America’s Shrinking Presence on the Global Internet


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Global Internet Advisors White Paper: America’s Shrinking Presence on the Global Internet - Opportunity, strategy, reality

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America’s Shrinking Presence on the Global Internet

  1. 1. WHITE PAPER America’s Shrinking Presence on the Global Internet Opportunity - Strategy - Reality by Eric J. Gerritsen, Global Internet Advisors, Palo Alto
  2. 2. I. 1998-2008: THE DE-AMERICANIZED INTERNET Thirsty for American Kool-Aid: In the last 10 years the Internet has radically de-Americanized with profound strategic consequences for Internet CEOs, boards, VCs, investment bankers, government policy makers, and the entire U.S. economy. Over the next 10 years the most money, the largest audiences, and the biggest opportunities for Internet growth will happen outside the United States. This reality is poorly understood. As a result most American Internet CEOs are leaving big money on the table, short-changing their investors, and limiting employee opportunity. Without effective global strategies CEOs will never achieve maximum company scale, full revenue potential, or the high valuations that reward category leaders. On the bright side, American Internet CEOs who do rapidly grasp this permanent new reality – and who develop dynamic strategies to engage with it – will create world-leading firms, generate greater revenues and profits, and deliver superior returns to investors. Tapping the revenue potential of these gigantic new global markets is the number one driver of Internet company value for the next five years. This remarkable situation only recently became true. When I first got involved in the American Internet in 1998, fresh off eight years in Asia, the Internet was an overwhelmingly American phenomenon. IN 1998: • Over 50% of the world’s Internet users were in the United States. • Revenues were almost exclusively derived from American sources. • All the leading companies – Yahoo, AOL, Lycos, Infoseek,CompuServe, Altavista, Microsoft, Netscape – were American. • Internet IPOs were all American. • Key driver technologies – browsers, search engines, directories, e-commerce platforms, advertising networks – were all American. Outside the United States the 1998 version of the Internet exuded a particularly American quality: young, brash, anarchical, risk-taking. Flashy entrepreneurs fueled this image. In 1998 European and Asian companies were caught flat-footed. From Tokyo to London media and telecom executives scrambled to partner and do deals with American Internet firms in the hope that some of the fairy dust would rub off. A lot of people drank a lot of American Kool-Aid. Fast-forward to today and only 15% of the world’s 1.4 billion Internet users are American.1 2 © Copyright 2008 | Global Internet Advisors
  3. 3. Major signposts are being passed on this journey of Internet de-Americanization. This year China moved ahead of the United States to become the country with the largest number of Internet users – 235 million2 – forecast to grow to 375 million3 users by 2012. China added 90 million new users in 2007 alone.4 At 19% penetration China has a lot of potential for further growth over the next decade; at 71% penetration, America’s Internet population is saturated.5 On the wireless Internet the non-U.S. numbers are just as striking: in 2010 only 11% of the world’s 779 million wireless Internet users will be American.6 Only 12% of Americans use their phones to access the Internet, versus 78% of Japanese who do.7 Beyond China: The rise of the Global Internet is not just a China story. India will be the next 100 million user Internet country and could grow as high as 500 million users by 2012, according to targets recently set by India’s Telecom Minister A. Raja.8 The Global Internet is even much more than a “Chindia” story. Vietnam’s Internet population is predicted to increase threefold to 30 million by 2010;9 Russia and Brazil both grew over 700% between 2000-2007;10 and Africa and the Middle East – both largely absent in Internet 1.0 – grew by over 1000% in the last eight years.11 At the same time that America’s Web footprint is shrinking the American Internet is falling behind in terms of technical sophistication. Broadband penetration in the U.S. has fallen to the 25th position globally and is 15th among advanced OECD countries.12 Domains go global: Another primary indicator of the de-Americanization of the Internet AMERICA’S GLOBAL POSITION AT A GLANCE: is the critical area of domain • Percentage of global Internet users that are American – 15 i registrations. Of the 168 million • Year in which non-U.S. paid search market is bigger than the U.S. – 2009 ii domain names registered globally • Percentage of global wireless Internet users that are American – 11 iii • America’s share of estimated $500 billion global e-commerce market in 2008 – 34% iv only 38% are owned in America.13 • America’s Internet population rank – #2 v • Percentage of global domain names owned and operated in America – 38 vi The fastest-growing domains • American search query volume as percentage of global total – 26 vii • Percentage of Google’s Q2/08 revenues that came from non-U.S. sources – 52 viii are domains, including • Rank, globally of U.S. broadband penetration – 25th ix country-code top-level domains • Percentage of YouTube users that are in America – 25 x like .de (Germany) and .cn (China), and new top-level generic domains like .eu (Europe) and .asia (pan-Asia). China domains, for example, grew to 12.4 million registrations in 2008.14 Another domain-industry development that bodes for further Internet de-Americanization is ICAAN’s plan to allow for local language extensions in Chinese, Arabic, etc. 3 © Copyright 2008 | Global Internet Advisors
  4. 4. This could lead to an explosion of non-Roman language activity as businesses make their offerings truly local. The advantages are obvious. For example, if a Chinese vendor wanted to sell cars to Chinese people in Beijing would he rather own “” or “ ”(“”)? Against this backdrop of Internet de-Americanization many governments and non-U.S. players feel that the Root File (the Internet basic “address book”) should be managed by a neutral group like the United Nations or the International Telecommunications Union and not the U.S. Department of Commerce. What if China wanted to create its own Root File for the Chinese Web? Search - New International Players: Another key Internet sector that is rapidly de-Americanizing is search. Google has made a spectacular sprint across the globe in recent years to be the search leader in most countries, but it is far from clear that its strength is unassailable. In China, Baidu leads with an impressive 60 percent market share; Google sits in second with 25.9 percent.15 In Russia, Yandex is the leader; in Korea Naver leads.16 Four out of the top 10 search engines used globally are now non- U.S. players and Baidu is the third-largest search engine in the world – ahead of Microsoft.17 In query volume – the number of searches done by users and a key industry metric – the United States represents only 26% of global search activity.18 Social media goes global - quickly: In the red-hot social networking sector only 21% of the global user base of 506 million is American.19 The majority of Facebook users, the world’s largest social network, are not American.20 Half the “Tweets” on Twitter come from non-American users.21 Friendster has 88% of its users in Asia22 and almost half of LinkedIn’s users come from outside the U.S..23 Internet CEOs have no choice but to adapt to these new international realities. II. MONEY FOLLOWS USERS U.S. financiers missing the party?: As Internet action grows overseas local financial groups have stepped up with money and international stock exchanges are offering serious alternatives to a NASDAQ offering – the ultimate Web 1.0 status symbol. Since Google’s spectacular 2004 IPO, the largest Internet IPO globally has been from 4 © Copyright 2008 | Global Internet Advisors
  5. 5. Hangzhou, China-based Alibaba, which raised a whopping $1.5 billion in its Nov., 2007 IPO.24 Notably, this money was raised on the Hong Kong Stock Exchange – not on the NYSE or NASDAQ. One third of the 15 Chinese Internet IPOs since 2004 (that collectively raised $5.1 billion) listed in China.25 In venture capital the size of non-U.S. Internet deals has also become impressive. In April, 2008 Japanese telecoms firm Softbank invested $430 million26 in Beijing-based Oak Pacific Interactive, owner of leading Chinese social network Xiaonei, dwarfing the $240 million that Microsoft invested in Facebook. For American Internet VCs these trends should be particularly distressing as they try to find and fund the next round of $100 million Internet companies. This new value creation and exit cycle – where Chinese Internet companies get funded by Chinese money; serve Chinese users; exit on Chinese stock exchanges or get sold to other Chinese companies – leaves no oxygen for American VCs, investment bankers, and stock exchange operators. With the rise of Asia on the Internet we can expect an increase in intra-Asian expansion activity like Baidu launching its search engine in Japan and Softbank investing in social network Xiaonei. We will also likely see more activity from Asian and European Internet companies buying U.S. operations, like Rakuten buying Linkshare, Daum buying Lycos, and Russia’s SUP buying LiveJournal. Direct Asian financial investments from Asia into U.S. Internet companies – like Hong Kong’s Li Ka-Shing (one of Asia’s richest men) investing $60 million in Facebook27 – can also be expected to happen more often. These developments are a net positive for U.S. Internet entrepreneurs. Asia can be a valuable source of development capital and foreign buyers could represent a new source of exits for American Internet firms, particularly during this period of closed IPO markets. International revenue outstrips U.S.: As Internet audiences grow faster globally than in the United States advertising and e-commerce revenues are following. America’s share of global B2C e-commerce is expected to be only 34% of the roughly $500 billion in revenues expected in 2008.28 In Q2 2008, for the first time, Google reported more (52%)29 revenue from outside the U.S. 5 © Copyright 2008 | Global Internet Advisors
  6. 6. than at home and Google is not alone: for the full financial year 2007 Yahoo got 32%30 of it revenues from non-U.S. sources; eBay 51%;31 Amazon 45%;32 and Cisco 46%.33 For ad-supported firms in particular these figures can be expected to grow substantially. Of the $106 billion to be spent on online advertising by 2011 less than half ($45 billion) will be spent in the United States.34 China leads the pack again on adspend growth rates, growing by 50% this year.35 Beyond China the fastest growing regions for global online adspend this year will be Central and Eastern Europe and the Middle East and Africa with average annual growth rates of 42.1% and 29.8% respectively.36 III. U.S. INTERNET EXPERIENCE ABROAD: 1998-2008 – a mixed bag: The results of the last 10 years of international expansion by U.S. Internet companies have been very mixed, with the singular exception of Google, and have rarely created market leadership positions. In China eBay has tried and failed to knock off Chinese rival Taobao; Yahoo has tried and failed to overcome Chinese portals Sina and Sohu; and Google has tried and failed to close the gap with local search champ Baidu. Other notable examples in specific international Internet sectors where non-U.S. companies lead include: • Bebo, which leads both MySpace and Facebook in Europe. • Huawei, which leads Cisco in infrastructure in China. • Rakuten, which leads Amazon in online shopping in Japan. • NTT, which leads everyone in Japan’s wireless Internet. •, which leads Facebook by a huge margin in Japan. • Xiaowei and Zhanzuo, which beat MySpace and Facebook in China. In the social network market Asia is the prize but Asia will be a tough nut to crack for companies like MySpace with 61% of its users in the United States.37 In Japan MySpace is 1/10th the size of the leader Mixi.jp38 and as of June, 2008 Facebook only had around half million users in Japan.39 Neither company has made much progress in China. Local social media players Naver, Daum, and Cyworld dominate Korea. Moving ahead in places like China, where foreign-ownership restriction laws prohibit control, has been difficult for American firms. Yahoo and eBay have had to take minority stakes in their China-equivalent sectors: Yahoo owns 39% of Alibaba; and eBay owns 49% of Tom Eachnet, a JV with Tom Online. 6 © Copyright 2008 | Global Internet Advisors
  7. 7. But giving up control is not necessarily a bad thing. Yahoo Japan, controlled by Softbank of Japan, has been a notable international success. It sits in the number one position in Japan with revenues of $1.8 billion in 2007 and a public market capitalization of $19.7 billion.40 Lessons: If the last 10 years of American Internet company international expansion has taught one thing it is that global plans need to be baked in to overall strategy from the beginning. Waiting two or three years to take control of international opportunities is a mistake. Competitors watch everything happening in the American market and American firms that wait will usually find that when they do go overseas their market position is occupied by fast-moving, plugged-in local firms. Facebook’s experience in China is a good example. Another common mistake has been to confuse strategy with localization. Language localization is hugely important but is a second-tier consideration. Strategy comes first, including an understanding of fundamental objectives; cultural fit; user experience needs; partner and alliance possibilities; local economics; competitive grid; M&A opportunities; local pricing; executive and technical talent availability; and government regulatory environments. Perhaps the more fundamental mistake has been to see international Internet traffic as less valuable than U.S. traffic and somehow deserving less attention and investment. No doubt monetizing U.S. traffic has been easier, and on a per-capita basis U.S. eyeballs are generally more valuable, but the simple math says that international traffic in toto is worth more. IV. CONSEQUENCES AND THE NEXT 10 YEARS Who should care?: American Internet CEOs & board members should have a deep interest in understanding how the permanent de-Americanization of the Internet affects their companies. Can a CEO get away with targeting only the American (15%) portion of the total available market? If not, “What is the global strategy?” For board members of U.S. Internet companies the globalization of the Internet poses some real challenges. To begin with, board-level international experience in Internet markets is thin on the ground. This makes it difficult for boards to judge CEO product and commercial strategies around international growth. 7 © Copyright 2008 | Global Internet Advisors
  8. 8. Parochial venture capitalists: For VCs the de-Americanization of the Internet presents some sobering challenges, particularly for VC firms that do not have the scale, talent, or ability to source, fund, and develop overseas deals. Of the roughly 800 VC funds operating in the United States only a handful have full-time partners and offices in places like India, China, Vietnam, or the Middle East/Africa. Less than five percent of American VC money under management goes into foreign deals.41 For American investment banks hoping to take American Internet companies public the future is bleak. In the second quarter of 2008 there were no VC-backed IPOs in America. This has not happened since 1978 and by the time the American IPO market turns around financial centers like Hong Kong, London, Singapore, Shanghai, or Dubai with less stock exchange regulation, promising local companies, and local investor support may have permanently changed the Internet IPO landscape. For policy makers in Washington the shrinkage of America’s presence on the global Internet should be deeply worrying. Tax dollars, technological edge, employment opportunities, and prestige are all seeping overseas. American lawmakers have actively made matters worse since the dotcom crash with the introduction of Sarbanes-Oxley and the passage of restrictive immigration laws that make it harder for foreign nationals to come to the United States and be entrepreneurs or complete graduate studies. American lawmakers interested in tax receipts should also worry that it has taken only 13 years (from Netscape’s IPO in 1995) to go from near total American dominance and leadership on the Internet to a de-Americanized Internet. America’s declining (relative) position on the global Internet has also exposed a dangerous macroeconomic fallacy that argues that American standards of living can withstand competition from abroad by moving to ever-higher value industries like the Internet. Thirteen years is not enough time to recoup the economic benefits of industry investment and leadership. By comparison it took the American car industry exactly 100 years (from the Model T in 1908) to lose a similar global leadership position. SWOT: American Internet industry strengths are many. The United States still leads in creating innovative ways for consumers to use the Internet. Up to now, most non-U.S. Internet success stories have been copycats or iterations of America-developed ideas. The English language is another strength and opportunity that American Internet companies have that is among the least appreciated. 8 © Copyright 2008 | Global Internet Advisors
  9. 9. English remains by far the dominant language on the web, with 430 million42 users versus 276 million for Chinese. This is particularly true in view of the rise of India and the widespread use of English as a second language in Asia, Africa, the Middle East, and Latin America. Australia, Canada, New Zealand, the U.K., and Singapore are all wealthy and attractive English-speaking markets where U.S. firms can do well through effective localization. Excellence in Global English markets should be a cornerstone of any effective U.S. Internet firm’s international strategy. While the potential for growth is strong, so are the challenges. Americans are respected the world over as expert marketers but the next generation of Internet marketing challenges – selling to fragmented, multilingual global markets – will be unfamiliar territory for most U.S. marketing executives and represents a strategic weakness. China remains a daunting challenge. International Expansion Sequence While the numbers surrounding China’s Internet are huge and compelling Old School New School it is not at all clear that these are Launch product/service See what happens Launch product/service See what happens necessarily the strongest revenue and Discover a lot (most?) traffic is international Ignore it because you don’t know what to do with it Discover a lot (most?) traffic is international Immediately decide on a strategy to monetize and grow this traffic profit opportunities for American firms. Stay ‘focused” on U.S. priorities Decide if your product/service has an American or Global future Competitors see good idea - start to run 2-4 years later decide to go international If Global, define separate China, Japan, India, South-East Asia strategies As soon as a good idea rears its head in Define Global English strategy Go somewhere understandable like Canada or UK A year or more later look at Asia Define select Eurozone territory strategies Execute international strategy in parallel to U.S. efforts - mark territory Silicon Valley it is copied in China (over Result: lost market share; lost revenue; lower valuation; fewer strategic options Cede no ground to competitors Take all the marbles - Be happy 200 YouTube copycat sites alone!). Result: greatest revenue; biggest audience; thwarted competition; highest valuation; most strategic options India may make a better target for some U.S. firms over the next two years. Summary: The Global Internet has undergone a profound process of de-Americanization over the last 10 years and 2008 will be remembered as a watershed moment when the balance of Internet power shifted permanently overseas. Either CEOs adopt rapid and effective international expansion and execution strategies or their companies will be marginalized to ever-smaller pieces of the Global Internet. The good news is that the next ten years will be the Golden Era of the Global Internet. Opportunities are huge. Major new companies and thousands of small and medium sized-companies will be born. Great wealth will be generated. Many of those companies will not be American and much of that wealth will not be denominated in dollars. Whether American, Asian, or European the most wealth will go to companies with the best global strategy. Eric J. Gerritsen is Principal of Global Internet Advisors, a Silicon Valley-based international strategy consulting firm. Gerritsen is a former VP-International of Lycos Inc. and can be reached at eric@globalinternetadvisors DOT com. 9 © Copyright 2008 | Global Internet Advisors
  10. 10. SOURCES Sources (Box): i ii*d_170762.pdf*h_-3ohpnmv iii iv*d_170762.pdf*h_-3ohpnmv v vi & vii viii Google ix x Sources (Body Text): 1 2 3 4 5 6 7*d_170762.pdf*h_-3ohpnmv 8 9 10 11 12 13 & 14 15 16 17 18 19 20 21 22 23 24 25 GIA research 26 27 28*d_170762.pdf*h_-3ohpnmv 29 Google 30 Yahoo 31 eBay 32 Amazon 33 Cisco 34 35*d_170762.pdf*h_-3ohpnmv 36 37 38 39 40 Yahoo 41 National Venture Capital Association 42 10 © Copyright 2008 | Global Internet Advisors