Sep 9, 2014
The Internet economy: Gianroberto Casaleggio’s address to the Ambrosetti Forum
Thanks to Ambrosetti for repeating last year’s invitation to us.
In general terms, the topic I will be addressing here today is the Internet economy, of which schooling, which is often referred to as “the school of the future”, is a component part. Let’s begin with the situation in which Italy currently finds itself with regard to innovation and, indirectly, also the schooling system.
Broadband in Italy
A Gian Antonio Stella article from a few days ago that appeared on the front page of Corriere della Sera , talked about download speed and then about downloading data from the Web, as well as where our country stands compared to the rest of the world as regards download speed.
It turns out that we are in 98th position, after Greece and just ahead of Kenya. In recent years we have been sliding backwards since 2010 when we were in 70th place and by 2012 we were already down to 84th place.
With our 8.51 megabytes per second we are bottom of the list of G8 countries. Canada, which is sitting second from bottom, nevertheless has three times our speed. A quarter of European tourism relies on the Web, growing to 39% in the United Kingdom and dropping to only 17% in Italy. The Web creates jobs and here in Italy it employs 6 times as many people as does the chemical industry, we’re talking about 700,000 posts.
This notwithstanding, judging by the drafts of the “Sblocco Italia” (literally “unblock Italy”) bill, financial assistance for extending broadband services are being limited. In the last World Economic Forum Report, the competitivity of countries was assessed.
In this report, which is available online for anyone who wants to look for it, Italy is lying in 49th place, ahead of Kazakhstan and just below Lithuania. According to the OECD, the average penetration in industrialised countries is currently 26%, while here in Italy it is 22%.
Many other countries have achieved far more flattering results. It is estimated that every 10% increase in broadband services results in a 1.21% increase in Gross Domestic Product.
We also see that in terms of international stock exchanges, in the past 10 years the American technology exchange, namely the Nasdaq, has seen an 8.72% growth, the Dow Jones about half of that at 4.91 and the top five hundred listed companies have grown by 5.75%. So investing in technology and in innovation not only causes the GDP to grow, but also industry and society, in addition to creating more jobs. In the past ten years, more or less all countries’ large companies have embraced the world of technology, not only the traditional ones in the United States, but also in China, Japan, Russia and even Argentina there are important new players whereas here in Italy there don’t appear to be any.
Monopoly and the Internet economy
In order to illustrate the main trends and models from which to find inspiration for developing organisations of online companies, I have used the Monopoly game, which most of you will certainly have played and probably also won at, given that you are here today. I have used the English version of the game board even though we are more used to the Italian version, the one that bears the names of the streets and squares of Milan since it was imported and translated back in the Thirties when fascism prohibited the use of any foreign languages. The game was again revised after the end of the war because a number of street names were linked to the fascist era, such as Via del Fascio.
Disintermediation
So at this point, let’s begin the game and let’s go to the start, namely the GO square. We throw the dice and land on the disintermediation square. In the case of the Internet, this is essentially the elimination of intermediaries that do not add value, which are to be found in any process as well as in any organisation, be it a manufacturing or other type of organisation.
Therefore, the producer or service provider interfaces directly with the client, understanding his needs, and the client thus becomes the sole point of reference. What opportunities does this involve? Well, the reduction of costs relating to the cutting of useless intermediation processes.
The risk, on the other hand, is that the entire sector in which you operate may disappear. The case I would like to put to you is that of the postal services, more specifically two cases in particular. The first is that of the US Postal Service, which handled 200 billion letters in 2000 and then thirteen years later, that number dropped to 160 billion, reflecting a loss of 16 billion Dollars. If this trend continues, hardcopy postal services are certain to disappear completely.
In Canada they have already forecast this phenomenon. The Canadian Postal Service decided to stop hardcopy mail delivery within 5 years and this decision has already resulted in the cutting of eight thousand jobs within the Canadian postal service. This is a global phenomenon. Every year traditional mail volumes decline by 4%, which means that everyone in the postal sector must take note and must restructure their costs and revenues accordingly, otherwise they will find themselves without any reference market and without any company.
The Free Economy
The Free Economy is essentially a way of generating profits by giving something away for nothing, in other words free of charge. A number of free economy models have already been established and have become part of our everyday lives, and with great success. The first one that I will mention today is the “Direct Cross Subsidy” model in which something is given away in order to create a market and aiming to satisfy some future demand, for example the free use of an application or free basic playing of a game, as is the case with Angry Birds.
Then there is the Advertising Supported model, where the advertising and sponsorship revenues subsidise free information services or search engines such as Google.
Then there is Freemium, where a limited number of paying users subsidize all the others. The basic functions of a product or service are given away free of charge and a payment is required in order to access the entire service. One example of this is Flickr, which is used to manage your photographs.
The last one is the Gift Economy model, in which the user receives a gift in exchange for their activity. This is activated online by many charitable organisations and independent artists who, in exchange, then get to publish their songs or other artistic material free of charge.
The most important example of this is the online encyclopaedia Wikipedia, which does not advertise at all and relies entirely on donations.
Chris Anderson, who became famous for his book of a few years ago, entitled “The Long Tail”, has said that the free model should always be evaluated in any online business. According to Anderson there are two economies, namely the Atomic Economy, in which the price of goods and services tends to increase over time due to inflation-type mechanisms, and the Bit Economy, in which prices instead tend to decline over time due to deflation-type mechanisms and even approaching zero.
Globalisation
The definition that the OECD gives for globalisation linked to the Internet is the following: “The Internet is busy changing our society in that it facilitates interconnectivity between people and information, with a major impact on our society, economy and culture.”
At no other time in history has this kind of global communication and access to information been so pervasive. With globalisation there are no longer any borders. The Internet has no barriers so the Internet can be considered to be a global market and anyone with money and ideas, but above all ideas, can access it immediately. In globalisation, anyone that doesn’t participate is cut out because at this point you can no longer think in terms of a domestic market, but only in terms of a planetary market as regards services produced online.
One phenomenon that is linked to globalisation is that of so-called preferential aggregation, which is one of the web rules described in “Linked”, a famous book written by the mathematician Barabasi. The book essentially states that a hub, for example a company, depending on its qualities, immediately tends to attract other hubs with similar qualities, in that market, in a very short space of time and excluding all other hubs. This is essentially what happened with the Google search engine. 12 years ago there were various search engines and all were well-utilised. These days however, anyone doing an Internet search usually goes straight to Google only and the others have disappeared. Number two seldom survives on the Web, only number one survives. One example of the change resulting from globalisation is that of Kodak versus Instagram.
Kodak used to employ up to 140,000 people but then, following the company’s bankruptcy in February 2012, they stopped manufacturing photographic material. Instagram, which operates in the same market sector and had only 13 employees at the time, was bought out by Facebook for one billion Dollars in 2012.Globalisation is not the same as decentralisation, so it is not a case of relocating a production facility to somewhere where the labour costs are lower, thereby essentially spreading slavery, but it is linked to two factors, namely network efficiency, in other words the ability to create added value by linking up with other company to generate overall revenue for your own service and product, consistently , and then to always select the right hub, a company with the highest quality, and then the so-called income inequality, in other words mass participation in the creation of added value, as happened in the case of the social media like Facebook and Twitter, where the real value lies the content published on a daily basis by millions of people.
The Internet is becoming an increasingly global phenomenon that is not limited to the United States and this is revealed by the continuous growth in the number of Internet users in the most disparate of countries. From 2008 to 2012, the growth in the number of Internet users in China alone amounted to 264 million while in India that figure was 88 million. By the end of 2012, China had double the number of Internet users than the United States.
Nevertheless, amongst the 15 top countries in the world in terms of growth between 2008 and 2012, there are countries like Egypt and Colombia, which you would expect to find at the bottom of list when it comes to growth, yet Italy does not appear anywhere on that list.
Still within the scope of globalisation, there is the emerging phenomenon of Big Data, in other words the continuing increase in the amount of data available on which to base all kinds of market-related decisions or more generally even social or political decisions.
90% of all the data that exists in the world today was generated in just the past two years. By 2020 there will be 50 times as much available data as there was in 2010. According to the MIT, the productivity, and therefore also the competitivity of companies with the ability to analyse data will be 5 or 6 times greater than that of companies that instead don’t have this ability.
Mobile technology
The speed with which mobile Internet is spreading is unprecedented in the history of technology.
Mobile Internet began spreading in the mid-2000s, around 2005 – 2006. Mobile traffic as part of the overall Internet traffic has grown exponentially in recent years, from 0.9% in2008, to 10% in 2012, to around 19% in 2013 and it is estimated that it will hit 28% in 2014.
Given the speed at which it is spreading, if a company manages to set up a mobile business model, which has nothing to do with the previous business models like those linked to the desktop and the PC, it will see an immediate return in terms of ROI. If instead the company stays out of this market, which is set to become the online market of reference over time, the company could find itself sidelined and therefore no longer able to compete. In 2013 in the United States, 16.5% of the online purchases made on Thanksgiving Day were made via mobile devices.
E-commerce
E-commerce is essentially the sale of products and services via the Internet. One of the advantages of e-commerce is the possibility of accessing new markets that may be either domestic or foreign. At the same time there is also the risk that international players may come and sell their products here in Italy and thus compete with Italian firms.
Another fact linked to the growth of e-commerce is that last Christmas in the Great Britain, online transactions amounted to 4.7 billion pounds, 10% of which was done on mobile. It is estimated that this will be 4 times greater by 2017.
Every year Casaleggio Associati does a study on e-commerce in Italy, which is then presented to the Milan Chamber of Commerce in April. I have extracted certain data from the last study done.
From 2004 to 2013, the e-commerce sector in Italy has grown constantly, slowing down slightly in the past two years, but nevertheless almost always with a double-digit growth rate that has reached 22.3 billion Euro, totally in contrast to other markets and the GDP, which has declined to 0.2. Via e-commerce, Italy is able to sell its products and services abroad, particularly in the fields of tourism and top quality foodstuffs and farm products.
The majority of sales by Italian companies are made to Europe, in other words to France, Germany, Switzerland and England, followed by the United States and Russia. Then there are also Japan and China, where sales could potentially become much greater than what they are at present.
E-commerce is growing explosively worldwide: the figure of 1000 billion Dollars in revenues was exceeded in 2012 and in 2013 that figure rose to 1300 billion Dollars. Now let’s go on to the last but no less important step in this game of Monopoly, which is linked to the school of the future.
The school of the future
According to futurologist David Houle, university education is set to change drastically in the next few years between now and the year 2020, and the model adopted until now, which has been around for 500 years, is set to change more in the next 10 years than it did in the past 100. Here are some facts on what is happening in terms of education at the university colleges in the United States. As regards the quality of online education, 51% of the deans have stated that the quality of online courses is the same as that of traditional classroom courses. 77% of college deans have stated that their institutions currently offer online courses. Overall, some 89% of all American public colleges and universities currently offer online courses. 23% of all graduates have taken at least one online course, but this figure doubles to 46% in the case of students who have graduated in the last 10 years. Of all the students that have taken at least one online course, 39% feel that the quality of online lessons is just as good as that of the traditional lessons.
As regards the future of online education, college deans forecast a substantial increase, with 15% of them stating that students currently working on their degrees are taking online courses and 50% of them forecast that within the next 10 years the majority of students will be studying via online classes. As regards computerised testing, 62% of college deans believe that within the next 10 years more than half of the all tests will be entirely digital.
One example of this change is the EDX site, created by MIT and Harvard University in May 2012. EDX hosts university courses in a wide variety of different disciplines and is open to everyone, in other words to a global user pool, without any costs whatsoever. EDX is a non-profit initiative that uses open source software and is therefore not linked to any private property. By 22 July 2014, EDX had reached 2.5 million users taking 215 online courses.
One negative example is that of EU funds. The European Commission has criticised the Italian plan for the utilisation of 41 billion of EU funding, in particular for the lack of a digital strategy, lack of action against early school-leaving and the significant decline in the amount of funding set aside for innovation. Of the 41 billion Euro of funding provided, a mere 1.3 billion have been set aside for digital development.
Worldwide, the increase in the spread of technology and network innovation is leading to a scarcity of human resources available to companies, countries and organisations. Therefore, the future is going to be a global competition between individual nations in terms the development of technology and innovation, something that is already happening in the United States with programmes aimed at attracting engineers, IT specialists and people with strong technology skills to make up for the chronic shortage of human resources.
The same thing is going to happen in the rest of the world and obviously here in Italy as well, and this Country will have to work hard to attract technology talent for its own development. I am going to quote two examples to help you to understand the difference that there was, and unfortunately still is, between us and the rest of the world.
Back in 1998 I happened to be in Denver. I went into a library where there was a huge hall with hardcopy books lining the one side, which no one was using, while on the other side there was an extremely long line of desks filled with children accessing the Internet and being assisted by teachers who were teaching them how to browse the Web. In the 2000’s, I heard stories about engineers attending classes at Italian polytechnics who had to ask for the keys in order to be able to gain access to the institutions’ desktop computers or PCs because the room in which they were housed was kept locked.
Conclusions/Game lessons
So what conclusions can we reach from all of this? And what action can be taken?
The first is to develop start-up technologies funded by the state and by private parties in order to establish a network of companies in this sector right here in Italy.
Then we must create technology development hubs along the lines of the San Francisco Bay Area, call it a birth or indeed a re-birth if you will because here in Italy we have had groups such as Olivetti, which was an Italian company and a major international player. These development hubs must be able to compete globally in the fields of technology and IT and must be integrated with the public sector.
We have to attract people with technology skills to Italy from abroad and even getting back those science graduates who chose to go abroad due to the lack of future prospects here in Italy.
We need to provide incentives to attract innovative companies to come to Italy, whereas currently they are actually being discouraged by our high levels of taxation and our excessive bureaucracy.
We need laws that favour the development of new technologies, unlike the protection of lobbies and the status quo that we have today. One example is the current taxation of e-books, which are subject to 22% tax whereas hardcopy books are only taxed at 4%.
Then we also need to have at least a three-year plan for the introduction of digital schools here in Italy.
Thank you for your attention.
Gianroberto Casaleggio.
