How Small Business Can Achieve 'Economies of Scale' by 2030

At EY, we believe that by 2030, more than half of all new business contracts will be blockchain-based smart contracts. While this change will utterly transform the administrative complexity of managing business operations, we also think it will transform the competitive landscape of the global market economy as well. Combining blockchain with other internet-based technologies and digital systems, we see a transformation coming where smaller companies, already nimble, will be nearly as efficient and scalable as their larger competitors.

In July of 1994, Yahoo, one of the very internet search engines, got started. And suddenly, the internet, a technology platform that was designed to drive security through decentralization, kicked off into a thirty year wave of digital centralization and consolidation. The economies of scale that turned software platforms into monopolies accelerated with the addition of internet-based network effects. The big got bigger and the small struggled to survive.

Paul Brody is a Principal and Global Blockchain Leader at EY. This post from CoinDesk's "Internet 2030" series about the future of the crypto economy.

If that wave of centralization crested in 2020, by 2030, it will start to recede, and quickly, thanks to the power of re-decentralization coming from blockchain technology. The new business environment is one where economies of scale are less powerful, as blockchain-based software lets smaller companies collaborate together as efficiently as larger enterprises.

So let’s imagine what things might how all this might come together by 2030:

On Wednesday afternoon, Feb. 6, 2030, at around 4:15 p.m., a washing machine in Sheffield, England is going to break. As the machine enters the spin cycle, vibration from the rotating drum rattles the connecting water drainage hose loose, and water from the spin-drying clothes starts to leak out onto the bottom of the washer housing and through the ventilation holes on the floor of the laundry room.

The leaking water is going to trigger a water sensor in the washing machine, which will shut off the spin cycle and text the owner about a fault. From there, the owner arranges a service call, selects a locally available repair person, and goes on with their day. Two days later, on Friday afternoon, a new drainage hose was installed. The owner will never see a bill for this service, as their machine is under an extended warranty.

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If this scenario strikes you as unremarkable, that’s because it is. All of this is possible today, though not yet available. We will see the first really integrated smart offerings like this very soon, but those offerings will be faking their integration. Behind the scenes, there will be a mess of non-digital paperwork, and even then, it will be accessible to only the largest, and most sophisticated enterprises. And for all of that, you will need a clumsy installation and registration process as well, including a frustrating three-way dance between your smartphone, the washing machine, and the home internet router.

What should be easy and sensible today is in fact very difficult. Retailers are not fully integrated with manufacturers and they, in turn, are not fully integrated with repair service providers. Behind the scenes, people are busy emailing each other spreadsheets to keep track of everything. To make those integrations properly digital usually requires the creation of a customized network service and a big one-time investment. By 2030, blockchain technology will have changed all of that.

You see, in 2030 this smart digital washing machine that breaks won’t be from a major brand. It will be from a startup that designs customized washing machines for smaller, older homes. Most commercially available machines don’t fit neatly in the slightly odd-side spaces under the stairwells or closets in British homes that were built before electricity was widely available. Buyers will snap photos of their unique spaces and the company’s smart algorithm with move around components to create something that actually fits. Installers will even 3D print special connectors and parts on-site to finish the installation. Homeowners looking to make the best use of their quirky spaces will snap them up.

The new business environment is one where economies of scale are less powerful, as blockchain-based software lets smaller companies collaborate.

Today, such a proposition would be staggeringly expensive, but thanks to the internet and blockchain technology, this startup can offer their highly localized and customized products for only a small premium over mass-market offerings. Some of the magic comes from digital manufacturing technologies, like 3D printing and digital machine tools, that keep the costs of one-off parts and components not much higher than mass production. Another chunk of the magic comes from blockchain-based tokenization and smart contracts that make it possible to administer a network of partners without building a massive IT organization.

Combining blockchain innovations through the internet with clever software, and you have a tiny startup that can build customized appliances and get them installed and serviced anywhere. Digital directories of 3D printing service providers, warehousing services, and installation and service companies make it possible to quickly identify local partners in nearly every part of the world. Standardized smart contracts, in turn, make it possible to set up and administer those business relationships quickly and run them without constant supervision.

None of this gets rid of the hard work of real innovation, but that often isn’t what keeps startups from scaling. The clever algorithms that adjust the washing machine size and components may be unique, but the cost of managing 200 different installers and partners and negotiating with each one is what will sink any such startup today.

Today, it costs about $50-$100 for a company to issue a bill manually and get paid, and around $100-$200,000 to install a customized system-to-system integration, but once that is in place, the per-transaction cost goes nearly to zero. It’s easy to see how, by the time a startup has found a manufacturing, warehouse, delivery, and service partner, they could have spent more money administering their business network than on the cost of actually making and selling the product. If you don’t have large volumes, you cannot compete.

Blockchain-based smart contracts mean that once a relationship has been established and the credentials of a partner verified, much of the administration (bills, payments, warranty checks, and scheduling) can be handled in a touch-free manner, and without the need to create a customized digital network. And startups need only create one major integration at first – from their own operations into the public Ethereum blockchain.

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As a result by 2030, the future of commerce may start to look, in some ways, strikingly similar to the past. If you go back to the 1950s, hundreds of companies made televisions, for example. Wikipedia keeps a list of hundreds of companies that were once in the TV business, from Motorola to Mivar to English Electric. Nearly all of them are gone, driven out by standardization and economies of scale. Today, the top-10 TV makers represent 75% of the market.

Globalization and scale haven’t been all bad. A black-and-white TV with a 12 inch screen cost approximately $2,500 in current prices back in 1950. Today, you can get a 60 inch, UHD 4K flatscreen for about $500. Oh, and the modern TV also shows color pictures.

By 2030, we will be back on a path towards a proliferation of smaller brands, but instead of regional brands and high prices, we will have hundreds of global brands and competitive pricing. Old homes with unique spaces are not just a feature of English towns, they are, in fact, a global phenomenon. Tiny startups that cater to unique markets will become niche global brands, each offering highly customized products to a small market, but independent of geographic location.

If there is a final thought worth having, it is that there are many things that can go wrong with this rose-tinted vision of the future. We thought the internet was going to make democracy and freedom inevitable everywhere. It didn’t. Time and again, technology revolutions have failed to produce the benefits we hoped for, and this time is probably no exception, though it should not stop us from trying one more time.