Part 3: The Destruction of Local Markets
In my previous two posts on the geopolitical implications of the mobile wave, I’ve discussed English language dominance over software and how software is primed to displace manufacturing around the globe. Indeed, the mobile wave’s geopolitical implications are enormous and I will be returning to them often in the coming months. Today, however, I want to complete my three-part geopolitical series by examining the disappearance of local markets that is already happening and bound to accelerate as part of the wave. Let’s revisit the simple example of opening a house or apartment door with software on your mobile device instead of a key. Now expand that thought: If all locks and keys dematerialize to software then one day there’ll be a network that opens a billion doors. You don’t need to get keys from your local locksmith; your keys are on the network. And that network is probably developed by an English-language American software company. When you no longer need a location-based business to make and sell keys, then that is an example of the destruction of local markets. Let’s look at another example. Not too long ago, I met someone who told me that he is the largest textbook manufacturer in his country, but that his government just put in a tender offer for universal use of tablet computers. His question to me: “What do I do?” My answer was probably not what he wanted to hear. “Well,” I said, “if you think about it you realize that the price of all static textbooks is going to zero. You cannot hold copyrights on nonfiction. And then when you think about it some more, you realize pretty quickly that the future of textbooks is interactivity. Now you could chase it, and build the software for those interactive books. But physics, calculus, and chemistry work the same way in every culture. The cost to transmit software is zero. There is no need for the local development of math textbook software. If you’re in Argentina you want the same crew working on your software that works in the U.S. You want the best software. No one wants the fourth best. So now we have a software dynamic in which the single largest market for developing software in the world has evolved to be a block of America, Australia, Canada, and the UK, plus the EU, Dubai, Middle East, and Russia. And by the way, they all deal in English.” But my main point was and is this: There are one and a half billion people on this planet who have 80 percent of all the money. They buy in English. Anything you sell in English has a larger market, so it goes for a higher price. Anything you buy in English, has more liquidity, so you buy for a lower price. If you win the English speaking market, you win every other market. So what we’re really seeing here, in a way that is not always appreciated, is this threat of Google, Wikipedia, Facebook, eBay, these ecosystems, that will actually go to Peru and Argentina and China. And they’re knocking down the walls which are local language, local custom, local manufacturing, and local law. American and Western values are spreading. I believe if you look out in one to two decades you’ll see five billion people and they’ll all be trading in English probably with American technology. Now, there will be people and governments who try to restrain trade. But Facebook added 63.5 million users in China during the three years they were made illegal. My key point is this: the most powerful idea in the world today is the software application network. Facebook is a software application network to share things with friends. It’s fairly trivial. What happens when I have a software application network that monitors your cardio arrhythmia? And I put two million people on it and I put good enough software back there that will predict your cardiac arrest 15 minutes early? A decision to not be on that network will be a life-or-death decision. So as we move from trivial networks to a network of credit cards or a network of devices to start cars or a health network, there is at that point a serious economic consequence to being off that grid. Now every single year from this point forward it will get more and more extreme if you stay off the grid. You’re stuck. So if half of the economy is software, that means half of everything we want is about to go to a variable cost of zero, which means you’ve got to buy from the single best if you want to stay in the ecosystem. This means that despite what has happened in recent years, the Chinese walls are going to be knocked down. They’re going to be chiseled down bit by bit and the entire world is going to be drawn into this American intellectual technical ecosystem. It won’t happen with perfection. I’m not an idealist. But I am saying that it’s like putting your finger into the hole in the dam. It’s just going to be very, very difficult to stop. So what does all this change mean? The biggest opportunity is for companies in America to change from being manufacturers to being software network operators. To the extent they do that, they have a very vibrant future as exporters. Apple is a company that did that marvelously through iTunes and iCloud which, of course, are software application networks. Other smart companies are evolving, too, and of course the ones that are doing the best are the ones that have in their genetic code a software application network like a Facebook, like a Google, like an Amazon, like an Apple. But there’s a place for the American Express Co’s of the world, as well as the banks, insurance companies and the healthcare providers to become future worldwide networks should they choose to aggressively pursue those opportunities. I’ll dive more into what American companies need to do to dominate these global software networks in future blog posts.