Enterprises worldwide are facing a massive wave of digital disruption that’s causing them to rethink their current business and IT deployment models. The McKinsey Global Institute (MGI) sums up the situation well, describing the meteoric rise of what it calls the “digitally interconnected global economy,” where global data flows have replaced and transformed large parts of an economy once dominated by flows of goods, services and finance. Global flows of data primarily consist of information, searches, communications, transactions, video and intracompany traffic.
“While the global goods trade and financial flows have flattened since the Great Recession, cross-border flows of data are surging. They now tie the world economy together just as surely as flows of traditional manufactured goods,” MGI says in its 2016 report, “Digital Globalization: The New Era of Global Flows.”
A digitally interconnected global economy demands greater digital collaboration and productivity platforms, and interconnection solutions to support them. Businesses worldwide must collaborate over various digital channels that have become the major drivers for increasing global data flows and gross domestic product (GDP) growth. This requires businesses to transform and evolve their legacy network infrastructures with an interconnection-first strategy that enables greater collaboration, productivity and value.
The GDP Impact of Global Digital Interconnection
Global data flows have increased 45 times over the last decade and have been a significant contributor to global GDP growth. Over the past decade, all types of global flows have raised the global GDP by at least 10%, totaling $7.8 trillion in 2014 alone. However, data flows now make up the largest component of GDP growth with $2.8 trillion in 2014, exceeding the contribution of goods in global trade.
Source: TeleGeography, Global Internet Geography; McKinsey Global Institute analysis
Why is this happening?
According to MGI, “The world is more interconnected than ever. For the first time in history, emerging economies are counterparts on more than half of global trade flows.”
In Equinix’s 145 global colocation data centers, we see more and more vertical (i.e., financial services, manufacturing, media and entertainment) and horizontal (network, cloud, Internet of Things, etc.) business ecosystems directly interconnecting with each other to more efficiently create new value and growth. MGI describes how the same phenomenon is shaping the global digital economy, with global buyers and sellers more quickly finding each other and collaborating via digital platforms and marketplaces, and directly connecting at little or no cost.
The volume of data moving across global borders has also skyrocketed, facilitated by the growth of undersea cable networks running along coastlines and between continents. Cross-border bandwidth has also increased 45x, from 4.7 terabits per second (Tbps) in 2005 to 211.3 Tbps in 2014. According to MGI, the Internet of Things (IoT) and machine-to-machine (M2M) traffic promise to expand this traffic spectacularly, accounting for more than 40% of global devices and connections by 2019. Over the next five years, cross-border bandwidth usage will continue to grow ninefold.
Source: TeleGeography, Global Bandwidth Forecast Service, McKinsey Global Institute analysis
We see this increase in global data flow at play among our customers in industry sectors that regularly move terabytes of IoT and M2M traffic and leverage cloud computing to capture and analyze this data. For example, last year General Electric introduced its Predix Cloud, the world’s only cloud-based, Platform-as-a-Service for storing, processing and analyzing the huge amounts of IoT and M2M data being produced as a result of the “Industrial Internet.” A significant portion of the Predix Cloud makes its home in Equinix data centers.
Digital Platforms: The Great Equalizer
Global interconnections and digital platforms can be game changers for developing countries and smaller companies that previously lacked the means to participate in the global economy. In fact, MGI estimates that some economies could grow 50% over the long term by accelerating global participation: “The near-zero marginal costs of digital communications and transactions open new possibilities for conducting business across borders on a massive scale.”
At Equinix, we have seen how multiple public Internet platforms, including social media and
e-commerce global marketplaces, are leveraging greater interconnection to connect to virtually anyone, anywhere on the planet instantly. Equinix customers Amazon and Alibaba, and others industry players like eBay, Flipkart and Rakuten, are great examples of this. The largest of these platforms can support hundreds of millions of global users and interconnections simultaneously, dramatically eliminating previous market asymmetries and inefficiencies. By using these digital platforms to connect with customers and suppliers in other countries, small-to-medium businesses can level the global playing field by becoming “micro-multinationals.”
Source: Facebook, Twitter, Freelancer, Upwork, Mashable, Fortune, Statista, McKinsey Global Institute analysis
Businesses of all sizes, non-profit organizations, and even individuals worldwide are using the plug-and-play infrastructure of Internet platforms “to put themselves in front of an enormous global customer base and become exporters,” said MGI. Almost 12% of the global physical goods trade is conducted on e-commerce and global online marketplaces, with 361 million people worldwide taking part in cross-border e-commerce.
Then, of course, there are virtual goods, such as e-books, apps, online games, digital music, streaming audio and video, software and cloud computing. At Equinix, we see the flow of digital content increasing exponentially throughout our media and entertainment ecosystem of more than 875 content and media providers.
Interconnected digital platforms also offer new ways to collaborate, learn and acquire new skills, and showcase them to employers and others via digital channels such as Freelancer.com, LinkedIn, and YouTube ̶ the latter launching the careers of many performers who otherwise might have never been known to the public. And countries with broad global data flow participation are exposed to innovation, ideas, research, talent, technologies and best practices across the world that enhance their economies.
Untapped Economic Impact of Interconnection
The digitally connected global economy is still in its infancy. Today, just a small group of countries contribute to majority of overall global flows, with Singapore, The Netherlands, United States, Germany and Ireland topping the list. What MGI calls “less connected periphery countries and regions” have yet to fully participate and reap the benefits of the interconnected economy. According to MGI, if countries in the bottom three digitally connected quartiles had increased participation in the interconnected economy at the same rate as the top quartile over the last decade, global GDP would be an additional $10 trillion, or 13% higher than today.
Source: International Monetary Fund, McKinsey Global Institute analysis
For those regions that make a large contribution to the global digital flow, MGI research estimates that just 600 cities will generate some two-thirds of world GDP by 2025. Urban centers with significant Internet infrastructure play a large role for data and communication flows such as New York, London, Tokyo, Los Angeles, San Francisco, Singapore, Hong Kong, Shanghai and Dubai.
We also see similar growth trends from our global data centers in those metros, and expect it will only increase as more and more companies worldwide adopt interconnection-first strategies and platforms. As companies everywhere reinvent themselves to thrive in this interconnected era, MGI advises them to consider a lean approach, leveraging digital tools for remote collaboration and instant communication with virtual cross-border teams, while centralizing many global functions such as back office operations or R&D in one or a few strategic locations. Don’t establish large physical presences in many cities and countries, but focus instead on dispersed local presence in sales and marketing only.
And if you deliver digital goods and services, you may not need any physical global presence at all, just a virtual presence. Many companies are achieving this by interconnecting to customers via geographically distributed colocation data centers and leveraging clouds to expand their global footprint. For instance, Equinix customer Netflix has added viewers across more than 190 countries via the cloud, without having to set up any of its own local physical operations. In our cloud ecosystem, there are more than 500 cloud providers worldwide, enabling their customers to reduce costs, increase scalability and expand their global footprint.
MGI reminds readers that even with the Internet, physical distance still matters, and a significant share of global flows move more efficiently within established regions, rather than between them. It also advises companies to take a fresh look at their assets, including customer relationships and market data, to determine if there are new ways to monetize them via digitally interconnected data flows that maximize new markets and technologies. As we have seen with our 8,000 customers worldwide, tapping the power of proximate, direct interconnection to your employees, partners and customers, as well as services such as clouds and content delivery networks, allows you to bring your products and services to market faster and seize new revenue growth opportunities.
Download our white paper “Change the Way We Collaborate with an Interconnection Oriented Architecture,” to learn how to realize a greater return on the digitally connected global economy.