Rapid advancements in digital technology are redefining society. The plummeting cost of advanced technologies (a top-of-the-range smartphone in 2007 cost $499; a model with similar specifications cost $10 in 2015) is revolutionizing business and society. In addition, the ‘combinatorial effects’ of these technologies – mobile, cloud, artificial intelligence, sensors and analytics, etc. – are accelerating progress exponentially. This revolution could significantly improve the quality of life of billions around the world, and technology is the multiplier.
However, with the advent of digital technologies, a number of accelerated and new market dynamics are dramatically transforming the environment in which regulatory bodies govern. While this has the potential to dramatically change their role, it also provides access to new instruments and rulemaking opportunities for regulators. Here are some of these changing dynamics, as well as rulemaking opportunities:
1. Speed
The speed of innovation of digital technologies stands in stark contrast to the pace of regulation. Jack Ma, CEO of Alibaba rightly pointed out that “seven- to twelve-year regulatory policy timelines do not reflect the speed of the internet.” New technologies that used to have two-year cycle times now can become obsolete in six months, and the pace of change is not slowing. These technologies can be developed, deployed, and iterated faster than ever. The challenges of the digital world require the ability to answer faster than classical instruments of regulation allow.
One key area affected by the speed of innovation is the protection of consumer interests. As innovation takes place at a far greater speed than regulation can keep up with, regulatory frameworks originally put in place to protect consumers are no longer always appropriate. For example, the logistics industry alone contributes 13% to global emissions, but stakeholders need to act quickly to develop safe and trustworthy approaches to unlocking benefits from digital technologies such as drones. With the promise of reducing emissions by up to 90% and costs by 25% in last-mile deliveries, drone technology is ‘ready’, but regulation is not.
2. Emergence of Business (Eco)Systems
Business (eco)systems have been described as “dynamic and co-evolving communities of diverse actors who create and capture new value through both collaboration and competition.” These networks of organizations operating across industries are enabled primarily by digital technologies, and constitute a stark departure from the siloed and self-contained organizations of the past. The emergence of these business systems gives rise to new requirements for regulation and policy; they can no longer narrowly target individual industries, but need to take into account developments of common trends and patterns across sectors.
Digital technologies have also reduced barriers to entry for traditional and non-traditional organizations, often undermining long-standing sources of product differentiation. For example, online service providers tap markets without having to build distribution networks of offices and local agents.
This changing landscape presents real challenges for regulators. Not only is the number of services and products they regulate growing, but so is the number of suppliers and consumers, increasing the complexity of the environment they govern in.
3. Globalized Networks
We live in an increasingly interconnected world. Just as it is no longer sufficient to look at policy and regulation within siloed sectors, one can no longer create policy frameworks without taking global and trans-regional developments into account. While policy will continue to be mostly created at the national level (for the near-term future, at least), globalized networks require regulators to take into account a broader and more complex scope of geographical dimensions.
One example of this phenomenon is the convergence of global supply and demand. Digital technologies know no borders, and the customer’s demand for a unified experience is raising pressure on global companies to standardize offerings. Consumers and businesses have come to expect payment systems that work across borders, global distribution, indiscriminate access and rights, and a uniform customer experience. Harmonized regulation across regions can greatly accelerate innovation and leverage existing technologies to realize these goals, while heterogeneous approaches risk stinting development.
Several ongoing regulatory changes are impacting world trade – for example, Safe Harbor, Google versus the EU Commission, and the Federal Aviation Administration and unmanned aerial vehicles (drones) – and are creating challenges to national boundaries, unfair competition and consumer protection.
4. New Business Models
It is widely recognized that digital technology is an enabler of fundamental innovation and disruption, for business and society. One of these sources of disruption is a multitude of new business models (e.g. on-demand model, access-over-ownership model). Whether it’s adaptations of existing market models or completely new models, the current regulation is still not in a position to respond to these disruptions in a timely manner.
While many of these models are sources of new value creation, income opportunities, or employment, there are also inherent risks to society. For example, who is responsible for the public health and safety of a passenger who chose a rideshare in the case of an accident? The sharing economy is just one recent example of technologies disrupting traditional business models, and there may be more disruptions ahead as entrepreneurs find new ways of meeting consumers’ needs.
For more insights on The Fourth Industrial Revolution, join Alan Marcus, Head of ICT Agenda, Member of Management Committee, World Economic Forum, at the CommunicAsia2016 Summit.