The New ‘Fusion’

As the physical and digital worlds merge, companies, investors and society will need to adapt.

Recent responses to the coronavirus have illuminated the enormous changes that technology has introduced in the ways we live and work. “Big data” and advanced computer modeling are proving to be crucial in tracking the disease; live video is helping health care workers to treat and monitor patients; remote work applications are letting millions of people do their jobs at home; and social networks are maintaining the vital personal connections impeded by distancing measures.

These examples are tied to advances that appear to be reaching critical mass in a range of areas: the growth of smartphones, the accumulation of detailed data, the spread of sensors, the use of artificial intelligence, the development of the “internet of things” and the widespread employment of video. All of these trends are driving an upgrade of digital networks, which in turn may be creating new capabilities and further accelerating usage demand—something that the coronavirus will likely only accelerate.

Nearly two years ago, I wrote about the coming of 5G, and how an increase in connectivity would facilitate this changing landscape. The transition, with impacts across many spheres, from technology, to politics, to social interaction, to the environment, will likely be a multiyear journey. Current networks labeled as 5G are really an amalgam of multiple standards, and critical mass will require significant buildout and capital expenditure over the next decade. Increasingly, however, we are getting a better a sense of the contours of the new world that the combination of capability and connectivity could facilitate.

If I chose one term to describe this new environment, it would be “the new fusion,” in which digital information would be applied to the physical world and physical information would strengthen and inform digital analysis and application. The result could be a whole new set of capabilities, experiences and possibilities across health care, entertainment, transportation, housing and more. This evolution could also carry significant risks, and not just relating to cybersecurity. Business transformation may become more pervasive in the future, dwarfing past changes achieved via personal computers and other innovations.

Things That Talk (to Each Other)

Global Machine-to-Machine Connection Growth by Industry (Billons of Connections)

Source: Cisco VNI Global IP Traffic Forecast, 2017 – 2022.

Video Is Helping Drive Connectivity

Global IP Traffic by Application Category (Exabytes per Month)

Source: Cisco VNI Global IP Traffic Forecast, 2017 – 2022.

Personalized Health Care

Although the transition looks to be pervasive, I believe a few areas are both important and indicative of general trends. Consider health care, which, especially with the focus on COVID-19, is likely to experience enormous digital change, leveraging the power of the cloud, big data and artificial intelligence, to help provide more insights and allow medical professionals and individuals to make better decisions about treatment and lifestyle.

You may have read about Google’s pending acquisition of Fitbit, which makes wearable “activity trackers” that help consumers monitor steps taken, heart rate, quality of sleep and other fitness-related data. Apple has also generated enthusiasm in “wearables” with its Apple Watch, which can monitor health information while offering other mobile functions. These devices are fun and intuitive—something that doesn’t exactly come to mind when you think of health care. They could provide a far richer experience, and encourage more self-monitoring, which, combined with robust analytics and extensive data sets, could drive better, faster insights. In addition, the system could provide significant cost savings, to the extent medical issues are identified before they become acute and require an emergency visit or more intense intervention. As mentioned, the power of digital diagnosis and delivery is becoming more apparent with video communications taking place between health care professionals and patients in the fight against COVID-19.

Augmenting Experiences

Augmented reality is another area with considerable potential. Distinct from the submersive experience of virtual reality, “AR” weaves a digital overlay onto the real world.

Four years ago, with the release of Pokemon Go, millions of young people were observed staring at their smartphones as they walked through public spaces and roads in search of game characters. The technology was rudimentary, but the application was new, with an electronic treasure hunt superimposed on physical places. The potential of this and similar apps was not lost on the many companies (including Apple) where gaming is a substantial source of revenues.

Augmented reality (and virtual reality), however, will be about more than just gaming. As a basic rule, popular apps and platforms (think SnapChat) are often initially aimed at specific targets—teens, singles, etc.—before their ideas and technologies move to broader audiences. AR should be no different, and the building blocks appear to be solidifying with each passing day.

Sensors are key hardware that is improving and becoming more pervasive with successive generations of products, including the smartphones that many of us increasingly rely on. With greater capabilities, phones can become a window through which to impose digital images on the physical world. A promising example might be in interior decorating, where you can move beyond basic floor plans to really see how a piece of furniture may look in your living room. AR might also provide real-time background on historical sights, the restaurants or shops you visit, or (at the risk of sounding creepy) the people you meet.

The concept could become even more compelling with smart glasses. These were received with amazement and curiosity a few years ago. Some models are currently available, although they have not yet reached the mass market. In light of their convenience, they could potentially augment smartphones and other devices as a means of interpreting the world. As technical issues are overcome (e.g., motion sickness), improving technology and declining prices could lead to broader acceptance.

Augmenting Effectiveness

Beyond entertainment and personal use, augmented reality has meaningful potential for the ways companies do business. Workflows have already seen major improvement with automation, AI and wireless connection. Faster, large-capacity 5G networks should enhance the ability to share digital information more quickly, whether on the factory floor, in the office or at a remote worksite; and AR will likely take the video experience to a higher level, with detailed, lifelike interactions—potentially from continents away.

Let’s say, for example, that a critical piece of machinery breaks down on an oil rig. Lacking onsite experts, the company might choose to “beam” someone in via AR, for a discussion with local personnel in which she is able to examine the part virtually and then provide a solution. 3D printing makes this scenario even more intriguing, allowing upload of specifications and the creation of the physical spare part without resorting to the traditional supply-chain delays. 3D printing has actually been around for decades, but has become far more effective because of connectivity and sophisticated software and materials. The net result, along with other digital improvements, could be reduced downtime and more effective, profitable production.

Rethinking Business Models

This brings us to a broader conversation about how companies can adapt to the new environment over time. The use of AR is just one element in a theme of change in corporate operations driven by the fusion of digital and physical. Increasingly, all the elements of a manufacturing plant or supply chain are likely to be connected with smarter networks, informed by artificial intelligence, which could enable management and employees to make better choices. By necessity, this is prompting new conversations about how to redesign workflows and the factory floor. Meanwhile, office buildings (and homes, for that matter) are increasingly connected to systems and devices on premises as well as the broader “smart grid” in ways that help reduce their carbon footprint and make them more cost-efficient to operate.

Smart Buildings, Smart Grid

Source: Getty Images.

In retail, upheaval among brick-and-mortar providers is obvious to anyone who visits a mall. But the notion that electronic commerce is replacing a physical presence is an oversimplification. Despite the availability of its products online, Apple’s stores have proven to be popular with customers looking to try products and engage with sales and technical staff. Amazon, while the “grim reaper” for many competitors, has built its business not just on digital storefronts but through infrastructure and delivery capabilities, and (in addition to its Whole Foods grocery chain) has even opened physical retail outlets. In effect, a fusion of digital and physical appears to be critical in attempting to achieve full potential in an omni-channel world.

Interestingly, digital trends are also changing how companies are categorized. Amazon and Apple are generally thought to be technology companies, but really operate in multiple sectors. Meanwhile, companies in traditional areas like manufacturing and transportation are becoming more tech-oriented, blurring the lines further. Is Airbnb a hotel or a services company? Is Uber a transportation or technology firm? What matters more than their description is whether (and in what form) they can stick around, and how strategic they will be to their customers.

Looking Ahead, Not Backward

As a research analyst, I seek to develop a deep understanding of the mosaic of factors affecting a company’s prospects, drawing on both traditional inputs and big data for insights. One of my most important jobs is to assess whether the company is prepared for change. Past performance is often an incomplete yardstick, while factors like brand dominance, business “moats” and available capital can go only so far. In addition, considerations including the ability to attract talent globally, or to operate effectively without harming the environment, may come into play. A good attitude helps: I much prefer leadership that understands its vulnerabilities and is constantly searching for answers. However, even forward-looking companies often have extensive infrastructure and processes that have become obsolete. Wanting to adapt and doing so are often very different.

Recently, auto parts manufacturer BorgWarner agreed to acquire competitor Delphi Technologies, and I believe similar transactions are likely to occur across industries as companies seek to cut costs and become more competitive. This has occurred repeatedly in the technology sector, where business cycles are relatively short, but now it is happening more broadly amid pressure from Amazon and other dominant players. In the end, some incumbents are likely to make it, but many probably won’t—at least not in their existing forms. These companies often can’t move fast enough, and their processes, supply chains, incentives and intellectual property may not be set up for the “fused” world that we are entering.

For those with a chance to survive, the road may be difficult. From my perspective, managements need to reimagine the underlying pillars of their businesses, including their core offerings, how they create value and how they achieve differentiation. Shifts in mindset, incentives and personnel may be needed, and even a willingness to cannibalize their own businesses.

Sometimes, companies can be their own worst enemy, not only maintaining outdated business models, but operating with many layers of management and/or incentive structures that reinforce the status quo—often at a high cost. In an unforgiving environment, this is probably not a formula for success.

Ironically, a “willingness to fail” can help. I’m not talking about failure with no purpose, but rather an orientation toward innovation in which initial failure is used to gain perspective and information, which can then be leveraged to come up with something better. It’s the essence of creativity. In my view, the companies that are able to embed this philosophy throughout the organization should have a better chance of being the winners in coming decades.

Security and Politics

When thinking about trends such as digital health care, smart glasses or AR, I believe that the security of personal and corporate data will be crucial. This is already a source of much attention, not only because of the detailed information revealed through digital activity, but given data breaches by profiteers and rogue actors.

To some degree, societies have to come to grips with the tradeoffs between safety and the free flow of information and commerce. What’s good for China may not be good for the U.S., and what flies in San Francisco may not be right for Mobile, Alabama. Community-wide standards are important, but so is a diversity of ideas, and it will likely take time to find a balance. Part of the puzzle is education and greater transparency to help consumers gain more understanding of the value of their data and the importance of safeguards.

Security, however, does not just mean data. Terrorist threats have not gone away, and the coronavirus has highlighted the efficacy of data in tracking aggressive disease. It is humbling to see how far we haven’t come. For example, many 911 centers still cannot receive texts or videos—which have become standard modes of communication for just about everybody else. And parts of our critical infrastructure, such as airports and utilities, could use far more protections than are currently in place. In short, security needs to move into the 21st century—both in digital and physical dimensions.

Politics is another challenging issue. Countries historically understood that technology was useful, but its broad ramifications for nearly every aspect of the economy, politics and social behavior have recently become more evident—whether as a platform for opinion, a vehicle for protest or a mechanism for control. Those best able to leverage technology may exert influence far beyond what their resources or size might otherwise suggest. The debates around using technology from some vendors attest to the importance of trust in a world that is becoming increasingly concerned about spying and data falling into the wrong hands.

With so much at stake, nations need to think about how they want to invest in technology, how they can incentivize companies and how they can attract talent. Part of this may involve developing sustainable infrastructure, including a smart grid and buildings that draw on alternative energy and connectivity to operate efficiently, as well as fostering relevant education, and setting regulation that provides guardrails, but avoids suppressing innovation and risk-taking.

The competitive implications are enormous, as recent maneuvering over trade and 5G dominance makes clear. Beyond external rivals, however, countries may have trouble bringing their own citizens along. Brexit and the 2016 U.S. election were to some degree a rebellion against elites, governance and globalization at the expense of working people, while one byproduct of the digital explosion has been to exacerbate the wealth gap that is all too visible in our cities. To have potential for success in the coming environment, governments and the private sector will likely need to work together to address damaging side effects, and to build more trust and a sense of community around digital platforms. More basically, I believe politicians need to look past today’s short-term-oriented discourse to talk more about the techno-economic challenges ahead so that they can secure electoral buy-in to crucial choices.

Change Is Coming

In anticipating the landscape ahead, it’s possible to disagree about the details: how communication will evolve, what form infrastructure will take, how people choose to live. However, the notion that things will be different—often radically so—is hard to dispute. On a global basis, technology and ingenuity are altering our world. Even if one company, government or society chooses to remain static, others will likely step in and eventually force the laggards into action. For investors, that makes for an exciting, if challenging time; more broadly, in my view it means that careful research, flexibility and a well-considered approach to portfolio construction will remain crucial.