Smart economy is the intersection between the economy and Smart Cities.  This is a very broad definition but we roughly broke it into three different components: how Smart Cities technologies are changing urban commerce, the Smart City as an economic driver, and the economics behind Smart Cities.

Changing Urban Commerce

The Smart City platform creates new ways to reach and engage customers.  Below are some examples we discussed.

  • The virtual supermarket  in a South Korea subway is a good example of how information and communication technology (ICT) changes customers’ interactions with goods.  The enabling technology is the QR code. Each image of a good has an associated QR code that when scanned by a cell phone, will allow the customer to purchase the good and have the good delivered to their home.
  • Near Field Communication (NFC) is a technology that will enable payment through smart phones, which opens opportunities for dynamic pricing, finely tiered pricing, and micropayments, among others.  NFC technology differs from QR code technology because NFC is two-way communication and QR is one-way communication.
  • Companies have also experimented with augmented reality (AR) advertising and customer engagement. AR opens up a completely new arena for advertising that does not require physical installments.

A first-cut overview of the enabling technologies and where the technology influences urban commerce is displayed below.  The circles represent the relative influence of the technology (the rows) under each of the arenas for influencing consumer behavior (the columns).

The Smart City as an Economic Driver

The realization of the Smart City requires extensive infrastructure. To provide bandwidth, this infrastructure is supplied with a combination of fiber optic cables and copper cables.  To borrow a metaphor from transportation networks, fiber optic cables are the highways that carry the majority of traffic (information) over the longest distances and at the highest speeds.  The copper cables branch off of the highways to form arterials that carry less of the traffic to more locations. Transportation infrastructure is viewed as an economic driver, is there a similar metaphor for information and communication technology?

The influence of bandwidth on the economy can be measured in two ways: the first looks at the economic impact of broadband penetration, i.e. the proportion of the population with access to broadband; the second metric looks at broadband speed, usually represented as an average download speed for the area of study.

A report from June 2011 by the Broadband Commission for Digital Development, a commission of the International Telecommunications Union (ITU) and UNESCO, explains the connection between increased bandwidth penetration and economic development. The report defines broadband as “combined provision of voice, data and video at the same time.” The report cites other studies that have linked investment into broadband infrastructure with a growth in jobs along with an increase in a country’s GDP. Besides purely economic growth, increased broadband penetration can also contribute to the proliferation of “Knowledge Societies.” According to the report, these are societies that exhibit “freedom of expression, universal access to information and knowledge, respect for cultural and linguistic diversity, and quality education for all.”

At the international scale, broadband penetration is the key issue.  In a country like the United States that already has high penetration rates, broadband speed has become the central concern.  Why does the United States rank 26th for average broadband speed, falling behind not only acknowledged leaders like South Korea and Sweden, but also the likes of Lithuania, Ukraine, Moldova, Taiwan, and Belgium? Perhaps geographic issues contribute (we are a large country with a diverse geography), but invariables aside, the major factor is a lack of competitive incentives within the monopolistic ISP market and thus resistance to invest in the infrastructure.

This has been a major barrier to innovation and expansion, but Google is launching an initiative to disrupt these industry dynamics.  Back in 2010, Google announced a community fiber program that will provide a new kind of fiber network to residents of Kansas City, Kansas and Kansas City, Missouri.  The new fiber network will be fast, with plans to reach (1 GB/sec), and it will run along the fiber arterials from the fiber highway (backbone) directly to your home.  Without the copper portion of the connection, the new network will be much faster. The idea behind the program is to put pressure on the ISP market leaders to invest in network capacity rather than putting caps on data usage by introducing more competition and making transparent the real costs of ICT infrastructure construction.  Who better to address this problem than a company that stands to benefit significantly from increased internet-based activity?

The Economics behind Smart Cities

Deciding where to invest in ICT infrastructure is quickly becoming a global issue. To put things in perspective, Google is providing lightning fast internet in Kansas City while large portions of Sub-Saharan Africa lack any kind of broadband coverage.  A report produced for the World Bank from 2008 identified three types of ICT “gaps” in Sub-Saharan Africa:

  • Efficient market gap: residents could afford ICT infrastructure but there is no provider;
  • Sustainable coverage gap: residents could afford the required infrastructure but could not afford the service;
  • Universal coverage gap: residents could afford neither the service nor the infrastructure.

According to the report, covering all of the market gaps would cost approximately $7.5 billion. To cover just the efficient market gap, however, would only cost around $3.5 billion, but would increase penetration of broadband coverage by 40%, for a total coverage of 95% (up from the existing coverage rate of 55%). The remaining gaps represent only 5% of the population, but covering this last 5% would cost another $4 billion.

The non-linear relationship between cost and number of people affected conforms to the Pareto principle: a dollar spent in providing the first 20% of broadband coverage is much more powerful than a dollar in providing access for the last 20% of the population without coverage. This raises another point for investment in broadband speeds in the United States: when we already have residents with access to relatively fast broadband, is it worth the investment to increase broadband speeds further? If broadband penetration is the goal, how can the market incentivize companies like Google and the major telecom companies to invest in increasing penetration in areas of the country and the world that have not been considered “profitable”?