EVRYTHNG’s Ryan McManus says, “The new technologies contributing to superfluidity are built on the data and content assets which preceded them and there are already significant parts of markets dedicated to specific technology and solution areas rather than broader business strategy. Superfluidity is pictured as a sort of idealized frictionless future state, but it still depends on other existing infrastructure to function.”
In a recent roundtable on superfluid markets held by EYQ, participants pointed out that those industries with lower levels of digital maturity—healthcare, education, real estate, mining, oil & gas and construction for example—will be more challenged to catch up to superfluid frontrunners. But at the end of the day, driving friction out of markets will be an irresistible force.
The costs of viscosity
3. Are transaction costs high?
Some markets have low transaction costs while others are viscous—they have high transaction costs. Buying a car or house exacts higher transaction costs than purchasing a convenience product. Some of the differential is obviously based on the value of the product being bought and sold. But there are other industries where high transaction costs are a function of longstanding inefficiencies.
And markets where transaction costs remain very high due to native inefficiencies have strong reasons to turn towards superfluid solutions. Take the healthcare industry. A recent study shows that each manual transaction costs providers and health plans approximately $3 more than an electronic transaction. Given the fact that more than three billion manual transactions are conducted annually between commercial medical health plans and providers in the U.S., shifting to electronic transactions could save medical health plans and providers roughly $9.4 billion in direct costs each year (pdf).
The high cost of transactions in the healthcare domain is pushing numerous startups to develop superfluid solutions. The opportunity to relieve pain points in the healthcare system speaks to the fact that digital health innovators received raised
$6.1 billion in global equity funding in 2016, the industry’s seventh straight year of growth.
4. Is the market mediated by expensive middlemen?
Digital innovators will continue to disrupt markets which operate with intermediaries that add to transaction costs without delivering commensurate value.
Consider residential real estate markets, long a viscous market. Agents, brokers, attorneys, mortgage lenders, inspectors, appraisers, title companies and more form an expensive web. What if real estate could become a superfluid, intermediary-light market?
Velox.RE is just one start-up that has the vision of revolutionizing the real estate industry by making it peer-to-peer on a public blockchain. The technology could enable “every property, everywhere, to have a corresponding digital address that contains occupancy, finance, legal, building performance, and physical attributes that conveys perpetually and maintains all historical transactions. … The speed to transact will be shortened from days/weeks/months to minutes or seconds.”As a start, Cook County, Illinois, has partnered with Velox to test blockchain-based property title transfer.
But real estate is just one market amenable to the eradication of middlemen. Industries as diverse as energy, music, ridesharing, car leasing and more are all being targeted by blockchain startups. And in some cases, such as ridesharing, these industries have already been disintermediated and re-intermediated by a digitally-based substitute.
Tomorrow’s superfluid markets will be either intermediary-free (peer-to-peer) or intermediary-light (the digital intermediary or market maker adds significant value without siphoning away a disproportionate share of market value.
5. Are errors expensive?
Markets where the cost of an error is particularly high will also be driven to superfluidity. Errors can add costs from both a financial and reputational aspect.
For example, diamond miners and traders can suffer financial losses through product diversion and counterfeiting. They risk reputational damage when blood diamonds enter their supply chains. London-based startup Everledger—a global digital registry for diamonds powered by blockchain technology—is trying to make this market more superfluid by reducing these kinds of errors.
Healthcare errors lead to higher financial costs at the macro level, with one 2016 estimate putting the cost of medical errors in the U.S. at $20.8 billion per year. At the micro level, transaction errors can result in the loss of human life. A 2016 study published in BMJ reveals that medical errors are the third largest cause of death in the U.S. on annual basis.
Conclusion: Assessing the pace of the superfluid market journey
In summary, for markets to become superfluid, impetus must exist to do so. The opportunity and ability to digitize products and services, as well as participate in digitally-based ecosystems that better meets the needs of buyers and sellers alike, represent one lever. Significant net earnings potential in solving existing inefficiencies and customer pain points must be also be present. How would your organization answer these five questions?
- Can the product or service be digitized?
- Can the market infrastructure be digitized??
- Are transaction costs high?
- Is the market mediated by expensive middlemen??
- Are errors expensive?