The Internet Value Chain

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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