Blockchain — The incumbent’s weapon against disruption
How incumbent companies can win back, the battleground lost to digital platforms and built a strong defence against future digital platform-based disruptions.
Blockchain technologies are one of the most hyped technologies seen in years, being positioned as the potential disruptor of numerous industries. While this is true for organizations living of being the trusted third party (the digital platforms), the case is different for an industry’s incumbent companies that are delivering the actual product and services. For incumbent companies, blockchain has a de-disruption potential as the incumbent companies should prepare to use blockchain as a weapon to defend themselves against disruptions from digital platforms and reclaim control of the customer interactions in industries where digital platforms have been able to acquire significant market share.
The decentralization elements of Blockchain technologies are direct assaults on the key competitive advantages enabled by the centralized digital platform business model. Blockchain, therefore, has the potential to disrupt the disruptors like eBay, Booking.com, Airbnb, Uber, Amazon, Spotify, etc.
Direct interaction with customers returned to incumbent companies
Digital platforms are a growing feature of digital competition, and the typical operating model of most of the largest Internet companies that show strong payoff in revenue and growth. Digital Platforms are creating new revenue sources and disrupting industries, severely draining the profits and revenues of incumbent companies. Exemplified by Tom Goodwin observations that the world’s largest taxi firm, Uber, owns no cars. The world’s most popular media company, Facebook, creates no content. The world’s most valuable retailer, Alibaba, carries no stock. And the world’s largest accommodation provider, Airbnb, owns no property.
The tremendous success of such platform businesses has given rise to the question: Is any industry safe from their attack? From today’s viewpoint, it may be hard to see threats to the successful march of the digital platforms. However, the creative destruction of an established economic order is not something new, and there is no reason why the platform business model should be immune to disruptions any more than what we have seen with previous successful business models. Blockchain solutions based on distributed trust and autonomous intelligent software agents (AISA) will disintermediate many digital platforms. Returning the direct interaction with the consumers to the incumbent product and service providers, while the consumers will discover better automated services at lower cost unleashing a new economic order.
Only producer and consumer benefits from a transaction
You can ask yourself why so many industries are caught unprepared for the massive potential for disruption and destruction that digital platforms offer although they have seen how digital platforms change the way value is created and reinvent business models in other industries.
The best platform will control the industry, and within a few years, many industries will have a new set of market leaders that use the digital platform model to achieve this position.
“Platform business disruption will create winner-takes-all markets. The market makers will be the owners and controllers of the platform.”
- Marshall Van Alstyne, Professor, Boston University Questrom School of Business
Platforms shift the economy from industry optimization to ecosystem optimization, and this is no different with blockchain. However, blockchain enables the industries to fight back against the digital platforms that have piggybacked on their huge investment in assets and regain the direct control of the interaction with the ecosystem. The result will be that the only parties benefitting from a transaction is the producer of the value requested and the consumer that need this value, no middlemen will gain a percentage of the revenue. Which means that Blockchain will be moving revenue from digital platforms controlling the interface back to revenue to incumbent entities controlling the goods and services
Interface controlled by no entity
Tom Goodwin’s primary point is that companies that control the interface between the consumer and the provider of the goods or services are in an incredibly valuable position. They carry none of the costs of providing the service but take a cut from the millions of consumers that buy from them. The interface is where the profit is. The interface between producer and consumer is also critical with Blockchain, however, in this case, no entity controls the interface, it is running autonomously on the blockchain, therefore controlled and owned by no entity and therefore no one to take a cut. And as an additional benefit, the consumer’s experience will be even better.
Blockchain will disrupt digital platforms in four ways:
Digital Platforms will lose their revenue — Transactions on the blockchain occurs without an intermediary, therefore, no associated fees to the digital platform provider.
Digital platforms will lose their exclusive insight into customer's behaviour — Customers store and control personal data on the Blockchain wherefore they can participate in economic transactions or interactions without giving data away. The digital platform, therefore, loses the advantage of expanding into new business using, accumulating and analyzing the information of their customers that they have captured in previous interactions (e.g., Amazon relies on a common platform to manage customers and suppliers and have therefore been able to expand from selling books to now more than 350 million products in several categories). Consumer’s control over own data also lessens privacy and security issues.
Digital platforms will lose their negotiations muscles — Digital platforms do not produce products and services like e.g. car manufactures, they typically match suppliers and customers and typically uses their big customer base to get good prices from suppliers, exemplified with Scandic Hotel chain that in 2012 decided not to use Online Travel Agents like Expedia anymore. One year later they found out they couldn’t live without them and had to sign a new agreement on tougher terms than they were offered the year before. Autonomous Intelligent Software Agents (AISA) will be able to efﬁciently ﬁlter and match prices minimum as good as and in many cases better than the digital platforms. Those prices will be the official price, as offered by the producer of the goods (e.g., Scandic Hotel), which means that there is one price for staying at Scandic Hotel, not a lot of different prices scattered on different digital platforms like booking.com, hotels.com, etc.
Digital platforms will lose control of the merchant’s reputation -Similar to consumer's control of their data then merchants also have control of their reputation and pricing strategies. They will via Blockchain be able to manage trust between unknown parties better and therefore can directly interact and transact with customers, suppliers, and partners, without the need for a digital platform's network. Even small merchants with only a few products will be able to compete effectively as consumer’s AISA will be able to find and negotiate with all merchants’ AISA, irrespective of the size of the merchant behind it.
Blockchain as the incumbent’s weapon to regain lost ground
Since the mid-’90s, digital business is about gathering and capturing data from the physical domain to be processed in the digital domain, but the blockchain-enabled global transformation will evolve the digital business into the next phase.
This next phase is the programmable economy where autonomous intelligent software agents (AISA) will transact with each other in a broad range of value-exchange scenarios. This transition is a result of a convergence of technological and societal trends and is as inevitable as the Web was.
How will the battleground look?
Many will say that the main characteristic of Blockchain is additional security, this is not the case! Blockchain does not address any security use cases that cannot be implemented just as well and, in many cases, more efficiently in a traditional central solution. Many of the blockchain solutions we see today are just digital platforms build on blockchain technology with the only claim that it increases security.
Instead, Blockchain has three main characteristics that will change the momentum on the battleground towards the incumbent companies away from the digital platforms
Distributed trust — No one owns the trust-building between consumers and producers and therefore no need for a profit-seeking trusted third party
The programmable economy — Where the actual interactions between the consumers and producers will not happen via a third party’s interface but by autonomous intelligent software agents (AISA) also called dapp that runs on the blockchain and are authorized, controlled and instructed by each party to autonomous negotiate on their behalf as illustrated in the Barcelona scenario below:
Shared ledger — Gives a shared version of the truth among all actors in an ecosystem, the ownership of the data is not moved to an independent party but remains under the control of the ecosystem and the owner of the data.
AISA negotiating trip to Barcelona: Peter is planning a weekend trip to Barcelona, and instructs his travel AISA with dates, price levels, breakfast included and other characteristic. Peter’s AISA identifies potential hotels in Barcelona and begins autonomously to negotiate with the potential hotel’s AISA according to Peter’s instructions. Peter’s AISA selects a winner, and store their signed agreement in a smart contract on the Blockchain. The hotel’s AISA updates the internal hotel IT-system, and Peter’s AISA updates Peter’s calendar about the booking and asks him whether it should ask his airline AISA to book a flight.
Distributed Trust — Build into the blockchain model
Today, we place trust in central authorities with the “single version of the truth” maintained securely in their databases. The centralized trust model adds delays and costs (commissions and fees) to transactions.
Blockchain provides an alternative distributed trust model. The core design goal of blockchain technology is to add trust within an untrusted environment. It does that through immutable records in a shared distributed ledger, one that is replicated across the nodes of a peer-to-peer network to create a consensus-based authoritative record of transactions, giving a single version of the truth throughout the ecosystem. And therefore, it removes the need for central authorities in settling and reconciling transactions.
The characteristic of business ecosystems most suited for Blockchain is those having a decentralized peer-to-peer structure of relationships, where the parties do not necessarily trust/know each other, but they need to do business together to make the ecosystem work, and parties involved are typically dynamically collected — and most importantly there is no central trusted authority, or there is not a willingness among the parties to give power to a central trusted authority.
In fragmented and disordered business ecosystems, blockchain technology is the only technology that can unify disparate flows of payments, information and physical goods in a trusted, immutable system of record, without a need for a central digital platform. This covers sectors like banking and financial services, healthcare and life sciences, supply chain and manufacturing, energy and utilities, government and public sector, etc.
And this is what we can imagine today, just like people with the internet back in the mid-nineties, could envision e-commerce (Amazon) but not innovations in areas like Facebook, WeChat or mobile web that today integrates all aspects of our personal lives, there are many opportunities with Blockchain that today is not within peoples’ imagination
The programmable economy — Autonomous Intelligent Software agents
The programmable aspect is Autonomous Intelligent Software Agents (AISA) that enable members of a network to collaborate and transact autonomously and intelligently. AISA runs on the blockchain, it negotiates transactions among each other on behalf of and instructed by the entities controlling them.
An ecosystem of software agents is ready to participate in diverse scenarios of value exchange. So whatever request you have there will be an AISA available for you that can find the right solution by understanding the potential suppliers and understands your preferences.
While the focus regarding Blockchain until today primarily has been on the distributed ledger aspects of Blockchain, the AISAs is what will change the markets to a decentralized business model without a need for centralized digital platforms or notary to control and own it and represents the future of business as illustrated in the scenarios below
Shopping before start of school: John and Mary’s oldest daughter Ann is starting in school. They instruct their AISA to determine what needs to be purchased and it does that by interacting with other parent’s’ AISA, to understand what they have purchased, and scans the market for necessary products and substitutes. It negotiates with the shop’s AISA and transacts to make the purchases
Container transport negotiation: A container ocean carrier needs an empty shipping container for a transport of wine from Durban in South Africa to Algeciras in Spain. The carrier do not have any of its own containers available, wherefore it ask it’s container rental AISA to rent a container. The AISA identifies the currently three best-located containers and contacts the AISA representing each container owner. The owner’s AISA first autonomously scan the Internet to understand potential mismatches in demand for delivery and supply (drivers, vehicles, etc.) and returns a quote to the carrier’s AISA. The AISAs continue contract negotiations based on the instructions they have been given, and after settlement, they also handle insurance and manages delivery logistics and other activities. Their agreement is persisted in smart contracts. This scenario is also ilustrated by Blockshipping
AISA manages energy for a community: A community resident’s shared AISA manage their energy needs and has been instructed of parameters for usage and purchases. The AISA acts as an energy manager to negotiate with energy suppliers based on demand and supply to purchase and distribute energy. It also handles billing and payment within the community
Blockchain technology provides a base-level foundation — not a complete business solution. It is analogous to a concrete foundation in building construction, upon which a 30-story building needs to be constructed. So a lot of extra work has to be done before the weapon is ready.
Despite the immaturity and rapid evolution in the blockchain sector, your organization or industry cannot sit on the sideline for 3–5 years waiting for the technology to mature, you have to start wading in now, you have to engage.
Industries should not be surprised they should be prepared, because the faster they build their blockchain-based weapon, the less chance there is that new digital platform players have disrupted and changed their industry
Blockchain-based collaboration cannot come from a single company, except for industries where one entity has a dominant position. Industry collaboration has to proactively drive disruption, innovation, and transformation throughout the industry by identifying and modelling areas where distributed autonomous intelligent software agents can transact on behalf of people, businesses, and things.
Realize in three-five years
When you look at the blockchain landscape today, the main challenge is the current immaturity of the technology that cannot scale and is not flexible enough.
There are more than 100 different blockchain platforms out there, and like other new technologies, there will be a provider cycle where initial vendors fail to become sustainable and are replaced by next-generation. Which means that whatever blockchain technology that you are using today, plan for replacing it within 3–4 years.
So, in the short-term, there are significant obstacles and challenges about the adoption of blockchain technology and today a mature technology does not yet exist that can reliably support that vision described in this paper. But the interesting thing is that it doesn’t matter for the industry initiative, because two initiatives are important prerequisites before the final weapon has been produced on next-generation Blockchain technology. Executing these activities can and should be done in parallel with the maturation of the Blockchain technology while running proof of concepts and pilots on the current technologies:
Initiative one — Business development
Interesting to notice that in some industries the incumbent players have allowed the digital platforms to flourish in a way that allows the digital platforms also to move into the incumbent player's home turf of producing products and services, like Amazon with freight forwarding and Netflix that is now producing movies and series. These industries have changed forever, and if incumbent players do not start fighting the digital platforms, they will find themselves also being disrupted at their home turf.
Incumbent participants within the industry’s ecosystem need to agree to collaborate using blockchain orchestrated by the incumbent members, many of which are fierce competitors. This is similar to RFID in its early days before blockchain can reach its potential business processes and standards must be resolved
Initiative two — Data interoperability challenge
After competitors have agreed to collaborate, there is significant effort to define what data will be shared by whom, to meet the range of complex business interactions. Industries will need to go through the laborious process of agreeing upon what data belongs in the Blockchain and what processes should be handled by AISA, as well as the structure, format, and meaning of the data they share.
Collaboration within an industry is not something new, however important to notice that in many industries they have a digital platform gun pointing at their head, so this initiative is more urgent than many previous standardization efforts, that primarily have been a digitization effort focused on optimization and automation of existing business models and maintaining status quo.
Blockchain collaboration is different as it is an industry-wide digitalization transformation initiative to new AISA based digital business models that will transform how value is exchanged and cannibalize existing business models protecting the incumbents from having the customer interaction taken over by digital platforms.
Significant effort to construct the system
When the incumbent companies have solved the above two challenges, the industry is ready to build the Digital Platform elimination weapon. And it will require significant effort to construct the system, test it and deploy it across the diverse set of participants. New terminology, concepts, and technology usage all mean adoption will take time and patience.
A do-nothing strategy is not viable
Enterprises cannot take a do-nothing approach, they have to run pilots and proof of concepts to familiarize themselves with the potential this new technology brings, and maybe most importantly they have to prepare their existing legacy systems to a decentralized world where Blockchain-based interactions happen.
Reluctant to disrupt today’s business model
Many are reluctant to disrupt today’s business model for an uncertain digital future. Most companies worry that they may open the value pool to competitors if they cede power to customers via new platforms. The AISA based interactions will address these worries, as no power is ceded to digital platforms but to the blockchain that is owned and controlled by no entity
AISA based business models are untested
However, the fact that no one is directly profiting from the blockchain-based AISA disruption is also an Achilles heel. Decentralized Blockchain-based interactions require a huge investment to facilitate the agreement, standardization and the building and maintenance of the AISAs. Business models will evolve and show how to make money when the code is free, trust is distributed, and data is shared directly between consumers and producers, but currently, no successful business models have been validated,
Fight back from the established digital platform
The digital platforms that have already established themselves as a strong player that controls information and the interface will aggressively fight competitive threats to their capital, data, and distribution.
Summary — Incumbent companies in an industry cannot sit still
Platform businesses have disrupted entire industries over the past few decades, but now Blockchain threatens to beat these disruptors at their own game, destroying the centralized digital platform business model.
The disruptive effect stems from Blockchain’s capacity to enable trust in a decentralized model undercuts many of Digital Platforms' competitive advantages by reducing the need for intermediaries or brokers, who can consume a significant part of the revenue stream and exert control over the shape and operations of the market.
Making these intermediaries irrelevant can transform markets and enable the emergence of new business models. Restructuring an ecosystem and displacing established players is the classic pattern of innovative disruption.
While the promise of decentralization is large, we are in the early stages of it. This requires many factors to fall in place across technology, business, society and probable law.
Blockchain technology needs to mature and harden to support signiﬁcant demands in performance, data, integration, analytics and other needs.
But incumbent companies in an industry cannot sit still, they have the technologies in their hand that can disrupt the digital platforms, which is the biggest threat to their existence. It is important that incumbent companies collaborate to design this weapon and thereby regain control of the interactions with the consumers of their products and services, all resulting in lowering costs, reduced transaction settlement times and revenue growth.