In March of 2020, the world changed. The COVID-19 pandemic brought countries and their health care systems to their knees, caused a massive global economic recession, and whiplashed many social and economic norms. In doing so, the pandemic also caused many new norms to be adopted, though reluctantly. Some of these new norms will be short-lived while others will endure.
But beyond these immediate changes in social behavior, we see two major shifts in the global economic and social patterns that will last for decades: the acceleration of migration from atom to bits, and an escalation of social and environmental problems. These two megatrends will pose significant challenges and create large opportunities for our world in the coming decade, impacting all investors and entrepreneurs in the process.
Below we discuss these two trends in detail, and follow their investment implications on various sectors, especially in logistics, online transaction infrastructure, education, communication, and collaboration platforms.
Inflection Point in Transition from Atoms to Bits
While online platforms were gaining ground before COVID-19, the rate of gain was decelerating in most sectors. What happened after COVID-19 was a massive acceleration that “packed ten years of growth in three months”, as McKinsey put it.
By 2030, we expect that at least 50 % of health care needs and advice will be delivered through digital platforms.
Growth of this magnitude will decelerate in the coming years. In fact, we estimate that about 30%-40% of the new e-commerce orders could revert back to regular shopping methods (mostly offline) once COVID is over. These were the transactions that were forced to be online out of necessity faced by the shoppers. But the majority of the new transactions that moved online will stay online as users get hooked on the convivence and efficiency of their online experience. This will be especially true as the infrastructure for delivery is rapidly improving.
This pattern in e-commerce is easy to see but we believe that the same pattern holds in many other sectors, most notably in health care, fitness, education, and banking and finance.
In each of these accelerated transformations from atoms to bits, the “atom” is different: physical stores vs. Amazon, physical doctor visit vs. Teladoc, physical brokerage and banks vs RobinHood, physical gyms vs. Peloton, and physical meetings vs. Zoom. This trend has unleashed a far larger market opportunity by leveraging the largest “paid trials” of online platforms that came out of necessity and captured millions of people.
Recruiting such a group would have been cost-prohibitive using traditional advertising channels. But COVID-19 provided millions of users for free, and many will continue to use the system past the “trial period” when the pandemic is under control.
To understand the vast implications of this megatrend, consider the history of a market that has experienced similar forces in the past 15 years. Back in 2005, nearly all of the home entertainment revenues were driven by physical models. Now, in 2020, the trend has reversed, and we estimate that more than 70% of global home entertainment revenues are driven by digital models such as subscription or advertising-based video-on-demand models.
Source: Statista; Think + Ventures
Although this transformation was in a sector that was highly suitable for digital transformation, we believe a similar pattern, though not as massive, is inevitable in many other sectors.
Currently, we estimate less than 10% of all health care services and advice are delivered through digital platforms. This includes not only telehealth and digital therapeutic services but also information, advice, and monitoring platforms. By 2030, we expect that at least 50 % of health care needs and advice will be delivered through digital platforms of some sort.
Source: Fortune Business Insight
Source: American Medical Association
There are other sectors beyond health care where this megatrend will play out and alter the landscape of the industries completely. Examples of other industries include real estate, education, banking, environmental and green technologies, entertainment, and fitness. The common theme in all these transformations will be a move from “contact to connectivity”.
The common theme in all these transformations will be a move from “contact to connectivity”
Even when the services or products have to be delivered physically, the infrastructure will become highly automated and online, connecting a vast number of customers and enterprises together. This is not simply the same trajectory of migration to online platforms that have been happening in the past 20 years. We are talking about industries that will move from a “multi-channel” strategy to “online-only”, or at a minimum to Online-centric models.
For example, in real estate, we expect not just search for the house and 360 viewings of the house to be online, but also a full walk through the streets, comparison of houses, video interviews with neighbors, and eventually the entire transaction to be conducted with minimal personal interaction. In fitness, we expect continued growth of platforms and equipment that guide the consumer to exercise at home. Notice that in all these trends, another common factor is increasing the empowerment of the consumer. The customer will need to take more initiative and responsibility for his/her health, fitness, education, and even fixing things at home through a video call.
In education we expect the entire adult education category to shift primarily online, moving to an on-demand model. All of these developments will usher new growth trajectories that can take online penetration to 50% and more in many categories, where they are at 10% or so now.
We are talking about a major shift in acceleration and resulting dislocation of markets across many industries, a restart of the S curve of the Internet.
Source: Ernst and Young
Escalation of Social and Environmental Problems
How can a tiny organism such as the COVID-19 virus alter the world order in just a few months, rendering our advances and safeguards useless and creating havoc across the globe? Such an outcome implicates our lack of resilience and preparedness, as well as an unbalanced world of humanity and nature.
Could the world face another natural threat of this sort in the coming decades? Almost certainly yes, whether in the form of another pandemic, unexpected consequences of global warming, agricultural or water supply disruptions, or other health and environmental issues. But we are not prepared for the next event. We have not built sufficient defenses, contingencies, or resilience models. Most importantly, we have not adapted our societies to co-exist in a balanced way with our natural resources and biosphere.
We have not built sufficient defenses, contingencies or resilience models. Most importantly, we have not adapted our societies to co-exist in a balanced way with our natural resources and biosphere.
We believe that the Covid-19 Pandemic could act as a wake-up call and accelerate our efforts to manage our environmental problems and challenges. We need to take bold actions now, such as accelerated adoption of green energy, focus on building natural resilience systems, the establishment of an effective global health care model, and growth in industries that are focused on saving our natural resources such as water and clean air. We also need innovations in new energy and water resources, as well as supportive and encouraging policies by the governments for such innovations. Just as Environmental and health concerns are becoming a central focus, we have to deal with the increasing social implications of three disruptive waves of the past 20 years: Technology, Globalization, and Post COVID Disruptions.
...We have to deal with the increasing social implications of three disruptive waves: Technology, Globalization, and Post COVID Disruptions
Together this triad will displace more workers than any single transformation in the past. We will also see increasing polarization of the society, as we have already noticed during the CVOID-19 pandemic: the knowledge workers gaining while service workers are suffering. Those with investments are increasing their wealth while those without are drawing on their savings. In the U.S. alone, we are likely to end 2020 with more than 3m jobs permanently dislocated from the job market. This number is only likely to grow in the coming years, in most advanced economies. This level of job disruption will create not only increased inequality (already high in the U.S. and many other countries) but could lead to social unrest and weaken our democratic-capitalist model.
The global wave of populism that we saw in the decade of 2010-2020 will look like a prelude to significantly more discontent demographics and disruptive political waves unless these issues are addressed by society and the governments.
The increasing inequality will demand more investment in education, health care, and social safety net. Most importantly, we will need to focus on re-skilling an entire generation of workers for the new world of mostly online platforms that rely on Artificial Intelligence, high degrees of automation, robots, and driverless deliveries, automated physical stores, and the like.
The rapid acceleration of the transition to digital platforms has several near and long-term implications.
1. Infrastructure Build up. the infrastructure for providing these services through online platforms has to be expanded. We need more efficient last-mile delivery networks and localized distribution centers. We believe that in the next ten years, many households will receive regularly scheduled delivery of various items several days a week. Such a volume will enable massive cost reductions and increased efficiencies [ insert example of Amazon scheduling deliveries on certain days.
In addition to logistics of delivery, logistics of ordering and visual communication will need large investment and innovation. If the online platforms are to take the largest share of spending in a given category, the experience of browsing, selection, and ordering will need to be significantly improved, with things such as better displays, on-demand video viewing, and customer support, etc.
2. New Industries Going Online. the migration of services from analog to digital would expand to new categories. Consider that many churches are now using Zoom to conduct their Sunday services. The biggest opportunities are in areas where there is significant friction in the physical model. We consider much of health care, including mental and preventive health care as ripe for massive adoption of remote and online delivery.
We believe, in the future, 2020 will be viewed as an inflection point in the migration of physical platforms to digital models, or from atoms to bits.
3. Accelerated Process Automation. We expect an acceleration of automation of various parts of many businesses, even when the actual delivery of the service still has to be in person. From increased (and more efficient) online presence to ordering, contract signing, payment, follow up and customer communications will all be far more streamlined in the coming years, as they take a jolt from the massive uptick that many businesses experienced in 2020.
To be sure we are not suggesting that every physical model will be migrating to an online platform. However, we do believe that almost every type of transaction and service will be impacted in some ways. For example, once Covid-19 is under control, most schools will go largely back to physical classrooms, but the accessibility of online education will change the dynamics of most learning institutions. Online-only platforms will compete with physical classrooms in remote areas and for special interest groups, among other use cases.
The investment implications of the second megatrend, the dislocations created by increased environmental and social problems are also significant. We will need to invest heavily in education, labor training, and expanded connectivity platforms. Connectivity has to become a global mandate, especially as we will need to replace many “contacts” with connectivity in the post-COVID world.
Global connectivity requires not just broadband, 5G, and mobile devices, but more platforms that take advantage of these infrastructures. Platforms that create seamless, real-time, and engaging communication and collaboration among customers and sellers, workers and companies, and citizens and governments.
We look forward to a new decade of progress and increasing resilience.