Or why investors will invest in service industries tomorrow
We are all talking about AI today, just as we fantasized about “the Internet” in 2000. But what will be left of all the thoughts and discussions after a few years? Sure, the big model providers will somehow survive. Will they end up like the first network equipment suppliers and data center operators? Only time will tell.
But which new giants will rise from this new foundation? Who or what will become the new Amazon or Google of the AI world? The best place to start is with a brief excursion into the industrial age, which is coming to a somewhat rude end.
The age of industrial mass production – oversupply
With science, innovation and ideas, we humans learn to invent technologies with which we can make something better, faster or cheaper.
If we can make it better or cheaper than a comparable product or service, then we have a higher demand and more people or companies buy it.
We use narratives, stories, media and advertising to steer demand – sometimes in the right direction, sometimes in the wrong one. This logic creates markets, hopefully growing ones. Because this drives the outlook for investors for more capital, for more innovation and for even lower prices.
The dilemma of industrial mass production is that there are only brief moments of happiness in the optimal utilization of production chains and that supply and demand are becoming increasingly difficult to coordinate due to the ever more complex products.
If we have four years of development time for a new car, global markets for sales and a maximum model life and thus production time of four years, then we need gigantic amounts of capital and gigantic potential sales channels in order to achieve the expected unit costs.
The image of man in the age of industrial mass production
In this now fading age of industrial mass production, humans have the status of implementing what a machine cannot yet do. In return, they receive a wage and are paid by the hour. We feel that not paying people by the hour is unfair. The underlying concept is to make people a little more equal. How productive a person is becomes the company’s risk. Companies therefore try to employ as few people as possible.
People receive a wage for the time they put in – they can then use this wage to cover their consumption. For a long time, the norm was working 2/3 of our free time (without sleeping) and consuming 1/3 (eating, movies, reading). This quickly feels a bit like a run in the hamster wheel. Even purpose, good leadership or the 4-day week can’t change that. Envy makes the problem even worse.
What will happen to people in the age of AI?
Of course: I don’t know. But a few questions quickly arise:
- What will happen to us humans if the products we have passionately consumed up to now, such as cars, games or cell phones, can be completely manufactured by machines?
- What will people still get paid for if they no longer feel they have to work to produce something of value?
- Do we still get paid for telling stories (Youtubers)?
- Do we still get paid for the creative output of a new product?
- But do we really still need all this?
- And above all, what use are products and services that save us time if we no longer have to work?
As long as we look at AI developments with the tried-and-tested models of mass production, we could get pretty restless. But what if we simply haven’t satisfied our basic human needs with the one-sided optimization of supply, i.e. the most efficient production of goods?
Because our needs are usually services. But these services require inexpensive products. In today’s world, we generally do not find a balance between supply and demand in services. Instead, we shift the risk of utilization of the products required for the service unilaterally to the consumer.
Service industries paving the way for a new balance
We don’t actually need cars, we want mobility. We want to get from A to B as quickly or comfortably as possible. Okay, for some people, the brand and the type of vehicle are highly emotional status objects through which they can communicate their claim to status. But that’s a different field.
So, what are the big service industries?
- Lifestyle including household, laundry and cleaning, but also food and supermarkets, kitchen appliances and/or restaurants
- Real estate including construction, renting, buying for industry, commerce and housing
- Mobility including cars, buses, ships and cab drivers, bus drivers, train drivers, pilots and all service personnel at airports, train stations and workshops
- Nursing and healthcare which includes longevity topics
- Leisure including vacations, hotels, amusement parks, pubs/pubs
- Education or rather preparation and adaptation for the reality of our lives and participation in society with school, training, university, further education
If we rethink and reimagine service industries, then services are no longer the increasingly expensive alternative for the consumer to consume a product, but a rethought management of demand and supply!
We’ve been there, done that: platform models
Ok, sounds familiar. XaaS, i.e. everything as a service. We already know: Uber, Spotify or myHammer. No.
Spotify, Google and Netlix are simply distribution models for operating digital services with the platform economy business model. We have thus learned to build digital infrastructures with global scale.
As platform business models, MyHammer and Uber only partially balance supply and demand. Rather, in the case of Uber, Lyft and the like, they shift the risks away from the consumer towards the service provider. And the platform provider always seems to win.
We have built large corporations, created value for the time being and thought that the platform economy is the ultimate and the maximum end of possible value creation.
No, these are not the future service industries I’m talking about.
Where does it start? But won’t it end?
I see the first real beginnings of intelligent service industries in companies such as Flixbus or Enpal and 1komma5. What? Seriously? Yes.
The full leasing of a car with insurance, winter tires and full workshop service looks like a start, but leaves the entire utilization risk with the customer. That’s a little service wrapped around the existing supply-oriented model.
Flixbus is outwardly boring and not exciting. What they really do is actually unimaginable. They are building a long-haul bus network in more than half of Europe and parts of the US and manage to get the buses full via their demand management system. This can only be achieved with a lot of technology and operational excellence, as well as direct and personal contact with customers. Investors don’t find all of this very exciting yet. Not asset light, difficult market. Of course, in order to realize margins and raise prices, you need a lot more size. It’s also not as exciting as Space X or OpenAI. But it shows the way.
What are Enpal or 1komma5? Craftsman platforms? Energy suppliers? Financiers? Technology providers for home automation? For some investors, these are still uninteresting general stores that cannot be properly categorized.
Here, too, you need operational excellence in many areas, an understanding of technology and a good and intact direct customer relationship with the service recipient so that the model can work for many years.
Service worlds – can it be smaller and less risky?
Today, there are a whole host of service businesses that everyone needs, but which are not the core of the central value creation in the processes of today’s standard products and services.
These are, for example
- Call and service centers that are not fully integrated into companies’ overall processes and have therefore been outsourced by management consultants in “make or buy” decisions in recent years, or
- IT-managed services, which have enjoyed great popularity in recent years because they have not contributed to the original value creation of companies, but were nevertheless difficult to fill due to the shortage of IT specialists
- Don’t forget the many compliance and bureaucratic service providers, such as those in the ESG environment, who help to tick the boxes that we humans have previously thought about in order to improve the world on paper without having any effect on reality.
I think we will see the first waves of consolidation here, where providers with a clear and distinct tech stack will gain significant advantages over the purely human-driven models.
Conclusion – AI and technology will redefine service industries
We must and will rethink service industries. We will move away from the one-sided optimization of the production of products that are then serviced afterwards and by someone.
The world has become so complex for consumers that we can no longer organize all the service chains ourselves or simply no longer want to. But the service models driven by new technologies must really reorganize supply and demand and not simply shift the risks to one side. This is the only way they can deliver real added value.
And if investors understand this new added value, then such service models could slowly but surely turn from an insider tip into the new hype. And then we will also have a snappy new name for it. I am intrigued.
