The World Has Gone Digital, and It Is Time For Investors To Spend Like It
“We were in a bubble!” “Tech was over-invested!” “I knew this was unsustainable!”
With trillions of venture dollars sunk into tech in recent years, it’s no surprise to see pundits conclude that investors were “over-committed.” But I disagree. To understand why, let’s look at the airline industry.
On December 28, 2022, Southwest Airlines canceled 2,500 flights. The prime culprits? According to many reports, weather and outdated technology. “It’s phones, it’s computers, it’s processing power, it’s the programs used to connect us to airplanes…and it’s systemic throughout the whole airline,” said Captain Casey Murray, president of the Southwest Airlines Pilots Association, in a CNN interview.
Just two weeks later, 1,300 flights were canceled, and nearly 10,000 were delayed when the FAA’s 30-year-old notification system failed. This is a story that’s being repeated across the entire business landscape.
Why? It’s because of underinvestment in digital infrastructure.
For over 100 years, government and private enterprises heavily underwrote the infrastructure needed for a physical economy, and it paid off in spades. But now, the digital economy is taking over, creating major social and economic transformation. And this requires massive investment in infrastructure.
How 20th-Century Infrastructure Investment Created The U.S. As We Know It
The amount of money that the federal government invested in economic growth in the 20th century was impressive in both scale and impact. Ellis Island cost $1.5 million (nearly $45 million in 21st-century dollars) and welcomed the forebears of many Americans today, who powered the Industrial Revolution. The Panama Canal dug at a cost of about $375 million (nearly $11 billion in 21st-century dollars), opened the floodgates to America’s leadership in global trade. And the U.S. Interstate system, whose contribution to the U.S. economy is hard to hyperbolize, was built at a cost of approximately $250 billion as of 1996.
That’s just a fractional list of major 20th-century investments. Trillions more were spent by state and local governments and private enterprises to build energy, water, and sanitation plants, put up office towers and shopping malls, lay power and telecommunications infrastructure, and much, much more. Investment in the physical economy infrastructure transformed the United States GDP from under $100 billion to nearly $10 trillion over the course of the 20th century. The standard of living improved by about 700%. The poverty rate declined from over 50% to less than 12%. In every way imaginable, America’s 20th-century investment in physical infrastructure proved its worth.
A Digital World But A (Mostly) Analog Infrastructure
Fast forward to the year 2023. GDP stands today at about $24 trillion, and the United States economy is increasingly digital. Digital music, video, and even crime have surpassed their physical counterparts; digital shopping has exceeded the trillion-dollar mark; and digital retail banking is gaining fast on physical branch volume. No longer “just another channel,” digital is the main channel for many business sectors. Well on its way before 2020, the digital economy hit a true inflection point with the arrival of Covid-19.
So why does our infrastructure still reflect a brick-and-mortar economy?
Take personal banking. In the old economy, the average American depositor needed a car, roads, bridges, street signs, traffic lights, gas stations and all the associated drilling, refining and shipping, just to reach a bank branch. Those branches were specially constructed with security doors, vaults, safety deposit boxes and alarm systems. Tellers, managers, armored trucks and guards with shotguns and flak jackets were trained to thwart robberies.
The same story exists from healthcare to education to retail. Those sectors function because of infrastructure that simply did not exist 100 years ago. And while there is still a lot of mileage left in the brick-and-mortar economy, huge swaths of it are digitizing at a scale that most of us can scarcely comprehend.
Infrastructure Investment For Digital Transformation
Gartner estimates that less than $200 billion/year is spent on data security—worldwide. Even at three times that amount, it would still be far too low. McKinsey predicts $10.5 trillion in damage from cybersecurity attacks by 2025 and estimates a total addressable market for cybersecurity solutions at $1.5 to $2 trillion—10 times the size of the vended market today.
Where infrastructure once meant physical roads, it now means data pipelines. Where we once built bridges, now we need APIs. Those bank vaults translate into digital data vaults. The trusty security guard of old now means network and endpoint security products. America needs over 755,000 more cybersecurity professionals, and that is just the tip of the cybersecurity iceberg.
Of course, investment is needed in all facets of digital infrastructure, not just security. As we begin to expand and improve 5G coverage, it seems clear that the future of digital connectivity is 6G and 7G. While Starlink is an extraordinary accomplishment, it will not be the last nor the best iteration of private satellite networks. As we expand the volume, surface and utility of connected devices, we need better energy storage, automation software, networking solutions for the hybrid workforce and rapid data processing engines to manage it all. The global AI market alone is projected to grow nearly 40% a year over the next five years.
When you start to pull on the thread of infrastructure needs for the digital economy, it quickly becomes clear that we are not over-invested by any stretch of the imagination. It is quite the contrary.
Private Investment In Digital Economy Infrastructure
While the government-led investment in the physical economy, I believe private enterprise will do so for the digital economy. Just as 20th-century investment in physical infrastructure produced immeasurable long-term returns, so too can our current investments in digital infrastructure continue to deliver ROI in the 21st century.
The digital economy is not a bubble: It is our current and future reality. While markets may feel deflated at the moment, the opportunities for investors, startup entrepreneurs and larger companies over the next ten years should be astronomical.