As We Enter The Era Of The Ecosystem Economy, Are We Prepared For The Risks?

Featured in BRINK News

By: Leslie Chacko
This article first appeared in BRINK News on June 11, 2019.

We are entering the era of the ecosystem economy, in which complex networks of companies across industries collaborate to provide seamless experiences for customers. The economic opportunity of operating in an ecosystem is sizable and unprecedented—but so are the risks.

Digital ecosystems—enabled by data, emerging technologies and innovative platforms—are anticipated to be a major contributor to unlocking the so-called $100 trillion digital dividend by 2025. That is larger than global GDP today.

As they disrupt industries, technology-based and Internet-driven companies and digital startups are playing an influential role in enabling the ecosystem economy. Traditional firms, especially those under imminent threat of competition from new entrants, are also digitally transforming to try to remain relevant and thrive in the ecosystem economy.

Value In The Ecosystem Economy Is Unequally Distributed
Unfortunately, not all companies are equally poised to benefit from the $100 trillion digital dividend. Plenty of companies are investing in technology, but the scales are clearly tipping in favor of technology giants and digital startups.

Why is this happening? First, these companies have positioned themselves to anticipate changes in the customer’s lifestyle and mindset, which have shifted dramatically in the last two decades. Second, technology companies have prioritized building innovative platforms over products. Finally, technology companies have also prioritized taking their platforms to market via digital ecosystems.

As a result, technology companies have claimed the top five spots in the world in market capitalization. That’s a stark contrast from a decade ago, when the top five companies were mostly traditional corporates that offered a mixture of physical products and services.

Technology companies have also been winning over customers in brand appeal and trust. Based on analysis from brand consultancy Lippincott, customers gave higher ratings to ride-sharing platforms compared to traditional rental car companies; online banks over high-street banks; and online shopping over brick-and-mortar services.

Exhibit 1: Technology Companies Are Beating Traditional Firms In Market Capitalization

Source: Visual Capitalist

The Risks Emerging From Operating In Ecosystems
The economic opportunity of engaging customers in an ecosystem is sizable, but so are the risks. Companies that operate in ecosystems need to monitor and respond to four broad sets of challenges.

Fragmented business landscape: The number of companies building platforms will explode in the next five years. Take any industry where startups are encroaching, such as fintech, healthtech, edutech, or adtech, and you will find a large and expanding number of competing companies.

This proliferation can potentially be painful for consumers, enterprise clients, investors and the platform companies themselves. Customers can become frustrated interacting with so many applications from competing platforms. Enterprise clients can struggle to pick the best vendors. Investors can get cold feet when faced with so many competing investment targets. The platform companies can struggle to manage complex value chains involving many other players in their ecosystems.

The flip side of this fragmentation is potential consolidation, as platforms compete for the customer base by being stickier, attracting more investment and gaining influential allies. Some platforms even become critical enablers of large ecosystems; so far, this phenomenon has worked to the advantage of the largest tech giants. Winner-take-all platform business models can even raise the risk of monopolies, and competition laws have yet to be updated to address this concern.

Operational/concentration risk: Firms that enable ecosystems (especially in an enterprise context) are increasingly becoming the targets of state-sponsored cyberattacks, hacking, terrorism, fraud and legal disputes.

This is especially true for the tech giants. The argument is one of scale: Cyberattackers are more likely to attack a payments platform, a social network or a cloud storage platform if they host a large portion of consumers or enterprise customers. Any company that holds a centralized repository of data is also at risk, as illustrated by the Equifax breach that unleashed most American adults’ Social Security numbers, birth dates and credit card numbers.

Technology companies, especially the tech giants, are aware of the potential concentration risk and are investing heavily in bolstering their cybersecurity. As ecosystems become more massive and more complex, motivated attackers will continue to search for weak points to exploit.

Reactive governance: A fundamental premise of operating in an ecosystem economy is that the participants operate on a shared set of principles and incentives to ensure fairness, accountability and transparency in generating value for the customer.

It is a very delicate balance, especially when many firms within the ecosystem can be competitors but choose to cooperate in the spirit of delighting the customer. In many cases, the participants choose to “self-govern” instead of seeking regulation from external third parties.

So what happens when a player starts going rogue in the ecosystem? Or when the most influential player exerts undue influence on the ecosystem? The ecosystem tips off balance, and the most influential participants come under increased scrutiny from governments and regulators.

A case in point: It is not every day that a technology CEO asks for more regulation. Yet, in March, Mark Zuckerberg did just that on the Facebook blog. Incidents such as the Cambridge Analytica scandal, in which a large amount of user data was taken without permission and misused to sway an election, raised awareness about the unprecedented risks posed by operating in ecosystems.

In this case, Cambridge Analytica was the rogue actor in the social network ecosystem. Mr. Zuckerberg realized that the ecosystem he developed required better governance and asked for help to address four problem areas: harmful online content, election integrity, privacy and data portability.

Societal obligations unchecked: The four problem areas that Mr. Zuckerberg listed were all governance issues stemming from potentially harmful interactions with consumers.

Consumers are an integral part of the success in the ecosystem economy and inherently trust technology players—they trust that their privacy will be protected and that their data will be leveraged in legal and ethical ways. They trust that technology companies will avoid enabling terrorists, criminals and other rogue players.

So, it is only fair that when trust is broken, consumers think twice about sharing their data with technology companies. More and more customers are expecting increased ownership over their own data.

The Future Of Ecosystem Governance
Clearly, the severity and complexity of these risks could put a dent in realizing the full potential of the ecosystem economy. Corporations participating in ecosystems need to review how they handle data, how they empower their workforce, how they shape government regulation, how they govern new technologies and how they influence society at large, among many other issues.

These are difficult issues to address and require broad cooperation across governments, regulators, corporations, tech companies, academics and broader society—otherwise we risk damaging the health of our future global economy.