Digital Transformation Improves the US Economy and Creates Jobs: The New, “Megadigital” Economy

by Robert Cohen

Steve Case argues in his recent book, The Third Wave, that we are entering a new phase of the Internet and infrastructure where “the Internet will be fully integrated into every part of our lives…every industry leader in every economic sector is at risk of being disrupted.” In The Third Wave, entrepreneurs will use technology to revolutionize major “real world” sectors and transform the way we live. Because of the widespread transformation, we call this economy the megadigital economy[1].

This forecast breaks new ground by estimating the economic impact as the Internet becomes an integral part of firms that adopt “innovation-centric and software-defined” infrastructure, such as software-defined data centers. It asks will this change be positive or negative? It explores the likely influence on jobs. It also investigates whether there will be other economic consequences of this digital transformation.

The forecast models spending by early adopter firms in 19 industries from 2015 to 2025. Based upon these estimates, we forecast how much industries are likely to spend on software-defined infrastructure. The forecast predicts how much the 19 industries could to contribute to growth and job creation over the next decade. We also estimate the size of a main offset to the increased spending, notably the decline in spending on traditional infrastructure. The result depicts the net impact of new spending on growth and jobs.

Our analysis concludes that firms will increasingly rely upon data analytics and software programming as they shift to a software-defined infrastructure. We find that this digital transformation will not only have highly beneficial impacts on economic growth (US GDP), productivity and jobs; it will also alter firms’ business models, workforce skills, and the determinants of competitiveness. As Marc Andreessen suggested more than five years ago, “software is eating the world.”

This transition will reshape the economy, creating a megadigital economy. This will alter value chains and disrupt business models and strategies. Software exchanges like GitHub will become important collaboration destinations for coding and programming innovations. The skills firms need to function at a high level will change, as will the structure of value chains.

Contributions to Growth. Our forecast shows that industries adopting this new infrastructure will add $1.2 trillion to $1.8 trillion to US GDP from 2015 to 2025. Most of this will occur between 2020 to 2025. During this time, we estimate that the adoption of software-defined infrastructure is likely to add $907 billion to $1.4 trillion to US GDP. The additional spending would likely increase expected US GDP growth by 8.4 percent to 12.7 percent over expected $5.2 trillion in GDP growth during this time.

Job Growth. For job growth, our analysis predicts that adoption of software-defined infrastructure and cloud services should create between 514,000 and 921,000 direct net new jobs from 2015 to 2025. If we include multiplier effects, job gains be 1.5 million to almost 3 million. During the 2015 to 2019 period, we forecast small job losses of 4,000 to 25,000. Thus, net new employment expands considerably in the second six-year period from 2020 to 2025. This reflects wider adoption of the software-defined infrastructure and a New IP and the fact that many industries would begin to reduce or end payments for traditional infrastructure.

Job Growth Compared to Forecast Growth. If we compare these gains to U.S. Bureau of Labor Statistics’ (BLS) forecast for job growth, we forecast very small job losses of 4,000 to 25,000 from 2015 to 2019. For the later years we analyzed, 2020 to 2025, however, the forecast of job growth of 514,000 to 926,000 direct net new jobs. This would be 13.9 percent to 25.5 percent over more than the BLS forecast for 3.7 million new jobs. Taking multiplier effects into account, the forecast increase in jobs would be 1.5 million to about 3 million new jobs more than what the BLS forecasts for 2020 to 2025.

Industry Spending. In addition to these GDP and job forecasts, the analysis highlights how rapid adoption of software-defined cloud services will affect specific categories of industry spending. Thus, the industries we studied would provide $398.6 billion to $612.8 billion in net new spending on software-defined cloud services during the 2015 to 2025 period. Early adopter industries that adopted these cloud services very rapidly, including finance, information technology, government, retailing and agriculture, would account for between $ 66.1 billion and $166.8 billion of this total.

Spending on Private Clouds and Public Clouds. Spending on internal cloud development, largely private clouds, and public clouds would also increase. In the latter category, we forecast spending increases of $162.3 billion and $526.0 billion during the time period analyzed. We also estimated that telcos serving as Cloud Service Providers would gain between $16.2 billion and $157.8 billion, with the higher estimate representing 30 percent of all spending on outsourced cloud services.

Spending on Internet of Things. We also forecast total spending on both public and private clouds, excluding spending on the Internet of Things. We foresee this being between $221.0 billion and $554.4 billion between 2015 and 2025. By contrast, we estimated that spending on the Internet of Things would range from $24.6 billion to $237.6 billion during the 2015 to 2025 period. This represents between 6 percent and 39 percent of overall spending on software-defined, cloud services.

In sum, this transition will alter our economy, promoting the emergence of a megadigital economy. It will be based upon digital technologies, data analytics and software. This will increase US GDP and productivity. It will also change firms’ business models and strategies.

[1] Many vendors describe this infrastructure as the New IP.

Author bio

Robert B. Cohen

Senior Fellow, Economic Strategy Institute

Robert Cohen is an economist and senior fellow at the Economic Strategy Institute. He analyzes the economic impact of new telecommunications and computing technologies. His current work explores the emergence of software as the fundamental building block for networks, data centers and computing. It does this by forecasting the growth of cloud services and the Internet of Things. Dr. Cohen employs input/output analysis to forecast US investment and productivity changes and employment impacts. The Ewing Marion Kauffman Foundation, Brocade Communications and the OECD are sponsoring this effort.

Dr. Cohen’s studies of the impact of grid computing on North Carolina and the US used a similar approach, with support from the NC Rural Internet Access Authority, IBM, AT&T, Intel, Juniper Networks, MCI, Corning, Applied Materials, and Cadence. With support from Japan’s AIST, IBM, Cisco, NTT Data, and Intel, Dr. Cohen repeated this analysis for Japan. Dr. Cohen has been Associate Professor of International Business and Finance at New York University Business School, Associate Professor of Finance and Economics at York College of the City University of New York, and Senior International Economist at the Futures Group. He was on the Open Grid Forum’s steering committee and COMNET’s planning committee. He is a past president of the Forecasters Club of New York. He holds an MA and Ph.D. in economics from the New School for Social Research and a BA from Swarthmore College. He is an author, co-author or editor of five books.

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