Surviving the digital giants

By Peter Armitage, Anchor Capital’s CEO.

Few would deny 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, at the time, many would have struggled to recognise its good. So too with the digital revolution.

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 offset it. While SA has tried to facilitate e-commerce by passing legislation, it hasn’t seriously grappled with the reality of South Africans being customers of online behemoths such as Facebook, Amazon, Netflix and Google.

Netflix, for example, is making significant inroads locally, disrupting pay-TV giant MultiChoice by providing a cheaper, convenient way of watching content and drawing increasing numbers of viewers away from the incumbent. While this is not the place to debate MultiChoice’s monopoly in subscription TV, it is not wrong to question the appropriateness of regulating subscription TV, while having no regulation for online businesses such as Netflix. A licensed TV service pays VAT, company taxes, PAYE, the skills development levy, must invest in local content, contribute to self-regulatory bodies, be 30% black owned, etc. Now think about what Netflix pays. VAT. Just VAT.

How can SA manage disruption and what should local firms do to survive against these digital giants? The first task is to understand what you are up against. Research suggests industries are increasingly described as ‘winner take most’, where a few small firms take a very large market share. Network effects — large positive spill-overs from having many customers using the same product — propelled firms like Facebook towards achieving global dominance in an extraordinarily short period.

Historically, dominant manufacturing firms relied on large capital to gradually achieve scale and become low-cost producers. Today’s giant platform tech companies need very little capital. A combination of weak anti-trust enforcement and a rapid rise of capital-light digital firms means traditional companies have an intense period ahead as they adopt digital processes to raise productivity.

The second task is to appreciate that old and new firms do not operate under the same rules. Facebook’s data leak impacting 87 million users resulted in no financial penalties, while BP’s Deepwater Horizon oil spill cost it around $65bn in fines and redress. In reality, digital industries operate in a regulatory no man’s land and authorities haven’t established a way to regulate them — old companies need to highlight the unequal playing fields. Sadly, the disruptors are often only a handful of US and Chinese firms, and how their predominance will square with a world of rising nationalism is hard to fathom.

E-commerce has become a reality for local shoppers, and what would a major switch to online shopping with Amazon mean for retailers and for taxes, skills development levies and BEE commitments? We have already seen how the switch to online impacted print media with advertising decimated and the newspaper industry reliant on digital subscriptions. This only makes space for national titles, while local press fades away, with implications for local accountability and a healthy democracy.

Local businesses should start lobbying for fairer regulations for online and traditional firms or our weak economy will be subject to a period of disruption that may be too tough to absorb.

All companies doing business in SA by offering goods and services locally ought to contribute to the social good through taxes and upskilling local workers. Only then will the digital revolution possibly bear the fruits of rising household income for everyone.

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