When will your market become superfluid? Five questions to ask

By

EY Americas

Multidisciplinary professional services organization

8 minute read 27 Mar 2018
Related topics Digital Disruption

All markets are becoming superfluid, as traditional frictions are greatly reduced. But which markets will be transformed first?

While companies operate within industries, they differentiate themselves through the quality and ease of their engagement in markets. This is true irrespective of exchange mechanism or customer type or whether what’s being bought, sold, or traded is composed of atoms or bits.

Characteristics of a superfluid market

What exactly are markets moving toward when we say they are becoming superfluid? A superfluid market has the following characteristics:

  1. Digital products and services. The product or service delivered is digital or has digital value drivers embedded.
  2. Digital infrastructure. The infrastructure or “plumbing” for exchanging assets of value between buyers and sellers is digital.
  3. Intermediary-light. The market is either free of intermediaries that siphon away value (exchanges are peer-to-peer or direct-to-consumer) or has digital intermediaries that add significant value for industry participants (e.g., aggregating demand).
  4. Superfluid companies. Companies that participate successfully in the market invest in and leverage technologies such as artificial intelligence, robotics, IoT, data analytics, 3D printing and/ or blockchain to vastly improve their business interactions with partners, suppliers, customers and other stakeholders.

Technology advances continue to eradicate transaction costs, making commerce easier and less expensive. Some markets have already or nearly arrived at a superfluid state. Others are farther away. The journey to superfluidity will vary in speed from market to market, industry to industry.

Is there a way to gauge how fast this will happen? The following five questions provide guidance. The first two reference the ease of transition to superfluidity, while the last three point to the value such a transition can deliver.

The digital headstart

1. Can the product or service be digitized?

When asked about what makes a market move to a superfluid state, Tokenly’s Martin Rerak says, “If it already has wings, it’s more likely to fly.” In other words, those markets where the product or service is readily convertible to digital format will make strides toward superfluidity quickly.

If it already has wings, it’s more likely to fly.
Martin Rerak
Chief Strategy Officer of Tokenly

With the arrival of the internet, paper stock certificates gave way to electronic shares in equities markets. For music, the analog capturing of sound waves onto a recording medium gave way to digital sound encoding. Electronic versions of printed books became available alongside printed copies.  With all three examples, industry disruption ensued as new competitors pioneered and capitalized on digital formats. In turn, customers gained improved access, lower prices, and greater choice.

Hard goods can’t be converted to digital format. But thanks to the combination of artificial intelligence, sensor technology and the Internet of Things (IoT), they can now be embedded with digital value drivers. Digitization of physical products could see everything from medicine bottles that trigger their own refills to clothing items that recommend the right accessories to jet engines that call for their own replacement. Older forms of commerce were based on built-in product obsolescence—markets become more superfluid when customers can download updates and repairs directly to physical products, extending the useful life of goods and binding together manufacturers and customers in new ways.

2. Can the market infrastructure be digitized?

Superfluid markets are also characterized by digital infrastructures that enable market-making and the matching of supply and demand. Electronic exchanges supplanted the stock trading floor. Digital music streaming services disrupted record store chains. The availability of e-books, along with online ordering, decimated book distribution through physical bookstores.

For a market to become superfluid, companies have had to digitize their own enterprise architectures and business processes, as well as to connect digitally with the evolving market ecosystem.

The transformation of media publishing is a good example. New ways of aggregating supply arose in the form of supply-side platforms (SSPs) that help publishers sell their online advertising inventory to ad buyers on various ad exchanges and networks. Demand side platforms (DSPs) also arose allowing ad buyers to bid for digital ads via live automated auctions. Beyond better matching of supply and demand, market constituents also invested in data management platforms (DMPs) to house first- and third-party audience and ad campaign data.

Newer technologies—AI powered by deep learning, blockchain, virtual reality and others—will only add to the complexity.

Blockchain-based solutions have begun to emerge as an antidote to rising fraud in the digital advertising space. The recently-launched adChain, a collaboration between Ethereum and MetaX, is a protocol designed to work across all digital advertising channels, allowing advertisers, publishers, SSPs, DSPs and other market participants to operate in a fraud-free ecosystem.  

All of this is to say that the task of integrating superfluid solutions is challenging for incumbents.  Companies of all types have to contend with deeply embedded business processes and legacy technology systems.

Superfluidity is pictured as a sort of idealized frictionless future state, but it still depends on other existing infrastructure to function.
Ryan McManus
Senior Vice President of EVRYTHING

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.

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?

  1. Can the product or service be digitized?
  2. Can the market infrastructure be digitized??
  3. Are transaction costs high?
  4. Is the market mediated by expensive middlemen??
  5. Are errors expensive?

Summary

For markets to become superfluid, digital and financial opportunities provide the impetus for change.

About this article

By

EY Americas

Multidisciplinary professional services organization

Related topics Digital Disruption