[0:00] [background music]

Ray Wang: [0:06] In a digital world, things are infinite. The possibilities are infinite. The opportunities are infinite. The ability for inclusion is infinite. The ability to actually make money is infinite.

Dan Saks: [0:16] That's Ray Wang, the founder, chairman, and principal analyst of Constellation Research, a leading technology research and advisory firm based in Silicon Valley. In his role at Constellation, Ray covers cutting edge trends in big data, the future of work, technology optimization, and more.

[0:37] Ray's also the co host of "DisrupTV," a weekly enterprise technology and leadership webcast and writes a popular business strategy blog. Ray is an undisputed thought leader in the technology industry.

[0:50] He's spoken at almost every major tech conference and his groundbreaking, bestselling book on digital transformation, "Disrupting Digital Business," was published in 2015. Ray's latest book, called "Everybody Wants to Rule the World" was released in July of 2021.

[1:09] There are only a handful of people who have much insight into the massive digital disruption that has shaped the last 20 years as Ray does. In this episode, Ray talks about the biggest lessons he's learned and how companies can learn to thrive in a world of digital giants or how to become giants themselves. This is Daniel Saks, co CEO of AppDirect, and it's time to decode digital dominance.

[1:40] Welcome to "Decoding Digital," a podcast for innovators looking to thrive in the digital economy. I'm your host Daniel Saks and I'll sit down with other founders, CEOs, and changemakers to decode the trends that are transforming way we work. Let's decode. Ray, thrilled to have you on the show today.

Ray: [2:05] Hey, thanks for having me. I'm looking forward to it.

Dan: [2:07] Of course. Before we decode, let's talk a little bit about your background. I know in 2010, you founded Constellation Research, a Silicon Valley research firm that focuses on the tech sector. What led you to launch the research firm?

Ray: [2:22] We were looking at these trends around digital, and digital channels, and digital business. We realized there was a hole in the marketplace for a research advisor in this, and so we started talking to some of our early adopted clients and people I'd worked with in the past.

[2:34] I was in another firm called Altimeter. Before that, I was at Forester Research. We saw this hole in the market for high end early adopters' innovation. We went after that research market.

[2:45] I originally actually had a whole bunch of theses set up. The week after I founded the firm, I got an offer from Harvard Business Press to write a book. It turned out that at the same time I was building the firm, we were writing the book. That's when we launched the first book.

[2:59] It was actually they started the firm because all the principals were there. We finally got around to writing the book. That was the first book.

Dan: [3:05] Tell us about the first book.

Ray: [3:07] The first book is Disrupting Digital Business. We really looked at where business models were forming and how you actually built digital businesses. We realized that just getting a digital channel was not enough. "Hey, I've got a website. I've got mobile. I can do this in some kind of augmented reality."

[3:22] That wasn't going to work. It needed a lot more. You really had to rethink what a business model looked like. You really had to think the role of data and how that played into the equation.

[3:30] Culturally, a lot of organizations just weren't ready. They didn't have digital artisans. They didn't have folks that could balance the right brain and left brain capabilities. They couldn't figure out science, tech, engineering, and math had to get paired with empathy, and ethnographers, and design, and creatives.

[3:45] It was a big struggle up until about 2015, 2016 when the book launched. We are still early in the world of digital business. Then everything picked up from 2017 till about 2020. You could see that people finally got it. Boards were getting excited. People were like, "Let's go do this."

Dan: [4:02] It was interesting because you founded Constellation in 2010, which was right around the time that I moved to the Valley in 2009.

[4:08] A lot of our underpinnings for founding AppDirect, which also focuses on digital business and digital channels, as you know, was born out of the Great Recession and looking at how businesses on Main Street were disproportionally disadvantaged because they didn't have the typical access to technology and capital.

[4:25] As the service business models and digital channels, it gave opportunities to businesses, big and small, to be able to capitalize on digital tech. Can you speak to the undercurrent of what you observed in that time, in 2010, and what drove the catalyst to accelerate through 2015 and then obviously 2020?

Ray: [4:45] It's a great point. It was like the worst time to found a company. We were in the middle of a recession. People were like, "We're in trouble. This is all going to be chaos." People were leaving the Valley instead of moving into the Valley. Congratulations on your end. They were leaving because the opportunities that they thought they had gone away.

[5:02] The underlying current was different. We were going direct to consumer. We were moving to cloud. We had subscription business models. The fundamentals of how we actually distribute services and offerings had changed because the efficiency was there.

[5:16] I think a lot of startups in 2009, 2010 have eventually become unicorns. They were able to bypass that, think big, be able to build long term views, and they got the capital behind them to go do that. I think that's the backdrop.

[5:30] While we were doing that, we also noticed there were a series of folks that could figure out how to bring the business and the tech together. More importantly, they realized that every startup, we joke as kind of a cult. You had to believe in where it was going to go.

[5:45] That's how these organizations succeed. It's like, "We're going to dominate this market. We're going to do food delivery apps. We're going to do ride hailing services. We're going to re transform the world of space." All these things happened during that period of time. A lot of those ideas were there.

[6:00] I imagine, with the pandemic, there's going to be so many awesome startups in the next 12 to 18 months that we're going to be hearing about. Ideas that got formed, capital creation was already there. This time around, people were actually active. It's not that people weren't working. They were probably working twice as hard.

Dan: [6:15] I know you're releasing a new book called "Everybody Wants to Rule the World Surviving and Thriving in a World of Digital Giants." Where did the idea for the book come from? What are some of the important takeaways?

Ray: [6:26] I was watching "Real Genius." Towards the end of the credits...No, I'm just kidding. That's where the "Tears for Fears" kicks in.

[6:33] Here we are, talking about digital transformation in 2018. We have a list of executives called the Business Transformation 150. Dion Hinchcliffe and I put that together. We try to figure out who are the top digital transformation experts and the project that they'll be doing.

[6:47] We have the world's largest digital transformation case study live. We've got a thousand stories of people that have done it, the ROIs, and the metrics, and so we looked back to some of these folks and said, "Hey, how are you doing? What's going on?"

[6:57] Well, [laughs] their digital transformation projects were successful, but the overall strategy of turning digital around wasn't, and we couldn't figure out what it was. These were great projects. They were well funded. You had the right governance. You had the right amount of funding. You had the right level of technology platform, but they were still losing.

[7:15] It turned out there's a new class of companies called digital giants. Yeah, we know them as Facebook, Apple, Netflix, Microsoft, Google, Amazon, but there's also a new class like Airbnb, Roblox. If you think about Stripe, if you think about Coupon, if you think about eToro, if you think about Robin Hood, something was different about these companies.

[7:39] All the food delivery apps, DoorDash, Uber Eats. Something was going on. We realized there were a couple of patterns that people were missing. We started looking deep. I started looking deep into this and trying to figure out why companies weren't succeeding.

[7:51] A great example is our favorite poster child for digital transformation, which is Domino's Pizza. Love it, hate it, order the pizza or not. The point being is they won the battle for digital transformation. You can order pizza from any device, any digital channel. You can call Alexa up and say, "Hey, I want a pizza."

[8:07] The app is so good. It reminds you every week, "Hey, you ordered one last week. Do you need one this week?" You can track the order. The pizza's in the oven. The pizza is 10 minutes away. The pizza is 5 minutes away. By the way, take a picture of the pizza and our AI engine will tell you how good the pizza is and what the quality's like.

[8:21] They won, right? But in the world of food delivery apps, what happens? What happened during the pandemic? The food delivery apps helped out small businesses. That would be the positive spin.

[8:31] The reality is those small businesses gave all their customers to the food delivery app companies, who then took the payment information and learned the preference data from these customers to build really large networks over time to create new digital monetization models.

[8:48] Whether it's ads, search, placements, or even ghost kitchens to the point where they can lose hundreds of millions of dollars, these small businesses can and Domino's can't at all. What does Domino's do in a world of food delivery apps where digital giants are trumping them? Think about that. It's huge. It's huge.

[9:04] Do I need Domino's anymore? You order from a food delivery app, not Domino's. They just lost the war. They won the battle but they just lost the war.

[9:12] Now, they could be saved. Here's how I would do it. You would actually create a separate entity at Domino's called Delivered by Domino's and help all the small businesses and give them the infrastructure that they use for pizza, which is a small market compared to food delivery apps, which is 15x.

[9:29] That would allow them to play in both markets and leverage their expertise to help small businesses succeed. They're not there yet. They haven't invited me over to talk to them, but my point being is they're not there yet. That's something they should think about.

[9:41] That's what this book is about. Digital giants do five things really well. They disintermediate customer account control. They compete for data supremacy. They build the largest networks. They understand digital monetization. They're in it for the long haul.

Dan: [9:56] Super powerful. Let's go to the Domino's example, right? We all know that over the last 10 years there's been a lot of narratives around I'm a taxi company. I'm going to fight Uber. I'm a hotel. I'm going to compete against Airbnb.

[10:09] It's crazy that, as much talk as they had about digital innovation and hiring a chief digital officer, we all know how that played out a few years later, especially on market cap and market value.

[10:19] Do you still think there's hope for a lot of incumbents? I guess traditional incumbents that haven't innovated yet. How do they fight to thrive?

Ray: [10:28] There definitely is hope. That's part of why we wrote the book. We wrote the book to say, "Hey, how do you figure out digital giants?" Then we wrote...The second part is, "How do you compete against digital giants?" Then, we wrote the last part talking about regulation and the regulatory framework.

[10:41] Yeah, you're a small company. You're going to partner. If you're an existing company, you're going to have to rethink what your company is about. Using the Domino's example, let's go deeper there.

[10:49] If they opened up that capability to create a brand new startup, work with a whole bunch of partners, from payment providers to companies that can actually provide logistics and automation the back end, they could create a brand new entity that's worth a billion dollars, two billion dollars of market cap on day one and then invite all the small businesses to be part of it.

[11:07] Put in $50,000. Get the small businesses or other enterprises. Put $50,000 in. We'll give you shares of the company. Here's what we're going to give you, as well. We have the ability to leverage the capabilities to compete against a GrubHub or a DoorDash. That's where you want to be.

[11:21] I'm seeing a lot of joint venture partnerships, as well, at the enterprise side where companies can partner with other cloud entities to build these coalitions, what we call joint venture startups, to be able to then compete.

[11:32] There are typically four themes. One is compete a common enemy. Maybe the common enemy's Amazon, or WeWork, or another digital giant. Take the whole value chain. Maybe you want to go into the entire food delivery business and bring people together.

[11:45] Sometimes cross industries. Comms, media, entertainment, and telco are really the same because it's all about getting content. It's all about getting to distribution networks. It's about getting the technology platforms and then building the customers. That's the same business of moving digital IP and assets around.

[11:59] Then, of course, there's thing they can do that are good for a non profit or a public sector where people can actually share that information. You can share that data and actually get better outreach and accomplish their mission.

Dan: [12:11] What's a case that you would speak to, let's say in the incumbent space, of someone who has done this really well?

Ray: [12:17] I think Walmart has finally figured it out. When they first created Walmart Labs in San Bruno, Bentonville and San Bruno never got along. It was kind of...Here's this entity trying to build the future Walmart. Here's this entity that says, "Hey, we don't like what you're building and we're never going to use it."

[12:32] Then they bought Jet. Once they bought Jet, I think they figured out they were missing something, but it wasn't until I saw them make a purchase for TikTok that I realized they got in the game finally.

[12:43] They have 200 million shoppers every week and they never saw them as members. They never saw them as being part of something. When they realized they needed a digital ad network through TikTok when they started creating Walmart+ and the ability to be a member...

[12:57] When they started understanding that they could actually use their membership base to create this massive network effect to deliver health care, to deliver other types of services, that's when they got it.

[13:07] That's where you can see an interesting turnaround over there, where they realized it's not just a tech play. They're not just competing against Amazon for commerce. They're really turning into a digital business over time.

Dan: [13:18] Decoding Digital talks a lot about transformation stories. I know a lot of your research is around digital transformation.

[13:24] What would you say are the most effective strategies that a traditional business can take to transform?

Ray: [13:32] That's a great question. We actually start with this one chapter talking about how organizations have to transform their life cycle. The life cycle of organization goes like this.

[13:41] When you're a company and you first start out, you focus completely on getting the best idea out there. You answer the question, why? What's my mission? What's my purpose? How do I get there and be successful?

[13:52] Then, you start focusing on brand value. This is all happening because you have a dynamic founder. Then, when you go out, you go hire the biggest team you can. Let's go find the top talent. Let's become the best place to work. Let's take in our talent networks.

[14:04] Then you use design. You create the best offering. What's our minimum viable offering? Your metric of success, as Alice reports. From there, you build out the markers. How do we win market share? How do we win customer satisfaction? How do we get the top customers in each market in every industry?

[14:18] The problem is you go public. Now, let's maximize the deployment of capital. Profit per sale, revenue per employee, EBITDA, right?

[14:26] Over 30 to 40 years, these companies get stale and forget even why they exist and what they're building. You need some turnaround catalysts.

[14:33] You have to hit all five of these purpose, team, offering, markets, and capital. This is the secret behind it. The turnaround catalyst for purpose is an owner operator, someone who comes in willing to make the investments turn around the company.

[14:45] The turnaround catalyst for team is reset the cap tables to get stock upside. The catalyst for offering is a brand new exponential technology comes in and you use that to actually say, "Hey, let's put that into the cloud. Let's use AI here. Let's figure out a new type of augmented reality challenge were talking about earlier."

[15:00] Then, of course, the catalyst for markets is building partner ecosystems with multi sided trading networks against data. Then, the last piece around capital is you're basically refreshing investment cycles and communicating that to investors so they understand that long term nature of how you actually get there and why you have to invest 10x in order to do that.

[15:20] Innovation in your technology and, of course, in your teams because that's what the digital giants are doing.

Dan: [15:26] You've consistently mentioned this concept of the importance of the human element or people. That's a philosophy that we have at Decoding Digital and at AppDirect. We call them digital heroes, people who take the transformative change to make a difference.

[15:38] One of the things I know you do beyond Constellation and all of your research is you're the co host of DisrupTV. You feature some incredible business leaders that are making huge transformations.

[15:50] What are some of the similarities that you see across these successful transformative entrepreneurs?

Ray: [15:56] They understand empathy. They understand. They start from that point. I think that's really important because every year I watch your Digital Heroes. It's awesome. This is where you guys go celebrate folks that are winning in the digital economy. These digital champions are out there.

[16:12] I think that's awesome because we need more of that in this business. What I also notice about your Digital Heroes, and the people that we celebrate, and the folks that show up on DisrupTV, and my co host Vala Afshar is that we live in a culture of abundance, not a culture of scarcity.

[16:25] A culture of scarcity is where you're dividing the pie and you're thinking that, "Hey, if I do this then I only get this piece. Someone else gets that piece."

[16:32] It's like, "No. I'm trying to build the pie." In a culture of abundance, you're building the pie. You know that. In a digital world, things are infinite. The possibilities are infinite. The opportunities are infinite. The ability for inclusion is infinite. The ability to actually make money is infinite.

[16:45] That perspective, I think, underlines that. The third part is, these are change agents. You know that. You select change agents as your winners, I'm guessing. I'm making the assumption. You select change agents, people who are forces of nature, people who are open to actually helping others succeed. I think that's important.

[17:04] The last piece is they're digital artisans. They blend the right brain/left brain piece that are out there. They understand that hard science is important, but you also have to understand the humanities and your role in playing out what the implications of that change is going to be, not only just on your employees but also your other stakeholders. I see that as all the other characteristics.

Dan: [17:25] We've touched a wide variety of topics, but I really want to double click and decode the intersection of digital channels and digital monetization. I know you've spoke to the term digital monetization quite a bit. We see the whole fintech and payments ecosystem penetrating every aspect of our economy.

[17:40] Can you speak to some of the trends in digital monetization and how every company can be a part of that shift?

Ray: [17:47] A great example of this, and people don't necessarily realize what's in the news is, "Oh, evil tech companies, those monopolies. We need to break them up." When you actually sit down and think about business models, and channels, and monetization, you realize those are three different things.

[18:02] In the digital world, in monetization, there's only six things you can do. It's ads. It's search. It's services. It's goods. It's memberships. It's subscriptions. We can drill in on any one of those if you want.

[18:13] Let's take an example of monopolies or big tech giants. Google, $130 billion in digital ads, 4.1 billion users. They're the dominant player in search. They're the 21st company to come out for search. It took them 10 years to get to that dominance. It took them 24 years to be a trillion dollar market cap. All right, fine.

[18:34] Let's look at Facebook. 2.8 billion users, $70 billion in digital ad revenue. It took them 10 years to be dominant in their place, depending on the date that we actually broadcast this, this year they became a trillion dollar market cap. Definitely dominant players.

[18:51] They all compete in digital ads. There's only two players. We're in a market of duopolies, right? If a third player were to emerge and to compete, and if we were to look at this five years ago, the only other player there was Microsoft at one billion. Google was 70X the size of Microsoft's revenue in digital ads.

[19:07] Today, that next player's Amazon, which is the dominant player in commerce. $14.1 billion in digital ad revenues. The only company Facebook and Google are worried about in digital ads. Is that a competitive market or what? Between three monopolies?

[19:22] The business models are monopolies. They've got monopolistic power in there, if you want to look at that way, even though they haven't exercised monopolistic abuses. Their business models are so different. Their channels are so different, yet they're all monetizing its digital ads.

[19:36] In the digital world, there's only six places to monetize. We're going to see a massive amount of competition, different business models to get to monetization. The use of every single channel you can possibly get to optimize that monetization. That's the inversion that's occurred because traditionally you sell a car. You have your own dealership. You sell the good. That's kind of it.

[19:55] No one else is selling cars unless they run a car business. Now, I'm selling you a subscription. I'm selling you an option. I'm selling you a membership. I'm building ads on top of that. I'm monetizing the search against that. You know what? It's kind of interesting. It's kind of exciting.

Dan: [20:10] It's super powerful. All these transformations are game changing in terms of the overall economy and competition. One of the things that we've observed across our commerce platform is that there's five pillars that can be enabled in terms of the digital transformation.

[20:24] One is the digital ecosystem, which is really opening up your product to others and creating a partnership environment. Two is digital supply chain, so taking operations that would have been done in the physical world or manually and digitally automating them. Three is a digital hub, which is enabling a unified customer experience across all the products and services that you offer.

[20:44] Four is digital channels, which we've spoke quite a bit to, but enabling your customers to buy where they want when they want. Five is becoming a true digital platform where you're turning data into a core asset.

[20:56] You spoke to all of these different components. I would love to get your perspective on how to bring these different themes together to augment your business and ultimately your bottom line.

Ray: [21:08] I like your framework there. I think those are the core components for where digital is headed. What's missing for companies is not just the execution of that framework. What's missing is the boardroom conversation about what do we want to do.

[21:22] This is the biggest challenge because let's just put it this way, the investors of highly profitable companies are pretty much stripping them of their cash through share buybacks and dividends and asking for growth through mergers and acquisitions.

[21:36] What's really happening over time is that the money that's available for innovation is being stripped away. Even worse, they're taking that cash and investing in startups in the same businesses to disrupt the companies they're invested in. They're basically hedging against the companies that they own.

[21:52] In order to make any of these numbers work, they want at least a 15 percent return on margin. Otherwise, they feel like they're going backwards. They're expecting 30 to 50 percent growth.

[22:03] You have to be able to reset the expectations in the boardroom about how to compete against digital businesses and what kind of runway you need for those investments to pan out. Otherwise, they're just going to be ATMs for other people's investments.

[22:16] That fundamentally is the piece that's missing for a lot of companies. Once you have that in place and you've got a charter and a mission to go after it, what you really want to think about is building what we call a data driven digital network.

[22:27] These DDDNs are the 100 year platforms that allow you to create multi sided networks that allow you to compete on data value chains. More importantly, that help you start building what we call the business graph.

[22:38] The business graph is like the social graph. The social graph in social networks, that tells you, "Hey, this person's connected to this person. Here are their actions. Here's what they're going to do."

[22:46] The business graph is, "Here's a stakeholder, a customer, an employee, a supplier, a partner. How do I connect that stakeholder to an action with an object? What do we learn about those patterns?" That becomes the competitive moat.

[22:59] You have to have that mindset of building that 100 year platform to get there.

Dan: [23:04] Last question. When you talk about the world of digital giants, and you mentioned the FANGs, and Facebook, and Google, and Amazon, do you think they're the giants to stay? Do you think that over the next couple waves they'll get disrupted by others?

Ray: [23:16] That's a great question. We look at the life cycle of what digital giants are going to be. We've seen the dawn of digital giants. We're in the middle of the rise of digital giants.

[23:23] There will be a decline and a dusk of digital giants. When that happens, their technologies, their capabilities are going to be critical infrastructure that's a public good. There's no patent on the wheel. Everyone gets onto the Internet. There's common standards on the HDMI cord.

[23:36] Those things are all going to be back to where we are. You're not going to expect them to forever be in their place.

[23:42] Along the way, you're going to see shifts. You're going to see acquisitions. Some companies fail. These companies are going to become middle aged and flail for a little bit and then find their footing again. Some might never find their footing and you'll see that complete decline. We'll go through life, just like all life cycles of companies.

Dan: [23:58] Ray, thanks so much for joining us. Everyone, check out his book, Everyone Wants to Rule the World Surviving and Thriving in a World of Digital Giants. Thanks again.

Ray: [24:07] Thank you so much for having me. I can't wait to engage.

[24:10] [background music]

Dan: [24:13] On the next episode of Decoding Digital...

Josh McCarter: [24:16] You hope that if you build it, they will come. That's where you start out in the early days. Without having the APIs and having that capability, nobody's ever going to come. Nobody wants to partner with somebody that has a closed ecosystem and is really difficult to interface with.

Dan: [24:35] CEO of Mindbody, Josh McCarter. Thanks for listening to Decoding Digital. Make sure you never miss an episode by subscribing to the show in your favorite podcast player. To learn more, visit decodingdigital.com. Until next time.