Torrents of super fast data with edge computing could unlock a much-needed productivity surge for New Zealand’s businesses and governments, Bernard Hickey explains.

It’s the great conundrum of New Zealand’s business and economic life: why is our productivity growth so slow and how can we improve it?

It’s the crucial task for any business or government service provider. Producing more and better goods and services with each hour worked is the only way to improve wages, profits, wealth and wellbeing. The record in recent years has been awful. New Zealand’s productivity has effectively stagnated since 2010. We’ve grown our economy by importing more people and working those people for longer each day, rather than using technology and capital to grow output per hour worked.

The reasons are not obvious, but they do give an inkling as to how the biggest laggards — small businesses and local and central government — can kickstart the performance of the wider economy.

The Productivity Commission has identified what improves output per hour worked: business investment; intense competition; widespread and fast technology adoption; and exposure to international markets and businesses.

This is where the rollout of 5G networks, starting with Vodafone’s in December this year, can work as a catalyst for those less connected, less internationally exposed and less capital intensive businesses and government service providers to transform how they produce goods and services.

Some will choose to use the blindingly fast and all-enveloping computing power enabled by 5G to pivot and grow their businesses. Others will be either over-whelmed by much larger and more powerful international and local businesses that do understand 5G, or will have to find another thing to do that does use that power.

How technology-driven productivity changes everything

To understand just how quickly and deeply the suite of new technologies and business models gathered around 5G could transform businesses and government services, it’s worth stepping back to look at previous technology ‘shocks’ that destroyed industries and companies, and built new ones that made many investors and consumers much better off.

Firstly, some relatively ancient history: the invention of steam engines, industrialised steel-making and the telegraph. These technologies, which were themselves evolutions of metallurgy and insights into the properties of electricity, combined to create the industrial revolution from the early 1800s. Suddenly, factories powered by steam engines could pump out countless garments, widgets and machines.

Almost as quickly, these new products and their masters could be transported to and around new markets via train and ship. Output per hour worked exploded. Prices often fell and some people made astonishing fortunes. The wages of others whose skills were replaced by machines fell. Often, with the help of governments and unions, they and their children retrained and got better jobs with better wages. Some businesses and workers never recovered. Most eventually thrived.

All this activity and the social revolutions that rose up because of it was coordinated, documented and often transacted by the telegraph. The telegraph lines often ran alongside the railways and along the seabeds under the steam ships. These lines eventually morphed into the telecommunications networks we know today. This catharsis of development powered by steam engines, steel-making and telegraphy was much greater than the sum of the three technologies.

These changes through the early and mid-1800s unleashed spectacular productivity and wealth growth, but not for everyone and not everywhere. They drove new social movements, political transformations, revolutions and the first major wave of globalisation. But it didn’t all happen at once or in a straight line. The full industrialisation of most of the world took 100 years and the progress wasn’t always clear or seen as good. But no one would say now that we’d be better off with horses, buggies, pigeons with little canisters for notes around their legs. Or that these technologies wouldn’t change much and were just more efficient versions of horses and pigeons.

A hint of the changes to come

Fast forward 200 years and the world is on the verge of another ‘steam-plus-steel-plus-telegraph’ moment.

Just like the steelmakers and engine designers of old, today’s telecommunications and computing technologies have evolved from earlier breakthroughs. Sometimes there comes a moment when two or three technologies come together and the synthesis is much more powerful than simply adding them together.

The advent of 5G in combination with a new wave of powerful and cheap devices and sensors and the increasingly endemic use of Artificial Intelligence is the same sort of moment. But this time the change will take a few years, rather than decades. (For an explainer on the technology and power behind 5G and Mobile Edge Computing check out my companion piece ‘5G: Atomic clocks, massive beaming MIMOs and sliced networks’)

There’s no better early indication of just how disruptive and transformative these changes could be than to look at how WhatsApp revolutionised an established and very profitable industry, delivered huge free benefits to billions of people and shifted tens of billions in wealth from one group of investors to another. And it did it in just five years, and with little more than a few dozen people writing software.

Former Yahoo! employees Jan Koum and Brian Acton saw the launch of the iPhone in 2007 and then the increasing prevalence of more accessible and cheaper 3G data through 2008 and 2009. But it was the growing usage of Apple’s App Store that convinced them to build an app that any iPhone user could download for free and ‘text’ anyone in the world with the same app for free.

Back in 2009 the global text messaging business earned US$113 billion in revenues for telecommunications companies and employed tens of thousands of people. It may seem like ancient history now, but it’s not that long ago. Current All Black captain Kieran Read had already played 17 tests before WhatsApp was launched in November 2009, as can be seen in his statistics for that year on the All Blacks’ Vodafone App. That was only a year after the first 3G iPhone was only available on Vodafone’s network in New Zealand.

Within five years of WhatsApp’s launch it had used that magic synthesis of the smart phone, the app store and cheap high-speed data to upend the text messaging market globally. Launched by Koum, Acton and a contract software developer 10 years ago, WhatsApp only had 55 employees when it was sold to Facebook for US$19 billion in February 2014. By then over 400 million smart phone users had downloaded the app and were using it for free instead of text messages. Texting revenues have collapsed by almost half or US$50 billion since the launch of WhatsApp,

Now globalisation is transforming services too

Up until the launch of WhatsApp, everyone had assumed telecommunications was a domestic industry unable to be part of the global economy and that huge capital was needed to start a competitor. Yet WhatsApp upended that as fast it was possible for a coder to build an app and put it up on the App Store and Google Play.

These little explosions in once protected services industries a long way from the internet have accelerated since the launch of even cheaper and faster 4G networks globally through 2012 and 2013. The rapid rollouts of fibre and so-called fixed wireless networks, which power WiFi networks inside homes at cable-like speed, have given this shift another turbo boost. Vodafone launched New Zealand’s first 4G network in February 2013 and is now rapidly scaling up its fixed wireless offering.

Just think of the disruption and deflation that has hit the taxi (Uber), hotel (Airbnb), travel (TripAdviser), free-to-air-television and movies (Netflix/Youtube), dating (Tinder), music (Spotify), retailing (Amazon) and mapping (Google Maps) industries over the last seven years to get a sense of the speed and breadth of the societal and business change enabled by the first synthesis of phone-plus-data-plus-app. And this is just the beginning for the services sectors. They are about to be upended and rebuilt in the same way that manufacturing and the way products were made, distributed and sold changed dramatically in the 1990s and 2000s.

Another doubling of the workforce

Economists cite 1989 and 2001 as key years for the global economy that led to the reconstruction of global supply chains and a three-decade fall in manufacturing costs and prices. The fall of the Berlin Wall 30 years ago and China’s entry into the World Trade Organisation in 2001 combined to effectively double the workforce able to produce products for the global economy.

Suddenly, both Eastern Europe and China could trade with the global economy, and most importantly start using their cheap factories and workers to compete their way to wealth. No wonder there has been downward pressure on manufacturing wages and goods prices ever since. The rust belts of America and Europe are one legacy of that shift, along with the subsequent political shifts that led to the election of Donald Trump and the Brexit vote in 2016.

But the arrival of 5G in tandem with the use of artificial intelligence-driven decision-making with the big data produced by wave of cheap sensors is set to sweep through services industries previously thought immune from the sort of competition and productivity gains seen in manufacturing.

Just think what the use of cheap sensors, big data and algorithmic decision-making will do to the likes of transport, legal services, financial services, medical services, education and whatever is left of retailing.

Seismic shifts for education, health, transport and finance

Think what an AI-powered traffic and public transport network that uses networks of cheap cameras, vehicle sensors and autonomous vehicles would do for traffic congestion, travel costs and the structure of cities.

Where once you would need to visit a doctor or lawyer or banker or fund manager or surgeon or insurer or accountant in your city or country, the arrival of the very-high volume and low-speed 5G networks in conjunction with even-smarter phones, AI and big data will transform these previously land-locked sectors.

New and probably global brands and services are expected to give consumers a whole new range of often low-cost services. Businesses that once needed huge amounts of capital and expertise to compete with bigger organisations will be able to weaponise these tools to revolutionise and grow their own businesses.

Epic changes such as these in any society or economy come with both opportunities and threats. Some businesses and government organisations will choose to stand back and wait for things to go back to ‘normal’ once the ‘hype’ has subsided. Some may even sit on their huge head starts and strong positions and watch them stall as new brands and competitors race past them.

Are you Kodak? Or Instagram?

For example, Kodak invented the digital camera in 1975, but it thought it was a fad that wouldn’t replace printed photos. It went bankrupt in 2012, just as Instagram was launched to take advantage of the powerful cameras in smart phones and the app economy.

New Zealand’s small to medium businesses and governmental organisations have been serial under-performers in productivity terms, particularly in the services sectors. Output per hour worked has actually fallen in these industries in the last decade. The Productivity Commission has identified a lack of competition, poor connections to the global economy and slow adoption of technology as factors in the poor performance.

5G, AI, big data and the app economy offer New Zealand’s SMEs and governmental organisations an opportunity for a quantum leap in productivity, or the threat of being overwhelmed by new global competitors which no one has heard of yet.

The exponential power of the technology also offers New Zealand’s ‘old’ industries making and building things another chance to increase productivity, particularly in the likes of manufacturing and construction.

Ignoring 5G or seeing it as a business-as-usual development that is just a faster way to watch video or upload photos is as dangerous as seeing the iPhone as just a fancier version of a Blackberry that doesn’t even have a keyboard.

Remember Blackberry? Kodak? Blockbuster? Motorola?

Think of how the likes of Apple, Nokia, IBM, TradeMe, Google and Netflix either pivoted their existing businesses or invented brand new ones with the springboards of these once-in-a-generation technology shifts.

Understanding 5G and how it could change everything is an opportunity for New Zealand to take a productivity quantum leap.

Bernard Hickey traveled to Dusseldorf and Milan to visit Vodafone’s 5G labs and Nokia R&D centres courtesy of Vodafone, which is a foundation sponsor of Newsroom.

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