Why Digital’s 3.0 Shift May Take Longer Than We Think

There is an out-and-out frenzy to capitalize on the pandemic-fueled digital shift that gave consumers few options for accessing products and services over the last twelve weeks.

Miss this shift and miss it now, and pundits say it probably won’t be long before you’re just another piece of roadkill on the highway of companies who couldn’t adjust with the times and changing consumer and business demand.

And you better do it right now, they add, since digital shifts wait for no one.

Innovators with better tech will appear and — literally overnight — snatch your customers out of your calcified incumbent arms and build scale, they say. And incumbent, for some, means any business that existed before March of 2020.

There is, of course, some truth to this.

Any business, new or old, that hasn’t used the last 12 weeks to rethink its business focus, business model and digital strategy likely won’t make it in the long term — but not because an overnight sensation will emerge in the next few months to eat its lunch.

And there will be businesses that, regardless of the will to shift, simply can’t because of a failure to embrace digital as a key customer touchpoint even before the pandemic made it an essential business strategy. For those companies, making the quantum leap to digital is, literally, a bridge too far.

And certainly, there will be innovators — new and existing firms — who see the very important secular shift that has just emerged, and the opportunity to capitalize on it, who will find success.

This shift isn’t about giving physical a digital channel, but instead integrating physical into a digital-first experience.

But it won’t happen overnight.

Just ask many of the players who are, today, powering the digital shift that we have just witnessed.

The Fallacy Of  ‘Internet Time’

In November of 1998, a book was published that captured the prevailing wisdom of startups operating at the time. The book, Competing in Internet Time, was written by Professors Michael Cusumano (MIT) and David Yoffie (Harvard Business School) about the headline-making browser war rivalry brewing during that decade: Netscape and Microsoft.

The book’s thesis, using the David vs. Goliath example, was that competitive advantage was up for grabs at the hands of startups that could take share, achieve critical mass and scale, quite literally overnight. Their message was that “internet time” waits for no one — and those who can’t move at internet speed would die at the hands of startups who could. And quite possibly even before incumbents realized they’d been out-flanked.

The “internet time” mantra drove startups into thinking that anything built to run “on the internet” could become an overnight success because the internet would magically propel its scale.

Unfortunately, that thinking ignored the complexities of adapting businesses processes, workflows and business models to a digital world, what was needed to successfully build and operate platforms at scale, the fragility of platform business models and an understanding of the dependencies needed to drive success.

Not to mention the time it would take to do it. Especially if any of those innovations touched the physical world.

As a result, many startups that drank the “internet time” Kool-Aid found themselves on the wrong side of the competitive advantage proposition.

The Nasdaq composite index, fueled by the notion that startups could be overnight sensations by operating at the speed of “internet time,” rose by 400 percent in the late 1990s, only to crash by 78 percent in 2002, erasing all of its gains. Most of the overnight successes built on “internet time” largely became one-hit wonders, including Netscape, which soon lost the browser war to Microsoft, and was largely shuttered not long after it was acquired by AOL Time Warner for $4.2B in 2002.

Soon, the “internet time” mantra was replaced by the “tipping point” battle cry — a concept where just a nudge of luck could vault an Internet business into the stratosphere.

If only.

Slow And Steady Through The Slog

There were, however, those born during the heady days of the dot com boom who survived the dot com crash, largely because they were in the middle of the long slog to build scale and ignite — and because they were also very much tuned into the complexities and slow pace of getting to scale.

These startups, and many who were born much later, saw the potential of digital and the internet to change how consumers and businesses found information and interacted — but also saw the challenges of quickly getting to critical mass, and had a business model that would generate and sustain profits for themselves and their investors.

And they steered well clear of the elixir of ad-supported content plays to help them do that.

For those startups, digital’s 1.0 shift was about figuring out ways to reduce the frictions of engaging in a physical world where the lines between physical and digital were then very bright and very fixed.

And where going digital was very new.

Access to the internet then relied on devices — desktop computers — that consumers had in only one of two places — their homes or offices — and had to make time to use.

At the turn of the millennium, only 25 percent of the U.S. population had access to a cell phone — and if they had a desktop at home, access to the internet wasn’t via a broadband connection. Broadband wouldn’t become pervasive in homes until about 2005.

Until then, going digital was largely via a very slow dial-up modem and required operating on a desktop at home during evenings and weekends, or at work using the office computer at lunchtime. Fulfilling those digital purchases meant figuring out how to accept payments online and managing the logistics of getting products delivered. Delivery times then were measured in weeks, not days or hours.

Some of those survivors, now two-plus decades old, include many of the digital 1.0 shift pioneers: Amazon, PayPal and Google. The first decade of their work to build a critical mass of stakeholders on both sides of their platforms helped position them well to capitalize on innovations in wireless broadband, smartphones and apps that made it possible for commerce to happen anytime, anywhere.

These innovations would usher in digital’s 2.0 shift, starting in about 2009 and 2010.

Digital’s 2.0 shift was truly about blurring the lines between the physical and digital worlds by making commerce happen anywhere a consumer with a smartphone wanted it to. The digital 1.0 pioneers who invested to integrate payments into digital and then mobile apps helped to ignite a new wave of digital commerce for themselves, while inspiring others to embrace mobile as a more accessible digital channel for doing business — or as an alternative to doing business at all in the physical world.

Digital 2.0 also inspired a new crop of innovators who saw the opportunity to further blur the physical/digital world lines by using mobile devices and apps to create new digital-first experiences. Their names are familiar: Uber, Lyft, Instacart, DoorDash, Grubhub — innovators who have removed enormous friction from doing business in the physical world, and who today are used by tens of millions of consumers, but who have yet to prove their business models are profitable, even a decade or more hence.

Now, fast forward a decade to January 2020.

The innovators who kicked open the doors to digital 1.0 and 2.0 more than 20 years ago had momentum, the result of their work over those two decades before to build scale, improve and enhance digital and mobile capabilities and add new features to their platforms. Yet as successful as they have been and as dominant as their platforms are today, they still represent a fraction of overall payments and retail sales.

According to a recent PYMNTS analysis, Amazon, for example, at roughly half of all online retail sales, accounts for only a small fraction of overall retail sales now, more than 20 years after it launched its eCommerce marketplace.

The ride-hailing platforms like Uber and Lyft represent a small portion of the overall mobility and transportation segment that they set out to displace and disrupt a decade earlier. In fact, Uber in its April 2019 S-1 said that it was only at 1 percent of its overall addressable market worldwide.

Aggregators and delivery platforms like Grubhub and Door Dash are expected to account for $16.6 billion in sales by 2023. Restaurant sales that same year are expected to hit $708 billion.

Digital’s 3.0 Shift

Today, the pandemic has opened the door to digital’s 3.0 shift — a world in which the lines between the physical and digital worlds will blur even further as physical becomes an integrated part of a digital-first experience.

But unlike the shifts to digital in the 1.0 and 2.0 versions, success will require more than a slick user interface on a mobile device, and even more than integrating payments and loyalty into a digital commerce experience. All of that is table stakes today.

A digital 3.0 shift will be characterized by the ability to deliver products and services at the hyperlocal level. Logistics — innovating and enabling that last mile, at scale — will ultimately decide who wins and who does not in a digital 3.0 world, a world where digital and physical become largely indistinguishable.  And a world in which consumers say many of their digital-first habits will largely stick in a post-pandemic world.

Like the 1.0 and 2.0 versions of prior digital shifts, those who have spent the last ten or twenty years investing in building out their platforms to evolve and blur the physical-to-digital experience, come to it with a running head start, having sorted through the kinks of getting critical mass and sporting the confidence of engaged platform stakeholders.

And, like every other digital shift, innovators will emerge who see the potential of the quantum leap to digital that the pandemic has created and who see an opportunity to amplify digital in a 3.0 world.

And all of them will be focused on truly cracking the code for the physical delivery of a digital-first interaction, on perfecting the workflows and the business models that underpin them and on removing the frictions that have become more visible as consumers and businesses have been forced to do business in a digital-first way.

That will be hard, and it won’t happen overnight.

Even innovators like Amazon, with decades of experience and billions of dollars of investments in building out a massive logistics platform, struggled to meet the upsurge in demand during the pandemic. They, like everyone, have a long way to go to handle large increases in volume as we move to a digital-first economy where consumers want more things delivered to their doorsteps — and faster than ever.

But it’s not just about the physical inventory and getting goods to consumers and businesses. Other innovations — in payments, in healthcare, in B2B payments, in moving money cross-border, in travel and hospitality, and more — will each have their own “last-mile” problem to solve as they try to leverage their assets and use digital’s 3.0 to revolutionize how they engage with their customers and partners.

Although time is of the essence, digital 3.0 will take time to realize its full potential. Those who understand this will take a measured approach to capitalizing on this extraordinary opportunity by playing offense, not defense. Thinking strategically, not being reactionary. Being focused, not distracted by the clatter of the next big thing that underappreciates the effort required to scale and drive profits.

Because if we have learned anything over the last 20 years of living in a digital world, it’s that playing to win in internet time probably isn’t necessarily the best way to play the long game.