Why is digital technology important? CONTEXT DIGITAL DISRUPTION IN QUEENSLAND What does this mean for Queensland’s economy in 2025? Boundlss’ analysis, using McKinsey’s data, suggests the impact of these 7 disruptive digital technologies on Queensland’s economy will be ~$96b per annum in 2025, or roughly 24% of the state’s projected $396b economy. DISRUPTIVE DIGITAL TECHNOLOGIES - ECONOMIC IMPACT ON QUEENSLAND ($B) ($M) Automation of knowledge work Mobile Internet The Internet of Things Advanced robotics Cloud technology Autonomous and near- autonomous vehicles 3D printing While these projections may seem high, they are less than those in Deloitte’s 2012 <strong>report</strong> Digital disruption Short fuse, big bang? which foresees 33% of the economy facing disruption from all digital technologies within the next five years. “One-third of the Australian economy faces imminent and substantial disruption by digital technologies and business models – what we call a ‘short fuse, big bang’ scenario. This presents significant threats, as well as opportunities, for both business and government.” 10 Applied to Queensland, 33% represents $132b of economic disruption from 2017 to 2025. That’s $46b higher than projections based on McKinsey’s <strong>report</strong> on the most disruptive digital technologies. In summary, this <strong>report</strong> estimates the economic impact of digital technology on Queensland’s economy in 2025 will be in the order of $96b per year, and this impact will be created largely by Mobile Internet, the Automation of Knowledge work, The Internet of Things, Advanced Robotics, Cloud technology, Autonomous Vehicles technology, and 3D Printing. While this economic disruption should not be equated with market sizes for these technologies (some will be captured as consumer surplus, and others as productivity growth), it does represent an enormous innovation goldrush. Up to two-thirds of this value will be captured by consumer surplus, with the remainder coming from productivity gains and revenue streams from new technologies. 34.9 25.9 22.2 17.7 8.4 5.9 1.7 Given the challenges involved with adopting disruptive technologies it is often <strong>startup</strong> companies that are best suited to seize new market opportunities. Makers of horse-drawn carts didn’t catch on to the car, IBM couldn’t see the opportunity in personal computers, and the music industry has been pulled into digital streaming music only reluctantly, worn down by years of music piracy. Assuming one third of the $96b in economic value in 2025 is direct value created by these disruptive technologies (the other two thirds being retained as consumer savings as McKinsey has found is the norm with Internet-based technologies), this <strong>report</strong> estimates that in 2025 $32b annually will be addressed by either foreign or local digital technology companies. Enrico Moretti, Professor of Economics at the University of California has found that technology companies have a five-fold impact on the economy. He states: “Innovative industries bring good jobs and high salaries to communities where they cluster and their impact on the local economy is much deeper than their direct effect. Attracting a scientist or software engineer triggers a multiplier effect, increasing employment and salaries for those that provide local services. In essence, a high tech job is more than a job... research shows for each high tech job, five additional jobs are created outside the high tech sector.” 11 Assuming this $32b represents this five-fold impact, this <strong>report</strong> estimates the direct contribution from digital technology employees on the Queensland economy to be over $6b in 2025. If this value isn’t captured by local digital technology companies and <strong>startup</strong>s it will certainly be extracted by companies from interstate and overseas. HOW MANY STARTUPS There is a real and substantive opportunity for the <strong>startup</strong> sector within Queensland to grow and play a much larger role in the local, national and international economy. It is also reasonable to conclude that the aims outlined by the Queensland Startup Summit held in 2013 are entirely achievable if the right infrastructure is put in place to develop the sector. The Summit’s “Big Hairy Audacious Goal” (BHAG) states: ‘By 2033, Queensland is recognised for its entrepreneurial culture, with the <strong>startup</strong> sector contributing four per cent to Gross State Product, injecting $20b and 100,000 new jobs into our economy, through the global impact of home grown <strong>startup</strong>s.’ 12 These estimates also align with PwC’s 2013 <strong>report</strong> The Startup economy: How to Support Tech Startups and Accelerate Australian Innovation: “By accelerating growth the sector could contribute 4% of GDP by 2033 and directly employ 540,000 people.” 13 The Summit’s BHAG equates to ~30,000 employees and a contribution to Queensland’s Gross State Product of roughly $5b in 2025. Compared to the opportunity outlined by McKinsey & Deloitte there is certainly enough need within the market to achieve this BHAG given the right environment. Thus the question: How many technology companies and <strong>startup</strong>s are needed for Queensland to meet this BHAG and retain some of the potential economic disruption within the state? What would Queensland’s <strong>startup</strong> <strong>ecosystem</strong> have to look like in 2025 for this to happen? One way to answer this is by modelling the distribution of technology companies using the 80-20 Pareto distribution – 80% of the value created by 20% of companies and vice versa. a Applying this methodology this <strong>report</strong> estimates there would need to be 3,000 to 4,000 technology companies b within Queensland by 2025. The vast bulk of these would be pre-revenue seed stage <strong>startup</strong>s, 300 to 500 with $1m-$10m in revenue, 50+ with $10m-$100m in revenue, 10+ companies with $100m-$1b in revenue, and a small number above $1b in revenue. Assuming a linear increase in productivity for each increasing tier of company size, from $200k per employee to $500k per employee, gives an estimate for the number of employees required across the 5 bands. Resulting in a total number of 25,000 to 30,000 employees working directly within the technology sector and creating over $5b of value in 2025. To achieve this target, participation in the sector would have to grow at approximately 40% each year, with new company / <strong>startup</strong> formation rates beginning at 10 to 20 new <strong>startup</strong>s per year and reaching a rate of 1,000 per year by 2025 - a yearly <strong>startup</strong> formation rate of 170 per million people. c While these sorts of formation rates may seem large, they are quite reasonable when you take into account two things. One, the current yearly <strong>startup</strong> formation rates per million people within the USA range from an average of 42 across the USA to between 147 to 387 in technology hubs such as San Francisco and Boulder. Two: the formation rates for technology companies will certainly increase over the next ten years - ever so slightly approaching the average private sector business formation rate of 1,342 per year per million - as technology becomes an increasing part of business. 14 Given the network effects of digital technology, the rapid revenue growth, exponential user acquisition of successful <strong>startup</strong>s and winner-takes-all structure of these markets, this <strong>report</strong> estimates that ~20% of these digital technology companies will create ~80% of the value. And it is by no means certain that starting a new business will result in success: the high-risks necessitated by innovative technology and business models inevitably leads to a large proportion of <strong>startup</strong>s failing each year (some estimate the global norm for <strong>startup</strong> failure rates to be as high as 90%). Hence this <strong>report</strong> uses a power distribution to estimate the distribution of digital technology companies (both mature and <strong>startup</strong>) participating in the sector in 2025 with an increasingly large number of <strong>startup</strong>s being created each year; of which only a select few will achieve the high year-on-year growth required to become the new Australian technology giants by 2025. a. Startup <strong>ecosystem</strong>s appear to follow this distribution. b. 4,000 companies employing more than one staff member. Up to 8,000 including sole-operators. c. Based on Australian Bureau of Statistics middle projection for Queensland population numbers in 2025 - 5.9 m. 8
THIS REPORT ESTIMATES THE POTENTIAL ECONOMIC IMPACT OF DISRUPTIVE DIGITAL TECHNOLOGIES ON QUEENSLAND’S ECONOMY IN 2025 IS ~$96 BILLION PER ANNUM, WITH A DIRECT IMPACT FROM THE DIGITAL TECHNOLOGY SECTOR OF OVER $6 BILLION PER YEAR. TO ENSURE THE MAJORITY OF THIS VALUE IS CREATED & RETAINED BY LOCAL COMPANIES, QUEENSLAND WILL NEED: 3,000+ STARTUPS, HUNDREDS OF ESTABLISHED TECHNOLOGY COMPANIES AND A UNICORN OR TWO. WITHOUT THIS, ECONOMIC GROWTH WILL BE LOST TO INTERNATIONAL COMPETITORS. 9
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