Internet Usage Trends and Economic Development :BCG Case Study in UK


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Internet Usage Trends and Economic Development :BCG Case Study in UK

  1. 1. ReportThe Connected KingdomHow the Internet Is Transforming the U.K. Economy
  2. 2. The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor onbusiness strategy. We partner with clients in all sectorsand regions to identify their highest-value opportunities,address their most critical challenges, and transform theirbusinesses. Our customized approach combines deepinsight into the dynamics of companies and markets withclose collaboration at all levels of the client organization.This ensures that our clients achieve sustainable compet-itive advantage, build more capable organizations, andsecure lasting results. Founded in 1963, BCG is a privatecompany with 70 offices in 41 countries. For more infor-mation, please visit
  3. 3. The Connected KingdomHow the Internet Is Transforming the U.K. Economy Carl Kalapesi Sarah Willersdorf Paul Zwillenberg October 2010 commissioned by
  4. 4. © The Boston Consulting Group, Inc. 2010. All rights reserved.For information or permission to reprint, please contact BCG at:E-mail: bcg-info@bcg.comFax: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA
  5. 5. ContentsPreface 4Executive Summary 5The U.K. Internet Economy: A Snapshot 7Active and Adventuresome Internet Users 7Online Shopping 7Mobile Access 8Exclusion from the Internet 8The Internet’s Ripples: GDP and Beyond 9Internet GDP Calculated 10Beyond GDP: Consumer and Business Economic Impacts 11Beyond GDP: Higher Productivity 13Beyond GDP: Broader Social Benefits…and a Few Concerns 14Internet Intensity 15On the Global Stage 15Elsewhere in the World 17Regional Differences 17The Great Transformation 19Teaching Old Companies Internet Tricks 19Reshaping Industry 21The Big Embrace by Small and Medium Enterprises 24Big and Getting Bigger 29The Upside and the Downside 29Shaping the Future 30Appendix: Methodology 33Note to the Reader 36The Connected Kingdom 3
  6. 6. PrefaceT he so-called Internet economy is not well About the Authors understood—a surprising fact considering Carl Kalapesi is a consultant in the London office of The that the Internet has been analysed and Boston Consulting Group. You may contact him by e-mail studied to death. But it is difficult to arrive at Sarah Willersdorf is a princi- at meaningful estimates of the Internet’s pal in the firm’s London office. You may contact her bysize and growth. e-mail at Paul Zwillenberg is a partner and managing director in BCG’s London of-In order to understand the nature and size of commercial fice. You may contact him by e-mail at zwillenberg.paul@activity on the Internet in the United Kingdom, Google commissioned The Boston Consulting Group (BCG)to prepare this independent report. The results have beendiscussed with Google executives, but BCG is responsiblefor the analysis and conclusions.Both Google UK and BCG are pleased to present thesefindings in order to foster a better understanding of howthe Internet helps power the U.K. economy.4 The Boston Consulting Group
  7. 7. Executive SummaryT he United Kingdom has embraced the commercial Compared with other developed nations, the United Internet and is now home to the largest per Kingdom has high levels of Internet activity, but this capita e-commerce market and the second-largest strength masks significant regional differences. online-advertising market globally. But the char- acter of the U.K. Internet economy is not well un- ◊ On the BCG e-Intensity Index, which measures thederstood. This report aims to describe and quantify it. depth and reach of the Internet in commerce and so- ciety, the United Kingdom performs well in onlineIn 2009, the Internet contributed an estimated £100 sales and advertising but not in infrastructure.billion, or 7.2 percent of GDP to the U.K. economy. , ◊ London is the leading region for Internet use, followed◊ This share is larger than that of the country’s construc- by the South East and East of England. Internet usage tion, transportation, or utilities industry. is lower in the rest of the country.◊ About 60 percent of the Internet economy is driven by While the Internet has disrupted several industries, consumption, a reflection of the United Kingdom’s it has empowered many others, especially small and strength in e-commerce. medium enterprises (SMEs).◊ The United Kingdom is a net exporter of e-commerce ◊ Proprietary research shows that SMEs which are active goods and services, exporting £2.80 for every £1 it online are more successful, growing more quickly and imports. reaching wider markets than their peers.The significance of the Internet to the U.K. economy ◊ SMEs are selling everything online from tights and tar-is actually greater than these numbers suggest be- tans to games and advanced e-mail services.cause important economic activities of both consum-ers and businesses are not directly captured by GDP. The U.K. Internet economy is likely to grow by 10 per- cent per year, reaching 10 percent of GDP by 2015.◊ Consumers benefit from the Internet by purchasing products offline which they researched online (about ◊ Consumption will be the largest contributor to £40 billion per year), by saving money through online growth—assuming modest increases in broadband shopping (about £18 billion per year), and by consum- adoption and in consumer acceptance of online shop- ing free online content (about £5 billion per year). ping.◊ Commercial activities not included in GDP calcula- ◊ The size and nature of this growth—and the winners tions include business-to-business e-commerce (about and losers which result—will depend on the actions of £360 billion per year), online advertising (about £3.5 businesses, governments, and individuals. billion per year), and productivity improvements.The Connected Kingdom 5
  8. 8. 6 The Boston Consulting Group
  9. 9. The U.K. Internet Economy A SnapshotT wenty-five years ago, the first address Active and Adventuresome Internet was quietly registered. A decade later, the Users commercial Internet engine was roaring, and the United Kingdom was quickly The United Kingdom has become a power user of the In- emerging as a leading force. ternet. More than 19 million of its 26 million households have an Internet connection. Broadband penetration hasToday the country is the largest per capita e-commerce more than doubled since 2005.1market and second-largest online-advertising market inthe world, after the United States. The United Kingdom Users are increasingly active and adventuresome on themay not be home to Internet giants such as Facebook, Internet. The average U.K. user spent nearly an entire 24-Google, Yahoo!, or eBay, but it has produced Sir Tim hour day on the Internet in April 2010, an increase of 65Berners-Lee, the father of the World Wide Web, and a percent in just three years. Close to one-quarter of thatsolid base of savvy online consumers and companies time was devoted to social-networking sites and blogs,whose success is driven by their use of the Internet. double the time spent three years ago. Indeed, about 25 million U.K. consumers are members of Facebook.A wide range of companies are actively exploiting the In-ternet for commercial advantage, including retailer John The Internet is gaining on television as the most popularLewis—which reported a 36 percent increase in online media activity. Among 16- to 24-year-olds, more time issales in the first half of 2010—and UK Tights, a family spent on the Internet than in front of the television. Con-operation which sells hosiery online. sumers rank sending and receiving e-mail and text mes- sages, making mobile phone calls, and general InternetBut how big is the United Kingdom’s Internet economy? use as more important than watching television.Remarkably, that question has not been widely studied,perhaps because the answer is not easy to uncover, letalone explain. It is nonetheless an important question for Online Shoppingpolicymakers and business executives to address. U.K. residents are active and avid online shoppers. AboutBy putting a value on the U.K. Internet economy and ex- 62 percent of adults, or 31 million people, have boughtploring its commercial character, we hope to provide a goods or services online in 2010. Collectively, they spentcontext for business executives and government officialsto make better and more informed strategy and policy 1. The statistics in this chapter come from the Interactive Advertis-decisions. ing Bureau Europe; the Interactive Media in Retail Group; the UK Online Measurement Company/Nielson survey, May 2010; U.K. Of-In order to set the stage for that broader discussion, we fice of Communications (Ofcom), The Communications Market Report 2010; Martha Lane Fox, Manifesto for a Networked Nation, a reportfirst discuss how companies and consumers in the United commissioned by the U.K. government; and the Oxford Internet In-Kingdom use the Internet. stitute, July 2010.The Connected Kingdom 7
  10. 10. about £50 billion in 2009 on goods and travel, or about Exclusion from the Internet£1,660 each. The clothing and sporting-goods categoryis the most popular, both overall and among women. Access to the Internet, however, is not universal in theFor men, it’s film and music. Half of all travel is booked United Kingdom. One-fifth of the adult population—online. Meanwhile, 38 million U.K. consumers have ac- around 9 million people—have never gone online. Thesecessed eBay, while 7 million have sold an item on the auc- people tend to live in rural areas at a distance from Lon-tion site. don. Although nonusers are concentrated in the lower in- come groups, cost is only the fourth-most-cited explana- tion for not using the Internet, after lack of a reason to goMobile Access online, lack of skills, and lack of desire.Nearly one-third of U.K. Internet users, or 31 percent, About 60 percent of those aged 65 or older have neverhave accessed the Internet on their mobile phone, up used the Internet. Nearly two-thirds of nonusers are infrom 23 percent in 2009. That share rises to 44 percent this age group. Progress, however, is being made. Moreamong users aged 16 to 24. Facebook is the most popular than half of the 1.9 million new Internet users over theU.K. mobile Internet site. past year were aged 50 or older. One of the challenges for the United Kingdom—and for all nations—is to bring thisThe popularity of the iPhone and other smartphones is final fifth of the population into the Internet age.fuelling this rapid rise in mobile data traffic, which tripledfrom the fourth quarter of 2008 to the fourth quarter of2009. Over half of smartphone users say they frequentlyaccess the Internet on their phone. By the second quarterof 2010, 12.8 million smartphones were in use—morethan a quarter of all mobile phones.Tablets, such as the iPad, will likely be the next populardevice for accessing the Internet. While U.K. consumerslag U.S. consumers in their awareness of tablets and e-readers, 20 to 40 percent of those surveyed in a recentBCG survey said they were interested in buying one ofthese devices in the next year.8 The Boston Consulting Group
  11. 11. The Internet’s Ripples GDP and BeyondT he Internet’s influence on commerce and such as groceries bought on These transac- society in the United Kingdom is large, pal- tions make up the bulk of the inner circle shown in Ex- pable, and growing. But measuring that in- hibit 1. The remainder of this circle comprises invest- fluence is difficult. There are visible and ments, government spending, and net exports. easy-to-measure indices, such as onlinesales, but also less obvious factors, such as productivity 2. It is frequently difficult to calculate the economic impact of agains, which defy easy quantification.2 general-purpose technology such as the Internet which transforms and pervades commerce and society. The steam engine, electricity, and the internal combustion engine presented similar challenges.We have broken down the Internet’s economic impact While it may once have made sense to ask about the size of theinto four key parts. The measurable transactions include “electricity economy,” that question is now moot. Electricity is fullydigital transactions—downloads of a movie on LoveFilm, woven into the fabric of the developed economies. The Internet is not yet as ubiquitous as electricity, but the analogy illustrates thefor example—and transactions which originate on the In- difficulties of defining and sizing the Internet economy and de-ternet but terminate in the world of trucks and planes, scribing its growth. Exhibit 1. Only Some of the Internet’s Impacts on the U.K. Economy Are Captured by GDP U.K. Internet economy captured by GDP, including: ◊ Consumption, investment, government spending, and net exports Ring 1. Consumer and business economic impacts not captured by GDP, including: ◊ Business-to-business e-commerce ◊ Online advertising ◊ Consumer benefits Ring 2. Productivity impacts, including: ◊ Productivity gains from e-procurement in manufacturing ◊ Productivity gains through e-sales in wholesale and retail trade Ring 3. Broader social impacts, including: ◊ User-generated content ◊ Social networking ◊ Fraud and piracy Source: BCG analysis.The Connected Kingdom 9
  12. 12. In addition, the Internet creates ripples which move supply chain, including ordering, stocking, transport, de-through the rest of the economy. These effects may be livery, and customer care.measurable, but they are not included—or they are onlyindirectly reflected—in GDP calculations. For example, Ring 3 covers social effects of the Internet which are sim-the Internet has helped launch new types of businesses ply not measurable, such as sharing user-generated con-and bring down transaction costs. It unites buyers and tent, using social-networking sites, and staying connectedsellers who would otherwise be unlikely to transact, it with faraway friends and family through video chats.speeds procurement cycles, and it enablesconsumers to rapidly compare prices. We The measurable sizehave divided these “beyond GDP” effects Internet GDP Calculated of the U.K. Internetinto three parts, shown in the three outerrings in Exhibit 1. economy in 2009 was The measurable size of the United King- £100 billion, or about dom’s Internet economy in 2009 was £100Ring 1 covers the significant economic im- billion, or roughly 7.2 percent of GDP. (Seepacts of the Internet from three sources: 7.2 percent of GDP. Exhibit 2.) Its share is larger than that ofbusinesses-to-business e-commerce; online the country’s construction, transportation,advertising; and various consumer benefits, such as the or utilities industry and is slightly smaller than that of theconsumer surplus—the difference between what consum- financial industry. (See Exhibit 3.) These comparisons areers are willing to pay for a product and what they actu- offered in order to give a sense of the scale of the Inter-ally pay. net’s effects rather than as an absolute barometer of eco- nomic performance. (See the sidebar “Three Ways to SkinRing 2 covers the impact of the Internet on productivity an Economy.”)across the manufacturing and service sectors. For exam-ple, the Internet has allowed Arena Flowers, a company Despite its limitations, this £100 billion figure conveys theprofiled later in this report, to automate and control its Internet’s economic punch—and its rapid evolution. Ear- Exhibit 2. Consumption Accounts for Most of the U.K. Internet Economy Consumption 59 Investment 18 Government spending 25 Exports 18 Imports 19 Internet economy 100 7.2% Share of £billions 2009 GDP Sources: Sanford C. Bernstein; European Commission; Gartner; IMRG; U.K. Office for National Statistics; Ovum/Datamonitor; BCG analysis. Note: The components of the Internet economy do not add up to 100 because of rounding.10 The Boston Consulting Group
  13. 13. Exhibit 3. If the Internet Economy Were a Separate Sector, It Would Be the United Kingdom’s Fifth Largest Sector size as a share of 2009 GDP (%) Real estate and business services 1 23 Manufacturing 12 Wholesale and retail 11 Financial services 9 Health and social work 7 Construction 6 Education 6 Other services 5 Public administration and defence 5 Transport and storage 5 Mining 3 Hotels and restaurants 3 Communications2 2 Utilities 2 Agriculture 1 Internet’s 7.2% share Sources: U.K. Office for National Statistics; BCG analysis. Note: The size of the various sectors and the size of the Internet economy were calculated using different GDP methodologies, so direct comparisons are not precise. For example, the Internet economy includes slices of other sectors. 1 This sector includes rents and the imputed cost of home ownership, in addition to business activities and business services. 2 This sector includes telecommunications, so there is a large overlap with the Internet in the century, during the funny-money dot-com era, information and communications technology (ICT)the Internet helped produce tremendous wealth for a few equipment.shareholders but not much revenue. Today the Internetis helping to strengthen the U.K. economy. Beyond GDP: Consumer and BusinessSpecifically, nearly 60 percent of the country’s Internet Economic Impactseconomy consists of consumption, comprising two mainparts: consumer e-commerce (about £50 billion, up from Business-to-business e-commerce, online advertising, andjust £2 billion in 2001) and consumer spending on Inter- a variety of consumer benefits are all measurable, evennet service providers and devices to access the Internet if they do not count on a GDP scorecard.(about £10 billion). In other words, U.K. consumers spendsignificantly more money online than they do getting on- Business-to-Business E-Commerce. Business purchasesline. The remaining 40 percent of the Internet economy over the Internet and other electronic channels exceededis driven primarily by government spending and private £360 billion in 2008, representing 23 percent of the totalinvestment in Internet-related technology. purchases of nonfinancial businesses, according to the U.K. Office for National Statistics (ONS). To avoid doubleExports are an important—although hidden—force in counting, we did not include these transactions in our es-the Internet economy. In 2009, the United Kingdom timate of GDP, since the final sale of a product includesexported £9.5 billion in e-commerce goods while import- the value of these intermediate £3.4 billion, a ratio of 2.8 to 1—the reverse of whatwas happening in the rest of the economy. This strength Mimecast, for example, a London-based cloud providerin e-commerce, however, does not show up in the figure of e-mail services to businesses, generated more than £13for overall net exports, because it includes net imports of million in revenues last year. These revenues—and thoseThe Connected Kingdom 11
  14. 14. Three Ways to Skin an Economy There are three methods of calculating GDP, and none of ◊ Consumption: goods and services bought by households them was designed with the Internet in mind. in the United Kingdom over the Internet and consumer spending on Internet access, both payments to Internet The output or production method measures the value cre- service providers and the cost of the relevant portions ated through the production of goods and services. The in- of devices come method measures total income earned by individuals and companies. The expenditure method measures total ◊ Investment: capital investment by telecom companies spending on finished goods and services. related to the Internet as well as Internet-related private investments in information and communications tech- The output method is theoretically the best way to meas- nology (ICT) ure the Internet’s contribution. It is the approach used to calculate the contributions of most traditional sectors in ◊ Government spending: public ICT spending the economy. But using this method would have required that we look at every transaction of every good or service ◊ Net exports: online goods and services and ICT equip- produced in the U.K. economy and decide whether it was ment exported less comparable imports “online” or “offline”—which is not practical with current data. It is important to be clear about the assumptions folded into the Internet’s £100 billion contribution to the U.K. The income method has its own Achilles’ heel in the many economy. Most notably, the full value of goods sold online assumptions that would have to be made about the share is counted because it gives a sense of the importance of of the income of traditional companies to be allocated to the Internet as a retail channel. Most online transactions, the Internet and the share of the income of multinational of course, terminate in the physical world, so they are not companies to be allocated to the United Kingdom. Those pure online transactions, but many of them might not assumptions would call into question the accuracy of the have taken place without the Internet as a catalyst. Data final calculation. on the “online” value generated at each link in the value chain is unavailable and estimating it would imply a false Although the expenditure method is also imperfect, we level of accuracy. (See the Appendix for more detail about chose to use this approach because it reveals the contri- the underlying assumptions.) butions of consumers, businesses, and government enti- ties to the Internet economy and approximates the sum of the online components of all the other sectors. The ex- penditure method is built on four pillars.of other companies which enable the operation of the In- touch on in a later chapter. For example, UK Tights, theternet, such as PayPal, a payments provider, or Akamai, a hosiery company mentioned earlier, has built a £1 mil-company which speeds content delivery—are not includ- lion business out of a remote warehouse through pay-per-ed in our GDP estimate. click advertisements which target consumers interested in purchasing stockings, socks, and suspenders.Online Advertising. Like business-to-business transac-tions, online advertising revenues are not included in our Consumer Economic Benefits. Many benefits to con-GDP calculations, because they do not represent final sumers which are generated by the Internet are also leftsales. Online advertising totalled £3.5 billion in 2009, or out of GDP, such as the value of goods researched online30 percent of all U.K. advertising spending, up from just but purchased offline, the cost savings from shopping on-11 percent in 2005. line, and the consumer surplus which results from access- ing free content.This advertising helps support the offering of free goodsand services on the Internet. It also helps smaller busi- We estimate the value of goods and services researched on-nesses compete against larger competitors, a subject we line but purchased offline at £40 billion in 2008, nearly the12 The Boston Consulting Group
  15. 15. size of the consumer e-commerce market.3 The retail, au- entirely on its ability to raise its output per worker.” Smalltomotive, and travel sectors represent 71 percent of this differences in productivity growth compound over timeconsumption. Shoppers make better decisions and often and boost economic performance and the standard ofsave time and money when they conduct research online, living.which allows them to compare prices and read reviews.For example, many consumers prefer to research mobile Recent research conducted by the statistical offices of 13phones and services online but to make their purchases European Union countries, including the United King-at a store. Vodafone recently estimated dom, examined the impact on productivi-that online advertising and research gen- Savings from shopping ty of three key variables related to the In-erated 1.75 new service connections pur- ternet: e-procurement, e-sales, and the online is about £18chased at a store for every connection pur- percentage of employees connected tochased online. billion, nearly £1,000 broadband.6 The largest productivity gains per online household were generated through e-procurement inCost savings from online shopping can be the manufacturing sector, through e-salessubstantial, even when shipping and han- annually. in the wholesale and retail trade sectors,dling costs are included. In a recent survey and through broadband adoption in theconducted by the ONS, 60 percent of households said business and financial services sectors.lower prices were key reasons for shopping online. Weestimate the cost savings from shopping online across a Manufacturing. A 10 percent increase in e-procurement,range of product categories at about £18 billion, or close the research found, leads to a 2.6 percent increase in pro-to £1,000 per online household annually.4 Most of these ductivity, which—given the compounding effect—is size-benefits are currently being captured by high-income able. This finding argues in favour of further integrationhouseholds, which are more likely to go online and to of e-procurement into supply chain management and thespend more money there. development of e-invoices and sophisticated inventory in- formation systems.We conservatively estimate the consumer surplus from freeonline content to be about £5 billion annually, or twice Wholesale and Retail Trade. A 10 percent increase inwhat consumers pay to access the Internet.5 According to e-sales leads to a 3.1 percent increase in productivity. Butthe previous U.K. government’s Digital Britain report, 70 in this sector, an increase in e-procurement appears to di-percent of people with home broadband services say they minish productivity, at least in the short term, as thincould not live without it. They value the Internet more wholesale and retail margins are squeezed.highly than their mobile phone, landline, or digital TV. Business and Financial Services. Giving employees ac- cess to high-speed Internet and e-procurement boostsBeyond GDP: Higher Productivity 3. This value is derived from our estimate of the proportion of peo-It seems intuitive that the Internet should increase pro- ple who purchased a product offline after researching online in 36ductivity by lowering transaction costs, accelerating and product categories and the average spending per person in each category. The proportion of customers who research online but pur-simplifying business processes, and improving the flow of chase offline comes from a survey of 2,000 households for the IABinformation. But it takes time for these benefits to show Europe/Google Consumer Commerce Barometer.up. The full impact of the steam engine was not fully en- 4. Cost savings were estimated across 15 product groups and thenshrined in productivity statistics until nearly 100 years applied to household spending by product group for each income group and by the percentage of households in each income groupafter its invention. likely to be online. 5. The estimate of what consumers would be willing to pay for se-Although academics love to debate it, this is not an aca- lected online content, over and above basic e-mail and Web brows-demic issue. As Paul Krugman, the Nobel laureate in eco- ing, is based on a survey by Entertainment Media Research of about 1,600 U.K. consumers which asked them to make hypotheticalnomics, has written, “Productivity isn’t everything, but in tradeoffs.the long run it is almost everything. A country’s ability to 6. Eurostat, Information Society: ICT Impact Assessment by Linkingimprove its standard of living over time depends almost Data from Different Sources, 2008.The Connected Kingdom 13
  16. 16. productivity in these sectors. A 10 percent increase in the tive intelligence. Finally, the Internet has brought thenumber of employees using fast broadband raises pro- world closer together through e-mail, IP telephony, in-ductivity by 0.9 percent, and a 10 percent increase in e- stant messaging, and social networking.procurement raises productivity by 1.2 percent. Knowl-edge management and customer relationship But the Internet can foster bad intentions in the samemanagement systems are probably driving the improve- way that it fosters good ones. For example, the most re-ments in these businesses. cent Microsoft Security Intelligence Report estimates that 97 percent of e-mails globally are unwanted. Some con- sumers are turned off by intrusive advertisements andBeyond GDP: Broader Social Benefits . . . commercial messages. The exchange of information isand a Few Concerns much easier, cheaper, and faster on the Internet, but that also facilitates the distribution of illicit content, such asThe writer Clay Shirky coined the phrase “cognitive sur- pornography and pirated video and music. Identity theftplus” to describe the creativity and knowledge unleashed and fraud are increasing, too. The Interactive Media inby the Internet and made available for public use. By his Retail Group (IMRG) estimates that online fraud costs thecalculation, it took 100 million hours of human thought United Kingdom £3.5 billion and affects more than 3 mil-to create Wikipedia—roughly equivalent to the amount lion Britons annually. Banks and card companies are tak-of time U.S. viewers spend watching television commer- ing preventive measures, but it is an unending game ofcials in a single weekend. cat and mouse.A creative form of cognitive surplus is provided by Lon- These risks are not deterring the public from using thedon-based mydeco, which allows consumers to design Internet, however. According to a study by the Oxford In-rooms using sophisticated 3-D online tools. Mydeco makes ternet Institute, only 12 percent of those who havemoney on advertisements and commissions from stores stopped using the Internet cite privacy concerns as a rea-whose goods are displayed on the site. But customers fre- son, and only 9 percent cite spam and viruses.quently offer their designs to one another for free, andthe value of this service is not captured in GDP.The distribution of content, too, has been revolutionisedby the Internet. Consumers themselves have created use-ful content, not just in such obvious places as Wikipediabut also through product reviews, special-interest blogs,and social-networking sites. Crowdsourcing has helpedgenerate news reports, traffic updates, and other collec-14 The Boston Consulting Group
  17. 17. Internet IntensityA lthough the Internet is global, not all na- ture and engagement (each with a 25 percent weighting). tions have embraced it equally. Some, Despite its assumptions and the inherent margin of error, such as South Korea, have built advanced such an index does help to show a country’s strengths broadband infrastructures. The Nordic and weaknesses, especially at the sub-index level. (See nations, in particular, have excelled at Exhibit 5.)bringing businesses, government, and consumers to theInternet. But others are falling behind. Enablement. The United Kingdom ranks in the middle of the pack on the enablement sub-index, which meas- ures broadband adoption by consumers and businesses,On the Global Stage smartphone adoption, and average download and upload speeds. Slow broadband speeds dragged down the U.K.How well does the United Kingdom fare compared with score. In a ranking of 23 OECD nations on broadbandother countries? To answer that question, we created the speed, the United Kingdom finished near the bottom, atBCG e-Intensity Index to measure the depth and reach of 17. Only 15 percent of U.K. subscribers have connectionthe Internet in commerce and society among the nations speeds above 5 megabytes per second, compared with 65of the Organisation for Economic Co-operation and De- percent in South Korea, 60 percent in Japan, 40 percentvelopment (OECD).7 The United Kingdom does well in most of the Scandinavian nations, and 25 percent inamong OECD nations, scoring similarly to the Nether- the United States. Average monthly access costs, however,lands, Norway, and Finland and better than Germany, the are low, at £14.United States, and France. Among large European econo-mies, it has the highest score. (See Exhibit 4.) Expenditure. The United Kingdom emerged as the top nation on the expenditure sub-index, ahead of Denmark,The index looks at three measures of Internet activity: the United States, and Germany. This yardstick measures business-to-business and business-to-consumer online◊ Enablement: how well built is the infrastructure and sales and spending on online advertising. As the country how available is access? with the highest per capita spending online, the United Kingdom is a clear leader in this part of the Internet com-◊ Expenditure: how much money are consumers and mercial scene. businesses spending online on e-commerce and online advertising? Engagement. The United Kingdom received a moderate score for engagement across the three components of this◊ Engagement: how actively are businesses, governments, sub-index: Internet adoption by businesses, by consum- and consumers embracing the Internet? 7. We were not able to collect adequate data to include Chile, Mexi-The index balances enablement (which has a 50 percent co, Slovenia, and Turkey in the index. See the Appendix for moreweighting) against the two measures of usage: expendi- detail on the construction of the index.The Connected Kingdom 15
  18. 18. Exhibit 4. The United Kingdom Finishes High on the BCG e-Intensity Index Country Score Country Score Denmark 140 Austria 103 Republic of Korea 139 Belgium 102 Japan 138 Switzerland 101 Sweden 134 Ireland 99 Netherlands 129 New Zealand 95 United Kingdom 128 Canada 91 Norway 125 Spain 86 Finland 124 Czech Republic 83 Germany 120 Portugal 80 Iceland 111 Hungary 76 United States 109 Slovakia 70 Luxembourg 109 Poland 65 Australia 108 Italy 63 France 105 Greece 54 Sources: Akamai; Eurostat; Information Technology & Innovation Foundation; Organisation for Economic Co-Operation and Development; United Nations; MagnaGlobal; BCG analysis. Note: The index is scaled so that the geometric mean equals 100. Exhibit 5. The United Kingdom Performs Best on the Expenditure Sub-Index Enablement Expenditure Engagement Republic of Korea United Kingdom Norway Japan Denmark Denmark Sweden United States Netherlands Netherlands Germany Sweden Iceland Sweden Australia Switzerland Finland New Zealand Austria Japan Switzerland Denmark Netherlands Canada Finland Luxembourg Finland Norway Norway United States Belgium Czech Republic Iceland Germany Republic of Korea United Kingdom Luxembourg France Japan United Kingdom Australia Germany France Hungary Ireland Australia Ireland Republic of Korea Ireland Iceland Belgium New Zealand Canada France Spain Belgium Luxembourg Portugal Austria Austria Italy New Zealand Spain United States Poland Portugal Canada Spain Czech Republic Slovakia Portugal Hungary Greece Switzerland Poland Hungary Slovakia Slovakia Czech Republic Italy Italy Poland Greece Greece 0 50 100 150 200 250 0 50 100 150 200 250 0 50 100 150 200 250 Sources: Akamai; Eurostat; Information Technology & Innovation Foundation; Organisation for Economic Co-Operation and Development; United Nations; MagnaGlobal; BCG analysis. Note: The sub-indices are scaled so that the geometric mean equals 100.16 The Boston Consulting Group
  19. 19. ers, and by government. The Nordic nations, Australia, Regional Differencesand New Zealand led on engagement. The Nordic na-tions also scored well on consumer engagement, in par- All nations do not exploit the Internet equally and nei-ticular, which measures the percentage of online users ther do all parts of the United Kingdom. To understandand their propensity to conduct various activities online. the Internet’s influence throughout the United Kingdom,Switzerland led on business engagement, followed by we created a regional e-Intensity Index; it uses the sameNew Zealand, Norway, and Australia. structure and methodology as the global index.The United Kingdom ranked eighth on So long as companies Not surprisingly, London emerged as thegovernment engagement, which measures leading region, followed by the South East have a broadbandthe share of government interactions with and the neighbouring East of England.businesses and the public which occur on- connection, they can The rest of England finished in the middle,line and the number of schools with broad- enjoy the benefits of and Wales, Scotland, and Northern Irelandband; this measure also includes a series scored fairly poorly. (See Exhibit 6.) Theof United Nations measures of the provi- the Internet economy. lower enablement scores of the less dense-sion of online services. Directgov, the U.K. ly populated areas pulled down their over-e-government portal, has 10 million registered users and all rankings. (See Exhibit 7.)covers 75 percent of key government services. In 2009,about 60 percent of residents used at least one online The engagement scores of the different regions provide agovernment service, according to the Oxford Internet In- study in contrasts. While consumer and government en-stitute, but only about 40 percent of U.K. businesses rou- gagement both correlate with many socioeconomic vari-tinely interact with the government online. More effec- ables, such as average household expenditure, age, andtive deployment of e-government initiatives can reduce education level, business engagement does not. The Eastcompanies’ administrative burden. The Netherlands, for of England and Scotland, for example, are on oppositeexample, has reduced administrative costs by 14 percent, ends of the socioeconomic spectrum, yet both have highequivalent to about 0.4 percent of GDP, through the use business-engagement scores.of online technologies.8 Of course, companies still have a large degree of freedom to chart their own destiny, even if the overall Internet cli-Elsewhere in the World mate within their region is lacking. So long as businesses have a broadband connection, they apparently can enjoyOutside the OECD, there are intriguing Internet develop- the benefits of the Internet economy, as the concentra-ments afoot, especially in Brazil, Russia, India, China, and tion of successful game companies in Dundee illustrates.Indonesia (the BRICI nations).9 In many of these mar- Several small and medium enterprises (SMEs) profiledkets, consumers are leapfrogging the computer as a de- below are located in rural regions such as Herefordshirevice to access the Internet and are using their mobile and Cheshire.handsets instead. In China, for example, mobile penetra-tion is 57 percent, nearly three times the 20 percent pen-etration of PCs. Actual usage is difficult to derive, howev-er, because broadband services are often accessed atInternet cafés, and mobile phones are often shared.The proportion of the population using the Internet inthe BRICI nations is also low—between 7 and 33 percent,compared with 70 percent in the United States. But thelevel of innovation is high: microfinance and micropay- 8. See Micus Management Consulting, The Impact of Broadband onments are bringing banking services to the unbanked. Growth and Productivity, European Commission, 2008.And services such as Nokia Life Tools are helping to meet 9. See The Internet’s New Billion: Digital Consumers in Brazil, Russia,people’s agricultural, health, and educational needs. India, China, and Indonesia, BCG report, September 2010.The Connected Kingdom 17
  20. 20. Exhibit 6. London Is the Centre of Internet Gravity Regional e-Intensity Index Score London 156 South East 138 East of England 131 Scotland North West 127 Yorkshire 126 North East East Midlands 125 Northern Ireland North Yorkshire South West 124 West East Midlands West Midlands 120 East of England Wales North East 119 Wales 107 London West Midlands Scotland 103 South West South East Northern Ireland 96 Sources: BCG survey of 914 small and medium enterprises; Ofcom; U.K. Office for National Statistics; BCG analysis. Note: The index is scaled so that the United Kingdom’s average matches its international e-Intensity Index score. Exhibit 7. Rural Regions Have Low Enablement Scores Enablement sub-index London South East Yorkshire North West East Midlands North East West Midlands 100 East of England R2 = 0.8 90 South West Scotland Wales 80 Northern Ireland 70 0 100 200 300 400 Population density (people per square kilometre) Sources: BCG survey of 914 small and medium enterprises; Ofcom; U.K. Office for National Statistics; BCG analysis. Note: The sub-index is scaled so that the United Kingdom’s average matches its international e-Intensity Index score.18 The Boston Consulting Group
  21. 21. The Great TransformationA t the end of the last century, a distinction Below we briefly explore how the Internet has trans- which now seems quaint was made be- formed several established companies and disrupted in- tween the old economy of smokestacks dustries from fashion to insurance. and the new economy of Silicon Fen. Back then, the Internet was something apartfrom the everyday operations of most companies. Not Teaching Old Companies Internet Tricksany longer. The Internet is entwined in the nervous sys-tem of nearly all large companies and many SMEs, too. The Internet has been a mixed blessing for large, estab- lished companies. They have legacy assets and invest-The Internet’s £100 billion contribution to the United ments which cannot easily be switched off to make wayKingdom’s GDP in 2009 was largely produced not by so- for Internet technologies. Yet they also have the capital,called Internet companies but by a wide range of busi- resources, and scale to facilitate change.nesses, large and small, across all industries. (For more onthe companies powering the larger Internet economy, see In the airline industry, for example, many Internet-en-the sidebar “Engines of the Internet.”) abled innovations originated with low-cost carriers but eventually migrated to full-service carriers. Ryanair andThe Internet has altered almost every industry it has easyJet introduced online booking more than a decadetouched, with companies drawing on five fundamental ago, when other airlines were still relying on agents andtransformational levers: toll-free phone lines. Today about one-third of British Air- ways seats are booked through its website, dramatically◊ Geographic expansion without the need for a brick- lowering marketing and sales costs. The website also en- and-mortar presence in new markets ables the carrier to offer more-responsive customer ser- vice, allowing travellers to select seats, check in, print◊ Profitable sales of the “long tail” of products to small boarding passes, and order additional travel or ancillary subsets of consumers services.◊ Improved automation and information exchange The Internet has fundamentally altered retailing as well. across supply chains to increase efficiency and produc- Tesco, the fourth-largest global retailer, pioneered the so- tivity called store fulfillment model of online grocery retail, cre- ating the most successful U.K. online grocery operation,◊ Greater collaboration with and among customers, sup- with annual sales in excess of £2 billion. By fulfilling or- pliers, and partners ders through traditional stores rather than a centralised distribution operation, Tesco is able to save capital and◊ Increased transparency and a reduction in the ability give store managers an interest in seeing suc- of parties such as middlemen and brokers to take ad- ceed rather than viewing it as a competitor. Argos, too, vantage of information asymmetries has become a strong Internet player, with more thanThe Connected Kingdom 19
  22. 22. Engines of the Internet The U.K. Internet economy is enabled by a group of com- ◊ Enablement platforms: companies which provide essen- panies which allow traditional companies to conduct busi- tial services which facilitate trust, commerce, and traf- ness online. These companies are the engine of the Inter- fic net economy. They employ an estimated 250,000 people and have annual revenues of about £50 billion. (Since ◊ Services and content platforms: online retail sites, portals many of these companies sell to other businesses, this and aggregators, and other companies which serve the amount is not comparable to our GDP calculation, which public or enable the provision of those services only counts final sales to consumers.) ◊ Access: companies which offer devices and services to These companies are best described as a “stack.”1 In IT, a access the Internet stack is a set of layered software and hardware. Each layer can be swapped out and can communicate with layers ◊ Communities: consumers who both consume content above and below it. At the bottom of the stack is the phys- and services through the Internet and produce them ical infrastructure. Each higher layer contains a related through user-generated content, social networking, and horizontal set of activities. When Internet companies are other means viewed in this way, five layers emerge: 1. For each segment of the stack, several methods were used to ◊ Telecommunications and infrastructure: companies which estimate revenues and revenues per employee, including bottom- build and manage the Internet’s infrastructure and op- up market sizing, external estimates, and top-down macro esti- timise the delivery of content mates. The Building Blocks of the Internet Stack Mainly consuming Communities Mainly producing Network hardware Access: Other hardware Mobile devices devices and services used to Internet service IT Soware and access access the Computer hardware and operating Internet providers consultants systems Search 1 development Services and computing Soware agencies editorial services content Gaming Music, content platforms Cloud video, Adult Other 2 Ad Pure-play online retail Gambling Aggregators Enablement 3 platforms Enablement platforms 4 Other Network hardware Hosting Telecommunications Business-to- and infrastructure business Manufacture and maintenance of core network Internet service providers Sources: Advertising Association; Alexa; A.T. Kearney; Business Insights; comScore; Enders Analysis; Interactive Advertising Bureau; Gartner; Global Betting & Gaming Consultants; H2 Gambling Capital Consultants; IMRG; Informa; MagnaGlobal; New Media Age; Ovum/Datamonitor; PhoCusWright; press searches; BCG analysis. Note: Size of the boxes is proportional to the estimated revenues of the companies within them. 1 Game consoles and other Internet-enabled devices. 2 VoIP, online dating, e-learning, and social networking. 3 Billing and payments, advertising networks and servers, analytics and metrics, verification, and encryption. 4 Domain name registration and trading, mirroring, and content management.20 The Boston Consulting Group
  23. 23. Stacks are interoperable, modular, and open. These char- revenue. But if they disappeared, e-commerce would grind acteristics encourage the innovation and competition at to a halt. the heart of the Internet’s development.2 Interoperability and openness lower barriers to entry and encourage par- Services and content platforms are a study in the invisible ticipants in the stack to build upon the creative efforts of nature of the Internet economy. This layer, which includes others. Modularity encourages competition among play- Facebook and Wikipedia, comprises services such as VoIP, ers within a layer. Were the Internet vertically integrated, video sharing, online gaming, music, social-networking it would be hard to imagine a comparable level of innova- sites, and user-generated-content sites. The companies tion or growth. In the exhibit on the previous page, the which provide these products and services generate about size of the blocks corresponds to the amount of revenue £13 billion annually, but the benefit to consumers is argu- produced by the companies within them. ably much larger because so many of them are offered for free. Many of the companies which make up the stack are relatively small cogs which are essential to the overall operation of the Internet. For example, Web hosting, do- main name services, mirroring, and content management generate less than £1 billion in annual revenues in the 2. The Internet stack is the subject of a forthcoming book by Philip United Kingdom. The group of companies which provide Evans, a BCG senior partner and coauthor of Blown to Bits: How the verification, encryption, billing and payments, analytics, New Economics of Information Transforms Strategy (Boston: Harvard and ad servers generate less than £1.5 billion in annual Business School Press, 2000).30,000 products available online, 10,000 of which are Reshaping Industryavailable through this channel alone. The Internet has reshaped not just companies but indus-The Internet has obviously disrupted the media business, tries as well. Fashion and insurance, in particular, offer abut several traditionally print-based companies are stak- window into the changing habits of Internet consumersing out a strong presence in the online world. The Guard- and the power of the Internet to unlock value for con-ian’s has a larger share of the online mar- sumers and companies alike.ket, as measured by unique daily visitors, than of theprint market. The Daily Mail’s MailOnline site has 2.6 mil- Uncloaking the Fashion Industry. For many years, thelion daily unique visitors, which is more than its print cir- fashion industry resisted the seductions of the Internet. Itculation. was and is an industry swayed by look and feel and—at least among shoppers—instant gratification. Designers,The strong online following of these publishers should al- buyers, and shoppers want to touch the fabrics and seelow them to compete more effectively against portals, ag- the colours and patterns of an article of clothing. Shop-gregators, and other pure-play Internet companies. pers also want to make sure that it fits. Gradually, how- ever, both consumers and fashion companies gave upThe BBC’s website, meanwhile, ranks seventh in total their initial reluctance and have been drawn to the Inter-traffic among all U.K. sites. The BBC’s iPlayer Internet net. And the Internet has transformed both shopping andtelevision and radio service generates about 5 percent of product development.the country’s Internet traffic at peak times and has about8.5 million individual users each week. Online Shopping. Retailers which go online are able to ex- pand geographically and develop close and collaborativeAll these companies have gone beyond merely being on- relationships with customers. By shopping online, con-line to successfully transforming their business models to sumers are able to buy at low prices and access a widerexploit the advantages of the Internet and generate selection of merchandise than is available in physicalgrowth. stores.The Connected Kingdom 21
  24. 24. Today online sales account for about 14 percent of total er for several high-end manufacturers of tights and beach-sales of apparel—clothes, shoes, jewellery, and watches— wear. Sales at the seven-employee company will exceedin the United Kingdom. The online apparel market has £1 million this year.grown by 15 percent annually since 2005. Online sales ofapparel are projected to reach £5.4 billion in 2010, around Accelerated Development. Fashion will always be more art10 percent of total online sales and the equivalent of ap- than science, but the Internet is helping to both speedproximately £280 per online household. and systematise the development of new styles and prod- ucts. In the past, it took more than a yearSeveral pure-play online players have re- It’s not just large to bring a new article of clothing to mar-shaped the online apparel market. ket, and it required frequent travel to spot companies was founded in 2000 and today trends, even more frequent guesswork,offers 36,000 designer and private-label Internet start-ups and long lead times to coordinate design,products, free delivery, and free returns. which are selling production, and marketing.Its online store is visited by nearly 7 mil-lion unique visitors per month, mostly fashion online. WGSN, based in London, is the leadingshoppers aged 16 to 34. The company has trend-forecasting company in the world.taken advantage of social-networking tools, such as Face- Its hundreds of fashion experts search the globe daily forbook and Twitter, to communicate and collaborate with the latest fashion trends. They collect, collate, and cate-its young customers, and its website is complete with gorise millions of images from catwalks, stores, streets,blogs, forums, and other user-generated content. and industry trade shows around the world. WGSN’s revenues grew by 35 percent in fiscal 2010 these images and related commentary on its members-(March), reaching £223 million, and its pretax profits in- only website, affording designers, buyers, and executivescreased by 44 percent to £20.3 million. More than one- enhanced insight into the global fashion zeitgeist. Thequarter of the company’s sales are from overseas. website also has forecasts, news updates, and vast ar- chives of historical images to help the fashion industryNet-a-Porter, which was acquired by Richemont of Swit- capitalise on trends. The instantaneous distribution ofzerland in June in a deal which valued the company at this intelligence would be impossible without the Inter-£350 million, has created a luxury shopping experience net. Likewise,, a London-online—its site is similar to a fashion magazine—which based blog, and similar sites have rapidly gained an influ-2.5 million users enjoy each month. Net-a-Porter offers ence over designers, retailers, and other industrysame-day delivery in London and New York and easy re- players.turns for all customers. Cutting Out the Middleman in Insurance. AutomobileTraditional retailers, such as John Lewis, House of Fraser, and homeowners insurance was a market just waiting forBurberry, and Marks & Spencer, have likewise discovered the Internet. In the past, insurance was traditionally soldthe benefits of offering online shopping. Rather than can- by brokers or agents paid by commission. A consumernibalising their business, the online channel has increased would have to make several calls or visits to compareoverall sales for most companies. Marks & Spencer is in- quotes and coverage and still not be sure he or she wasvesting heavily in its Internet business, with the goal of getting the best deal.increasing its online market share in clothing—currentlyat 5.6 percent—to a level which is comparable to its pres- But brokers and agents were generally not performing aence in the brick-and-mortar market. complex task. The pricing for both types of insurance is based on rules and standardised formulas for calculatingIt’s not just large companies and Internet start-ups based risk. For autos, the driver’s age, the type of car, and thein thriving fashion centres such as London which are sell- miles driven are common factors, while for homes, theing fashion online. UK Tights, founded in 2005 in Macces- size of the dwelling and its distance from a fire hydrantfield in Cheshire, sells 23,000 types of hosiery from its go into the calculation. Finally, information for gauging4,000-square-foot warehouse. The company, started by the ability of insurers to pay claims is readily availableDawn and Jonathan Barber, is the exclusive online retail- through ratings agencies.22 The Boston Consulting Group
  25. 25. Adapt . . . or Else Change is hard, especially for large organisations and in- line for free in the expectation that they would generate dustries. The Internet is forcing a range of companies to advertising revenue. The Times and the News of the World make fundamental changes to their business models and have now reversed course and are starting to charge for operations. The economics of telecom and content com- online content, but it’s not easy to get people to pay for panies—newspapers and record labels, in particular— what was once free. have been disrupted by the Internet. We have seen this dance before. The emergence of game- For telcos, VoIP has allowed competitors like Skype to of- changing technologies creates winners and losers and fer free alternatives to once profitable services. For news- forces established players to adapt. “Creative destruction” papers, free Internet listings have wounded the cash cow is part of the DNA of capitalism. of classified advertisements. For record labels, the Inter- net has allowed consumers to access pirated copyrighted The demand for telecommunications, news, and recorded works. music has not disappeared, but how those goods and ser- vices are delivered has been radically altered by the Inter- These fundamental shifts in industry economics are pain- net. For example, recent research by BCG suggests that ful, but they are not the sole cause of the difficulties these consumers are willing to spend for content on tablets and industries are facing. To take just a single industry, for ex- e-readers. The success of content industries hinges on ample, television and lifestyle changes were altering the their ability to create new business models which take ad- newspaper industry’s economics long before the rise of vantage of the scale, cost position, and ubiquity which the the commercial Internet. Publishers put their content on- Internet offers.The Internet changed the game by replacing these inter- 2008, the total volume of U.K. auto and household premi-mediaries with transparency. In the United Kingdom in ums declined by 4 percent annually and for the past twothe early 2000s, several companies—called aggregators— years has stayed flat. Prior to 2003, premiums had beensuch as and cre- rising by 10 percent per year.ated websites which allowed customers to quickly com-pare auto quotes and coverage from several insurers. By This flourishing online economic activity has not been2007, more than half of new auto policies originated on- painless. The Internet has forced almost all companies toline, with the share fairly evenly divided between tradi- fundamentally alter how they do business. And while thetional insurers and aggregators. Today nearly three-quar- Internet has facilitated the creation of new businessesters of the U.K. market for new policies, or 74 percent, has and business models, it has disrupted others. (See themoved to the Web, with aggregators controlling more sidebar “Adapt . . . or Else.”)than three-quarters of those sales.Household insurance was slower to move online. Onlyone-quarter of new policies written in 2007 came throughthe online channel. But the pace has quickened, withnearly half of the market for new policies, or 48 percent,now originating on the Internet. Aggregators controlabout 60 percent of the online market, up from about 50percent in 2007.The online channel has been a tremendous benefit forconsumers because of lower premiums. From 2003 toThe Connected Kingdom 23
  26. 26. The Big Embrace by Small and Medium EnterprisesS MEs have historically been the hidden engine SMEs account for half of the annual revenues of U.K. of many national economies, but they have companies. They also provide jobs to half of the country’s not necessarily operated on the “bleeding private-sector employees. Three-quarters of these compa- edge” of technology. The Internet is starting to nies are located outside London and the South East. They change that dynamic. In the United Kingdom, include an amazingly wide array of businesses, from themany SMEs are aggressively exploiting the Internet to local corner shop to global businesses.take advantage of the same sets of transformative le-vers—geographic expansion, collaboration with custom- In order to understand their Internet activities, BCG con-ers, and the like—available to larger companies. In addi- ducted a survey of more than 900 SMEs, which the ONStion, the Internet is helping to level the playing field, defines as companies with fewer than 250 employees.10giving SMEs access to larger markets through cost-effec- We also conducted in-depth interviews with executives attive online advertising and tools once available only to nine of these SMEs and analysed data from the ONS.large companies. We divided the survey respondents into three groups: “high-Web” businesses (66 percent of survey respondents)The home design site mydeco, for example, rents time on market or sell goods or services online; “low-Web” busi-the “cloud”—which makes computing resources available nesses (20 percent of respondents) have a website or so-over the Internet—in order to do short bursts of process- cial-networking site; and “no-Web” businesses (14 per-ing which keep its index of products up to date. Mendeley, cent of respondents) do not have a website.also based in London, has created a business around re-search collaboration—iTunes plus LinkedIn for academ- The key overall finding: the Internet is paying dividendsics. The company has more than 500,000 users and per- for SMEs which take advantage of it. Data from the ONSforms real-time analytics on more than 40 million show that online sales grew by 43 percent annually fromcrowdsourced documents, a scale which cofounder Victor 2004 to 2008 for these businesses, faster than for compa-Henning says would not be possible without the cloud. nies with 250 to 999 employees (39 percent) or for those with 1,000 or more employees (31 percent). Our surveyWhile these two companies may be typical Internet start- shows that overall sales of high-Web businesses grew byups, most SMEs using the Internet sell more ordinary 4.1 percent annually over the past three years, whileitems, such as flowers and worms—yes, worms. Wiggly those of low- and no-Web businesses grew by 0.6 percentWigglers sells as much as half a tonne of worms a week and 0.5 percent, respectively. High-Web and low-Webonline. (See the sidebar “World Wide Worms.”) As to flow- businesses, meanwhile, have a much larger internationalers, when Arena Flowers opened in 2006, it did not want presence than no-Web businesses. The high-Web respon-to be just another corner shop. Instead, it set out to buildscale, efficiency, and customer loyalty with an 10. The survey was conducted with key decision makers at 914online store which now boasts 150,000 unique visitors per SMEs. Forty percent of the enterprises had fewer than ten employ- ees, 40 percent had 10 to 49 employees, and 20 percent had 50 ormonth and will generate close to £5 million in sales this more employees. The respondents were distributed equally amongyear. (See the sidebar “A Flowering Online Presence.”) regions.24 The Boston Consulting Group