• Published on 09 Jan 2015
• External News

Hyper-scalable business logic

Tatu Koljonen from VTT Technical Research Centre of Finland is the Co-chair of ARTEMIS Industry Association SRA WG, Chair of Chamber B and Member of CAF (CONNECT Advisory Forum Forum for ICT research and innovation). This is his vision on Hyper-Scalable Business logic.

The wealth of the western world has been created through industrialization. Up until 1900 China was the wealthiest country in the world due to its hugely successful agriculture with three crops a year in the best areas. Productivity increase through scalable production of goods was the idea in industrialization. In scalable business output grows more quickly than the input.  Hence, an industrial worker could produce an order of magnitude more than those in traditional jobs. Industrialization opened the whole world as a potential customer limited only by the cost of logistics.

The world order is again changing and the good old export industry is struggling. It’s laying off people and for example in Finland export industries share of GDP has nearly halved in the past decade. At the same time we have witnessed a steady growth of services – not only the old traditional services, but more and more new with some digital ingredient. We have noticed how the digital component, bearing no logistics costs, changes the industry dynamics, especially in terms of how businesses scale. New hyper-scalable businesses based on digital services and digital products have emerged.  Initial examples are from gaming and entertainment, where the average annual valuation growth has been phenomenal: for Spotify half a billion, for Supercell one billion and for WhatsApp, Twitter and Uber around four billion euro. The number of employees in the company has been few tens in the best cases, so the productivity per employee has been hyper, too. In hyper-scalable business, one person can create an annual turn-over of tens of millions compared to the one million of the traditional scalable business.

The term “hyper-scalability” came from the notion that surprisingly the actual service provisioning as well as the business value generation worked increasingly better when number of user increased. One way to explain this is Metcalfe’s law stemming from the telecommunications world that states that the value of a telecommunications network is proportional to the square of the number of connected users of the system. Metcalfe's law characterizes also many other networks such as the Internet and social networking. In essence, the competition in hyper-scalable business logic is about winning the Metcalfe’s law on one’s side. The winner is the one who gets most users and the winner takes it REALLY all in terms of profit for each business niche. Therefore it is necessary to have a fair share of European winners and strong local clusters to help them initially succeed and monetize the success in local jobs and economic growth.

“All this is very interesting, but does not concern us” or ”it’s an anomaly of the gaming and internet worlds and nerds. We can carry on minding our own business.” is what many traditional industries say. The bad news is that internet of things (IoT) makes the real world susceptible to digital tools and ways and consequently the new industry dynamics will eventually find its way to realm of traditional businesses and whole society. Nobody is safe.

IoT is principally about attaching varying amounts of identity, interaction and inference to objects. Identity can be e.g. tags, shapes and forms or IP addresses. Interaction includes acting, sensing and scalable physical connectivity, locally and globally. The connectivity is not just between devices, but also between materials, spaces, phenomena, human actions, concepts, processes, data repositories etc. Embedded systems play a major role in facilitating those interactions. Varying amount of inference is used to refine the data into information. That can be turned into new applications and services via cloud computing and big data analytics and other digital means.

Most importantly IoT virtualizes the real-world things for digital processing. The outcome of IoT is a digital representation of the real world that can interact with digital systems and applications and is susceptible to internet business models. Depending on the instance, the digital representation of the real world can be very simple or extremely complex, very local or globally orchestrated. The sources of information can be anything from tags, sensors, embedded systems, existing databases to human agencies.

In hyper-scalable business logic we have used Metcalfe’s laws to explain the increasing returns of businesses based on such services. It also implies in many business organizations a re-definition of their business model putting more emphasis on the user attention, instigation and involvement. There is a growing evidence of companies raising the user and user communities, or tribes or cults, on a major role in their product development and actual products and services:  the elevator maker Kone is opening its elevator interfaces to the developer community, the sports watch maker Suunto is in a constant contact with its user community through their Movescount portal and the search engine maker Google is systematically trying to conquer all IoT based businesses niche after niche, often through acquisitions, from home automation (Nest) to health, from self-driving cars to robots.

In hyper-scalable business, global natural monopolies will emerge in smaller and smaller pieces of innovation. The rise to the global dominance is quicker than ever and so is the fall. Europe needs to ensure two things: 1) a fair share of global winners and 2) a way to turn those successes in the jobs and economic growth for Europe. The history shows that the winners can be both big companies as well as start-ups, but the competition is global. In other words Europe needs to offer the best conditions worldwide for competitive, innovative and market-ready IoT solutions:

1. Global champions + strong local clusters of trust: a symbiosis of the industry and supporting non-scalable services like RTOs, universities and government offices breeding global champions through exchange of ideas in a positive atmosphere. A good example is Spotify in Sweden, which conquered the music streaming globally and now the whole music industry in Sweden enjoying a renaissance as number two in the world.
2. Trailblazer project: It is hard to keep up in the pace of competition with publicly funded research mechanisms. Therefore we need big challenge based trailblazing pilots that lay the (technology) foundation and create a lot of spill over business seeds for commercial competition.
3. MARL instead of TRL: While technology is an important enabler, in hyper-scalable business the adoption by user communities (being these individual users, business users or even larger communities – e.g. industrial applications) is the determining factor for success. Therefore Technology Readiness Level (TRL) gives a wrong frame of reference and Market Adoption Readiness Level (MARL) with milestones related to user instigation and involvement is proposed. Moving from B2B or B2C to H2H (heart-to-heart) business.
4. Service dominant logic: Service innovation, i.e the ability to create high-value offers to the customer in a systematic and integrated way, is increasingly important not only for companies, but also for public organizations. Companies and organizations, regardless sector, need to invest in service innovation to be competitive and find sustainability in their business. The traditional way of distinguishing between goods and services no longer reflects reality. Goods and services increasingly complement each other in order to create the best offering for the customer, and services in turn are tied to goods or a technical solution responding to the user’s needs and expectations.

A sustainable legal framework that facilitates innovation while ensuring fairness and a high level of user protection, protection of fundamental rights & trust is a critical competitive factor. Europe can have a front runner position here and even export its regulation. Regulation and legal framework for digital economy still missing. IoT creates new challenges for the existing legal framework. Attention is needed for the question of how the future legal framework can address these challenges and at the same time play a role in facilitating innovation in IoT, by providing common benchmarks, defining essential ground rules and generating trust.