Digital Paradoxes

Talking with various execs over the last weeks. I’ve noticed five digital paradoxes – areas where digital seems to be re-shaping markets in contradictory ways:

1 – digital drives disintermediation but also re-intermediation. Consumer products companies are now able to go direct to customer, avoid retailers. But in motor insurance , new price-comparison intermediaries have stepped in to offer the consumer a choice of insurers 

2 – digital drives commoditiation but also differentiation. Price-comparison tools leads to products (e.g., mortgages) being commoditised as customers can see a broader range of products but are provided with little information beyond price. But the most commoditised of products and services are now being reshaped into something more interesting. For example smart-metering and online consumer goods (e.g. Miele washing machines that turn themselves on when electricity is cheapest) are leading to a re-shaping of consumer electricity provision from a commodity into a service with differentiated features.

3 – digital concentrates value but also distributes it. Low switching costs, the scale of investment required to build digital platforms and paucity of digital talent, is leading to a concentration of value to leaders – firms like Amazon are eating up markets share across categories and markets. But, as long recognised by Chris Anderson and many others, digital also lowers barriers to entry and creates opportunity for niche attackers (e.g. Wonga) to get to scale more easily.

4 – digital drives specialisation but also broadening. Increased transparency and returns to scale means that its ever-more difficult to compete outside areas of core competence, leading to specialisation (e.g., investment banks retreating core asset classes as returns to scale increase). But consumer brands are more flexible online, allowing  firms like to broaden their offer into areas that historically been difficult (e.g. Tesco entering media)  

5 – digital drives value chain dis-aggregation but also re-aggregation. Digital drives value chain dis-aggregation, as firms seek to specialise (see previous point) or extract further economies of scale. For example, telcos have largely divested their network operations.  But in some cases we see the opposite effect – one insurance company bought a home security firm to extract the information synergies.  

To sort through these, we’ll need to understand the conditions that lead to one condition vs. the other. All comments/ideas welcome!

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