and upgrade the digital infrastructure. Just over 100 days since Obama signed the stimulus package, technology and telcos stocks in the S&P 500 have risen in value by 20.7 per cent and 8.8 per cent respectively (CNBC, 2009).

However, the majority of the technology needed to deliver Digital Britain is likely to be procured from companies headquartered in the US. The innovation and specialised research and development is likely to be centred in and round Silicon Valley or MIT. To reboot Britain for real, we need to be more involved in nurturing our technology companies and research centres and by ensuring enough kids are enthused about the right subjects taught in the right way.

A second benefit is that universal access to high speed broadband will amplify the benefits of existing websites and digital services. With greater access to high speed broadband, the economy in general will be better placed to take advantage of improved efficiency, discoverability, communication, and participation leading to increased international competitiveness. With the right policies, the benefits of the new technological potential can be fully realised across the economy and its social benefits better spread.

In certain sectors like communications, entertainment, information and knowledge industries, we can be more specific. The successful companies in these sectors are likely to have used cheap credit in 2003-2007 to invest wisely in revenue-generating digital solutions and online markets. Companies on the brink of generating revenue may see the publicly-funded market expansion tip them into profitability, while dominant players will likely increase their lead. For example, e-commerce is growing, with larger numbers of people able to take advantage of the the easily comparable prices and conveniences of shopping online. The interim Digital Britain report predicted that by 2012 £1 in every £5 of all new commerce in this country will occur online (Digital Britain Interim Report, 2009).

Music, which has already established a significant download-to-own market, is likely to see the gap in sales between physical and digital product shrink further until digital products make up the lion’s share of sales. This trend could accelerate if the road can be cleared for subscription-based services. The Games and Film industries will see their nascent download-to-own markets grow as a larger number of people have access to faster networks making big download files more manageable. The Games industry, which has already embraced networked play, will enter a new era of massively mainstream online games.

In essence, many of the businesses that have slowly been building online market share will be excellently placed to take advantage of the government actively growing this market for them. If these internet businesses can survive the recession, they should be able to accelerate growth with minimum amount of additional investment. Wikipedia will have more editors, Yahoo! more answers, flickr more pictures, Google more links, Amazon more sales and eBay more lots. Even the micro blogging service Twitter could migrate from the preserve of those currently connected 24/7 to a more representative slice of the population! If people were asking me where I’d place my bets in this new era, I’d say look to the industries that have taken advantage of the cheap credit frenzy that preceded the bust to build business that will genuinely benefit from government-encouraged market growth.

While this is all well and good, it concerns me that so many of the internet’s leading consumer services, those best placed to take advantage of UK public money, do not originate in the UK. Recent ComScore data confirms this. US web companies dominate the attention of UK web users. In February 2009, UK web users spent over 70 per cent of their time on the US-owned sites in the top 100. Over time this risks significant economic, cultural and social consequences which policymakers are only just starting to wrestle with. Foreign-owned companies are not commercially incentivised to invest in content and services specific for UK audiences, nor to back new UK talent and innovation. With so much UK revenue leaking out of the system, the smaller UK players lack resources to invest in innovation, particularly if it is for public rather than commercial purposes. This problem is exacerbated by the recession-led contraction in European private capital. Will Britain’s digital talent ever get the chance to build truly global internet business? Even with Digital Britain, could Britain ever produce a Google?

Placing bets that count

The more important but less well-understood claim made by governments and policymakers is that universal access to high speed broadband will stimulate new growth sectors. Worryingly the hopes set out in the interim Digital Britain report place an undue emphasis on content as opposed to services. As audiences fragment across the web it is clear we produce too much content to be supported by current business models.

However, through my work at 4iP, I’m sure internet entrepreneurs and technologists haven’t stopped dreaming up newfangled widgets or sketching technological marvels on the back of cocktail napkins. The internet is still in its early stages with so many new users and demands yet to be adequately met. But cutbacks have slowed the pace of getting the latest US, let alone UK, innovations to market. Venture capital investments have plummeted. Lenders aren’t funding business start-ups. Bank loans and ‘angel capital’ – money that friends and families and wealthy individuals cough up to support innovation – also are contracting.

So now more than ever we need to think carefully about our ideas before we rush to pitch it/build it/test it. Are we building sustainable businesses and working on things that really make a difference? I can’t help but feel that while the web has been travelling in a better direction since 2001, so much money and time has been wasted on frivolity. In my opinion one of the most sobering lessons of our current financial situation is the realisation that we must invest in new British companies rooted in production, dividends and real cash. There’s no point in rebooting Britain to the same unstable operating system we had before. The pot is limited so we need to make sure we place bets that count.

But there is another type of value, public value, that will become increasingly important as we claw ourselves out of the recession. Public value goes beyond the monetary measures of the marketplace and into the area of social wellbeing. The UK’s creative technologists would do well to look wider than the financial bottom line when thinking about their next business or next job opportunity.

First, services delivering public as well as fiscal value will all be in demand as public spending kicks in. With governmental funding in technology as well as areas like education, health and the environment, digital solutions to these crunchy problems should be able to avoid the current private investment drought. Lord Mandelson talks explicitly about the opportunity to build a high-tech, low-carbon economy.

But generating public value also provides the answer to a bigger piece of the puzzle, one that’s often overlooked: providing meaning in people’s lives. As web guru Tim O’Reilly puts it: “If you’re working on a project just for the money or where earning a living is the primary motivation and you fail, you’re probably going to feel like you’ve wasted your time. On the other hand, if you work on something you love that delivers some public good and you make a small improvement in the world because of what you care about, then that’s going to feel a whole load more worthwhile.”

The problem with public value in the UK is that it’s too much associated with charities and non-profits. This could well be because the two largest UK public value institutions, the BBC and the NHS, are rooted in public service. I, however, strongly feel that to relegate the important questions of our time – the environment, health care, democracy and the sustainable economy – to non-profits and social ventures diminishes our chances of solving them.

My favourite case study here is Google. Their original mission – to organise the world’s information – was incredibly altruistic and public-spirited in nature: clearly their original investors and then shareholders ensured that the business generated revenue, but it would be wrong to argue that profit was their raison d’être. I’d hazard a guess that most people don’t work for Google for the money; they join Google because they want to make a real difference. The success of the company has led them to increase reach and impact and critically invest further, expanding their public value beyond search into numerous other products. If Google had been a charity or a social venture, it wouldn’t have been half as successful in raising the original funding necessary to go mainstream.

Over the next five years, the influx of public sector funding and the refocusing of private money offers an enormous opportunity to the UK’s digital economy. The opportunity goes beyond simple economic growth and job creation to finding the key to some of the problems we face on a national and global level. However, as we attempt to Reboot Britain, we should bear in mind the mistakes of the past so we might better understand future opportunities. The UK is teeming with all the digital talent we need to answer the questions of the day. To unlock that talent Britain must focus its public and private investment alike on products, services and technologies that really matter. This public value mustn’t mean overriding traditional business values. We must give those our digital business the space and support to build, test, fail and rebuild, but also to be run as real businesses and not quangos and NGOs. Sooner or later we’re all going to have to pay this public money back, and the key services we build must be able to innovate and grow.

Dan Heaf is Digital commissioner of 4iP

This essay is one of a collection of viewpoints which will be published to launch NESTA’s ‘Reboot Britain’ programme. Reboot Britain will explore the role new technologies and online networks can play in driving economic growth and radically changing our public services. The programme will begin with a one day event on 6th July which will look at the challenges we face as a country and how the combination of a new digital technologies and networked 'Digital Britons' can produce innovative solutions to tackle them. For more information please visit www.nesta.org.uk