The shift to digital
Netflix is making significant inroads in South Africa. It is disrupting pay TV behemoth, Multichoice, by providing a cheaper, more convenient and non-linear way of watching TV content. The streaming-content provider is drawing more and more 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 currently has more young viewers than all BBC channels combined, is any indication then SA’s free TV and linear pay TV providers are now in trouble.
“Welcome to the digital revolution,” says David Gibb, Fund Manager of the Anchor Worldwide Flexible Fund. “If previous industrial revolutions are anything to go by it will bring great benefits to humankind, the most important of which is rising household income - due to productivity growth. There will also be disruption in the short run, but we should be far better off over the long run.”
In a country like South Africa, how do we manage this 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 anti-trust enforcement over an extended period has played a part, those industries most disrupted by the shift to digital display other characteristics which we have not necessarily seen before in economic history. Network effects, where large ‘positive spillovers from having many customers use the same product’, have propelled companies like Facebook and Google towards achieving global dominance in an extraordinarily short period of time. 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 anti-trust enforcement, and a rapid rise to dominance of capital-light digital firms, means that traditional companies have an intense period ahead as they speedily adopt digital processes to increase their productivity scores.
“The second task is to appreciate that these old and the new firms do not necessarily operate under the same rules. Facebook’s enormous data leak of personal details on 87 million people resulted in no financial penalties, whereas BP’s Deepwater Horizon oil spill has cost the company some USD65bn in fines and redress.
As crude as this comparison may be, the reality is that social media, search, online travel, online 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 European Union (EU) has started doing something (through its General Data Protection Regulation [GDPR] 2016/679), 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,” says Gibb.