“The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone,” wrote Microsoft co-founder Bill Gates in “The Age of AI has begun,” a March, 2023 blog. “It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it.”
Over the past two centuries, major transformative technologies like AI have led to both winners and losers. Kodak, Blockbuster, Digital, Wang, and BlackBerry are among the corporate giants who were once leaders in their fields, but were unable to survive the disruptive technologies of the past few decades. Amazon, Alphabet/Google, Microsoft, Facebook/Meta, and Apple have been among the big winners in the internet-based digital economy.
A recent issue of The Economist explored this question. We may all assume that given the continuing pace of technology and business change, no company is safe from disruption. But, in “America’s corporate giants are getting harder to topple,” The Economist questioned these assumptions. “America Inc has experienced surprisingly little competitive disruption during the internet age. Incumbents appear to have become more secure, not less.”
The Economist article is based on a thorough examination of the age of each firm in the Fortune 500, America’s largest companies by revenue, which account for about 20% of employment, half of sales and two-thirds of profits. It found that only 52 of the 500 were created after 1990, the year that marked the beginning of the internet era. In fact, the rate of at which new firms join the Fortune 500 has been slowing. Since 1990, the average age has crept up from 75 of 90. Why are America’s corporate giants harder to topple despite the disruptive changes of the past three decades? The Economist discussed several possible explanations.
The digital revolution has not been all that revolutionary in some parts of the economy. The industries most exposed to digital technologies, — e.g., IT, telecommunications, entertainment, retail, — have been radically transformed. However, other large industries, — such as oil and gas, electric power, construction, industrial goods, — look much the same. Moreover, while impressive, the impact of the digital revolution doesn’t quite compare to that of modern sanitation, electricity, cars, planes, the telephone, and antibiotics. These innovations, first developed in the late 19th and early 20th century, have long been transforming the lives of billions.
Productivity is generally driven by innovative ways of leveraging workers and resources through technological, organizational and policy advances. In a September, 2012 paper, Northwestern University economist Robert Gordon argued that innovation may be hitting a wall of diminishing returns. The rapid growth and rising per-capita incomes we experienced at the height of the Industrial Revolution, - between 1870 and 1970, - may have been a unique episode in human history. Despite the digital revolution, US productivity and income growth have dipped sharply since the 1970s except for an Internet-driven productivity boost between1996 and 2004.
The slow pace of competitive upheaval in many industries, has enabled incumbents to adapt to digital technologies. For example, at an average age of 138 years, banking is the oldest industry sector in the Fortune 500. And although about two thirds of Americans now bank online, they mostly use the long established old banks. “Fewer than 10% of Americans switched banks last year. … That stickiness has made it difficult for would-be disrupters to build scale before incumbents imitate their innovations. A labyrinthine regulatory system that favours big institutions with well-staffed compliance departments helps.”
“The recent growth of electric vehicles from Ford and General Motors, America’s two largest carmakers, offers another example. Their bulky balance-sheets have allowed them to spend heavily on reinventing their businesses at a time when raising capital is becoming more difficult for newcomers.”
Scale creates a momentum of its own around innovation. In his 1911 book, The Theory of Economic Development, Austrian economist Joseph Schumpeter coined the phrase creative destruction, the process of transformation by which the value of established companies is eaten away over time by the disruptive innovations introduced by entrepreneurs. Schumpeter originally believed that transformative innovations were mostly brought to market by startups looking to take-on established companies, writing that “in general it is not the owner of stage coaches who builds railways.”
But, by the time he published his 1942 book, Capitalism, Socialism, and Democracy, Schumpeter had changed his mind, the The Economist noted. “It was, in fact, big firms — monopolies, even — that drove innovation thanks to an ability to splash cash on research and development (R&D) and quickly monetise breakthroughs using existing customers and operations, spurred on by a constant fear of being toppled. America’s tech titans offer the quintessential illustration. Alphabet, Amazon, Apple, Meta and Microsoft invested a combined $200bn in R&D last year, equivalent to 80% of their combined profits and 30% of all R&D spending by listed American firms.”
Incumbents and newcomers often play complementary roles in innovation. For a startup a transformative innovation is all upside, an opportunity to take-on established companies with leading-edge technologies and products that offer significantly better capabilities and/or lower costs. Startups hope that their compelling new offerings will help them establish a foothold in the marketplace and, over time, become leaders in their industry.
But change is often difficult for established companies. Over the years, they’ve amassed a number of valuable assets and extensive organizations. Their innovations are likely to be more focused on incremental improvements to their existing products and services, as well as processes like, business models, supply chains, channel partners, sales and marketing. “That division of labour may help explain why many startups are bought by established firms.”
A final explanation for the lack of competitive disruption relates to demographics. “Between 1980 and 2020 the share of America’s population aged between 20 and 35 fell from 26% to 20%. The rate of new business formation dipped from 12% to 8% in the same period.” The Economist references a study by the Federal Reserve Bank of New York, “Demographic Origins of the Startup Deficit,” that concluded that 60% of this decline in new business formation over the past 40 years can be explained by the decline in population growth.
Who will be the winners and losers in our emerging age of AI? Investments in AI startups have significantly increased over the past decade. According to the AI Index Report 2023, while investment activity decreased between 2021 and 2022, — mostly because 2021 was such a banner year for AI investments, — the almost $92 billion invested worldwide was 18 times higher than it was in 2013. Similarly, the number of newly funded AI companies in the world was 495 in 2013, 1669 in 2021, and 1392 in 2022.
A second article in the same issue of The Economist argued that, despite the increased investments in AI startups, “AI could fortify big business, not upend it.” “A new wave of startups has sensed the chance to gain a foothold, crashing onto the scene with AI-powered legal chatbots, virtual doctors, writing assistants and so on. Some of these will make up a new industry of model-builders and innovators that soar to lofty valuations, rather as today’s tech giants ascended during the internet age. In the rest of the economy, however, it is far from clear that the upheaval will consign today’s corporate Goliaths to history.
“AI looks as likely to fortify reigning champions as to uproot them.” explains the article. One key reason is the distribution advantage of incumbents, who are integrating generative AI technologies into their existing offerings, leaving little space for rival startups. Google, for example, is reimagining what its search engine can do with the addition of generative AI. “With this powerful new technology, we can unlock entirely new types of questions you never thought Search could answer, and transform the way information is organized, to help you sort through and make sense of what’s out there.”
Microsoft is counting on generative AI to help the company reinvent its Bing search engine. “Ask complex questions, get comprehensive answers, summarize the information on a page, dive deeper into citations, and start writing drafts — all side-by-side while you browse, with no need to flip between tabs or leave your browser. Just click the Bing icon in your sidebar.” In addition, Microsoft is integrating generative AI into its suite of productivity applications and cloud-based services with the introduction of Microsoft 365 copilot. So are other major makers of business software like Salesforce and Oracle.
Finally, another major advantage of incumbents is the central role played by data in AI systems. Data has been the common element in the key advances of AI over the past 20 years, including big data and advanced analytics in the 2000s, machine and deep learning in the 2010s, and foundation models, LLMs, and generative AI in the past few years. Their access to large, proprietary data set gives incumbents a major advantage, in their ability to use their data to train AI models, as well as to customize they modes for specific markets.
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