The Internet Value Chain



THE INTERNET VALUE CHAIN the impact of being a market leader in categories with high network effects. While these companies had ROCE of 13 per cent and 20 per cent respectively, most other social network and dating providers had low-to-negative returns. Similarly, EBIT margins of 40 per cent for Facebook and 24 per cent for Match were very substantial compared with single-digit margins for most of the rest of the category. A small number of categories appear to enjoy both relatively high profitability and return on capital. These include gaming and gambling, both of which enjoy strong network effects, willingness to pay, and customer loyalty (or ‘stickiness’) in relatively low capital-intensity sectors. Shareholder value When considering the relative shareholder value of the five segments of the internet value chain since 2009, again based on a basket of representative companies, major differences emerge (see figure 9). Online services companies have on the whole significantly outperformed all other segments. This reflects general confidence in the future growth prospects of the biggest internet companies, and their ability to retain and improve their market position and business performance. When compared with the market as a whole, all segments except connectivity outperform the S&P 500 Index, which generated average annual returns of 12 per cent during the 2009–2015 period. Figure 9 Market capitalisation by segment Index (1 January 2009 = 100%) 1,400% Segment, CAGR 1,200% 45% Online services 1,000% 800% 600% 400% 22% 17% Enabling technology and services User interface 200% 16% Content rights 6% Connectivity 100% 0% 2009 2010 2011 2012 2013 2014 2015 Notes: Market capitalisations are based on a basket of players for each category: A) Online services: Amazon, Google, Netflix, Alibaba, eBay, Baidu, Tencent, Facebook, Priceline,,; B) Enabling technology: Akamai, Google, Level 3, GoDaddy, Publicis, PayPal; C) User interface: Microsoft, Apple, Samsung, Dell, Cisco, Sony; D) Content rights: Walt Disney, Newscorp, Time Warner, Warner Music Group, Vivendi, Electronic Arts; E) Connectivity (top 10): China Mobile, Verizon, AT&T, Vodafone, NTT, Softbank, Deutsche Telekom, Telefónica, América Móvil, China Telecom. Content rights and connectivity companies generally pay out higher dividends than the technology companies in the other segments, which will reduce market cap on a relative basis. Sources: Bloomberg; A.T. Kearney analysis 28

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