Summary of March 2015 BRIE-ETLA Special Issue in the Journal of Industry, Competition & Trade

The Digital Disruption & its Societal Impacts
Journal of Industry, Competition and Trade (JICT)
Volume 15, Issue 1, March 2015
ISSN: 1566-1679 (Print) 1573-7012 (Online); 6 articles in the issue
http://link.springer.com/journal/10842/15/1
Special Martin Kenney (Univ. of California, Davis)
issue Petri Rouvinen (ETLA)
editors: John Zysman (Univ. of California, Berkeley)
Executive summary
This BRIE-ETLA Special Issue in the
Journal of Industry, Competition &
Trade concludes the 4th three-year
round of BRIE-ETLA research
collaboration generously supported
by Nokia, the Federation of Finnish
Technology Industries, and Tekes.
These slides summarize the issue.

Journal of Industry, Competition and Trade
Mar. 2015, 15(1), http://link.springer.com/journal/10842/15/1
Kenney, Rouvinen & Zysman: The Digital Disruption and Its Societal Impacts.
JICT, Mar. 2015, vol. 15, iss. 1, pp. 1–4. http://dx.doi.org/10.1007/s10842-014-0187-z
Kushida, Murray & Zysman: Cloud Computing: From Scarcity to Abundance.
JICT, Mar. 2015, vol. 15, iss. 1, pp. 5–19. http://dx.doi.org/10.1007/s10842-014-0188-y
Pon, Seppälä & Kenney: One Ring to Unite Them All: Convergence, the Smartphone, and the Cloud.
JICT, Mar. 2015, vol. 15, iss. 1, pp. 21–33. http://dx.doi.org/10.1007/s10842-014-0189-x
Huberty: Awaiting the Second Big Data Revolution: From Digital Noise to Value Creation.
JICT, Mar. 2015, vol. 15, iss. 1, pp. 35–47. http://dx.doi.org/10.1007/s10842-014-0190-4
Kushida: The Politics of Commoditization in Global ICT Industries: A Political
Economy Explanation of the Rise of Apple, Google, and Industry Disruptors.
Ali-Yrkkö & Rouvinen: Slicing Up Global Value Chains: A Micro View.
Articles

Martin Kenney, Petri Rouvinen, John Zysman:
The Digital Disruption and Its Societal Impacts
Journal of Industry, Competition and Trade.
March 2015, Volume 15, Issue 1, pp 1–4.
DOI: http://dx.doi.org/10.1007/s10842-014-0187-z
PDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0187-z.pdf
Abstract: Deepening digitalization and globalization has induced an ongoing societal transformation that may ultimately prove to be as significant as
the original industrial revolution. Even as the ICT industry is being restructured, global competition is being transformed. Previously dominant firms—
including telecommunications carriers, equipment providers, and powerful legacy software firms—are under assault from the move to cloud
computing, in the network center, and mobile computing, on the network periphery. This transformation of the computing and communication
infrastructure has been occurring simultaneously with the spread of ever more complicated and sophisticated global value chains. The articles in this
special issue explore a number of the key facets of this transformation in a comparative lens. The authors find that the social, legal, and economic
arrangements will impact how these changes affect nation-states. For policy-makers there will be serious dilemmas, as they will have to simultaneously
nurture and support many aspects of these changes, while also mitigating or channeling some of the outcomes so as to protect privacy, income
equality, and fair taxation.

• Digitalization & globalization have induced
an ongoing societal transformation, the
benefits of which are many
• Yet previous leaders – in, e.g., Europe
& Japan – have been challenged; key
new aspects increasingly emerge
from Silicon Valley & the US
Kenney, Rouvinen, Zysman: Issues
http://link.springer.com/content/pdf/10.1007/s10842-014-0187-z.pdf

• Despite having the same digital building blocks worldwide, national policies &
politics influence outcomes in complex ways. Many developed countries are
caught in a commodity trap & are unable to command previous premiums
• The solution: to create distinctive high value added products & services
securing lucrative positions in global value chains. Value increasingly resides
the creation & control of relevant platforms & brands associated with them.
• Policymakers in a double bind: The transformation needs to be nurtured and
supported as well as protected against. Tools include infra provision, strategic
standards & smart procurement. Proactive debates require new ways of talking
about societal objectives & economic value creation.
Kenney, Rouvinen, Zysman: Implications

Kenji E. Kushida, Jonathan Murray, John Zysman:
Cloud Computing: From Scarcity to Abundance
DOI: http://dx.doi.org/10.1007/s10842-014-0188-y
PDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0188-y.pdf
Abstract: Cloud computing is a revolution in computing architecture, transforming not only the “where” (location) of computing, but also the “how”
(the manner in which software is produced and the tools available for the automation of business processes). Cloud computing emerged as we
transitioned from an era in which underlying computing resources were both scarce and expensive to an era in which the same resources were cheap
and abundant. There are many ways to implement cloud architectures, and most people are familiar with public cloud services such as Gmail or
Facebook. However, much of the impact of cloud computing on the economy will be driven by how large enterprises implement cloud architectures.
Cloud is also poised to disrupt the Information Technology (IT) industry, broadly conceived, with a new wave of commoditization. Offerings optimized
for high performance in an era of computing resource scarcity are giving way to loosely coupled, elastically managed architectures making use of
cheap, abundant computing resources today.

Kushida, Murray, Zysman: Issues
• How did we go from computing of
scarcity to abundant cloud computing?
• How is this transformation unfolding?
• What are the implications for
industries and policies?

Three-Layer Model of Competition
Equipment Manufacturers
Provides network infrastructure equipment, access devices, handsets
Network Carriers
Provides network services, eg., telephony, broadband, mobile
Digital Service Providers
Provides software, services, content
Value has been moving to the top layer, commoditizing those below

• As more devices are connected to the Internet, the
architectures of cloud computing will become the
underlying fabric of ICT-enabled services systems.
• Computing power & platforms are becoming more
concentrated in a handful of large firms, but the
competitive leverage points are shifting rapidly.
• Political & regulatory debates about antitrust, privacy,
security, jurisdiction, liability & industrial promotion
policies are poised to be reopened.
Kushida, Murray & Zysman: Implications

Bryan Pon, Timo Seppälä, Martin Kenney:
One Ring to Unite Them All: Convergence,
the Smartphone, and the Cloud
DOI: http://dx.doi.org/10.1007/s10842-014-0189-x
PDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0189-x.pdf
Abstract: This paper examines how recent trends in the smartphone industry may be expanding previous conceptions of the industry and its
boundaries. The increasing importance of Internet and cloud-based services—which in many ways lie outside the control of the physical device,
operating system, and even the cellular network—seems to be changing the roles and strategies of key firms in the ecosystem. Using industry
architecture and platform theory, we examine how the key firms seem to be reacting to these new changes. Our analysis indicates that the platform
“bottleneck,” or key control point, is moving away from the device and into the cloud, where a new meta-platform based on the Internet may be
emerging.

Pon, Seppälä, Kenney: Issue
• Internet & cloud-based services, which
largely reside outside the device, its
operating system & the cellular network,
are changing corporate strategies.
• This study uses industry architecture
& platform theory to examine key
companies’ responses.
http://link.springer.com/content/pdf/10.1007/s10842-014-0189-x.pdf

Complex platform market
Multi-dimensional
business models
– Hardware
– Software licensing
– Ads
Multiple, nested platforms
– Dropbox
– Facebook
– Line, WeChat, What’s App?
advertisers
publishers
end-users
developers
Dropbox

PCs, video games
Handset
OS
Apps
Network
Services
Handset
OS
Apps
Network
Services
Smartphones
Bottleneck is moving up the stack

Pon, Seppälä, Kenney: Implications
• The platform bottleneck, or key control point, is moving away from
the device and into the cloud, where a new meta-platform based
on the Internet is emerging.
• Controlling this environment as a gateway to the services that users
care about is critical, and may be more important than controlling
the operating system itself. Platform owners must determine which
complementary assets will be key to profitability.
• To borrow from the Lord of the Rings, the cloud center is threatening
to become the meta-platform that subsumes all of the devices. In
this way, it becomes the one ring to bind and unite them all.

Mark Huberty:
Awaiting the Second Big Data Revolution:
From Digital Noise to Value Creation
DOI: http://dx.doi.org/10.1007/s10842-014-0190-4
PDF: http://link.springer.com/content/pdf/10.1007/s10842-014-0190-4.pdf
Abstract: “Big data”—the collection of vast quantities of data about individual behavior via online, mobile, and other data-driven services—has been
heralded as the agent of a third industrial revolution—one with raw materials measured in bits, rather than tons of steel or barrels of oil. Yet the
industrial revolution transformed not just how firms made things, but the fundamental approach to value creation in industrial economies. To date, big
data has not achieved this distinction. Instead, today’s successful big data business models largely use data to scale old modes of value creation, rather
than invent new ones altogether. Moreover, today’s big data cannot deliver the promised revolution. In this way, today’s big data landscape resembles
the early phases of the first industrial revolution, rather than the culmination of the second a century later. Realizing the second big data revolution
will require fundamentally different kinds of data, different innovations, and different business models than those seen to date. That fact has profound
consequences for the kinds of investments and innovations firms must seek, and the economic, political, and social consequences that those
innovations portend.

• Big data has been heralded as the agent
of the third industrial revolution. So why
has this distinction not been achieved?
• The answer: Because the utopia of
big data is based on several flawed
assumptions.
Huberty: Issue
http://link.springer.com/content/pdf/10.1007/s10842-014-0190-4.pdf

Huberty: Flawed assumptions
• ”Big data is representative of all humanity.”
– Everyone we care about is not actually online.
• “Online behavior today is the same as tomorrow.”
– In reality, we only know about new developments in online behaviour well after they have
already become big. Therefore, there is no way to know how biased a sample actually is.
• ”Online behavior is the same as offline behavior”
– Research has consistently shown that individuals’
online identities vary widely from their offline selves.
• ”Social patterns today are the same as tomorrow.”
– The way people express their identity is in a constant flux. The rules of technological
platforms and online systems also constantly evolve and change in unpredictable ways.

2rd order biz model
Sell stuff (volume+profit)
1st order biz model
Specific input & output
Huberty: Big data business models
3rd order biz model
Info  Eyeballs  Adds

• Big data has not lead to a disruptive
change in business models (yet).
• Development has been incremental
with centuries old business models
applied in unprecedented scales.
Huberty: Implications

Kenji E. Kushida:
The Politics of Commoditization in Global ICT
Industries: A Political Economy Explanation of
the Rise of Apple, Google, and Industry Disruptors
Abstract: The global Information and Communications Technologies industry has experienced a rapid, radical reorganization of industry leaders and
business models—most recently in mobile. New players Apple and Google abruptly redefined the industry, bringing a wave of commoditization to
carriers and equipment manufacturers. Technologies, corporate strategies, and industry structures are usually the first places to look when explaining
these industry disruptions, but this paper argues that it was actually a set of political bargains during initial phases of telecommunications
liberalization, which differed across countries, that set the trajectories of development in motion. This paper shows how different sets of winners and
losers of domestic and regional commoditization battles emerged in various ICT industries around the world. Carriers won in Japan, equipment
manufacturers in Europe, and eventually, computer services industry actors rather than communications firms emerged as winners in the US. These
differences in industry winner outcomes was shaped by the relative political strength of incumbent communications monopolies and their will to
remain industry leaders, given the political system and political dynamics they faced during initial liberalization. The US computer services industry,
which developed independently of its telecommunications sector due to antitrust and government policy, eventually commoditized all others, both
domestically and abroad. This paper contends that a political economy approach, tracing how politics and regulatory processes shaped industry
structures, allows for a better understanding of the underlying path dependent processes that shape rapidly changing global technological and industry
outcomes, with implications beyond ICT.

• Global competition often unfolds as actors shaped by
particular national political economic contexts
interact on a global stage.
• Global ICT competition was comprised essentially of multiple
different domestic winners interacting on a global stage.
• Different sets of winners emerged out of telecommunications
liberalization across countries, with carriers emerging
dominant in Japan, equip. manufacturers in Europe,
and eventually the computer industry in the US.
Kushida: Issue

• Global competition often unfolds as actors shaped by particular
national political economic contexts interact on a global stage
• Global ICT competition was comprised essentially of multiple
different domestic winners interacting on a global stage
• Different sets of winners emerged out of telecommunications
liberalization across countries, with carriers emerging dominant
in Japan, equipment manufacturers in Europe, and eventually
the computer industry in the US
Kushida: Implications

Jyrki Ali-Yrkkö, Petri Rouvinen:
Slicing Up Global Value Chains: a Micro View
Abstract: Global value chains, GVCs, have had a transformative impact on the world economy since the early 1990s. We study 45 specific GVCs with
company-confidential invoice-level data. We find that the case companies’ headquartering functions capture a large share of the overall value added,
27 % on average. The value added shares of other functions are as follows: distribution 21 %, final assembly 16 %, and logistics 5 %. The remaining 30 %
of the value added goes to vendors. Upon considering value added by country, we find that the home economy’s share is 47 % on average. This share is
reduced with offshored—as opposed to Finnish—final assembly: 2 percentage points for a high-end smartphone, over ten percentage points for a low-
end feature phone, and 27 percentage points for machinery and metal products. We attribute the latter large drop to co-location of non-assembly
functions, intellectual property issues, transfer pricing, and profit allocation. We conclude that GVCs are complex and heterogeneous; value chains of
basic products and services are not nearly as global as those of advanced ones; and the value added share of wholesaling and retail is large in consumer
products. We nevertheless argue that value added is less tied to assembly—and other tangible aspects of GVCs—than conventional wisdom suggests;
the intangible aspects—market and internal services, and creation and appropriation of intellectual property—are more important. The increasing
presence of GVCs brings about several thorny policy issues that are yet to be addressed.

• Global value chains, GVCs, have had a transformative impact on
the world economy since the early 1990s. Many of the insights
with respect to GVCs relate to high-end electronics.
• The increasing geographic and organizational dispersion of
production raises the question of where the value added
is created and by whom?
• This article provides a micro view on GVCs in light
of diverse company-confidential invoice-level data
Ali-Yrkkö, Rouvinen: Issue

• Headquartering functions capture a large share (27%) of the overall value
added; distribution (21%) is also important. Final assembly captures 16%,
which is influenced by co-location of non-assembly functions, intellectual
property issues, transfer pricing & profit allocation.
• Value chains of basic products & services are not nearly as global as those of
advanced ones. The value added share of wholesaling & retail is large in
consumer products. Value added is less tied to assembly & other tangible
aspects of GVCs than conventional wisdom suggests.
• The dispersion of global value is not reversing but it is becoming more smarter.
If longer-term effects are consider, high-cost locations are often competitive.
• High-income European countries urgently need new strategies for retaining
higher value-added activities & for capturing associated returns.
Ali-Yrkkö, Rouvinen: Implications

Summary of March 2015 BRIE-ETLA Special Issue in the Journal of Industry, Competition & Trade

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