How much is it worth? The Valuation of the internet.

Printer-friendly versionSend to friendPDF version

What is the internet worth? A recent study by analysts at McKinsey & Company indicates that it is currently about eight trillion US dollars. This makes the internet a bigger economy than those of Canada and Spain combined. The study focused on the G8 and BRIC countries combined with South Korea. Taken together, about 200 million persons are active consumers on the net and the economy they create in this area is estimated to make up about 3.4% of the GDP. In consequence, seen as a sector, the internet surpasses sectors like mining (1.7%), agriculture (2.2%), and education (3.0%).
However, the impact of the internet differs strongly between countries. About 6.4 percent of Sweden’s economy can be attributed to the internet, more than twice as much as in Germany and France. The British are leaders in online retail, spending about twice as much as the US population. However, in the US the revenue of online industries accounts for more than 30 percent. Some countries lag significantly behind like Russia, with an internet industry of less than 1% of GDP. While the internet industry is dominated in most countries by private consumers, for China and India the production and sales of online services are the more important factors.
The numbers are impressive and confirm that we live in the industrial revolution of the internet. The core of this revolution is beyond benefits for individual consumption the globalization of the division of labor, and the flow of information. The internet primarily saves time and costs enabling companies and individual consumers to source internationally. The numbers also indicate that this revolution is quantitatively far from over. The 200 million active persons are only a fraction of the inhabitants of the countries studied, and the leading countries in some aspects may indicate where all the others are heading.
Where does this revolution stand qualitatively compared with previous industrial revolutions is a natural question to ask. Derek Thompson from ‘The Altantic’ confronted the McKinsey study with his own life experience alongside the findings of the book ‘The Great Stagnation’ by Tyler Cowen, one of the many authors observing an ‘innovation rut’ in the last twenty years. Derek Thompson works as an online journalist, a profession unknown twenty years ago. When he looks around his office all the gadgets of the internet revolution are in his view. But of course he is also aware of the fact that all this technology and his job create a product which has been constantly devaluated by the internet: information and entertainment. Close to or completely free ‘infotainment’ certainly has a worth, but its price is not high enough to contribute significantly to the GDP, and pay its creators.
Of course, McKinsey & Company is right in stating that the internet created a significant industry of its own as well as adding to the efficiency of other industrial sectors. Private net related consumption will quantitatively grow, and still there seem to be applications like the ‘internet of things’ which have not been exploited. Nevertheless, predictions on further development of the internet and its impact on other sectors appear difficult.
Industrial revolutions consist of three phases. Petr Lupac argues in a thoughtful paper that the ‘phase of stabilization’ may have been reached. As revolutionary as some recent developments in the social web may appear, they reflect the core of the internet as a means of rapid global peer to peer communication using computer networks. However, this revolutionary idea was born and realized in the ‘innovation phase’ by the Arpanet now 40 years ago. The ‘phase of interpenetration’ now seems to be completed. During this phase, the internet became a means for communication on a large scale, transformed the existing socio-technical structures and established its technical and legal standards. To be in the stabilization phase does not mean there will only be a few real revolutionary innovations to come; the gold rush is over.
Lupac argues that the ‘phase of interpenetration’ ended some years ago. It is at least tempting to think it reached its peak with the bubble ending the last century. Its implosion pointed out that there would be limits to the structures and functions of the internet and its economy. In addition, the market was cleared and powerful global players emerged where up to then a variety of hopeful small companies competed.
The phase of stabilization has advantages as big players can be fairly sure to stay. However, the internet revolution has a characteristic unlike other industrial revolutions: It was not very productive with regard to new material products. The revolutions of steel and plastic have been material ones creating a seemingly endless range of products. The major product of the internet is an immaterial one, communication, and it impacts on other sectors by increasing their efficiency. Genuine internet related technologies form only a small fraction of its $US eight trillion worth.
The stabilization phase of the internet revolution is consequently more likely to establish a plateau very fast and we may be close to reaching this plateau. Firstly, the limits of speed have been reached. It is hard to imagine how the global real time communication of today may be surpassed tomorrow. In addition, capacity and speed of computers and networks have changed the roles in the interaction between machine and the user in general. Up to a few years ago the user had to wait for the machine, now the machine has to wait for the user. Secondly, many markets seem consolidated; more than in any other industry the big players have formed oligopolistic structures nearly everywhere on the net and this will make it difficult for small companies to grow. The risk that stabilization gives way to stagnation is therefore much higher than for material revolutions whose products need maintenance and replacement.
The internet can be labeled a post industrial revolution. It radically changed social life and increased productivity by globalizing industrial efficiency. However, the internet created almost no material goods beyond those it needed to sustain and develop itself. Its dependency on the old economy is evident with the flagships of the internet like Google or Facebook mainly or completely resting on the shoulders of the old economy and above that, reflecting its supply-sided nature: They earn their money with advertisements.