This report presents an insightful view of the development of the Internet over the past five years and the dynamics that are shaping its future. It assesses how the Internet ecosystem has developed, the impact on mobile network operators, and how market positions have shifted.
Our analysis shows that the total value of the Internet value chain has almost trebled from $1.2 trillion in 2008 to $3.5 trillion in 2015. This growth has been driven by three powerful factors: greater access to fixed and mobile broadband, the availability of smartphones at all price points, and innovation in the range and quality of services offered online.
In the case of services that operate both online and offline, a greater proportion of revenues and transaction value is moving online, but the growth of online (for example, in music) is typically still insufficient to replace revenues lost to Internet disruption. Advertising revenues fund 29 per cent of the value chain, but end users still pay directly for the majority of services and hardware.
In terms of economic performance, the largest players in any given segment are able to deliver higher returns and profit margins, benefiting from the inherent network and scale effects of the Internet. The stock market valuations of online services companies (such as Google and Facebook) have risen as a result, delivering a compound annual growth rate of 45 per cent since 2009, versus 6 per cent for connectivity providers, 17 per cent for hardware firms, and 15 per cent for the S&P500.
Behind this story of growth, however, A.T. Kearney identified some trends that may give cause for concern about the long-term health of the Internet economy:
- Since our 2008 report, there has been less change and disruption than might have been expected. Innovation and technical development still proceed at pace, but the largest players tend to stay large: of the top 15 Internet sites in the United States, only four were not on the same list in 2009.
- While the Internet has empowered new business models, it has had a deflationary impact on some segments of the economy. Productivity may have grown in the “sharing economy” of AirBnB or Uber, but with a significant price in terms of social and economic disruption, particularly when viewed at the national (versus global) level.
- As players such as Apple, Facebook, and Baidu expand into adjacent segments, their rationale is based on leveraging scale and integrating services and features into their core products and platforms to create barriers to entry. Facebook’s purchase of WhatsApp for $22 billion was justified in terms of enhancing the Facebook platform and removing a potential substitute.
- Returns on capital employed (ROCE) are still high for industry leaders (those who operate across multiple segments) but have stabilised at a lower level for the overall Internet value chain.
The growth in the Internet Value Chain is impressive, but not all firms are benefiting. Those that focus on their traditional market are seeing value shift quickly to those firms that have grown and acquired aggressively in multiple segments and geographies, combining different offerings to create a powerful market position. This trend may reverse over the long run, or be challenged by regulators, but for now it means that a cautious strategy of “focus” is actually more risky than it may seem.