Definition

digital economy

The digital economy is the worldwide network of economic activities, commercial transactions and professional interactions that are enabled by information and communications technologies (ICT).

It can be succinctly summed up as the economy based on digital technologies.

Don Tapscott first coined the term digital economy in his 1995 best-selling book The Digital Economy: Promise and Peril in the Age of Networked Intelligence.

Nicholas Negroponte, founder of the Massachusetts Institute of Technology's Media Lab and author of the 1995 book Being Digital, has described the digital economy as using "bits instead of atoms."

Digital economy vs. internet economy

In its earliest days, the digital economy was sometimes called the internet economy, the new economy or the web economy due to its reliance on internet connectivity.

However, economists and business leaders assert that the digital economy is more advanced and complex than the internet economy, which, under one definition, simply means economic value derived from the internet.

The digital economy reflects the move from the third industrial revolution to the fourth industrial revolution. The third industrial revolution, sometimes called the digital revolution, refers to the changes that happened in the late 20th century with the transition from analog electronic and mechanical devices to digital technologies. The fourth industrial revolution builds on the digital revolution as technologies today continue to bridge the physical and cyberworlds.

Importance of digital economy

Although some organizations and individuals use technologies to simply execute existing tasks on the computer, the digital economy is more advanced than that. It is not simply using a computer to perform tasks traditionally done manually or on analog devices.

Instead, the digital economy highlights the opportunity and the need for organizations and individuals to use technologies to execute those tasks better, faster and often differently than before.

Moreover, the term reflects the ability to leverage technologies to execute tasks and engage in activities that weren't possible in the past. Such opportunities for existing entities to do better, to do more, to do things differently and to do new things is encompassed in the related concept of digital transformation.

Digital technologies

The digital economy extends well beyond digitization and automation.

Instead, this new paradigm harnesses multiple advanced technologies and new technology platforms. Those technologies and platforms include but aren't limited to: hyperconnectivity, the internet of things (IoT), big data, advanced analytics, wireless networks, mobile devices and social media.

The digital economy uses these technologies, both individually and in concert, to rework traditional exchanges and enable new ones.

Entrepreneurs in the digital economy

Numerous entrepreneurs seized on the technologies that fuel the digital economy to create new companies and new business models that could not have existed, or existed at the size and scale they do today, in past generations.

These new companies include the ride-sharing platforms Uber and Lyft; the home rental platform Airbnb; and content-on-demand services, such as Netflix and Spotify.

Digital transformation examples

There are numerous examples of traditional companies transforming to succeed in the digital economy as well.

Take retailers, for example. Most retailers initially developed websites to enable online sales. As the world moves more fully into the digital economy, forward-thinking retailers now leverage technologies to reach and serve customers through a variety of channels. These retailers use online sales and mobile apps to identify buyers, whether they're shopping via the internet or in person. They can collect and analyze each customer's browsing and sales data to better understand their interests. And they can use that data to reach out to customers via social media, allowing for better service and ultimately higher sales and increased brand loyalty.

The idea of utilizing technology to unify the customer experience across different real-world and cyberspaces is often called an omnichannel or multichannel approach.

Another example of digital transformation is John Deere, the 179-year-old company built on making farm equipment that now also includes data-driven platforms to help farmers optimize production.

Vehicle manufacturers that offer telematics solutions to pinpoint and communicate maintenance requirements, such as Daimler Trucks North America and its Detroit Connect Virtual Technician, which provides remote diagnostic service for select trucks, also illustrate the digital transformation needed to compete in the digital economy.

Waves of disruption

The digital economy has created waves of disruption. New companies and new ways of interacting have emerged. However, many companies and industries that did not or could not capitalize on the technologies to change their operations have faced declining sales, falling market share and even complete collapse.

Blockbuster and other content rental shops that did not adopt streaming technologies quickly enough shuttered their operations. The taxi industry is now struggling to compete for customers who find Uber and Lyft easier to use. Kodak and other camera equipment companies that didn't move to digital formats and online sharing platforms drastically shrank their product offerings as smartphones and social media platforms replaced film and photo albums.

The future of the digital economy

Leading business experts agree that the digital economy is at its start.

To compete in the years ahead, organizations -- whether they are for-profit businesses, service-oriented entities, such as healthcare systems, or nonprofit and government institutions -- will need both leaders and employees who are able to innovate.

They will need to leverage today's emerging technologies, such as IoT and prescriptive analytics, to better connect with existing and potential customers and to be more responsive while also being more efficient and effective.

Moreover, they'll have to be prepared to explore how best to develop or use emerging technologies or risk being left behind as the digital economy moves forward.

This was last updated in September 2017

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