How Globalisation is Giving Us the Splinternet

In the early 1990’s it seemed as though the social, political and economic doctrine of the future was determined and indisputable. Capitalism and democratic freedoms had won, and the world would globalise into an eventual state of stability driven through mutual trade and income improvements across the developing world.

Assisted by the fall of the Berlin Wall, the end of communism in Eastern Europe and a burgeoning new communications technology called the internet, open borders and participation became the method for investment, increased wealth and conflict reduction. The internet could not have arrived at a better time, the perfect tool to facilitate international commerce. While the internet had existed for decades, it was only opened to actual trade in 1991, when the National Science Foundation lifted its restrictions on its commercial use, sowing the seeds of the first dot com boom.

These two technological and geopolitical shifts gave rise to true globalisation and an economic boom, which served developing markets and investors extraordinarily well.

Benefits and Downsides of Globalisation

Since 1990 China has lifted 750 million people from abject poverty, income per person in Bangladesh and Vietnam has risen more than six-fold, the number of democratic governments increased, and the economic roles and incomes of women improved markedly, even in the already developed western world. Our recent history has been defined by a connected world trying to shrink and come together based on shared economic goals and geography. And while we now have complex global supply chains and globally interdependent economies, the cracks are appearing.

The era of unfettered globalisation is coming to an end as economies re-nationalise, put up significant technological boundaries, and remember that once a certain level of national income is achieved, what they believe in is more important than pure economics.

Many of the advantages of globalisation have been mismanaged. Global debt to GDP ratios are at the highest they’ve been in the past 200 years. While COVID has exacerbated the issue, the trend was already well in place. Income inequality is increasing in developed markets. This trend start way back at the birth of Reganomics when he stated that Government isn’t the solution but the problem and the narrative shift allowing lower corporate tax rates, which apparently lead to 'jobs and growth’. As industries got offshored to low cost labour markets, investors did well, but the middle class was eroded. Big-tech has further reduced the benefit spread of globalisation. A simple example is the revenue per employee of Ford Motor company which is $682,000 while Facebook has revenue of $2.3 million per employee – and that’s even before relative profitability is taken into account. In the western world, the many benefits of globalisation have gone to emerging technocrats and the shareholder class, and the middle class and Governments are starting to notice.

The new world order is turning out to be one which is again defined by rival ideologies, distinct and different ways of managing local economies. Ultimately full collaboration globally will only occur if both values and economic interests align.

The Splinternet

The ideology of the internet was a world without borders, immediate and global access to knowledge, spurring innovation and income potential for everyone who touches it. It was in many parts a new economic paradigm without a policy.

Up until 2010 Google had a 30 per cent market share of search in China before they abruptly left that market amid a cloud of hacking, censorship and PRC policy conflicts. Whether the early internet was a function of successful techno-utopian dream selling, or a lack of knowledge from many national legislators who otherwise might regulate it, is unclear. What is clear is that the days of a global internet are also coming to an end.

Countries are now viewing the internet in an increasingly values-based way which must firstly align to national interests. Upon inspection we can see national value systems emerging in their internet policy resulting in a Splinternet.

China, which has already removed all US tech firms from its shores, sees the internet as a tool of Sovereignty and Surveillance. It’s used as a tool to surveil their populace and maintain digital sovereignty. The policy has been one of allowing innovations in the short term to learn from and copy, be it US tech firms, or blockchain-based technologies until such time that they can launch sovereign versions and remove the intruders. They’ve built the deepest e-commerce eco system of any country learning from others. While it seems draconian to us to hear about the internet is being used by the PRC to maintain total control, the people (of mainland China at least) seem happy to sacrifice liberty, for continued prosperity and improved living standards.

In Europe the internet has become a battle around Data and Privacy. In the European Union the internet is increasingly about protecting people and local firms from the evils of the internet, rather than trying to build out dominant firms in the space.

While the US is trying to tame the beast, the beast they have built is dividing their society socially, economically and politically. As of today the top seven technology firms in the US have a collective market capitalisation of $US9.9 trillion. This has increased more than 30 per cent in a single year. The internet on its shores is set to be heavily regulated like manufacturing and traditional media and eventually broken into many more pieces as inevitable antitrust actions take hold.

Here in Australia, recent events have triggered the end of the www, or the wild-wild-west, and now we are taking steps to create the social and economic boundaries society is demanding. This is an especially easy move to make given we hardly benefit from big tech’s dominance. The accumulation of Government intervention cannot go unnoticed, regardless of their actual effectiveness. Policies including the News Media Bargaining Code, the G7 global tax agreement, the High Court ruling that firms are responsible for comments on their managed pages and recent commentary from the Morrison Government about making social media giants accountable for content on their platforms are all part of a huge shift, and it is this:

We ought to expect every country to have very different and nuanced laws for the internet.

Investing in the Splinternet

If big tech is broken up, then shareholders should benefit as the sum of the parts will be greater than the value of the whole. This was the case when AT&T was broken into the Baby Bells in the USA. We’ll also see a surge in innovation as technology gets unlocked and new network effects emerge.

But once the post big tech period has emerged, smart portfolios won’t be those with the best technology, or global dominance. Rather, they’ll be built around technology firms which have either less exposed regulation or have deeply ensconced national operations in every market they participate in, not just satellite offices. Deft management of local political agendas will be the defining performance requirement of management. While the product format of the global internet was once one size sits all, the splinternet will demand that product offers from global firms are heavily tailored to local regulations, adaptive in nature and keep a significant upside in the local markets they operate in. It would also be unsurprising if local versions of big tech around the world provide investment opportunities the likes of which we haven’t seen since the web was first commercialised.