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We may have been nearly 30 years in the internet age, but nearly every resource, product and service in the global economy remains an offline resource. From cars to farm tractors, from apartments to warehouses, the truth is that the vast majority of the world’s productive economic resources are offline. We do not know if they are occupied or not, if they need maintenance or if they are available for rent. We can’t even find the car keys.
It will end soon. Over the next few years, a combination of blockchain, wireless networking and the Internet of Things (IoT) will begin to connect, digitize and monitor the world’s stock of productive assets. Each piece of capacity can be represented as a digital token on a blockchain, accessible via smart contracts and managed and available based on IoT-enabled connectivity. The impact will be huge; some industries will be turned upside down overnight, while others may not change much. How will we be able to know and predict what will be affected and how? I suggest a brief study of history.
Paul Brody is EY’s global innovation leader for blockchain. The views in this article are those of the author and do not necessarily reflect the views of the global EY organization or its members.
Even though the possibility of true digitization has been around for about 30 years, we still have a long way to go. One case study worth considering is the aviation industry, which was one of the very first to be fully digitized and has had, to put it mildly, a very difficult path down the road.
In the fall of 2005, I remember landing at San Francisco International Airport on a flight from Dallas. In PA, the flight attendant thanked us, as usual, for choosing his airline. He concluded his message with a joke that made the whole plane laugh: “We know you had the choice of bankrupt airlines for your flight today and we thank you for choosing us.” At the time, nearly all major US airlines were under Chapter 11 bankruptcy protection. For some of them, it was their second visit in less than a decade.
While the immediate cause of this particular wave of bankruptcies was a combination of the dot-com crash and the terrorist attacks of September 11, 2001, the financial situation of the major airlines had been dire for a long time. Since airlines were deregulated in 1979, there has been a steady stream of bankruptcies and mergers as the industry consolidates. This is not a story about deregulation, however; it’s a story about digitization.
The airline industry offers a unique and interesting real-world experiment on what happens when you digitize an industry. What makes this sector particularly interesting is that the impact of digitization can be viewed as having actually taken place at any moment. This is because although the digitization of the aviation industry took more than a decade, regulations governing where airlines could fly and how much they could charge meant that no real impact could be seen on prices or the economy while the industry was regulated.
Each piece of capacity can be represented as a digital token on a blockchain, accessible via smart contracts and managed and available based on IoT-enabled connectivity.
Beginning in the 1960s with American Airlines, airlines began a process of converting their booking systems into fully digital online systems. In the 1970s, every seat on every flight in the United States was part of a continuously available digital market. Travel agents (and possibly consumers) could search the entire national inventory of flights and seats, compare prices and issue tickets entirely online. Although it wasn’t until the 1990s that e-tickets were implemented, the booking and purchase process was almost completely end-to-end digital in the mid-1970s.
During this period of digitization, the economy of the sector has remained essentially unchanged, thanks to the regulatory environment. Prior to 1979, the Civil Aeronautics Board (CAB) regulated airlines, determining where they could fly and how much they could charge. The CAB also ensured a reasonable rate of return, provided there was sufficient demand for passengers and limited competition between carriers. The result was an orderly national growth in air travel and a proliferation of several airlines, many of them profitable.
Since the end of 1978, the Airline Deregulation Act has quickly lifted most of the price and route restrictions and suddenly we had a free and open market where all capacity was visible. The result was a bloodbath. Between 1981 and 2000, more than 30 major US airlines filed for bankruptcy, and most never returned. Famous names from the early days of aviation have disappeared, including Pan Am and TWA. Many of the others have merged with the strongest survivors: “strong” is a relative term because most of the “winners” in the industry have also had a bankruptcy period.
See also: Paul Brody – Businesses Need Third Parties To Make Oracles Work
The economy of air travel is challenging for a couple of reasons. First, the marginal cost of flying an additional passenger on a plane is almost zero. Selling that ticket for a few dollars is better than leaving the seat empty. And since seats cannot be filled after take-off, there is always a “final sale” going on. This often leads airlines to sell seats on margin, which are profitable but on average far below cost.
Perhaps the most painful thing for airlines, and despite decades of work on everything from quality of service to planning analysis, it turns out that most consumers buy airline tickets based on one main criterion: price . And while it may at times seem like the whole world is addicted to frequent flyer miles, they turn out to be not a strong enough lure to sustain substantially better prices over a long period of time.
The result: Prices tended towards the marginal cost of flying an extra passenger (which is almost zero) and far below the actual average cost whenever the industry has excess capacity. The industry has historically been good at creating excess capacity by both ordering more planes and becoming much more efficient at flying those planes. Nor is parking the plane an option, not when they cost up to $ 100 million each and are purchased with borrowed money.
Finally, and this is where digitization is so powerful, the structural elements of the ecosystem (high fixed costs, low marginal costs) are amplified by the digital market. Every seat on every flight is instantly visible, making comparison shopping and capacity planning very easy. This does not leave quiet and profitable market corners hidden from view.
And as digital advances, there may be many other similar industry experiences across multiple industries. The IoT will exploit many industrial capabilities, many of which are currently inactive and invisible. Just like in the airline industry, once a huge amount of idle capacity becomes visible and bookable online, the likely effect is a price drop. How many idle MRI machines or pieces of heavy construction equipment and furniture are there?
Which products and sectors are most at risk? Not all products are easily split or shared, but those with capabilities that can be shared are at greater risk than others. Industries that have low resource utilization are also at risk. Even before COVID-19, most offices remained inactive most of the time. The cinemas are empty during the week. The classrooms are quiet three months a year. What if all of these facilities and resources could be managed, booked and used online?
Over the past few months, we’ve learned the hard way that we probably pay a lot more office space than we actually need. What’s next?
Many people are rightly skeptical about how transformative this technology can be: does anyone really want to use a theater during the day? How about a weekend class? But again, there are some interesting lessons from the aviation industry. In the United States, the CAB promised airlines that they would receive a 12% return on investment for routes that operated with at least 55% capacity utilization. Airlines often assumed midweek flights would be nearly empty and holiday destinations would perform poorly in the off-season.
In the decades following deregulation, airlines found that they could fill midweek flights and off-peak destinations to the brim if the price was right. In 2018, the average American airline had an 83% load factor. This means, as many have experienced, complete aircraft, seven days a week, 365 days a year. With the right incentives, we shouldn’t be surprised if, in a couple of decades, new movie theaters or classrooms will easily be reconfigured into offices or meeting spaces, and MRI services open 24 hours a day.
Can businesses prepare for this future of digital revolution? They can start by gaining a much deeper understanding of their resources, which ones are essential, how much they are actually used and how much they are needed for operations. Over the past few months, we’ve learned the hard way that we probably pay a lot more office space than we need. What’s next?
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