The changing economics of the digital ecosystem

The GSMA published a new report examining the structure, economic drivers and financial performance of the global Internet economy and its respective segments. The research provides a factual baseline that operators, policymakers and stakeholders can use to assess the opportunities, competitive dynamics and overall health of the Internet ecosystem.

“Each day, more than 600,000 people go online for the first time, supported by a highly interdependent ecosystem of companies including mobile operators,” said John Giusti, Chief Regulatory Officer, GSMA. “This study yields a wealth of insights about the evolving nature of the Internet and the companies that, together, drive it.”

Changing Internet value chain for the mobile sector

The report presents an insightful view into the development of the Internet over the past five years. In particular, the study highlights key implications of these changes for the mobile sector:

The value created by the Internet ecosystem is increasingly captured by online service providers. In 2015, online services captured nearly half of the revenues of the entire Internet ecosystem (47 per cent, EUR 1.4 trillion). Amongst these, a few powerful players are expanding their influence across the Internet ecosystem by acquiring players in other segments.

Although Internet connectivity revenue is growing, the proportion of value captured by connectivity players is declining. Connectivity revenue grew from EUR 199 billion in 2008 to EUR 508 billion in 2015, but this represents a smaller share of the of the total Internet value chain, declining from 18 per cent to 17 per cent, with a continued slide to 14 per cent expected by 2020. For mobile network operators, connectivity revenues generated by increased Internet use are not offsetting the decline in revenues from traditional communication services, and mobile data revenues are also forecast to grow at a lower rate than the growth of other segments. These trends pose challenges for investment in mobile networks that support the growth of the Internet ecosystem.

The Internet ecosystem is maturing. Innovation and technical development still proceed at pace, but the largest players in any given segment deliver higher returns and profit margins. They have secured their leadership position and fewer new players are achieving scale. Eleven of the top 15 US websites visited by users in 2009, for example, were still among the top 15 in 2015.

Implications for policy and corporate strategy

Drawing on its findings about the changing dynamics of the Internet value chain, the report highlights key implications for corporate actors and policymakers:

Interdependencies between segments of the value chain are powerful and complex. Decisions based on a narrow view could be seriously flawed, either for a company that may miss broader competitive threats, or for a regulator misjudging the true nature of the competitive dynamics.

The changed landscape requires a holistic policy framework. While the Internet has transformed sectors and boosted productivity at a global level, its impact can be different at a national or sectorial level. A holistic policy framework that recognises the changed competitive landscape, broader and multi-sided markets and dynamism of digital ecosystems is required.

More debate on aspects of competition policy across the Internet value chain is required. Strong concentration of returns and the inflows of capital to a few Internet segments, the increasing influence of few Internet entities through their portfolio approach and the changed competition dynamics indicate the need for debate on the future competition policy framework.

“Connectivity is at the heart of the digital ecosystem, but policy and regulatory frameworks have not been modernised to reflect these new market dynamics brought about by the Internet,” continued Giusti. “We hope this study will be a useful input at a time when policymakers are thinking about the policy implications of the digital ecosystem, and we encourage them to remove unnecessary regulation to foster innovation and drive consumer benefits.”