Pros and cons of digital revolution
• Lobby for fairer set of regulations for online and traditional businesses
Few would gainsay the benefits of the industrial revolution. Increased productivity brought with it rising household income and innovation-enhanced quality of life. But the disruption, displacement and dispossession it entailed meant that many at the time would have struggled to recognise its good. So too with the digital revolution.
But if SA has an advantage in not being the first frontier of the digital revolution it is that it can be better prepared for negative disruption and able to offset it.
While SA has tried to facilitate e-commerce by passing legislation such as the Electronic Communications and Transactions Act, it hasn’t really grappled with the reality of South Africans being customers of online behemoths such as the so-called Fangs: Facebook, Amazon, Netflix and Google.
Take Netflix. It is making significant inroads in SA, disrupting pay-TV behemoth Multi Choice by providing a cheaper, more convenient and nonlinear way of watching TV content.
The streaming content provider is drawing increasing numbers of consumers away from the incumbent, as it has done to other pay-TV operators across the world, and this is happening despite the absence of live sport. If the UK, where Netflix has more young viewers than all BBC channels combined, is any indication, SA’s free TV and linear pay-TV providers are in trouble.
Recently, in an attempt to head off pro-competitive regulations being imposed by the Independent Communications Authority of SA on its subscription TV business, Multi Choice gave valuable insights into the threat to DStv’s business model posed by Netflix.
Multi Choice says it lost over 100,000 premium subscribers in its last financial year, a fact it blames on Netflix, which it says has amassed between 300,000 and 400,000 subscribers since it launched here in 2016.
This is not the place to debate MultiChoice’s monopoly in the subscription TV market, but it is not wrong to question the appropriateness of regulating subscription TV while having zero regulation for online businesses such as Netflix.
Let’s think about it: a licensed television service such as DStv has to make the following contributions to the South African economy: it has to pay VAT, company tax, PAYE, UIF, the skills development levy and a percentage of its turnover to the Media Development and Diversity Agency, while it also has to invest in local content development (including independent productions) and contribute to self-regulatory bodies such as the Broadcasting Complaints Commission of SA through its membership of the National Association of Broadcasters. Besides these investment and taxation requirements, DStv is required to be 30% black owned in accordance with the Information and Communication Technology Charter and the Electronic Communications Act.
Now think about what Netflix pays. VAT. Just VAT.
So how are we to manage this type of disruption? What should local companies do to improve their chances of survival against these digital behemoths? The first task is to understand what you are up against. Research suggests that industries are increasingly described as “winner take most”, where a small number of firms take a very large share of the market.
Although weak antitrust enforcement over an extended period has played a part, those industries most disrupted by the shift to digital display other characteristics we have not necessarily seen before in economic history.
Network effects, where there are large “positive spillovers from having many customers using the same product”, have propelled companies like Facebook and Google towards achieving global dominance in an extraordinarily short period.
In the past, the dominant manufacturing firms relied on large amounts of capital to gradually achieve scale and become low-cost producers. The giant platform companies of today, mostly in technology services, need surprisingly little capital. The combination of weak antitrust enforcement and a rapid rise to dominance of capitallight digital firms means traditional companies have an intense period ahead as they adopt digital processes to raise their productivity scores.
The second task is to appreciate that these old and new firms do not necessarily operate under the same rules. Facebook’s data leak of personal details on 87-million people resulted in no financial penalties, whereas BP’s Deepwater Horizon oil spill has cost the firm some $65bn in fines and redress. As crude as this comparison may be, the reality is that social media, search, online travel, retail and many other digital industries are young and the authorities, in many cases, haven’t established a way to regulate or police them.
The EU has started doing something — through its General Data Protection Regulation — and Australia is not far behind.
However, for the most part these new digital players are operating in a regulatory no man’s land. And this is where the old companies need to speak out about unequal playing fields.
The European banking sector, which is yet to recover properly from the global financial crisis, is finding its voice as fintech and big tech companies threaten to pick the eyes out of an already weak business model, with the lucrative payments segment being the target.
Old-fashioned bankers contend that e-wallets are another form of deposit-taking and should thus be regulated.
In the US, retailers have long complained about an exemption that allows online retailers not to charge sales tax in states where they do not have a physical presence. So, with endless such examples across the globe, the disruptors themselves are, sadly, too often only a handful of US and Chinese firms.
How a predominance of US and Chinese global disruptors will square with a world of rising nationalism is also hard to fathom. Indian Prime Minister Narendra Modi’s government may be desperate for foreign investment but does it really want two US-owned firms — Amazon India and Flipkart (Walmart) — dominating the nascent e-commerce market in the country? India’s sole traders are estimated to carry out some 90% of the country’s retail.
It’s a challenge facing SA, too, as more people are online and are no longer unbanked. Being able to engage in e-commerce has become a reality for South African shoppers, and why not? It’s convenient and the choice is massive. What would a major switch to online shopping with Amazon mean for retailers? And what would this mean for company taxes, personal income taxes, skills development levies and commitments to black economic empowerment?
We have already seen what a switch to online has meant for the print media. Advertising has been decimated. The newspaper industry is now increasingly reliant on digital subscriptions, which means there is only space for the national titles, while the local press fades away, with implications for local accountability and a healthy democracy.
South African businesses need to start lobbying for a fairer set of regulations for online and traditional businesses or our weak economy will be subject to a period of disruption that may be too tough to absorb.
In our view, all companies that do business in SA by offering goods and services to South African customers ought to contribute to the social good through paying taxes and upskilling local workers. Only then will the digital revolution possibly bear the fruits of rising household income for us all.