Information and Energy and the Growth of the Digital Economy

DOTMAGAZINE: Gerd, what do you see as the economic benefit of connectivity for a region, and how can that be measured? 

GERD SIMON: Well, Judith, first of all, infrastructure investments are those which boost connectivity, and this connectivity leads to direct GDP growth during the investment period. What am I thinking about? I'm thinking about topics like right of ways which have to be arranged, ducts need to be deployed, and also fiber routes have to be laid, manholes have to be put in place. Well, in effect, these are dull investments, but these are investments and you need all of these in order to maintain the fiber routes. Furthermore, properties need to be developed and need to be fitted out to connect the fiber routes. And this is seen as an additional investment. In particular, when buildings offer opportunities to achieve a hyper-connected environment, this is what we call building IP gravity, and those buildings are then really visible even on a global scale. 

Then, how can it be measured? Well, infrastructure demand creates value add. If there is fiber available, it will be used. So you see the measurement in a way that you can address several topics that are visible. For instance, you can measure it on the basis of the investments made on these asset classes, and then you can measure the fiber by kilometer of fiber laid, even kilometer of fiber pairs sold, wave lengths sold, ports sold, and terabit per second of capacity installed, in particular in a metro area. So, but as the demand creates the value add on the infrastructure in general – meaning what is the worth of highway if no car is driving upon it, and what is the worth and value of a train system when there is no train – fiber needs to be made available for those who want to use it. So this is a bit of a chicken and egg problem, because as long as there is no infrastructure you cannot use the service on the infrastructure, so you have to lay it first before you can use it. 

So there's a second wave of investments. The second wave of investments is that this fiber, called dark fiber, has to be lightened up, so it has to be amended with active components so it's not dark anymore. This creates jobs for those who build the fiber, for those who build the equipment, and for those also who use the fiber and use that equipment, so you see there is also a usage uptake-related employment increase. And this is, in the meantime, common sense in all metro areas around the world and, in particular, this is common sense for a couple of governments. 

DOT: So where do you see the most growth and the most potential in connectivity and traffic flows? 

SIMON: Well, let me start... we have to go back to the big bubble crash of the new market in early 2002, because there was a big fiber investment at that time. Based on the bubble crash, a lot of guys pulled out of those investments. But now, after the big crash in 2002, you could see there is a strong move towards digital transformation. The current attention economy with the cloud uptake is just the beginning. What do I mean with attention economy? We all pay a lot of attention to our devices and the apps. But this is just a starting point of a digital economy. A digital economy is much, much more than just attention economy; looking at apps and looking at devices. So when will digitalization end? It will end when everyone and everything is digitalized. So we are just at the start. And there are six value chain elements, in particular, of the Internet access that rely on the availability of connectivity and traffic flow. These six ones are, for instance, international connectivity – which you see in the big metro areas like Frankfurt, you see it also in New York, you see it in Amsterdam and London. Then you have national backbones that need to be built. You have regional backbones, in particular in metro areas, which we also call the middle mile. Then you have the connectivity to buildings, which we call the last mile, and then you have Internet access – this is really the infrastructure in a building, in a house that enables an Internet service to be put on. 

So, what you see is that in a rural area it's rather difficult because there's not much density to offer in the first place. So, a metropolitan area is much, much more favorable for getting the benefits out of a growth of those investments. So, it is the density of the people and businesses in that area, and also the density of all investments made. That's the area where I see the most growth and most potential in connectivity and traffic flows. The metropolitan areas, in particular the big ones, all around the globe, like New York, like Dallas, like L.A. in the United States, Miami, of course. Then in Europe, the big metro areas, the big capital cities in western Europe. In Germany, it's rather different. It's more Frankfurt than anywhere else. And then when you move to the east, you can see the infrastructure investments of the capital cities of those big metropolitan areas that benefit from these kind of investments. 

DOT: So, moving away from major cities, what do you see as the main challenges for getting the next billion online, wherever they are? 

SIMON: Well, the big challenge I see is to connect everyone and everything. This is only possible when the raw material, the connectivity, is stable, resilient, secure, and affordable. It's like electricity in a way. You want a stable supply with a decent quality, but you don't want to experience power cuts. So, you want to power excess security and this is the same for online topics. Apart from that, security, stability, and availability can create growth where the power is affordable. That's the same with capacities and availability of connectivity. It's common sense in a way, that there is a link between economic growth and energy resources available. This pushed global economies over the past century and still it's the paradigm for the growth of the current one we live in. What is the big change, or is there a change? Well, in fact there's no change. This is the fundamental paradigm for the growth of the next 50 years. But there is a new element kicking in, and this is information. Information combined with energy is the ultimate paradigm for growth of the digital economy. 

DOT: How do different political and cultural perspectives impact global interconnectivity? 

SIMON: Oh, that's a good question. Looking from an investor's point of view, investors are looking for stability to let the money work for them, and an open and stable political and cultural environment offers a better platform for those investments to work than a closed and an unstable one. Frankfurt, in particular, is the global hub number one globally with over 50 terabits per second installed, and this 50 terabits capacity installed is hyper-connected. There is no other metropolitan area with this hyper-connected volume of IP capacity right now. When you look at New York, New York is, according to Telegeography, at about 15 terabit per second. And the same counts for Miami or Dallas. And if you look to Amsterdam or London, these areas are around 35 to 40 terabit per second installed. But most important is, apart from an investor point of view, that from a business point of view, people do business with people they trust and like. This is also the case in the digital economy. Machines and interfaces between those are just vehicles, but there is always someone in the back being the owner. Digital information changes the way people do business. In fact, these investments changed the methodology. So investments in digital infrastructures are system-relevant and mission critical. So the more open an environment will be and the more stable, this offers a lot of perspective for those who want to do something, who want to do business, who want to invest, and this will then push the economic growth and also the growth of society, and will play an important role for education, an important role for employment and all other cultural elements that come along with it. 

DOT: We've been talking about the world as a whole. Coming back to focus on Europe, what needs to be done to enable the gigabit society in Europe to become a reality? 

SIMON: Well, first of all, you can only use infrastructures if they exist. So, all kind of services we want to use require an infrastructure. The good thing about IP infrastructure is that it is a homogeneous infrastructure that can be used for many purposes. So, it needs to be built up on a really high scale and with high access volumes. When I mean high access volumes, I'm not talking about one Mbit per second or 20 Mbit per second, even 50 megabit per second. It's not what I'm thinking about. We need to come to a gigabit society. That means that the access for each and every building, for each and every household, needs to be at that level. And then there is a lot about training and empowerment in order to use it, because, as I said, we change the way we do business and we change the interaction between people. 

I have to say, unfortunately European metropolitan areas are not the leading ones currently on this planet. It's more the Asian ones, because there is a lot of density; density of people, density of business, and openness to explore the potential. I'm thinking about, in particular, smaller areas, like, for instance countries like Singapore, metropolitan areas like Hong Kong, thinking about Tokyo. What do you see here is that whenever a building requires maintenance or a building has to be built, always fiber cables are laid. And this is by law mandatory. There is nothing right now that pushes a kind of copper environment like we have in Europe, which prohibits a lot of those fiber investments. In the long run, fiber investments are more stable. And as I always say, better quality is the enemy of a good one. But with the corporate environment we are coming to an end, because it's not offering us the potential to jump into a gigabit society. 

Having those investments, we need to train and we need to empower the people to understand how to use it and how to get the benefits out of it. Because you're not doing the same thing over and over again when you have another infrastructure. As I said, digital transformation changes the methodology you do the things. So digital transformation is a change process where we have to inform the people about the potentials and also about the risks. And yes, there are also some effects of the transformation that are negative, for instance like job cuts during the digital transformation, this kind of affects. But the positive effects are overwriting the negative ones. There was a study in France, for instance, saying that, over the past 10 years, effectively two point six new jobs were created while losing one. So, the balance looks good. Think about it in a way that France is not a leading digital economy in Europe. When we do something really on purpose like the governments in Southeast Asia, like Singapore, like Malaysia, even like Australia and other ones in that area. What you see is a much, much higher growth rate. You see much more impact. And what I am missing right now is, from federal government down to a local government, that there are master plans available that support, as a framework, the uptake and the investments of digital infrastructure and services in the metropolitan area. 

Gerd Simon has worked for over a decade as a freelance Strategy and Management Consultant, and is based in Bad Homburg, Germany. Through his consulting activities he has helped a range of firms in the Internet industry to increase their enterprise value. His current focuses are Cloud Strategies & Infrastructure, M&A and Strategic Program Management for digital transformation. Gerd Simon is also a Senior Analyst for Crisp Research.