I’ve often described the consumer technology market which I cover as being comprised of five main domains: hardware, software, content, communications and connectivity. The successful big consumer technology companies compete across at least three or four of these domains, and tend to increase their scope and reach across these domains over time as they build ecosystems and compete on that basis. I’ve described and sized these markets, and they comprise significant opportunities, although some companies and some niches are much more lucrative than others. However, there’s another domain which is emerging, which has the potential to be significantly larger than all the rest over time, and it’s that sixth domain that I want to talk about here. I’m calling it the Digital Layer.
Transforming, but not replacing, analog products and services
The other five domains are made up to a great extent of digital products and services: though the hardware we purchase is obviously made up of atoms, and physical infrastructure is necessary to deliver all the content, communications and connectivity we enjoy, the products and services themselves exist to a great extent in the digital world and are made up of bits. In many cases, these digital products and services have replaced analog equivalents: ebooks have replaced paper books, digital music has replaced CDs, email has replaced paper letters, calendar apps have replaced physical journals and datebooks, and so on. What distinguishes the Digital Layer is that it doesn’t displace an analog model, but rather adds a layer to it in a way that has the power to transform business models while leaving many of the underlying components intact.
At this point, it will probably be helpful if I provide some examples to help make this theoretical construct concrete.
Example 1: E-commerce
In some ways, e-commerce is the original Digital Layer service: the digital layer is the online catalog, search, recommendations, ordering and payment capability that enables the more efficient and lower-cost distribution of the same physical goods we’ve always consumed. This layer replaces the physical retail store, but doesn’t replace the actual analog goods we consume.
Example 2: Uber
Though e-commerce has now been around for many years, other Digital Layer services are of more recent vintage. Uber is a great example of a newer Digital Layer service. Uber is firmly rooted in the physical world, with physical drivers picking up and transporting flesh-and-blood human beings. And yet, Uber is a Digital Layer service because its key value proposition is that it uses digital technology to bring together customers and suppliers in a unique, highly efficient way. The Uber app and service replaces just a thin layer – the process of hailing or ordering a cab – while leaving the physical layer (drivers, cars and passengers) intact, but in the process transforms the business model.
Example 3: Apple Pay
Apple Pay is arguably Apple’s first foray into the Digital Layer, from a company which began life in the hardware domain, and has successively expanded into the software, content and communications domains (as yet, the one domain Apple has left to others is connectivity). Apple Pay’s digital layer replaces the physical handover or swiping of plastic cards in the retail environment with a digital process, where the plastic card no longer needs to be present and software takes its place, thereby improving convenience and security. But it doesn’t replace the analog elements entirely – physical cards still exist in the back end and are necessary to the service, and physical goods are still delivered in return.
Example 4: Nest
Conversely, Nest is arguably Google’s first move into the Digital Layer, after spending years as more of a digital replacement specialist. Home automation equipment is another form of Digital Layer service in that it layers digital control and monitoring on top of physical elements such as lighting, HVAC systems and locks. It replaces just the thin layer of physical controls with digital controls, but leaves the analog systems beneath intact, while transforming the ways in which they’re used.
I could list many other examples, but hopefully you get the idea. What all these examples have in common though, is three facets:
- Rather than entirely replacing an old value chain, the Digital Layer merely replaces a single layer – often the one the customer deals with directly – while leaving the underlying structure in place
- The introduction of the Digital Layer is often transformative to the underlying business model, even as it preserves many of its components
- Digital Layer services often provide significant benefits in terms of efficiency, usability and reach, sometimes increasing the size of the underlying markets.
Potential greater than other domains
The great potential of the Digital Layer comes from the fact that, whereas the other domains largely replace existing products and services and therefore are somewhat limited by the existing size of those markets, Digital Layer services essentially extend to almost every aspect of our lives. E-commerce by itself is already larger than any of the other five domains at around $1.5 trillion per year, and it’s just the oldest and most established of the Digital Layer services, with many others only now springing up. Together, the new breed of Digital Layer services has the potential to become several times the size of the current market over the coming years, with e-commerce at its core. Of course, many of these services will only skim a percentage of total value off the top on a net basis, but it still has the potential to be a far larger market than many of the traditional opportunities in consumer technology.
Questions to think about
I’m spending a lot of time thinking about some of the implications of the Digital Layer as a domain for the companies in the consumer technology market, and I’ll be sharing my conclusions with my clients and to some extent in future blog posts. Some of the questions I’ll be tackling are:
- What other industries are ripe for a Digital Layer disruption, beyond those we’re seeing today, such as accommodation (AirBnb), Transportation (Uber, Lyft and others) and so on?
- What factors drive sustainable differentiation for Digital Layer companies, and does this have implications for companies that start in one segment (e.g. Uber in transportation) and their ability to extend into other segments? How should this affect valuations of these companies?
- To what extent will Digital Layer companies have to build broad ecosystems as they scale, versus specializing in a particular segment?
- Which of the existing major consumer technology companies have the potential to become significant players in the Digital Layer? Does the rise of Digital Layer-centric companies threaten any of them?
- To what extent is the Digital Layer a sustainable model, and to what extent will it eventually give way to Digital Replacement models (e.g. much as Amazon’s online sale of paper books eventually led to the sale of ebooks)?
I’d love your feedback on the concept, and on these questions (and any others you might have). If you or your company would be interested in an in-depth presentation on this topic, please contact me.