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Measuring the full impact of digital capital

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Although largely uncounted, intangible digital assets may hold an important key to understanding competition and growth in the Internet era.

July 2013 | by Jacques Bughin and James Manyika

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On July 31, 2013, the US Bureau of Economic Analysis released, for the first time, GDP figures categorizing research and development as fixed investment. It will join software in a new category called intellectual-property products.

In our knowledge-based economy, this is a sensible move that brings GDP accounting closer to economic reality. And while that may seem like an arcane shift relevant only to a small number of economists, the need for the change reflects a broader mismatch between our digital economy and the way we account for it. This problem has serious top-management implications.

To understand the mismatch, you need to understand what we call digital capital—the resources behind the processes key to developing new products and services for the digital economy. Digital capital takes two forms. The first is traditionally counted tangible assets, such as servers, routers, online-purchasing platforms, and basic Internet software. They appear as capital investment on company books. Yet a large and growing portion of what’s powering today’s digital economy consists of a second type of digital capital—intangible assets.

They are manifold: the unique designs that engage large numbers of users and improve their digital experiences; the digital capture of user behavior, contributions, and social profiles; the environments that encourage consumers to access products and services; and the intense big-data and analytics capabilities that can guide operations and business growth. They also include a growing range of new business models for monetizing digital activity, such as patents and processes that can be licensed for royalty income, and the brand equity that companies like Google or Amazon.com create through digital engagement.

Conventional accounting treats these capabilities not as company investments but as expenses, which means that their funding isn’t reflected as capital. Since the amounts spent aren’t amortized, they take a large bite out of reported income. Spending on those capabilities sometimes should be treated as capital, though, since they can be long-lived. Amazon.com’s development of an internal search process that promotes recurring sales or the efforts of Netflix to fine-tune personal recommendations to increase video viewing and retain customers are certainly more than expenses. Such capabilities, which are complex to build and replicate, can often help companies create enduring competitive strengths.

We’re acutely aware of misguided efforts to justify sky-high valuations during the late-1990s Internet bubble by claiming that finance and accounting fundamentals were no longer relevant. We also recognize that we’re far from the first to note the relationship among intangibles, company-level growth and productivity, and overall economic growth.1 What we want to suggest here is that those relationships, which once represented a small minority of business activities, are becoming the rule in the digital economy. In fact, much of today’s digital spending could pay for long-lived intangible assets that will define the competitive landscape going forward.2 The rising stakes are seen in the copyright battles between Internet and consumer-electronics companies and in major spending on patent portfolios.

Above all, we want to emphasize the importance, for many business leaders, of making the mind-set shift required to embrace the importance of digital capital fully. The disruptive nature of digital assets is intensifying in markets such as search, e-commerce, and social media (where attackers can build business models with near-limitless scale). Disruptive digital assets are also important in segments where behavioral data and user participation can be monetized, by defining entirely new business opportunities or fostering breakthroughs in collaborative innovation. As the mobile-payments start-up Square is demonstrating in the credit-card arena, increasingly, companies that deploy these assets have the potential to threaten large existing profit pools thanks to the challengers’ vastly different economics or radically new ways of doing things.

The big picture

There are parallels between what’s occurring today and during the period, 100 years ago, when electric motors gained widespread adoption. Early in that cycle, companies invested in physical motors, which like today’s servers and routers provided a new growth platform. But the more important kind of value appeared after companies began to understand how motors could change almost every process, improve productivity, and stimulate innovation. Companies that captured these benefits were more successful and more valuable than others.

Today, the market valuations of many Internet-based companies are higher than those of their counterparts in other sectors, including high tech. Many Internet leaders earn lower returns on equity than established technology companies do, yet there’s no reason to believe that markets are making irrational bets on the growth potential of digitally adept companies. As the sidebar “Valuation and intangibles: Viewing the numbers differently” illustrates, treating digital intangibles as assets rather than expenses clarifies the logic behind valuations. (We based these pro-forma valuation calculations on data compiled by academic researchers, as well as assumptions about rates of intangible and digital investment from our own and outside research.)

Macroeconomic studies we have done suggest that digital capital is not only growing rapidly but has also become a major contributing factor in global economic growth.3 We examined the national-accounts data of 40 countries, assigning values to tangible and intangible assets. In 2005, digital-capital investment represented barely 0.8 percent of GDP for those countries. This year, it will exceed 3.1 percent of GDP. Likewise, the accumulating global value of digital-capital investments has reached more than $6 trillion, about 8.5 percent of nominal world GDP. Globally, levels of digital intangible investment are more than half those of digital tangible investment. In more highly digitized economies, such as Israel, Japan, Sweden, the United Kingdom, and the United States, spending on intangibles represents two-thirds of digital capital’s total value.

This activity is starting to power growth. We estimate that digital capital is the source of more than one percentage point of global GDP growth (roughly one-third of total growth). Intangible capital already accounts for two-thirds of that slice, tangible investment for the rest. This growth flows from not only capital deepening but also increased labor productivity—a remarkable thing, since the digital economy has emerged in the relatively brief space of 15 years. By contrast, it took 80 years for steam engines to increase labor productivity to the same extent, about 40 for electricity, and more than 20 for conventional information and communications technologies.4 (For more on the relationship between capital formation and productivity, see sidebar “Innovation, capital, and productivity growth.”)

Navigating the new terrain

Intangible digital capital’s role in economic growth gives policy makers one more reason to favor investments in broadband and other forms of Internet infrastructure. Such investments correlate strongly with overall digital-capital levels. In our experience, though, the implications are even greater for executives, who often are not tuned into their organizations’ digital strengths or weakness. Few companies have gone through the internal exercise of reclassifying expenditures or segregating benefits from spending on intangibles. And of course, companies can boast a high ROE thanks to strong legacy-product margins but may nonetheless have muted growth prospects as a result of underinvesting in digital capital. To set a more effective digital course, leaders should consider the following ideas.

Take stock of your assets

Since identifying intangible assets is difficult, companies may be missing growth opportunities. Many have realized only recently that they can use social-media interactions with their best customers to leverage innovation efforts or that they may have unused data they could restructure into valuable big-data assets to sharpen business strategy. Similarly, companies should take stock of how digital capital they don’t own may be relevant to the business. A retailer that doesn’t have access to digital behavioral data on consumers, for example, may be at a disadvantage. So could a bank whose customers access products through a third-party platform that limits the bank’s ability to capture information.

Conversely, companies may wrongly assume that their growth results from conventional capital spending and therefore compromise growth by underinvesting in digital competencies. One online company, for example, stuck to a subscriber pay model in hopes of boosting returns on tangible investments such as server farms. It wound up missing a massive social-networking opportunity that would have yielded far greater returns on advertising revenues.

Our global research shows that the stock of intangible assets varies considerably by region. Some markets have larger numbers of strong digital contenders, others fewer. Companies could make those differences a factor in deciding which markets to enter and where to place digital bets.

Face up to looming threats

Assume that digital leaders in your competitive zone are relentlessly expanding their intangible assets both to attack existing markets and to create new ones. Amazon.com, for instance, won share from brick-and-mortar retailers with its ease-of-purchase model and its ability to reach long-tail customers. Now it’s launching new business models (such as Amazon Prime) to further leverage its user base and logistics capabilities. It’s also using tangible server assets to offer cloud-based labor services (Mechanical Turk) that match freelance workers with demand for their labor.

A good first step is to identify which areas of your value chain are most vulnerable—for example, service delivery or weak digital brands. Competitors can slide vertically or horizontally into large gaps, so you’ll need to build digital assets quickly as a counterweight. Even companies that have a considerable stock of digital assets should understand that capturing value from them isn’t a given. Instead, such companies must define (and relentlessly innovate with) business models that can be scaled up to match those assets.

One clue suggesting that a company might face emerging digital challenges is the existence of businesses that have unusually high levels of revenue per employee in adjacent market spaces. Amazon.com’s employee productivity, for example, is double that of traditional retailers. Netflix, similarly, generates more revenue per employee than traditional cable operators do, by leveraging intangibles such as its highly evolved recommendation algorithms. Unusual financial profiles are another warning sign. Since digital funding is counted as operating expenditure, digital leaders often have small capital-investment levels relative to their size and growth potential. They also borrow less, both because they may not need to (some reap sizable market rents from, for example, search licensing fees or patent income) and because banks may be less likely to lend against intangible assets.

Partner with care

Most companies rely on digital agencies for things like optimizing search marketing. In such cases, they may be ceding digital capital, since they never develop a full understanding of consumer segments or what inspires a customer who searches for their products. Seeing such capability building as an investment may change the logic of using third parties. Similarly, when companies look to established tech players for partnerships shoring up weaknesses, they should be cautious: some seemingly high performers may be on the wrong path and could burden you with outmoded standards and platforms. Alternatively, if you deal with strong players, you may be leaving yourself vulnerable by letting them lead.

The need for growth and competitiveness will force companies to build strong digital capabilities. Viewing them as assets rather than additional areas of spending requires a new set of management and financial lenses. Embracing them is a major shift—but one worth making for companies striving to master a still-evolving landscape.

About the authors

Jacques Bughin is a director in McKinsey’s Brussels office. James Manyika is a director of the McKinsey Global Institute and a director in the San Francisco office.

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Paypal to allow users to buy, hold and sell four cryptocurrencies

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Bitcoin is up $400 to $12,296 today. Part of the reason is that Paypal hass received a conditional bitlicence from the New York State Department of Financial Services and will launch a service for users to be able to buy, hold and sell cryptocurrency.
In the release the company said it “signaled its plans to significantly increase cryptocurrency’s utility by making it available as a funding source for purchases at its 26 million merchants worldwide.”
The company is introducing the ability to buy, hold and sell select cryptocurrencies, initially featuring Bitcoin, Ethereum, Bitcoin Cash and Litecoin, directly within the PayPal digital wallet. The service will be available to PayPal account holders in the U.S. in the coming weeks.
“The shift to digital forms of currencies is inevitable, bringing with it clear advantages in terms of financial inclusion and access; efficiency, speed and resilience of the payments system; and the ability for governments to disburse funds to citizens quickly,” said Dan Schulman, president and CEO, PayPal.
“Our global reach, digital payments expertise, two-sided network, and rigorous security and compliance controls provide us with the opportunity, and the responsibility, to help facilitate the understanding, redemption and interoperability of these new instruments of exchange. We are eager to work with central banks and regulators around the world to offer our support, and to meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce.”

This is great news for crypto but I’m told it shouldn’t have been entirely unexpected In June, there was a report that Paypal was working on direct crypto sales.

Source: https://www.forexlive.com/Cryptocurrency/!/paypal-to-enable-users-to-buy-hold-and-sell-cryptocurrencies-20201021

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Nokia awarded contract to build 4G network on the moon

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Nokia has been awarded a contract to establish a 4G network on the moon. The contract is one of several that NASA is awarding to companies as it plans a return to the moon.

The $14.1 million contract was given to Nokia’s US subsidiary and is a small part of the $370 million total awarded to companies such as SpaceX. The cellular service will allow astronauts, rovers, lunar landers, and habitats to communicate with one another according to Jim Reuter, the Associate Administrator for NASA’s Space.

Nokia Logo

The 4G network that Nokia will build will be miles superior to the form of communication that was used during the early missions to the moon.

This is not Nokia’s first attempt to launch an LTE network on the moon. It planned to do so in 2018 in collaboration with PTScientists, a German space firm, and Vodafone UK to launch an LTE network at the site of the Apollo 17 landing but the plan never came to fruition.

Source: https://www.gizmochina.com/2020/10/18/nokia-awarded-contract-to-build-4g-network-on-the-moon/

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Stripe acquires Nigeria’s Paystack for $200M+ to expand into the African continent

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When Stripe  announced earlier this year that it had picked up another $600 million in funding, it said one big reason for the funding was to expand its API-based payments services into more geographies. Today the company is coming good on that plan in the form of some M&A.

Stripe is acquiring Paystack, a startup out of Lagos, Nigeria that, like Stripe, provides a quick way to integrate payments services into an online or offline transaction by way of an API. (We and others have referred to it in the past as “the Stripe of Africa.”)

Paystack  currently has around 60,000 customers, including small businesses, larger corporates, fintechs, educational institutions and online betting companies, and the plan will be for it to continue operating independently, the companies said.

Terms of the deal are not being disclosed, but sources close to it confirm that it’s over $200 million. That makes this the biggest startup acquisition to date to come out of Nigeria, as well as Stripe’s biggest acquisition to date anywhere. (Sendwave, acquired by WorldRemit in a $500 million deal in August, is based out of Kenya.)

It’s also a notable shift in Stripe’s strategy as it continues to mature: Typically, it has only acquired smaller companies to expand its technology stack, rather than its global footprint.

The deal underscores two interesting points about Stripe, now valued at $36 billion and regularly tipped as an IPO candidate. (Note: It has never commented on those plans up to now.) First is how it is doubling down on geographic expansion: Even before this news, it had added 17 countries to its platform in the last 18 months, along with progressive feature expansion. And second is how Stripe is putting a bet on the emerging markets of Africa specifically in the future of its own growth.

“There is enormous opportunity,” said Patrick Collison, Stripe’s co-founder and CEO, in an interview with TechCrunch. “In absolute numbers, Africa may be smaller right now than other regions, but online commerce will grow about 30% every year. And even with wider global declines, online shoppers are growing twice as fast. Stripe thinks on a longer time horizon than others because we are an infrastructure company. We are thinking of what the world will look like in 2040-2050.”

For Paystack, the deal will give the company a lot more fuel (that is, investment) to build out further in Nigeria and expand to other markets, CEO Shola Akinlade said in an interview.

“Paystack was not for sale when Stripe approached us,” said Akinlade, who co-founded the company with Ezra Olubi (who is the CTO). “For us, it’s about the mission. I’m driven by the mission to accelerate payments on the continent, and I am convinced that Stripe will help us get there faster. It is a very natural move.”

Paystack had been on Stripe’s radar for some time prior to acquiring it. Like its U.S. counterpart, the Nigerian startup went through Y Combinator — that was in 2016, and it was actually the first-ever startup out of Nigeria to get into the world-famous incubator. Then, in 2018, Stripe led an $8 million funding round for Paystack, with others participating, including Visa and Tencent. (And for the record, Akinlade said that Visa and Tencent had not approached it for acquisition. Both have been regular investors in startups on the continent.)

In the last several years, Stripe has made a number of investments into startups building technology or businesses in areas where Stripe has yet to move. This year, those investments have included backing an investment in universal checkout service Fast, and backing the Philippines-based payment platform PayMongo.

Collison said that while acquiring Paystack after investing in it was a big move for the company, people also shouldn’t read too much into it in terms of Stripe’s bigger acquisition policy.

“When we invest in startups we’re not trying to tie them up with complicated strategic investments,” Collison said. “We try to understand the broader ecosystem, and keep our eyes pointed outwards and see where we can help.”

That is to say, there are no plans to acquire other regional companies or other operations simply to expand Stripe’s footprint, with the interest in Paystack being about how well they’d built the company, not just where they are located.

“A lot of companies have been, let’s say, heavily influenced by Stripe,” Collison said, raising his eyebrows a little. “But with Paystack, clearly they’ve put a lot of original thinking into how to do things better. There are some details of Stripe that we consider mistakes, but we can see that Paystack ‘gets it,’ it’s clear from the site and from the product sensibilities, and that has nothing to do with them being in Africa or African.”

Stripe, with its business firmly in the world of digital transactions, already has a strong line in the detection and prevention of fraud and other financial crimes. It has developed an extensive platform of fraud protection tools, but even with that, incidents can slip through the cracks. Just last month, Stripe was ordered to pay $120,000 in a case in Massachusetts after failing to protect users in a $15 million cryptocurrency scam.

Now, bringing on a business from Nigeria could give the company a different kind of risk exposure. Nigeria is the biggest economy in Africa, but it is also one of the more corrupt on the continent, according to research from Transparency International.

And related to that, it also has a very contentious approach to law and order. Nigeria has been embroiled in protests in the last week with demonstrators calling for the disbanding of the country’s Special Anti-Robbery Squad, after multiple accusations of brutality, including extrajudicial killings, extortion and torture. In fact, Stripe and Paystack postponed the original announcement in part because of the current situation in the country.

But while those troubles continue to be worked through (and hopefully eventually resolved, by way of government reform in response to demonstrators’ demands), Paystack’s acquisition is a notable foil to those themes. It points to how talented people in the region are identifying problems in the market and building technology to help fix them, as a way of improving how people can transact, and in turn, economic outcomes more generally.

The company got its start back when Akinlade, for fun (!) built a quick way of integrating a card transaction into a web page, and it was the simplicity of how it worked that spurred him and his co-founder to think of how to develop that into something others could use. That became the germination of the idea that eventually landed them at YC and in the scope of Stripe.

“We’re still very early in the Paystack payments ecosystem, which is super broken,” said Akinlade. The company today provides a payments API, and it makes revenue every time a transaction is made using it. He wouldn’t talk about what else is on Paystack’s radar, but when you consider Stripe’s own product trajectory as a template, there is a wide range of accounting, fraud, card, cash advance and other services to meet business needs that could be built around that to expand the business. “Most of what we will be building in Africa has not been built yet.”

Last month, at Disrupt, we interviewed another successful entrepreneur in the country, Tunde Kehinde, who wisely noted that more exits of promising startups — either by going public or getting acquired — will help lift up the whole ecosystem. In that regard, Stripe’s move is a vote of confidence not just for the potential of the region, but for those putting in the efforts to build tech and continue improving outcomes for everyone.

Source: https://techcrunch.com/2020/10/15/stripe-acquires-nigerias-paystack-for-200m-to-expand-into-the-african-continent/?tpcc=ECTW2020

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