Some interesting reports on the digital economy in the last couple of weeks suggest that the digital revolution is continuing globally. Let’s start with some implications. First, the digital economy is growing much faster than national economies and is worth billions, unlike in 2000 when revenues and profits were a figment of the imagination. Second, the digital revolution is taking off in rapidly developing economies – but you need to get in now. Third, any business that does not have an integrated online/offline strategy is potentially in trouble, as at best it is missing opportunities and at worst it can be disintermediated and undercut by new business models and players. Fourth, it is critical to understand the online/offline substitution dynamics going forward and how consumer/customer behaviour is changing. While this is far from clear right now due to the way we define “industries” (we don’t measure the internet sector), seeking some answers will put you and your business in a stronger position. There will be winners and losers. Last, but not least, timing is a-wasting…time to act. Want to know more – read on.
The digital revolution is accelerating. The ITU’s latest statistics suggest that by the end of 2010 the number of internet users worldwide will surpass 2 billion, with 1.6 billion having access at home. That’s almost 30% of the world’s entire population and double the number who had access in 2005. The majority of new users joining the growing internet community come from developing countries where penetration is lower – just 21% of people in developing economies will have online access by year end versus 71% in developed economies.
Along with online access, the spread of broadband is increasing – something which the ITU sees as a catalyst for growth globally, generating jobs, driving growth and productivity, and underpinning long-term economic competitiveness. However, in many developing countries the cost of high-speed broadband is prohibitive, so many are leapfrogging traditional fixed line and PC connections to access the internet via mobile phones. Mobile networks are now ubiquitous, available to over 90% of the global population and penetration in developing economies has reached 68%, higher than any comparable technology before.
The bottom line: More people than ever are getting connected – to each other, to their communities, and to potential providers of goods and services. Revenue generation opportunities via digital channels, fixed and mobile, are increasing rapidly if firms can establish an appropriate business model and connect effectively with potential consumers/customers.
Many of these potential consumers/customers will be in rapidly developing economies. A BCG report, The Internet’s New Billion, focuses on the BRIC countries plus Indonesia. Currently home to some 610 million regular internet users, the good news is that BCG suggests that this figure will double around 1.2 billion by 2015 – and 60% of these internet users are under 35 years of age and expected to increase their earnings. The bad news is that each of the 5 markets is at a different stage of the digital revolution. China is way ahead, both in terms of internet and internet via mobile usage, followed by Brazil and Russia, with India and Indonesia least developed. However, increasing affordability and availability of access (mobile and fixed) may well drive rapid adoption rates in these countries.
The challenge for businesses in trying to tap into these exploding digital markets is that the pace of the revolution is so fast that they need to enter now and establish strategic positions. Just as in the developed world, internet access will rapidly become part of daily life – just look at the countries, such as Spain, who are starting to proclaim it as fundamental human right. But one size does not fit all – pick your approaches to fit the stage of market development.
So why would you pursue digital consumers? The Connected Kingdom report, by BCG for Google, sheds some light. It suggests that the internet sector contributed an estimated UK£ 100 billion to the UK economy in 2009, or 7.2% of GDP, and will continue to grow faster than other sectors of the UK economy, potentially contributing 10% or more of UK GDP by 2015. We have come a long way, given that less that 10 years ago, revenue forecasts from internet services and businesses were (politely) a hope, or (less politely) absolute fantasy.
This £100 billion figure underestimates the internet’s economic impact, as it excludes benefits to consumers of buying products offline that they have researched online, plus B2B e-commerce (around £360 billion p.a.), online advertising (around £3.5 billion p.a.) and productivity benefits. The UK is the largest per capita e-commerce market globally, with 60% of the internet economy driven by household consumption, and as such suggests that many firms should pursue the digital revolution for the simple reason of the money! With potentially 1 in 10 pounds, dollars or yen being spent online, firms simplay cannot afford not to be there.
However, getting to the money is easier said than done. The internet has had a disruptive effect on many industries, for example newspapers, music, retailing, insurance, financial services, travel and many more. It has encouraged new channels, innovations in products and services, and new business models, e.g. giving the core product or service away for free and realizing profits (hopefully) from ancillary revenue streams. For businesses competing in the digital fray, key questions include “How to make money?”, as well as “If I don’t do it, who will?”
Here, the Connected Kingdom report raised some critical questions for me. Given UK economy household consumption expenditure since 2001 has grown extremely slowly:
- What products and services are consumers buying less of offline to be able to buy goods and services online? What have been the substitution effects?
- Assuming the internet sector will continue to grow faster than the overall economy, how will these substitution effects impact different business sectors in future? Who will be the winners and losers?
Clearly there are some channel switching effects, with products and services that used to be purchased via bricks and mortar now purchased online, often more cheaply. There are format substitutions as physical goods are translated into digital ones, e.g. CDs to music downloads. There are business model substitutions e.g. newspaper subscription to advertisement-funded free content or travel agent to online booking in the airline industry. However, there are also digital goods, e.g. games and entertainment platforms, which we simply did not have before the internet economy. Have we saved enough by buying insurance online through a new generation of aggregators or a cheap online ticket from EasyJet to be able to afford the expanding array of digital goods and services that we consume? My suspicion, and its only that at the moment, is that consumer purchasing behaviour has shifted fundamentally in the internet age.
Your thoughts are very welcome on these questions. In the meantime, I am off to try to analyse UK household expenditures a little more closely.
P.S. A last statistic to share is on the move from voice to data on mobile phones. The number of SMS or text messages sent globally has tripled in the last 3 years to reach a staggering 6.1 trillion in 2010. That’s 200,000 text messages sent every second!
Let’s not forget how to have conversations as we get increasingly connected…
