Firms and Markets. The EU in the global ICT dynamics. Pascal PERIN (*) ORANGE. Didier POUILLOT IDATE

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1 Firms and Markets The EU in the global ICT dynamics Pascal PERIN (*) ORANGE Didier POUILLOT IDATE The digital economy is based on the interdependency of five main components: equipment and terminals, IT and software services, telecommunications services, internet services (intermediation), and contents. This group, which forms the Information and Communication Technology (ICT) ecosystem (SICKER, 2002; WHITT, 2004; FRANSMAN, 2010), is being examined here, along with its geographical and industrial dimensions within a dynamic setting. The analysis addresses both the supply side and the demand side of the digital economy market. On the one hand, we have assessed the value of final consumption on the demand side (out of the pocket and "free services" financed by advertising) for each market segment and for each of the main regions (EU28, USA and Asia). On the other hand, on the supply side, we have considered the aggregation of the most important companies' revenues on the basis of their main activities and their respective domestic markets. We can thus analyse both the relative shares of sectors and regions and their evolution over time as well as the disparities between supply and demand, within and across regions, on a sector-by-sector basis. This approach has been developed in a earlier contribution (PERIN & POUILLOT; 2013). Its updating highlights the significant changes that have (*) Disclaimer: The opinions expressed in this article are those of the author and do not necessarily represent the opinions of Orange. Digiworld Economic Journal, no. 97, 1 st Q. 2015, p

2 128 No. 97, 1 st Q occurred since then. In particular, the decline in the weight of Europe seems to have gained momentum during the recent period: the dynamics of demand in Europe is slowing down in all market segments, compared to other regions, and the share of the domestic industry is decreasing in the sectors that are most exposed to globalisation. As the ICT sector is a major engine of economic growth (Oxford Economics, 2011; VEUGELERS, 2012), the ambition of the new European Commission in the field of the digital economy is of particular relevance in this context. The demand side General trends over the period The Global demand in all digital economy sectors has grown at a fairly regular pace over It has risen by 2.6% per year on average during the period. This growth rate is substantially lower than the growth rate of the global economy (the annual average growth rate of world GDP at current prices is estimated at 6.3% over the period). The slower growth of ICT sectors compared to the dynamics of the world economy can be observed globally, with the exception of North America. Figure 1 - ICT sector and GDP compared growth (CAGR ) Source: IDATE

3 Features Firms and Markets 129 In 2014, services account for three quarters of global ICT demand. Telecommunications services are still the most important market segment in value, followed by IT services. As of 2014, telecommunications services still account for nearly 32% of overall ICT sector, however its relative weight is declining steadily (-3.4 points over ). The share of IT and software services has remained stable in the long run, accounting for just over 25% of the whole ecosystem. The two other service sectors, content and especially internet services, have grown more rapidly. The share of content services (an average annual growth rate of 6.9% over the period) has increased from 10.7% in 2009 to 11.8% in 2014, while the share of internet services has more than doubled, increasing from 2.7% to 6.0%, with a 23% average annual growth rate. Finally, equipment markets, which were growing rapidly at the beginning of the period (due to a catch-up effect, primarily in infrastructure sectors after the downturn in 2009), have since then slowed down, despite notable successes in some segments, especially smartphones, with world sales increasing by 15% in Region profiles The US market is the most developed region, accounting for 28.6% of world demand in Its share has increased by 0.5 point since The EU-28, which accounts for 20.9% of world demand, is far behind, losing 4.7 points over the last five years to the benefit of the rest of the world: the aggregate share of the four largest Asian markets (Japan, Korea, China, and India), has increased by 1.5 points (however the share of the Japanese market has decreased dramatically over the period), and the aggregate share for the rest of Asia, Latin America and EMEA has increased by 2.7 points. The decline of Europe stems in part from a deteriorated macroeconomic context, especially in large southern countries. Nevertheless, the declining trend of Europe also reflects a reinforced competitive pressure, in particular in telecommunications services. In Asia and more generally in other emerging regions, the momentum remains largely driven by volume effects, with both the rollout of infrastructures and the purchasing of equipment by end-users. Moreover, the small share of IT services in these regions as shown in the figure below,

4 130 No. 97, 1 st Q tends to show that final demand is more driven by end-consumers than by businesses. Figure 2 - ICT market weights by region Source: IDATE Besides, these geographical areas exhibit very contrasted patterns. In the United States, IT and software sectors are well developed and their value accounts for more than one third of the US ICT markets. In Europe, telecommunications services, which were the main ICT market segment until 2011, have moved down from first to second place, behind IT services (as shown in the next figure). In Asia and in the rest of the world, telecommunications services remain largely ahead in terms of economic weight; equipment is the second largest segment in terms of value. Emerging markets, which are the main economic drivers of these regions, are essentially volume markets, with large needs for basic access.

5 Features Firms and Markets 131 Figure 3 - ICT markets by sector in each region as of 2014 Source: IDATE Trends by areas Recent evolutions are also highly contrasted across areas. In the United States, the ICT sector grew at a 4.9% average annual rate between 2009 and 2014, slightly above the world average. In the digital economy, only content and internet services have reported a lower growth rate than the world GDP over the period, which could be explained by the already high level of activity in these sectors, hence a weaker potential for growth. However, internet services have grown at an average annual rate of nearly 20%. In Europe, in contrast, average annual growth has been very weak, at +0.4% per year, with two sectors showing a declining trend during the period: equipment, for which the demand has decreased at an average annual rate of 1.3%, and above all, telecommunication services, whose endmarket value has decreased by 2.7% in average annual terms (a rate of % in five years). As a result, Europe is the only area where the telecommunications sector is declining 1. 1 At a country scale, it appears that telecommunications services have also declined in Japan.

6 132 No. 97, 1 st Q Figure 4 - ICT market trends by geographical areas, (2009 = 100) Source: IDATE Meanwhile, the large Asian markets have reached a 5.9% annual growth rate, high above the world average in all the sectors of the digital economy, while the digital economy markets have grown by 6.7% per year in the rest of the world (rest of Asia, Latin America, and EMEA). The case of France In our previous analysis (which focused on the period), the French market had a unique position, with significantly higher growth than in the rest of the European Union (+0.7% point). However, in the most recent period, the trend has reversed. The market for telecommunications services, whose resilience has been the essential driver of the relatively higher performances of the French market, has collapsed: the market for telecommunications services has indeed lost nearly 20% of its value in five years. The market for IT and software services has also decreased in value, notably in relation to the two leading markets of the areas (Germany and above all, the United Kingdom).

7 Features Firms and Markets 133 Figure 5 - ICT market performances of 5 largest EU countries Source: IDATE The supply side We now apply our digital economy analysis framework, previously performed over ICT end-market value (cf. supra), to the analysis of the large world ICT market players. This assessment of the supply side is based on published accounts of 500 publicly listed companies, which represent 92% of the revenues of all listed companies in the ICT sectors. These market players are sorted in five major sectors according, on the one hand, to their core activity, and on the other hand, to the three geographical areas considered in this study, on the basis of the location of their headquarters. It is not possible to establish a strict statistical comparison of the demand side and of the supply side given, in particular, the potential existence of double counts along the supply chain, the extension of companies' activity beyond their country of origin (for example, European telecommunications operators are often active outside the European continent) and the diversification of certain companies' activities (for example, Apple is operating in the sector of IT equipment and in the sector of content

8 134 No. 97, 1 st Q services). Moreover, some French internet players like "voyages-sncf.com", while relevant, are not listed on Stock Exchange markets. Nevertheless, industrial analysis is a necessary complement to the assessment of the final demand (the local consumption) in the understanding of the respective performances and contributions of the five sectors that shape the worldwide digital economy. It also provides a useful framework for the analysis of the balance of power between the main geographical areas, underlying industrial stakes, according to the performances of their regional champions in each of the ICT subsectors. Main figures of the global digital economy Telecommunications services account for one third of the global ICT activity, after the equipment and device industry. The investment effort is the highest in the telecommunications services sector (17% of operators' revenues). The telecommunications operators bear the bulk of the global ICT investments (62%). These investments drive the production of network equipment and terminals industries, and enable the rollout of new infrastructures (NGA like LTE), which support internet services industry. Internet players (Google, Facebook, ) account for a minor part of the global ICT sector (6% of global revenues and 4% of global investments). However, these players experience the strongest increase: +25% over They have very high Enterprise Value to Revenues and Enterprise Value to Ebitda ratios, unlike other players in the ICT industry. Table 1 Worldwide ICT industry in 2013 Note: Enterprise Value (EV) = market capitalization + Net Debt. Without Semiconductors sector Source: Thomson Reuters 447 companies

9 Features Firms and Markets 135 The composition of digital economy by geographical areas The profile of the European Union is unique. The telecommunications operators' revenue account for more than half of the total EU ICT players' revenues, whereas the internet services players' revenues account for less than 1% of the total ICT revenue in the European Union. North America has the most balanced distribution of ICT layers whereas Asian market players of the digital economy remain strongly specialised in the production of equipment and terminals. Figure 6 - ICT Industrial dynamics by geographical areas All sectors combined, the gravity center is shifting towards Asia and the United States, which accounted for 40% and 43% of the global revenues in 2013 respectively, while the European market players only accounted for 17%. In total, the relative weight of European market players in the world supply of digital equipment and services (content, internet, telecom and IT services) has decreased by 5 points between 2008 and 2013, to the benefit of the United States (+4points) and Asia (+1 point). Various digital market players in North America and Asia benefit the most from the growth dynamics of ICT (+9% per year in North America and +5% per year in Asia over respectively). This is especially the case for the Asian providers of IT and telecommunications services (with revenues

10 136 No. 97, 1 st Q growing at a 10% and a 9% average annual rate over ), and for the equipment and terminals industry in the United States: +10% per year. On the contrary, European market players are stagnating or declining in all three layers. The same performance gaps between the players of the three regions are found in the market for internet services. Whereas the revenues of North American and Asian leaders have increased by roughly 30% per year and 50% per year respectively over , Europe is lagging behind again. Figure 7 Revenue growth of players of each layer by region (CAGR ) Source: Thomson Reuters, 384 companies North American players continue to dominate three layers: IT and software services, internet and content services layers (respectively 65%, 76%, and 59% of the 2013 revenues for the three geographical areas), whereas Asian manufacturers still largely dominate the markets for equipment and terminals (IT, telecom devices, consumer electronics). At the industrial level, the relative share of European market players, virtually absent from internet services, is only significant in the IT and content services, and, to a greater extent, in telecommunications services. Despite a lower revenue growth than their foreign counterparts, the European telecommunications sector (58% of revenues of European ICT players), with mostly domestic markets and local companies, provides the basis upon which Europe can reinforce its position on its internal ICT market and also on the worldwide ICT markets.

11 Features Firms and Markets 137 Figure 8 ICT sector distribution of revenues by regions (2013) Source: Thomson Reuters, 384 companies The balance between supply and demand: the structural imbalances To what extent are the revenues of market players in each sector (equipment, telecom services, internet services, ) related to the level of demand in final markets of the geographical area where they are located? In other words, do the level of overall consumption of ICT goods and services in some geographical areas exceeds the level of production of the national market players which actually pay taxes in these areas, no matter the location where the aforementioned ICT goods and services are sold? Despite the limited connection between the supply side and the demand side (cf. supra), available data allow at least to provide insights into orders of magnitude. To achieve this, we estimate the end-market coverage rate given by the ratio [(final consumption revenue of market players) / final consumption]. In the equipment sector (networks, terminals, IT, consumer electronics), the revenue of European market players accounts for less than half of the final consumption in the EU-28. Asia and the United States exhibit opposite patterns: revenues of North American ICT industries notably exceed the domestic demand in their area, whereas Asia, with 62% of the equipment sector world revenue, has still a significant surplus, despite a decrease in the net production surplus. In the world of internet (social networks, search engines, e-commerce ), the United States bolstered their surplus until Since then, a rebalancing has begun to occur at the benefit of Asia, which internet sector's revenue has increased at a 49% annual rate over

12 138 No. 97, 1 st Q The revenues from Asian internet players are growing steadily and accounted for nearly 70% of the final demand value in the area in Europe is the only area that remains unable to produce internet services to meet its domestic demand. Figure 9 Offer / demand discrepancy: equipment market Source: Thomson Reuters, 86 companies Figure 10 Offer / demand discrepancy: internet market Source: Thomson Reuters, 24 companies + 4 non listed companies

13 Features Firms and Markets 139 Conclusion At the world level, the final consumption in the digital economy has continued to growth significantly over the last five years. This growth has been especially sustained in the internet services and contents. At a regional level, the growth in value of ICT consumption in Europe has been very low compared to other world regions. Europe's share of the global ICT market decreased by nearly 5 points between 2009 and 2014, partly because of a decline in the value of consumer demand for telecommunications services. From a supply-side point of view, telecommunications bear the bulk of worldwide investments, which drive the manufacturing industries and enable innovation in services. On a geographical level, the European share of the world ICT supply decreased by 5 points between 2008 and The gravity center of the digital economy continues to shift towards Asia and the United States: the result being lower growth of European telecommunications operator revenues, virtual absence of European companies in the internet services, and the worsening of the European industry of IT equipment and services. References COHEN E. & BUIGUES P.-A. (2014): Le décrochage industriel, "Télécoms et TIC : La sortie de route", pp , Paris, Fayard. EITO (2014): "ICT Market Report 2014/15", in collaboration with IDC. European Round Table of Industrialists (ERT) (2013): "Boosting EU competitiveness & jobs through the digital economy", July. ETNO (2014): "Shaping Europe's Digital Future", Brussels, October. FRANSMAN M. (2010): The new ICT ecosystem. Implications for Europe, Cambridge: Cambridge University Press. IDATE (2014): Digiworld Yearbook Oxford Economics (2011): "Capturing the ICT Dividend: Using technology to drive productivity and growth in the EU". PERIN P. & POUILLOT D. (2013): "EU Markets in the Global ICT Dynamics", C&S - Digiworld Economic Journal, no. 90, 2 nd Q. 2013, pp SICKER D. C. (2002): "Further Defining a Layered Model for Telecommunications Policy", School of Engineering and Applied Science University of Colorado, TPRC.

14 140 No. 97, 1 st Q TELEFONICA (2014): "Digital Manifesto". WHITT R. S. (2004): "A horizontal leap forward: Formulating a new communications public policy framework based on the network layers model", Federal Communications Law Journal (Indiana), May, vol. 56, n 3, pp VEUGELERS R. (2012): "New ICT sectors: platforms for European growth?", Bruegel Policy Contribution, Issue 2012/14, August. WORLD BANK (2013): "Connecting to Work. How ICT could help expand employment opportunities", September. Annex - Methodological framework ICT market / industry classification Example of company's classification according their core business