The Internet Value Chain

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THE INTERNET VALUE CHAIN

Figure 7

EBIT margin across the internet value chain

CR ONLINE SERVICES ENABLING

TECHNOLOGY CONNECTIVITY USER INTERFACE

& AND SERVICES

MADE FOR DIGITAL

M2M

SATELLITE

SPORTS OTHER E-SERVICES

PAYMENT

OPERATING

INFORMATION AND REFERENCE

CLOUD SERVICES

PLATFORMS

SYSTEMS

SEARCH

SOCIAL AND IP COMMS

OTHER

COMMUNITY

CONSOLES SMART

B2B COMMS ADVERTISING

SERVICES

FIXED

ITEMS

PUBLISHING

GAMING

GAMBLING

TABLETS

MUSIC

VIDEO

PUBLISHING

VIDEO

MUSIC

CORE NETWORK

AND INTERCHANGE

AD AGENCIES

CONTENT DELIVERY

AND OPTIMISATION

SMART TVS

PCS

APP

STORES

SECURITY

AND

SOFTWARE

OTHER

HARDWARE

WEARABLES

STBS

AND

DMRS

GAMING

B2B E-RETAIL

B2C E-RETAIL

E-TRAVEL

DESIGN AND

DEVELOPMENT

WEB HOSTING

MOBILE

SMARTPHONES

6% 13% 9% 13% 9%

Average EBIT margin: 25%

Note: The value chain is represented at category level, except when showing it at subcategory level would enhance the analysis and understanding.Average EBIT margin is derived from the

top three to eight players per category. To ensure representative financials, only companies that derive at least 30% of revenues from the category are included. CR is content rights, IP is

internet protocol, M2M is machine to machine, STB is set-top box,and DMR is digital media receiver.

Sources: Financial statements, investor presentations, broker reports; A.T. Kearney analysis

By contrast to online services, the high levels of

competition and product or service commoditisation in

the connectivity and user interface segments have been

major factors in suppressing profit margins. Apple is one

of the few exceptions, thanks to its success in building a

differentiated product and operating ecosystem at the

high end of the market. A recent industry report

estimates that Apple captured 94 per cent of the profits

of the smartphone sector in Q3 2015, despite accounting

for less than 14 per cent of smartphones shipped.6

Certain low-margin online services, such as cloud

services and IP communications, are provided as loss

leaders to consumers. At the time of writing, Microsoft

and Amazon both offer 5 gigabytes of free online cloud

storage, while IP communication services such as

WhatsApp, Facebook Messenger, and Skype form an

important part of their parent companies’ ecosystems as

traffic drivers, without the intention for them to be major

profit contributors on their own.

6 Source: Canaccord Genuity

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