Digital Economy Ch1 PDF

Chapter One The Digital Economy Dr. Ibrahim Elatroush  Introduction Understand the size and versatility of the digital economy. Explain how the adoption of Internet access and cell phone has enabled the digital economy. Understand what is meant by digitization of...

Chapter One The Digital Economy Dr. Ibrahim Elatroush  Introduction Understand the size and versatility of the digital economy. Explain how the adoption of Internet access and cell phone has enabled the digital economy. Understand what is meant by digitization of the economy and how it is related to digitization of communication networks and production and storage of digital information. 2  Definition The digital economy is an economy based on information and communication technology (ICT). The digital economy is based on ICT such as the Internet, smartphones, mobile and wireless networks, optical networks, cloud storage and cloud computing, sharing services, apps, and cryptocurrencies. The size and impact of the digital economy are driven by people’s adoption of these technologies. 3  Definition . Figures 1.1, 1.2 show the share of households for Internet access, 4G/LTE mobile from 2005–2019. In 2005, only 20% had Internet access while in 2019, 60% of world’s population has Internet access. Over last decade, Internet access has increased across the world. However, there are major variances in Internet adoption between countries. While 85% of households in developed has Internet access, less than 50% of households in developing world has Internet access. 4. Fig. 1.1 Percentage of households with the Internet from 2005 to 2019.. Fig. 1.2 Worldwide access 4G/LTE mobile networks.  2. Digital Economy Facets Facebook is the most popular social media services, with about 2.2 billion users. Facebook has significant impact on how people communicate and organize their social lives. The advertising industry has been dramatically changed because of the way social media advertisements can be tailored to match the attitudes and preferences of the users. 7  2. Digital Economy Facets Airbnb was established in 2008; it has grown to become one of the biggest hospitality services worldwide. In 2017, Airbnb has over 200 million users and offers over 3 million lodgings in 191 countries. Airbnb enables homeowners to rent out property to registered guests and is one of the best examples of expanding sharing economy 8  Digital Economy Facets Bitcoin (BTC) proven in 2009 by Satoshi Nakamoto. It became the well-known cryptocurrency. Bitcoin utilizes blockchain technology to provide a distributed currency without any third parties. Bitcoin has the potential to be a true global currency. However, recent surveys reveal several weaknesses with Bitcoin such as long transaction times and high energy usage. Other cryptocurrencies, such as Litecoin and Ethereum may overcome these challenges and turn out to be the dominant cryptocurrencies of the future. 9  Digital Economy Facets The size of digital economy is hard to estimate because: ①ICT is an industry on its own (production of communications networks, Internet equipment, cell phones, applications, and software) ② ICT is also integrated into almost all other industries. ICT has enabled new business models, more efficient production methods, and new ways of interacting with consumers. One example is online trading (e-commerce) where people can buy almost any kind of goods & services via the internet 10  2. Digital Economy Facets The world’s six largest corporations by market capitalization as of the first quarter of 2021 are Apple, Microsoft, Amazon, Alphabet (Google), Facebook, and Tencent. All these firms produce digital goods and services and are major businesses in the digital economy. In March 2021, their combined more than $8300 billion of market capitalization. Figure 1.3 illustrates the market capital of the top ten firms in the world.  These companies hold immense power in world business due to their size, span of operations, and international impact. 11. Fig. 1.3 Top ten corporations worldwide based on market capital  3. Digitization of the Economy Digital economy is triggered by 3 technological evolutions: ①digitization of data ②development of digital ICT infrastructures ③ digital processing and storage Technological evolutions have major breakthroughs and growth in performance and user adoption in recent decades. Figures 1.4 and 1.5 show how technological evolutions are related. 13  3. Digitization of the Economy Digitization of data means that the data is encoded as a sequence of bits (“0” or “1”). Examples of digital data are music stored as files on a computer, books downloaded on a tablet, bank account information in an e-bank application, e-mails, movies and music streamed from the Internet, apps installed on smartphones, and instant messaging services 14  3. Digitization of the Economy...01011011... Digitization of data Digital Digital ICT infrastructure processing and storage Fig. 1.4 Digitization of data, infrastructures, processing, and storage 15 3. Digitization of the Economy Analog data Digital data Video and audio cassettes, PC hard disks, DVD, Blue ray, CD, Fig. 1.5 Analog and digital data. 16  4. Digital Economics Digital economics: is the branch of economics studying digital goods and services. Hereafter, the term “digital goods” is used when referring to both “digital goods & services.” This is because there is seldom a need to make distinction between “digital goods” and “digital services.” The full term is used when this distinction is necessary. 17  4. Digital Economics Digital goods include data produced by users, digital applications and services provided over the Internet, and storage and processing of such data. A digital good can be: Any kind of software Any type of file stored digitally A smartphone app and associated services Any type of digital information Content of a website Any communication session Any application supported by the Internet Trade and bank transactions 18  4. Digital Economics Financial Technologies (FinTech): is the use of new and emerging technologies to replace traditional financial services. Examples include mobile payment services, cryptocurrencies, blockchain methods, crowdfunding, and smart contracts. A major challenge associated with FinTech is data security. Robotic Process Automation (RPA): is a form of business process automation based on using software robots as workers instead of humans. These robots can perform repetitive tasks such as updating websites, answering questions from customers, and sending standardized e-mails. More advanced robots based on cognitive automation are being developed. 19  4. Digital Economics Industry 4.0: This implies the use of ICT to create smart factories based on industrial robots. 3D printing is an example of an Industry 4.0 technology. Here, industrial products are created on demand at customer premises outside the traditional manufacturing plants. Intelligent Transport Systems (ITS): is the use of ICT to automate the road and transportation sector. Examples of ITS applications include smart traffic signs and self driving cars; both contribute to lower costs of transportation and increased traffic safety. 20  4. Digital Economics Network economy focuses on businesses in which much of the economic value is generated by network effects. Network effects are abundant in the digital economy and explain how value is generated in several, but not all, digital businesses. Platform economy focuses on businesses that act as platforms. The primary business idea is to connect two or more user groups (two-sided or multisided markets). Platform economy is closely related to network economies since network effects are also important drivers for platform businesses. However, not all network economies are platform economies and vice versa. 21  4. Digital Economics Information economy focuses on information products and how they are produced and traded. The information economy is part of the digital economy, but the latter is broader in scope since it also includes more than pure information goods. Data economy focuses on harvesting & analyzing data business. Data is gathered from users and stored in large databases. Big Data techniques and artificial intelligence are applied to analyze the data, where the purpose is to extract information of value to businesses or governments. Such data may also be traded on the market, for example, as input to statistics or as the basis for producing targeted advertisements.22  4. Digital Economics Virtual economy is the economy of virtual worlds, e.g., World of Warcraft and Second Life. To some extent, virtual economies reflect the real economy regarding the supply and demand of goods, trading, and network feedback. Virtual economies are mostly disconnected from the real economy. However, there are examples of virtual economies that can generate trade in the real economy (e.g., gold farming in World of Warcraft). 23  4. Digital Economics Internet economy covers the economics of Internet goods & services. Since most of the economic activity within the context of digital economics is performed over the Internet, Internet economy is close in scope to digital economics. One important digital market that is excluded in the Internet economy is the economics of telecommunications, that is, the market for broadcast, Internet, and mobile and fixed network services. 24  4. Digital Economics Abundance economy is the economy of goods and services that are abundant; that is, they are close to unlimited in supply. Many digital services exhibit abundance features, since they can be copied with zero marginal cost. This challenges one of the most fundamental assumptions in neo-classical economics, namely, that resources are scarce. In several digital economies they are not! 25  4. Digital Economics Digital economics, as defined, encompasses all or parts of the terms explained above. It is important to point out that digital economics is a young academic field of study. New terms appears, and definitions of existing terms are revised as researchers gain increased understanding of the field and as new technologies expand the boundaries of the digital economy and enable new business opportunities. 26