The digital century: Where is value headed in the digital space?

General wisdom suggests that, since the sector was fixed after the 2001 bust and new technologies play an increasing role in everyday life, all parts of the digital ecosystem have grown steadily and will continue to do so.

To investigate this, and to contribute to the public debate regarding sectorial policies, Arthur D. Little built its Digital Value Tracker and conducted analysis from 2007 to 2015. We have identified five key findings, some of which confirmed what we already knew, and some of which were more unexpected.

The digital ecosystem is growing faster than the global economy.

Revenues of the digital ecosystem vs. GDPThe digital industry is universally seen as an area of strong growth, which is driving growth itself and creating more business in other sectors. Our Digital Value Tracker shows that this is very true – the digital ecosystem has generated 15 percentage-point more growth than the general economy since 2007. This trend has shown no sign of slowing down so far. In fact, the gap is widening between the digital sector and the general economy.

Not all segments of the digital ecosystem have grown since 2007.
Revenues of the digital ecosystem by segment
The growth in revenues is felt differently in the various segments making up the digital ecosystem: pure Internet players have generated a lot of traction (but represent “only” 9 percent of the total sector’s revenues), while content and equipment have remained flat. This segmented view also explains why many companies are trying to find growth in online activities. Specialized companies are generally more at risk.

Internet and software drive more value.
Market capitalization value by segment
From a stock-market perspective, value appears largely driven by Internet players and IT services. Thanks mainly to these segments, the value of the digital sector has recovered from the downturn since 2011–2012, and is now in excess of 65 percent versus 2007 levels. Pure Internet companies have already captured one-fourth of the ecosystem’s total value.

North America and Asia are diversified and growing fast, but Europe has stayed flat.
Revenues and growth of top 30 players, 3 main areas
From a geographic perspective, North America and Asia are the leading regions, with 46 and 39 percent of total digital revenues, respectively, while Europe represents only 13 percent.

North America, largely made up of US companies, has managed to diversify its digital presence well, with three “buckets”: a strong telecom segment (25 percent of total revenues), a large device OEM sector (27 percent) including companies such as Apple and HP, and a thriving Internet and software & IT services sector (33 percent).

Asia is more skewed towards devices, with leading companies such as Samsung, Foxconn, Sony and Panasonic. The segment totals more than 50 percent of the continent’s revenues. This region has also managed to grow robust telecom champions.

Historically, Europe has been strong in the telecom segment. However, it has not managed to develop or maintain a diversified portfolio of activities – in particular with Internet services, in which it is clearly lagging behind other regions.

As a result, Europe is in a weak position to capture new growth in the digital ecosystem, and is, in fact, the only region in the world whose digital industry has remained flat throughout the period.

Telecom operators are Europe’s digital champions, but have delivered flat revenues compared to the rest of the world.
Revenues of telecom operators by region
As Europe’s digital presence is largely structured around its telecom operators, one may expect robust growth in this segment. Surprisingly, this has not been the case, and Europe is, in fact, the only region whose telecom operators have experienced flat revenues in the 2007–2015 period. Competition in the telecom field has been fierce over the last decade, lowering prices and putting telecom operators’ revenues under pressure.

Considering its existing strengths, the telecom sector in Europe should be supported strongly. This would give it the chance to create some dynamics and support the establishment of the European digital industry in the future. A new framework could embed investment incentives – like what can be seen in Japan and Korea – as well as stimulate digital education curricula.

At the other end of the spectrum, new Internet players will not be built overnight, but the work has started in many countries. Attractive ecosystems are being built in several European hubs, such as London, Berlin and Paris. More can be done, particularly regarding the financing of digital ventures, start-ups and taxation.

The digital century has only started. New growth will materialize in unexpected areas. Capturing this growth will require governments and regulators to continue to foster innovation from new players and technologies and to support existing champions more actively.

By Didier Levy, Eytan Koren and Mayeul Rebaudet at Arthur D. Little