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What is the digital economy?

The digital economy refers to the economic activities that emerge from connecting individuals, businesses, devices, data and operations through digital technology. It encompasses the online connections and transactions that take place across multiple sectors and technologies, such as the internet, mobile technology, big data and information and communications technology.

The digital economy differs from a traditional economy because of its reliance on digital technology, online transactions and its transformative effect on traditional industries. Digital innovations such as the internet of things (IoT), artificial intelligence (AI), virtual reality, blockchain and autonomous vehicles all play a part in creating a digital economy.

How did the digital economy begin?

Don Tapscott first coined the term digital economy in his 1995 bestselling book The Digital Economy: Promise and Peril in the Age of Networked Intelligence.

In its earliest days, the digital economy was sometimes called the internet economy, the new economy or the web economy because of its reliance on internet connectivity. However, economists and business leaders assert that the digital economy is more advanced and complex than the internet economy. Under one definition, it simply means economic value derived from the internet.

The digital economy reflects the move from the third industrial revolution to the fourth industrial revolution. The third industrial revolution -- sometimes called the digital revolution -- refers to the changes that took place in the late 20th century with the transition from analog electronic and mechanical devices to digital technologies. The fourth industrial revolution builds on the digital revolution as technologies today continue to bridge the physical world and cyberworld.

The COVID-19 pandemic further accelerated digital economic growth as remote work, online shopping, telemedicine and digital entertainment became essential during lockdowns and social distancing. The digital economy continues to evolve and expand rapidly, with emerging technologies and innovations shaping its trajectory.

Major examples of the digital economy's evolution

The digital economy has evolved significantly since its inception. There are numerous examples of traditional companies transforming to succeed in the digital economy.

The following are some notable examples of the digital economy's evolution:

Inception of digital trade and e-commerce. The surge of e-commerce -- where platforms such as Amazon, Alibaba and eBay have transformed online buying and selling -- has reshaped retail and created new technologies and business models.
Social media. The emergence of social networking platforms such as Facebook, Twitter, Instagram and LinkedIn has changed how people communicate, connect and promote their products.
Increased remote work adoption. The pandemic caused a change in workplace culture as more people accepted remote work and began using apps such as Zoom, Slack and Microsoft Teams to promote online collaboration. The digital economy has evolved as a result of this trend, which has reshaped how businesses function and manage their workforce.
Omni channel approach to sales. Many retailers reach and serve customers through multiple channels such as online sales and mobile apps. This lets them identify buyers, whether they're shopping via the internet or in person. They can collect and analyze each customer's browsing and sales data to better understand their interests and use that data to reach out to customers via social media, enabling better service and ultimately higher sales and increased brand loyalty.
AI and automation. Automation and AI have significantly shaped the digital economy. Virtual assistants, chatbots and recommendation algorithms powered by AI improve consumer experiences and provide more personalized services.
Digital payments and cryptocurrencies. Digital payment systems such as PayPal, Venmo and mobile wallets have changed how people conduct financial transactions.
Digital entertainment. The entertainment industry has undergone significant changes due to the rise of streaming services such as Netflix, Spotify and YouTube. These platforms have revolutionized media consumption by providing instant access to an array of content.
Telemedicine. The COVID-19 pandemic accelerated the spread of telemedicine and made remote medical care possible through digital platforms. Today, telehealth is a crucial component in providing healthcare.
Sharing economy. The sharing economy has transformed how people share resources such as cars, lodging and services, as exemplified by the Uber, Airbnb and TaskRabbit platforms. Peer-to-peer sharing has reshaped traditional industries and made possible new business opportunities.

Why is the digital economy important for businesses?

Businesses that make digital transformation a priority can streamline processes, reduce costs and create new revenue streams. But the digital economy is more than just using a computer to perform tasks traditionally done manually or on analog devices. It's about finding ways for organizations to make their systems and people work more effectively together.

The digital economy highlights the opportunity and need for organizations and individuals to use technologies to execute those tasks better, faster and often differently than before. Such opportunities for existing entities to do better, do more, do things differently and do new things is encompassed in the related concept of digital transformation.

Chart showing important goals for digital transformation.

This illustrates a percentage-based comparison of key strategies essential for a successful digital transformation.

Numerous entrepreneurs seized on the technologies that fuel the digital economy to create new companies and new business models that couldn't have existed or existed at the size and scale they do today, in past generations. Examples include the ride-sharing platforms Uber and Lyft; the home rental platform Airbnb; and content-on-demand services, such as Netflix and Spotify.

What technologies are accelerating the digital economy?

The digital economy is expanding rapidly with the use of new technologies that improve connectivity, enable automation, advance data analysis and create new business prospects.

Common technologies that are accelerating the digital economy include the following:

AI. AI technologies, including generative AI, machine learning and natural language processing, facilitate automation, data analysis and decision-making for organizations across various industries. Businesses can analyze large amounts of data, improve customer experiences, automate activities and increase operational efficiency with the help of AI-powered systems.
5G. 5G technology enables rapid downloads, low latency and a wide range of device connections. 5G offers many advantages, including facilitating smooth data transfers, enhancing mobile experiences and fostering the development of innovative applications and services.
Wi-Fi 6. In comparison to earlier Wi-Fi standards, Wi-Fi 6, also known as 802.11ax, provides faster data transfer rates, decreased latency and increased network efficiency. It also accommodates the increasing number of connected devices and the demand for high-bandwidth applications, making connections faster and more dependable, especially in congested areas.
Augmented reality and virtual reality. Augmented reality and virtual reality technologies are revolutionizing gaming, education, healthcare and training through the development of immersive experiences and simulations.
Blockchain. Blockchain technology enables decentralized and secure recording and verification of transactions. It eliminates the need for intermediaries and secures the transparency, immutability and trustworthiness of digital transactions. This technology is transforming Industries, including finance, supply chain management and healthcare.
IoT. IoT is a system of networked sensors and devices used for data collection and exchange. By enabling the fusion of physical items with the digital world, this technology creates new possibilities for automation, real-time monitoring and data-driven insights. Smart homes, smart cities, agriculture and industrial automation are just a few of the areas where IoT applications are improving efficiency, productivity and convenience.
Quantum computing. While still in its early stages, quantum computing can tackle difficult problems at previously unheard-of speeds. It has applications in cryptography, materials science and optimization.

Advantages of the digital economy

The digital economy provides numerous benefits, which have contributed to its rapid expansion and positive effect on a variety of industries:

Increased productivity. Businesses can improve their productivity and efficiency by using digital technology to automate their operations and processes.
Reduced costs. Cloud computing and digital frameworks eliminate the need for substantial physical infrastructure and capital expenditures, enabling organizations to scale up and down as needed.
Extended reach. Businesses can foster a global economy and presence through online platforms and technologies, thus expanding their customer bases and market opportunities.
Access to more data. The digital economy produces large amounts of data that can be analyzed for insights, trends and data-driven decision-making. Businesses can use this data access to better understand customer behavior, customize experiences and increase operational effectiveness.
Greater convenience. Consumers can purchase digital goods and services from the convenience of their homes. E-commerce and mobile commerce let customers purchase products whenever and wherever they want.
Improved customer experience. Businesses can deliver faster and more responsive customer service through digital channels and chatbots.
Personalization. By using data analytics and AI, businesses can customize products, services and marketing campaigns, ultimately improving customer satisfaction.

Disadvantages of the digital economy

While the digital economy provides many advantages, it also presents the following challenges:

Privacy and security concerns. The digital economy is significantly dependent on the acquisition and storage of personal data, which can create data privacy and security issues. Events such as data breaches, cyber attacks and unauthorized access to private records can lead to financial losses, identity theft and various adverse outcomes.
Waves of disruption. The digital economy has created new companies and new ways of interacting. However, many companies and industries that didn't or couldn't capitalize on the technologies to change their operations have faced declining sales, falling market share and even complete collapse. For example, Blockbuster and other content rental shops that didn't adopt streaming technologies quickly enough shuttered their operations. The taxi industry is also another example, as it struggles to compete for customers who find Uber and Lyft easier to use.
Job displacement. Automation and digitalization can displace jobs, rendering some roles obsolete. Individuals might need to acquire new skills for ongoing employability, which can cause temporary unemployment and economic disruption.
Monopoly. The digitalization of the economy has resulted in a small number of large providers such as Apple, Amazon and Google gaining substantial power, resulting in monopolistic conditions in certain sectors.
Digital divide. The existence of a digital divide, which refers to the disparity between those who have access to technology and those who don't, is a prominent disadvantage of the digital economy. This division can result in inequalities concerning access to information, education, employment prospects and economic advancement.
Environmental footprint. The digital economy's energy use in data centers and electronic device production has environmental consequences, with rising demand for digital services leading to greater carbon emissions, e-waste and a bigger environmental footprint.

The future of the digital economy

The World Economic Forum predicts that over the next 10 years, business models built on digitally enabled platforms will account for 70% of all new value created. This proves that the digital economy is rapidly evolving and shaping how people live, work and interact.

The following key trends and technologies are expected to shape the future of the digital economy:

AI and machine learning. AI, including machine learning, deep learning and neural networks, is advancing and will have a growing role in the digital economy. AI is essential for extracting insights from big data, automating complex tasks, making predictions and managing autonomous systems and robots.
Transformation of traditional sectors. The digital economy is also changing traditional industrial industries such as agriculture. For instance, farmers can get real-time updates on crop quality, soil conditions and irrigation with the help of smartphone apps.
Digital connectivity. Strong broadband connectivity and infrastructure are crucial to the success of the digital economy. Technologies such as 5G are predicted to play a key role in enhancing digital connectivity, resulting in quicker and more reliable communication while supporting the growth of the digital economy.
The metaverse. Immersive technologies such as the metaverse can create entirely new experiences for consumers and open up innovative business applications. These digital environments have the power to revolutionize entire sectors, and in the future, a parallel universe with a distinct financial and economic system might also come into existence.
Healthcare transformation. The integration of telemedicine and digital health tools and applications is expected to improve healthcare delivery and accessibility.
Cybersecurity advancements. The rapid adoption of a digital economy is evolving cybersecurity measures to address increasingly sophisticated cyber threats, including AI-powered attacks. By applying machine learning algorithms, AI-powered cybersecurity systems can detect anomalous behavior, identify potential vulnerabilities and proactively lower the risk factors.

Digital transformation is a global business trend that's changing how companies innovate and streamline processes using technology. Explore strategies for a successful transition to this evolving business model.

This was last updated in October 2023