Report. Connected Poland. How the Internet is Transforming Poland s Economy

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1 Report Connected Poland How the Internet is Transforming Poland s Economy

2 The Boston Consulting Group (BCG) is a global management consulting firm and the world s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 74 offices in 42 countries. For more information, please visit

3 Connected Poland How the Internet is Transforming Poland s Economy Grzegorz Cimochowski Franciszek Hutten-Czapski Magdalena Rał November 2011 Commissioned by bcg.com

4 The Boston Consulting Group, Inc All rights reserved. For more information, please contact the Warsaw office of BCG at: The Boston Consulting Group, sp. z o. o. Zebra Tower, 6th floor Mokotowska Warsaw Poland For permission to reprint, please contact BCG at: [email protected] Fax: , attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA USA

5 Table of Content Preface 4 Executive Summary 5 Poland s Internet Economy: A Snapshot 7 Active Internet Users in Poland 8 Digital Exclusion 8 Internet Economy: GDP and Beyond 9 Internet GDP Calculated 11 GDP and Beyond: The Internet and Polish Consumers 12 GDP and Beyond: The Internet and Polish Businesses 13 GDP and Beyond: Social Benefits and Concerns over the Internet 14 Internet Intensity 16 E-Intensity Worldwide 16 Regional Differences in E-Intensity 19 How the Internet is Transforming the Polish Economy 21 Banks: The Courage to Innovate 21 Commerce: Online Sales and Beyond 22 Travel: The Basic Source of Information 23 Enthusiasm and Resistance: Internet in SMEs 25 Poland s Internet Economy: Getting Bigger 33 The Growing Importance of the Internet in the Development of Poland s Economy 34 Appendix: Methodology 36 Note to the Reader 39 Connected Poland 3

6 Preface The Internet has been available in Poland for 20 years. Beginning in the summer of 1991 with academic experiments, it has since evolved into a key driver of social transformation and economic progress. It has also become a mass communications medium used by the majority of Polish people. In spite of its evident impact, it has been difficult to meaningfully estimate the size and growth of Poland s internet economy. This independent report, commissioned by Google Poland, fills that gap by providing a clearer picture of the Internet s impact on Poland s economy and its role in powering economic growth, both today and in the future. About the Authors This report was a collaborative effort between Grzegorz Cimochowski, Franciszek Hutten-Czapski and Magdalena Rał from The Boston Consulting Group and is one of a series of reports prepared for 11 countries. Grzegorz Cimochowski is a principal in the Warsaw office of The Boston Consulting Group. He can be contacted by at [email protected]. Franciszek Hutten-Czapski is a partner and managing director of the Warsaw office of The Boston Consulting Group. He can be contacted at [email protected]. Magdalena Rał is a consultant in the Warsaw office of The Boston Consulting Group, and can be contacted at [email protected]. 4 The Boston Consulting Group

7 Executive Summary The Internet economy is becoming an important sector of the Polish economy. Entrepreneurs and consumers are increasingly more interested and confident in leveraging the opportunities offered by the Internet. The purpose of this report is to describe and measure the Polish Internet economy since this has not yet been investigated. In 2009, the Polish Internet economy reached 35.7 billion PLN, or 2.7% of GDP. In 2009, the share of the Polish Internet economy was less than half that of the Northern European countries but higher than that of Southern European countries such as Spain and Italy. The value of the Polish Internet economy is greater than the added value of the mining sector (traditionally the important one), but it is still less than the contribution of most other sectors of the economy. The Polish Internet economy is primarily driven by consumer spending led by e-commerce, which generates 62% of revenue or 22 billion PLN. The Polish Internet economy is distinguished by the small level of government investment, both in terms of the total amount (5 billion PLN) and as a percent of GDP (0.4%). However, the impact of the Internet on the Polish economy is much greater than is apparent from its GDP contribution as a significant number of consumer and business activities on the Internet are not directly included in GDP. Nearly 60% of households in Poland already have Internet access, and Polish Internet users spend 14.5 hours online per week, 0.5 hours more than they spend watching television. Online shopping, which represents 2.9% of retail business, saves Internet users approximately 15% compared to what they would spend in traditional shops, even a er shipping costs are included. On the other hand, purchases made in traditional shops a er researching and price checking online - which account for 6% of retail sales - are approximately 80% higher in value than e-commerce. Polish consumers are more active users of the Internet than Polish businesses. Polish Internet users are rigorous about searching for information online (Poles are at the forefront of Europe in this regard), contributing user-generated content (Poles rank second in the world for the number of articles in their language per capita on Wikipedia), using innovative open source so ware to reduce costs, using cloud services, and actively using the Internet for communication (for example, via Skype and Gadu Gadu). Internet use by businesses continues to be limited. Polish entrepreneurs are increasingly advertising on the Internet (accounting for approximately 13% of total advertising spend) but rarely use more advanced online tools to realize productivity gains, which puts Poland at the bottom of international rankings. The Internet is increasingly penetrating more and more sectors of the Polish economy. In banking, retail trade and tourism, it has already paved the way Connected Poland 5

8 for significant transformations, triggering a wave of innovations to increase efficiency and facilitate consumer choice. Online banking blazed the trail for the Internet economy 10 years ago, building confidence in the Internet by showing the benefits of a service channel available 7 days a week, 24 hours a day and introducing flexible savings accounts, which are now used by both online and offline customers. In the retail sector, price savings of approximately 15% and access to a wider product range have led the Internet to have a direct (e-commerce) and indirect (the so-called ROPO effect, Research Online Purchase Offline, where consumers research purchase online but make the final purchase in a traditional shop) impact on nearly 9% of retail trade in Poland; in some categories (e.g. electronics or home and garden), the impact is even greater (20-30% of sales). In tourism, the Internet has become the primary source of travel information and the basis for decision making, although most transactions are still made in the traditional manner in company offices or by telephone. The Polish Internet base, namely companies that support businesses in their use of the Internet, has achieved revenues of approximately 2.7% of GDP and employs roughly 50,000 people, or 0.3% of total employment. More than half of the revenue is generated by Internet service providers selling access services and internet connection devices. Polish small and medium-sized enterprises (SMEs) generally only use the Internet for basic purposes. Our studies show that SMEs which actively use the web have been able to increase their employment and revenue faster, have a greater range of operations and export more. According to research conducted by BCG, most SMEs have a website (98%) and (over 95%), but rarely (less than 15%) use more advanced options offered by the Internet (such as online payments, paid Internet advertising and social networking tools). The percentage of companies using the Internet actively (about 51%) is lower in Poland than in Western European countries (about 70%); SMEs using the Internet in a limited manner ( , web access) feel that increased Internet activity is not necessary in their industry. Businesses surveyed recognized that the Internet opens up access to new clients and geographies, improves efficiency, increases the effectiveness of advertising campaigns and enables better interaction with the customer (through gathering feedback and opinions). In BCG s international ranking of Internet usage rates, Poland comes out poorly compared to many other OECD countries; this is mainly due to insufficient development of the Internet infrastructure and limited online activity. The Internet usage rate in Poland is very low due to the limited availability of broadband connections (over 40% of enterprises have a connection speed of less than 256 kb/s) and the relatively low Internet activity of public institutions and enterprises. There is only minor regional variation in Internet usage, although provinces that are more urbanized and have a greater concentration of businesses (Mazowieckie, Dolnośląskie, Wielkopolskie, Śląskie and Małopolskie) show more intensive Internet use. The Polish Internet economy has a strong growth potential and is estimated to grow twice as fast as GDP (14% per year) over the next five years, reaching at least 4.1% of the GDP in In the optimistic scenario, the Internet economy may reach as much as 4.9% of GDP by 2015, or more than the current contribution of the financial services sector. The main contributor to growth will be online consumer spending (with an increase of 16% per annum), stimulated largely by higher Internet penetration (75% of households in 2015). The growth of the Polish economy over the long term will increasingly depend on the level of advancement of the Internet economy and on investment in human capital (e.g. on the competence and skill of employees). 6 The Boston Consulting Group

9 Poland s Internet Economy A Snapshot In Poland, the Internet has been around for 20 years. The first TCP/IP message was sent between Warsaw University and Copenhagen University in the summer of Despite being a few years behind Western countries, Polish people quickly embraced the new technology. The Internet has become a platform for a wealth of economic initiatives and innovations. During the era of the centrally planned economy, computer studies provided a playground for private entrepreneurship. Furthermore, Poland s academic computer scientists have an excellent international reputation. The university departments educate a steady flow of accomplished scientists and professionals. Polish students, together with their Russian and Chinese counterparts, have dominated international computer science competitions for over decade, whilst US company TopCoder ranks Polish universities third in its international programming competitions. The first Polish websites and portals, developed in the mid 1990s, matched the standard of their US and UK counterparts. Poland, like Western countries, also saw the Internet investment fever that generated the first digital fortunes followed by a wave of spectacular bankruptcies. Still, the best initiatives, such as Onet and Wirtualna Polska, survived these turbulent times and continue to thrive. During the first decade of the twenty first century, Poland s economy and Internet users were very receptive to Internet innovations. Prime examples included Gadu-Gadu, the most popular Polish instant messaging service, and the enthusiastically welcomed Skype so ware, both services that directly addressed the needs of Internet users. The huge potential of the Polish Internet market has been demonstrated by the annual Google Zeitgeist survey, which uses search statistics to locate significant online trends both globally and by nation. In 2008 it rated Nasza-klasa.pl, a Polish social-networking site, the seventh fastest-rising search term globally. While facing tough competition from Facebook, Nasza-klasa.pl (Nk.pl) continues to be top-ranked among the most popular Polish websites; it was the top Polish search term in the 2010 Zeitgeist survey and listed third by Megapanel PBI/ Gemius in January In the two decades since the first academic experiments with the Internet in Poland, it has evolved into a mass communication medium that has exerted, and will continue to exert, a strong impact on the national economy. It streamlines offline business processes and stimulates the development of new online business models. Poland offers numerous notable examples of how Internet opportunities can be exploited, notably Gadu-Gadu s instant messaging, mbank s e-bank, Nk.pl s social platform, and Allegro.pl s online auction platform. At the same time, other promising initiatives have encountered serious difficulties and failed to capitalise on the full potential of the Internet. What else can be said about the importance and size of Poland s Internet economy? It defies easy quantification, and the question has not been widely studied. Yet without an understanding of the Internet economy and its structures, policymakers and business executives will struggle to develop strategic and informed decisionmaking. Connected Poland 7

10 Active Internet Users in Poland 60 percent of Polish households have an Internet connection, and Internet users consider it a basic tool for communication and social-networking. World Internet Project Poland 2010 found that Polish Internet users spent 14.5 hours online per week, 30 minutes more than they spent watching television. It also found social differences in patterns of Internet use. On average, men devote 16.3 hours a week to online activities and women 12.6 hours. The most active Internet users are under 30, mostly city dwellers and university graduates. The Internet is most o en used at home. Mobile access is becoming more common, but as yet, only 8 percent of users are estimated to access the Internet with devices such as mobile phones, smartphones and notebooks. Mobile phone access is mainly used to make up for the shortage of fixed infrastructure (Ericsson Consumer Lab 2009). At the same time, mobile Internet users spend longer online, averaging 21 hours per week (World Internet Project Poland 2010). Polish Internet users are most likely to search for information, entertainment, and education services. The Web is also playing a bigger role in commerce - 78 percent of Internet users research products online, 63 percent shop online, and 47 percent use the Internet to pay their bills. Polish is ranked fourth in terms of the total volume of content generated behind English, German and French, and Polish ranks second behind Dutch in terms of the number of entries per Internet users in their native language. Digital Exclusion Poland s positive overall statistics for online engagement conceal problems of digital exclusion. More than 40 percent of Poles are non-users. Half of the non-users see no reason to go online. Seventy-eight percent of over 50s, more than 10 million citizens, are non-users refusing to go online even if they have Internet access at home. They include both private citizens and businessmen. Financial and infrastructure problems are not the only reasons for digital exclusion. Lack of motivation and skills also play a role. While these challenges may be partially mitigated through education, neither the private sector nor public authorities are addressing the issue. As a result, the advantages offered by the Internet economy are not being fully exploited in Poland. 8 The Boston Consulting Group

11 Internet Economy GDP and Beyond T he Internet s influence on commerce and society in Poland is undeniable. Some indicators of impact, such as the number of online transactions, are visible and easy to measure. Others, such as gains in productivity and business competitiveness due to innovation, are less obvious and more difficult to quantify. We have broken down the Internet s economic impact into four key parts (illustrated in Exhibit 1). The first includes transactions that have a direct impact on GDP (the inner circle shown in Exhibit 1). They include digital transactions such as e-books bought online at Empik.pl s bookshop and printed books bought online at Merlin.pl s bookshop and mailed to the buyer. Online shoppers must first pay a subscription fee for Internet access. Consumer spending includes both online shopping (using the internet as a transaction platform) and these subscription fees. It is a key pillar of the Internet economy, along with other contributors such as investments in ICT technologies, government spending, and the export and import of ICT products and services. Exhibit 1. Impact of the Internet goes beyond the GDP affecting Internet economy Ring 1. Consumer and business economic impacts not captured by GDP, including: Business-to-business e-commerce (B2B) Online advertising Consumer benefits, including: Savings on online shopping Research online purchase offline Benefits from using free content Polish Internet economy captured by GDP, including: Consumption, private investment, government spending and net exports 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 Sources: BCG analysis. Connected Poland 9

12 Three ways to quantify the size of the Internet economy There are three alternative methods of calculating GDP. None was designed with the Internet economy in mind: The output or production method measures value created through the production of goods and services. The income method measures total income earned by individuals and companies. The expenditure method measures total domestic spending and the balance of foreign trade. The output method is theoretically the best way to measure the Internet s contribution to GDP. It is the approach used to calculate the contributions of most traditional sectors in the economy. But using this method would mean looking at every transaction of every good or service produced in the Polish economy and deciding whether it is online or offline. This is not practical with current data. The weakness of the income method is the many assumptions that would have to be made about the share of income of traditional companies to be allocated to the Internet, and the share of income of multinational companies to be allocated to Poland. These assumptions would call into question the accuracy of the final calculation. Although the expenditure method is imperfect, we chose to use this approach. It is built on four pillars: Consumption: Goods and services bought by households in Poland over the Internet and consumer spending on Internet access. Investment: Capital investment by telecom companies related to the Internet as well as Internet-related private investments in information and communications technology (ICT). Public spending: Public spending on ICT. Net exports: Online goods and services and ICT equipment exported minus comparable imports. It is also important to be clear about the assumptions included in the Internet s contribution to Poland s economy. The full value of goods sold online is included because it gives a sense of the importance of the Internet as a retail channel. Most online transactions terminate in the physical world, so are not pure online transactions (unlike, say, buying and downloading games online). Many, though, might not have taken place without the Internet as a catalyst. Data on the online value generated at each link in the value chain (inquiries, orders, delivery) is unavailable and estimating it would result in a false level of accuracy. See the Methodology appendix for more detail about the underlying assumptions. As well as directly influencing GDP, the Internet creates ripples that move through the rest of the economy. These include supporting new types of innovative businesses and bringing down transaction costs, uniting and facilitating contacts between buyers and sellers otherwise unlikely to transact, speeding up transactions and deliveries, and enabling consumers to rapidly compare prices, thus reducing information asymmetry between buyers and sellers. We have divided these beyond GDP effects into three parts. They are shown as the three outer rings surrounding the inner circle. Ring 1: This covers significant economic impact on customers and businesses which go beyond a direct share in GDP. They include business-to-business e-commerce, online advertising, and consumer benefits such as savings from comparing prices, checking offers online before buying a product offline (ROPO) and access to free content. Ring 2: This covers the impact on manufacturing productivity. One example is the use of e-procurement and automated supply chains, leading to improved customer relationships and management systems. Ring 3: This covers both the positive social effects of the Internet, such as improved communication, better ways of staying connected, and user-generated content models, as well as the negative effects such as cybercrime and copyright infringements. 10 The Boston Consulting Group

13 Internet GDP Calculated The measurable size of Poland s Internet economy in 2009 was PLN 35.7 billion, accounting for 2.7 percent of GDP. While this is less than other market sectors, such as industry, real estate and agriculture, 2009 saw a significant breakthrough. Only 18 years a er the first TCP/IP message was sent from Poland, the value of the Internet economy exceeded that of the mining sector (2 percent of GDP), formerly the major contributor to Polish GDP, and still a disproportionately large influence on social and political life. Poland s Internet economy is driven mainly by consumer spending (PLN 22 billion in 2009), which contributes twice as much as business investments and four times as much as public spending. Seventy percent of consumer spending is accounted for by online shopping (including financial services and travel). The remainder is divided between expenditure on Internet access (19 percent) and on devices to access the Internet (11 percent). In the highly developed economies of Western and Northern Europe, the share of these private spending categories is half that of Poland. Business investment in the Internet is double public spending, which can be explained by the relatively high spend of telecom companies in the early stages of infrastructure development. However, Poland s public spending is low, both in absolute terms (PLN 5 billion) and in relation to GDP (0.4 percent), putting it in line with developing nations. By contrast, Northern European countries, which have considerably higher GDPs, spend twice as much in relation to GDP. A further drag on the value of Poland s Internet economy is a negative foreign trade balance (0.4 percent) in ICT goods and services (mainly attributable to computer and telecom device imports). A positive balance, as seen in the Czech Republic (0.8 percent) where several international computer are based, would further stimulate the growth of Internet economy. Exhibit 2. If the Internet were a separate sector, it would generate 2.7 percent of Poland s GDP Sector size as a share of GDP (%) Manufacturing 19 Wholesale and retail commerce 18 Real estate 14 Transportation, logistics, communication 7 Construction 7 Public administration and defense 6 Education 5 Other services 5 Financial services 4 Health and social work Power, fuel, water 4 4 Farming, forestry, fishing 4 Mining 2 Hotels and restaurants 1 Polish Internet economy: 2.7% Sources: IAB; GUS; EIU; UKE; OVUM; Gartner; OECD; BCG analysis. Note: The size of the Polish Internet economy and of the various sectors were calculated using different GDP methodologies. Connected Poland 11

14 Overall, Poland ranks similarly to the less advanced Internet economies of Southern Europe, such as Spain or Italy, where the Internet economy contributes 2 percent to GDP. In developed Northern European countries, such as Sweden or Denmark, the Internet economy contributes 5-6 percent of GDP, and in the UK, more than 7 percent. Consumption drives the Polish Internet economy. E-commerce is well developed, with the number of online shops having increased two and a half times since Allegro.pl, a commercial platform bringing online shops and consumers together (with B2C transactions forming the majority of Allegro s turnover) is the hallmark of Poland s e-commerce sector. E-commerce accounted for 2.9 percent of retail trading in more than Russia, the same as Italy, and slightly less than the Czech Republic and Spain. The 2.9 percent share is satisfactory, especially given poor Internet penetration (only 60 percent of households), and should rise sharply with the development of the Internet infrastructure and reach. E-commerce accounts for more than 10 percent of retail trading in some more advanced Internet economies. GDP and Beyond: The Internet and Polish Consumers The estimated share of GDP is only a partial reflection of the Internet s influence on the Polish economy. Many online consumer and business activities are not reflected in GDP estimates. The internet has become an important forum to share information and communicate around product research, reviews and feedback. Increasingly it is where consumers join forces to assert their rights. Consumers now raise complaints via traditional media and online, and protests on the Internet can influence companies as well as regulators and supervisory bodies. E-commerce in Poland still has a long way to go to match advanced internet economies such as the UK, but Polish Internet users have already begun to research products and services online. ComScore.com reports that in August 2010 Poles generated the highest number of searches per user in Europe. In 2009, the value of researched-online, purchased-offline (ROPO) goods reached PLN 26 billion, more than 80 percent higher than online purchases. Exhibit 3. Consumer spending contributes the most to the Internet economy Consumer spending 22 Business investment 13 Government spending 5 Exports 12 Imports 16 Internet economy 36 bn PLN 2.7% Share of GDP Sources: IAB; GUS; EIU; UKE; OVUM; Gartner; OECD; BCG analysis. 12 The Boston Consulting Group

15 Exhibit 4. Size of the Internet economy as a proportion of GDP - international comparison Sector size as a share of GDP (%) UK Sweden Denmark Czech Republic Poland Spain Italy Northern Europe Central-Eastern Europe Southern Europe Sources: GDP estimates for individual countries; BCG analysis. The most popular online or ROPO products are consumer electronics, cars, books and travel. While e-commerce has made little inroad into food and beverages (the largest retail sector with 27 percent of total business), the Internet is a preferred source of information about food and a popular opinion sharing medium. Engagement by Polish Internet users is a matter of common sense - Internet use pays dividends. Online shoppers can save up to 25 percent. Even when shipment costs are included, online prices are still 15 percent lower than offline. When transportation costs are included, cosmetics, household equipment and electronics are the most costeffective online purchases. The differential is lowest for books, with shipment costs significantly increasing final prices. GDP and Beyond: The Internet and Polish Businesses The Internet offers some obvious advantages to both consumers and businesses. Nearly all Polish businesses have access to the Internet and . Since 2007 online advertising has grown by roughly 30 percent per annum - reaching PLN 1.4 billion or 13 percent of overall business advertising expenditure. However, engagement varies sharply by sector with banking, retail and travel the unquestionable leaders. The Internet has become a powerful tool for customer communication and a global commercial platform. B2B (business-to-business) online transactions are now worth more than PLN 120 billion, eight times more than B2C (businessto-consumer) online transactions, and account for 5 percent of all B2B transactions. However, the actual extent of online business has not yet been reliably quantified. Available data suggests that businesses, especially SMEs, have shown only moderate interest in the Internet. Despite the wealth of opportunities it offers, only 30 percent of SMEs use advanced stock management, e-learning or dispatch tracking tools, and still fewer use the Internet for selling or buying goods and services. Only 8 percent of businesses with more than eight employees sell online, and only 12 percent purchase online. Polish companies are also infrequent users of enterprise resource planning tools (e.g. IT tools designed to support management). In this respect, Polish SMEs are ranked twenty-sixth among the twenty seven EU member states. Connected Poland 13

16 Exhibit 5. Average savings from online shopping, including shipping costs Online shopping savings 1 (%) Cosmetics Household appliances Consumer electronics Vitamins, diet substitutes Other Games and toys Home furnishings Clothes and shoes Books and multimedia Sources: Allegro; Ceneo; BCG analysis. 1 Including shipping and handling. GDP and Beyond: Social Benefits and Concerns Over the Internet The Internet has become integral to economic and social life, influencing the market in many ways. It aids innovation and enables the development of service models and products that would otherwise be impossible. Wikipedia, YouTube, the blogosphere and open source so ware all show how the Internet can be used to develop social production models. User generated content is not directly captured by GDP but aids all Internet users. Free content puts commercial content providers under pressure, stimulates innovation, improves productivity and contributes to the development of new service models. Salon24.pl, which evolved from a collection of non-professional blogs into a powerful blogging platform that generates income from advertisements and marketing services, exemplifies this phenomenon. Similarly open source so ware, such as OpenOffice, Firefox or Chrome, is available to all users and inexpensive to operate. They can help reduce company operating costs, particularly for SMEs, and boost competitiveness. Cloud computing, with services such as Google Docs giving access to so ware, data storage, website development and network cooperation tools at low or no cost, will soon have a similar effect. The Internet can, however, also negatively affect the economy. Cybercrime is a major threat, involving all types of copyright infringements (illegal sale and use of so ware, sharing of music and movies and use of registered trademarks), that reduces the measurable value of the Internet economy. It also includes identity the, breaking into private and corporate computers, credit card and bank account data the. As well as creating direct financial losses, these crimes affect consumer confidence in the safety of the Internet economy. 14 The Boston Consulting Group

17 Exhibit 6. Use of advanced Internet tools by SMEs - international comparison Enterprises using the Internet to support procurement Enterprises making purchases online Enterprises selling products and services online Enterprises using ERP systems Belgium Norway 50 Ireland Norway Sweden 50 Sweden Belgium Denmark Norway Germany Greece Sweden Austria Croatia France Malta Estonia Cyprus Poland Romania Denmark Netherlands UK Czech Rep. Luxemburg Slovenia Portugal Spain Hungary Italy Latvia Bulgaria Ireland Czech Rep. Iceland Portugal France Estonia Slovenia Poland Latvia UK Germany Austria Luxemburg Netherlands Finland Lithuania Croatia Spain Malta Italy Hungary Slovakia Cyprus Romania Bulgaria Denmark Sweden Germany Czech Rep. Finland Luxemburg Austria Spain Greece Poland Slovakia Latvia Bulgaria Belgium Lithuania Netherlands Ireland Portugal Iceland UK France Slovenia Estonia Hungary Cyprus Romania Italy Finland Austria Spain Ireland Norway Slovakia Cyprus Poland Lithuania Hungary Denmark Portugal France Italy Czech Rep. Romania Malta Croatia Bulgaria Iceland Latvia Estonia Sources: Eurostat, data for Connected Poland 15

18 Internet Intensity The Internet impacts the economy in a variety of areas, depending on specific interdependencies and correlations. It has huge growth potential, which has been limited by a number of factors: poor infrastructure development, lack of awareness, and insufficient skills of private and business users. E-Intensity Worldwide BCG has devised its e-intensity Index as a means of measuring the reach of the Internet in commerce and society. It is made up of three measures reflecting the extent of Internet use by businesses, consumers and the government: Exhibit 7. Poland finishes low on the BCG e-intensity Index Country Score Country Score Denmark 140 South Korea 139 Japan 138 Sweden 134 Netherlands 129 UK 128 Norway 125 Finland 124 Germany 120 Iceland 111 USA 109 Luxemburg 109 Australia 108 France 105 Austria 103 Belgium 102 Switzerland 101 Ireland 99 New Zealand 95 Canada 91 Spain 86 Czech Republic 83 Portugal 80 Hungary 76 Slovakia 70 Poland 65 Italy 63 Greece 54 Sources: Akamai; Eurostat; Information Technology & Innovation Foundation; OECD; UN; MagnaGlobal; BCG analysis. Note: The index is scaled so that the geometric mean equals The Boston Consulting Group

19 Infrastructure (50 percent weighting) measures the availability of Internet, its quality and speed estimated on the basis of: penetration of broadband subscriptions (mobile and fixed), download and upload speeds, and smartphone penetration. Expenditure on online activities (25 percent weighting) compares the expenditure of businesses and consumers online. It is based on relative measures consisting of e-commerce B2C expenditures and expenditure on online advertising as compared to retail sales. Engagement (25 percent weight) defines the extent to which businesses, government and consumers use the Internet. It is based on the number of businesses with a website, the proportion of the population which has bought or sold online, and the proportion of citizens and businesses which have interacted with the government online. The BCG e-intensity Index provides a measure for comparing the intensity of Internet use in various countries. Poland s BCG e-intensity Index score is one of the lowest internationally. It scores only around half the level of other Northern and Western European countries, and lower than Central European countries such as the Czech Republic, Hungary and Slovakia. This performance is mainly attributable to poor infrastructure development and weak engagement in online activities. Poland has the lowest infrastructure score of any of the 28 countries surveyed. The hope is that government programmes co-funded by the EU to develop a broadband infrastructure will improve matters in the next few years. The Innovative Economy Operational Programme, the Operational Programme Development of Eastern Poland and 16 regional operational programmes have been designed to tap into roughly EUR 1 billion allocated by the European Regional Development Fund to improve access to broadband Internet. Exhibit 8. Poland is ranked in the lowest quartile of the Enablement subindex Enablement Expenditure Engagement South Korea UK Norway Japan Denmark Denmark Sweden USA Netherlands Netherlands Germany Sweden Iceland Sweden Australia Switzerland Finland New Zealand Austria Japan Switzerland Denmark Netherlands Canada Finland Luxemburg Finland Norway Norway USA Belgium Czech Republic Iceland Germany South Korea UK Luxemburg France Japan UK Australia Germany France Hungary Ireland Australia Ireland South Korea Ireland Iceland Belgium New Zealand Canada France Spain Belgium Luxemburg Portugal Austria Austria Italy New Zealand Spain USA Poland Portugal Canada Spain Czech Republic Slovakia Portugal Hungary Greece Switzerland Poland Hungary Slovakia Slovakia Czech Republic Italy Italy Poland Greece Greece Sources: Akamai; Eurostat; Information Technology and Innovation Foundation; OECD; UN; MagnaGlobal; BCG analysis. Note: The index is scaled so that the geometric mean equals 100. Connected Poland 17

20 Exhibit 9. Percentage of enterprises with Internet access of at least 256 kbps Iceland South Korea Australia Switzerland Canada Finland Spain France Belgium New Zealand Norway Sweden Germany Luxemburg UK Netherlands Portugal Greece Italy Denmark Ireland Slovakia Czech Republic Austria Japan Hungary Poland Ø % Source: Eurostat. Note: Concerns enterprises employing at least 10 people. Infrastructure developments have also been promoted by telecom companies. Under an agreement with the Electronic Communications Authority, Telekomunikacja Polska S.A. has invested in the development of broadband Internet access and provides free broadband access in all public libraries across Poland. Mobile operators have extended mobile broadband networks and experimented with LTE data transmission standards (offering significant improvements over 3G networks). FTTH/B technologies should also help to close the infrastructure gap. Specific business models would have to be devised to stimulate private investment with a long return on investment (10 years or longer). If all of these undertakings are fulfilled, broadband Internet access should improve significantly within the next few years. However, Poland still has a long way to go before it successfully remedies delays, instead of setting new trends as South Korea does. There is an example to follow in the case of South Korea, whose government focused in the late 1990s on developing broadband infrastructure and stimulating both expenditure and engagement by businesses and consumers. Although South Korea is not a leader in terms of online expenditure and engagement, its dynamic development of the ICT sector by eliminating infrastructure obstacles should be an inspiration to Poland. 18 The Boston Consulting Group

21 South Korea - Case study Since the 1960s, South Korea has been ranked amongst the most dynamic economies worldwide. In the 1960s, its GDP was similar to those of poor African and Asian countries. Between 1962 and 1989, its GDP grew at 8 percent per year. Later it escaped the recession caused by the financial crisis. Its economy is currently ranked 12th in terms of domestic income, with USD 30,000 profit per capita (PPP). Despite its high level of development, the South Korean economy continues to grow rapidly (more than 6 percent in 2010). A knowledge-based economy has been the main driving force, stimulating strong broadband Internet penetration. In 1995, the South Korean government announced a programme for a knowledge-based economy, and assumed that the promotion of broadband Internet access was one of the key means to this end. Consumer broadband access began in Within two years, South Korea boasted the best broadband Internet penetration in the world, maintaining this position until At present, over 90 percent of households have access to broadband Internet. More than 50 percent use Mbps speed. The development of broadband technologies is also a vital contributor to the growth of the ICT sector. Over 300,000 jobs have been created, and ICT has been growing twice as fast as other economic sectors. South Korean search engines, local websites and online games grew very rapidly, and South Korean companies are among the best in the world in the gaming industry. Finally, there have been a number of key government initiatives to promote broadband Internet. There has been simultaneous stimulation of supply and demand for broadband Internet services. The Internet Education Programme announced in 2000 covered 10 million citizens. Powerful incentives for private investments. While public investment in infrastructure between 1995 and 2005 was only USD 900 million, the private sector invested USD 32 billion thanks to an environment that stimulated the use of Internet by businesses, consumers and government. Stimulation of competition among Internet providers has prompted them to provide services with better technologies at more attractive prices. Flexible regulatory policies, tailored to market conditions, have been implemented by an independent regulatory body. Regional Differences in E-intensity in Poland The BCG e-intensity Index can be used to compare regions as well as countries. E-intensity in different regions of Poland can be estimated on the basis of regional indices measuring Internet infrastructure, online expenditure and engagement. Poland has, compared to the UK, Spain or Turkey, relatively small regional differences in Internet usage. Poorly developed infrastructure, and in particular low broadband accessibility, appears to be a more important factor. E-intensity is highest in the most urbanized regions, which also have the largest number of businesses - Mazowieckie, Dolnośląskie, Wielkopolskie and Śląskie. But differences in Internet use are relatively small - 56 percent of households in the Mazowieckie region have Internet access compared to 47 percent in the Lubelskie region. The significant difference is in Internet quality. In the eastern regions, the Internet speed is half that of the national average. Connected Poland 19

22 Exhibit 10. The Mazowieckie and Dolnośląskie regions ranked highest in BCG s regional e-intensity Index Lubuskie Dolnośląskie Pomorskie Wielkopolskie Opolskie Warmińsko-mazurskie Łódzkie Mazowieckie Świętokrzyskie Śląskie Małopolskie Podlaskie Lubelskie Podkarpackie E-Intensity Index Mazowieckie Dolnośląskie Wielkopolskie Śląskie Małopolskie Pomorskie Łódzkie Lubuskie Kujawsko-pomorskie Zachodniopomorskie Podlaskie Opolskie Świętokrzyskie Podkarpackie Warmińsko-mazurskie Lubelskie Sources: GUS; TNS; World Internet Project Poland 2010; Regon; Ministry of Economy; SME study ordered by BCG. Note: The index is scaled so that the average for all regions equals 65 (the overall index value for Poland). Exhibit 11. Regions with the highest number of businesses also have the highest e-intensity E-Intensity Index Dolnośląskie Zachodniopomorskie Kujawskopomorskie Wielkopolskie Małopolskie Pomorskie Łódzkie Lubuskie Kujawsko-pomorskie Zachodniopomorskie Podlaskie Opolskie Świętokrzyskie Podkarpackie Warmińskomazurskie Lubelskie Śląskie Mazowieckie R 2 = 74% Number of business in the region (ths.) Sources: GUS; TNS; World Internet Project Poland 2010; Regon; Ministry of Economy; ESPON; BCG analysis. 20 The Boston Consulting Group

23 How the Internet is Transforming the Polish Economy Until recently, the Internet economy was mainly associated with e-businesses representing the so-called new economy, as opposed to the traditional economy tied to a concrete location and maintaining direct customer contact. But as well as creating a new virtual market sector, the Internet has altered almost every industry it has touched. It has created ripples which move through the rest of the economy, and have shaken the foundations of many businesses. Many businesses have recognized the potential of new technologies and used them to improve their market position. The Internet applies five fundamental transformational levers to businesses: Geographic expansion without the need for a bricksand-mortar presence in new markets. Profitable sales of the long tail of products to small subsets of consumers. Improved automation and information exchange across supply chains to increase efficiency and productivity. Greater collaboration with and among customers, suppliers, and business partners. Increased transparency and a reduction in the ability of parties such as middlemen and brokers to take advantage of information asymmetries. Below we briefly explore how the Internet has transformed three Polish business sectors - banking, retail and travel. Banks: The Courage to Innovate Polish banks were fairly adventurous in adopting the Internet, in spite of its limitations, early in the 21st century. In 2000, fewer than 10 percent of households had access, and the speed and quality of services were far from satisfactory. E-banking offered very competitive interest rates on deposits to attract new customers. Combining these high interest rates with the flexibility of a pay-in and pay-out savings account proved a winning new formula and was later adopted by traditional banks. Savings accounts are still very successful, accounting for a 25 percent share of deposits. The creation of safe online transaction systems promoted customer confidence in e-banking and in the Internet economy in general. Research by Deutsche Bank (November 2010) shows that 21 percent of Polish bank accounts are online, the highest proportion in Central and Eastern Europe, compared to 18 percent in the Czech Republic and 16 percent in Hungary. This has enabled leading Polish banks to expand into neighboring countries (mbank is present in the Czech Republic and Slovakia), whereas those countries banks have made no inroads into Poland. It is the 24/7 access to e-banking services which Poles appear to appreciate. Approximately 20 percent of Poles use e-banking services regularly and there are currently 7.4 million online bank accounts. Nearly all top Polish banks offer Internet accounts. Businesses are equally engaged. In 2010, 1.6 million SMEs used e-banking, with 1 million making its services part of their everyday operations. Connected Poland 21

24 Exhibit 12. The number of banking transactions made through the Internet has significantly increased Number of transactions (bn) 2.0 CAGR (%) % 38% Internet transactions 50 28% % 22% % 78% 72% 70% 63% Non-internet electronic transactions Sources: Results of an KNF (Polish Financial Supervision Authority) study that included 23 Polish commercial banks. The migration of private and corporate customers to the Internet has led Polish bank branches to reshape their operations. No longer occupied with managing simple transactions, they now focus on providing comprehensive customer service to more demanding clients, offering consulting services and advanced products. Long queues are no longer prevalent as customers can contact customer services at any convenient time. Transaction costs have fallen and the focus on advanced products rather than simple transactions has made bank outlets more cost-effective. Polish banks took advantage of their sector s development gap. Inheriting an under-developed system from a centrally planned economy, they quickly adopted advanced techniques, leapfrogging the intermediate development stages seen in developed countries. As a result, credit card systems and e-banking were soon thriving in Poland even though cheques remained almost unknown. Commerce: Online Sales and Beyond Internet users in Poland quickly discovered the advantages of online shopping. While Poland has only moderate Internet penetration by European standards, its e-commerce has reached levels comparable to Italy and only slightly lower than the Czech Republic and Spain. E-commerce accounts for 2.9 percent of retail trade. With ROPO-type transactions included, the Internet accounts for approximately 9 percent of Polish retail trade. The reasons for the success of e-commerce appear obvious: lower prices, time savings and a wider range of goods and services than traditional shopping. Even if the final transaction takes place offline, the Internet provides customers with information which gives them a negotiating advantage. Internet users make informed decisions based on online product research, have specific expectations and are more price aware. They are also assisted by dedicated websites, such as price comparison services (Ceneo.pl; Skapiec.pl), enabling them to check and choose the most competitive offers. On the Internet, competition is just a click away. This means that all online shops, wherever they are located, compete on equal terms. According to IAB statistics, the number of online shops offering consumer electronics, one of the most popular online product categories 22 The Boston Consulting Group

25 Exhibit 13: Multimedia, books and consumer electronics are the most popular online purchases Online purchases by Internet users (%) Multimedia and books House and garden Consumer electronics Value of purchases in Clothing and accessories 1 bn PLN CAGR ( ) Sources: IAB; Gazeta.pl report titled Internet pomaga kupować (The Internet helps do shopping); Euromonitor. (others are books and multimedia, household & garden, and clothing), is estimated to have risen from 340 in 2007 to 540 in At the same time, diminishing information asymmetry between buyers and sellers combined with increased competition squeezed retail margins to roughly 3 percent. Sellers, whose income decreased through lower margins, benefited from the counterbalancing effect of higher turnover and productivity gains. Poland s e-commerce development had distinct qualities. Consumers rapidly became confident online shoppers. Confidence in e-commerce was further enhanced by the banks whose e-banking services were evidence of the safety of online financial transactions. The innovative approach of banks and other financial institutions contributed to the development of safe and quick online payment methods, which are still evolving. One of the latest developments is the Payments transaction settlement option of the Allegro auction website, which aggregates multiple offers and provides additional services (such as the Payments option). Allegro.pl is now a powerful Internet platform connecting shoppers and suppliers. In addition, it has been improving the standards of collaboration and mutual trust. For example, the continuous improvement in the safety and quality of Allegro transactions is a result of improved functionalities such as an opinion-sharing option which minimises dishonest users. For many years, logistics had been the weakest element in Poland s e-commerce. Today, the logistics sector generates percent of its revenue through services provided to online shops and auctions (PLN 0.5 to 1 billion in 2010). Travel: The Basic Source of Information The Internet, and the passion of its Polish users for online research, has profoundly changed Poland s travel industry. Before choosing a holiday destination, Poles browse the Internet for the most attractive places to visit, then scrutinize the offers of travel agencies, airlines and hotels. 58 percent of holiday destinations are selected based on online research, and in 76 percent of cases, Poles look for detailed information about their holiday destinations on the Internet (TNS OBOP study: ROPO in tourism). Websi- Connected Poland 23

26 tes which aggregate useful information and travel offers, such as Tripadvisor.com, Holidaycheck.pl, Travelplanet.pl and Wakacje.pl are particularly popular. Yet Internet users remain reluctant to buy trips online. They prefer to visit a travel agent or book over the phone. If traveling in Poland, they prefer to contact service providers directly, without involving any middlemen. Even so, more than 50 percent of all airline tickets sold in Poland are booked online. Within the travel industry, the Internet has driven consolidation - small travel intermediaries were eliminated, reducing service costs for consumers. At the same time, it has helped small businesses, enabling hotels, guest houses, holiday resorts and private accommodation owners to contact customers via the Internet and to advertise online. 90 percent of businesses operating in the travel industry now have a website, while data aggregators, such as Nocowanie.pl or Fajnewczasy.pl, are increasingly popular. In addition, major travel agencies which previously operated exclusively offline, such as Itaka Neckermann and TUI, have been forced to introduce online services. Itaka now leads online sales. 24 The Boston Consulting Group

27 Enthusiasm and Resistance Internet in SMEs Small and medium enterprises (SMEs) have been one of the major engines of Poland s economy. SMEs in Poland, as in the majority of other EU member states, produce over 50 percent of the GDP (as much as 70 percent in Spain and Italy) and employ 70 percent of the overall workforce. However, this large-scale entrepreneurship is a relati- vely new phenomenon in Poland, dating back only to the social and economic transformation of Many Polish businesses have yet to reach maturity and as such, more modern business support tools such as the Internet have not yet been used to their full potential. Proprietary data shows that nearly all SMEs in Poland have access to the Internet, with over 95 percent of SMEs using . Closer examination, however, shows serious Exhibit 14. SMEs have a significant impact on GDP and employment SMEs provide nearly 50 percent of GDP s added value SMEs employ ca. 70 percent of all employees working in the enterprise sector Added value (PLN mln) No. of employees (mln) % 7% 10% 24% 39% 13% 18% 30% Micro Small Medium Micro Small Medium 250+ Sources: PARP 2008; GUS SME = 47% SME = 70% Connected Poland 25

28 Exhibit 15. Main types of online activity among SMEs % of SMEs participating in the survey Has Internet access 98 Uses 96 Has its own website 73 Has an entry in an online company directory 70 Uses search engines as a form of advertising 49 Sends advertising s 43 Advertises using paid web banners 14 Has a profile on social networking sites 11 Has its own company blog 4 Sources: BCG survey on how SMEs use the Internet by SMEs; BCG analysis. Note: The values do not total 100% because each respondent could select more than one answer; Sample size n=1000. weaknesses. While more than 70 percent of businesses claim to have a website, companies offering website design and hosting services estimate that the real figure is about 50 percent, with the others only present on aggregator websites, such as online directories or online location finders (Zumi, Google Maps). Small and medium businesses also fail to exploit the full potential of their website. A typical company website includes only basic business data. Only 32 percent of businesses have price lists and product portfolios on their sites, and a mere one in five facilitate active interactions through customer reviews and feedback. However, Polish businesses are slowly exploring other types of online interactions. About 10 percent of SMEs are present on social networking sites and almost 15 percent use web banners. Based on proprietary study results, we have classified SMEs into three groups: Low-Web businesses. Approximately 15 percent of businesses have access to the Internet and are present in online directories, location finders, and maps but do not have a proper website. As many as 70 percent of these companies see no reason to have a website, especially those in the service sector (as many as 90 percent). This view overlooks the point that having a website is the first step towards active use of the Internet. Businesses with a website (medium-web or high-web businesses) were shown to have better business coverage, even in market sectors where the Internet appears to be of little relevance. Medium-Web businesses. 32 percent of SMEs have a website or are present on social-networking websites and send promotional materials via . Their engagement in online communication is rather passive; medium- Web SMEs fail to use online advertising or to offer any of their products and services online. High-Web businesses. 51 percent of SMEs in Poland use the Internet to advertise online or to distribute products and services. High-Web businesses online activities are mainly focused on marketing: 60 percent use to distribute advertising materials and over 70 percent refer to search engine positioning strategies. Display advertisements are less common (only 26 percent of businesses use this option). Only 16 percent of businesses offer an online payment option, whereas 26 percent actively interact with customers through online comments and feedback. 26 The Boston Consulting Group

29 Exhibit 16. Reasons for having a website Companies with their own website (%) Every company needs a website 46 A website helps to win new customers 20 A website is the best form of presenting the company 13 A website increases the company s recognizability 10 Our customers expect us to have a website 3 Modernity, ease of information flow 2 Fashion and a general trend 2 Website creation is inexpensive 1 Website maintenance is inexpensive 1 We have the necessary skills in-house 1 Other 0 Sources: BCG survey on how SMEs use the Internet by SMEs; BCG analysis. Note: The values do not total 100% because each respondent could select more than one answer; Sample size n=1000. Exhibit 17. Information published on websites Companies with their own website (%) Contact data phone, address, 99 Overview of the company and its operations 96 Overview of the product range 90 Ability for the customer to customize products 48 Post-sales services 33 Product pricelist 32 Online ordering 31 Customer reviews/feedback 22 Online payments 12 Shipment/parcel tracking 11 Live chat with the sales department 10 None of the above 1 Sources: BCG survey on how SMEs use the Internet by SMEs; BCG analysis. Note: The values do not total 100% because each respondent could select more than one answer; Sample size n=1000. Connected Poland 27

30 The level of engagement is largely sector dependent. Travel agencies and producers - such as hotels, restaurants and tour operators - are the most active online businesses. 90 percent of such businesses are medium-web or high- Web users. SMEs from the real estate and transportation sectors are the least engaged. Company location appears less important with regional differences mostly attributable to market diversification across regions. The Małopolska region tops the list for engagement (65 percent), with the Lubelskie and Świętokrzyskie regions at the bottom (39 and 40 percent respectively). Many SMEs recognize the opportunities the Internet has to offer. Amongst businesses who use the internet, over 60 percent find it easier to contact customers both near and far, without needing a bricks-and-mortar presence. Nearly 55 percent of businesses reported that online advertising campaigns were more effective and relatively inexpensive. Almost 50 percent of businesses valued the ability to get customer feedback. Over 50 percent of SMEs say that the Internet has provided tools to improve their business performance. Both statistical data and individual case studies show that it pays to go online. Increase in employment. 30 percent of high-web businesses, compared to only 10 percent of low-web businesses, report having increased employment within the last three years. Q-workshop.com, which sells decorative dice online, has increased its labour force threefold to 14 in the last three years. Increase in revenue. 47 percent of high-web SMEs, compared to 10 percent of low-web companies, reported increased revenues in Gry-OnLine.pl, which creates and runs multimedia Internet services, has doubled its revenue in the last 3 years. Artweb-media, a flight comparison site, was equally successful. Better range of business. Internet use and geographic coverage are strongly correlated. 35 percent of high-web businesses operate throughout Poland compared to 17 percent of low-web businesses. Exhibit 18. Level of Internet activity depends on the industry % of SMEs participating in the survey Total Hotels, restaurants Construction Manufacturing Healthcare Information Commerce Services & media Research, consulting Other Transport Financial services Real estate No-web business Low-web business Medium-web business High-web business Sources: BCG survey on how SMEs use the Internet by SMEs; BCG analysis. Note: Sample size n= The Boston Consulting Group

31 Exhibit 19. High-web businesses use the Internet mostly for advertising Marketing and advertising Sales Social Networking % Uses search engines as a form of advertising Uses positioning in search engines Sends advertising s Advertises using paid web banners Enables shopping Enables online payments Has a site with Has a profile Has its own customer on social company blog reviews/ networking sites feedback Sources: BCG survey on how SMEs use the Internet by SMEs; BCG analysis. Note: Sample size n=1000. Exhibit 20. Benefits to SMEs from using the Internet % of SMEs participating in the survey Better access to customers in our region Better access to customers in other regions of Poland Access to tools which improve efficiency Improved efficiency of advertising campaigns Obtaining customer feedback and comments Lower marketing and advertising costs Better access to international customers More collaboration with customers around product development Simplifying customer payments Easier recruitment of new employees Lower goods/services distribution costs More products sold Definitely YES Rather YES Rather NO Definitely NO I don t know Sources: BCG survey on how SMEs use the Internet by SMEs; BCG analysis. Note: Sample size n=1000. Connected Poland 29

32 Duch Morza offers Baltic cruises. It has customers from all over Poland and could operate internationally but has postponed geographic expansion because domestic demand is so high. Increase in exports. Aided by Internet tools such as price lists and payment options, high-web companies have realised significantly higher export volumes. 30 percent of them sell more than 10 percent of their products abroad compared to 15 percent of low-web businesses. Psiloc produces smartphone software. Nearly 90 percent of its revenue comes from exports. Medical Travel offers medical travel services to customers abroad. What does the Internet mean for businesses in Poland? First and foremost, it is a source of information ( information, a window to the world ). Secondly, it is used as a communication channel ( , mail, contact ). Thirdly, the Internet is considered a modern and convenient medium of the future ( access, speed, comfort, future, modernity ). Exhibit 21. What does the Internet mean for businesses in Poland? Efficiency Advertisment Effectiveness Productivity Communications WWW News Safety Nothing Net Web site Fast access Facebook Work Access Google Globality Future Site World Safety Mail Contact Shopping Information Freedom Data Computer KnowledgeAvailability Fast Possibilities Window Time Connection Browser Entertainment Help Comfort Allegro Modernity Easyness Saving time Technology Phone Search engine Contacts Marketing Mobility Bank Data base 30 The Boston Consulting Group

33 Internet stack The Polish Internet economy is enabled by a group of companies that provide goods and services to traditional companies to enable them to conduct business online. These companies are the engine of the Internet economy. They have annual revenues of PLN 38 billion and employ around 50,000 people, roughly half the number in Spain and around five times fewer than in the UK. Since many of these companies sell to other businesses, the PLN 38 billion is not comparable to our GDP calculation, which only counts final sales to consumers. These companies are best described as a stack. There are five layers of the Internet stack: Telecommunications and infrastructure. Companies which build and manage the Internet s infrastructure (in wholesale and retail trade). This includes telecom operators related to network development and maintenance as well as web hosting companies, such as NASK.pl, Home. pl and Domena.pl. Access and equipment providing access to the Internet. Companies which offer devices and services to access the Internet, such as fixed and mobile Internet providers, and computer companies which develop Internet access software and equipment. Enablement platforms. Companies which provide essential services to facilitate activities online, such as companies enabling payments online or creating active online advertising. Services and content platforms. Online retail sites, price comparison portals, aggregators, and other companies The Internet economy in Poland generates revenues of ~9 bln EUR and provides employment for ~50 thousand people Communities: Producing and consuming Mainly consuming Mainly producing Search Services and content platforms Enablement platforms Pure-play online retail Enablement platforms 2 Gaming Social networking Music, video, and editorial Aggregators Other services 1 Cloud computing Advertising agencies e-learning Web design Access: Devices and services used to access Internet Computer hardware Internet service providers IT Consultants Software and operating systems Mobile devices and access Network hardware Other hardware 3 Telco and infrastructure Hosting Network maintenance Network design and manufacture Other 4 Wholesale ISPs Sources: BCG analysis; Magna Global; Datamonitor; Ovum; Spark; Euromonitor; AKAR; Nielson; MTS; RusSoft Association; National Bookmakers Association; Coordination Centre of National Domain of Internet; Annual reports. Note: The size of the boxes is proportional to estimated revenues of companies in that part of the stack. 1 Gambling, dating, advertising agencies, e-learning, and cloud computing 2 Billing and payments, advertising networks and servers, analytics and metrics, and verification and encryption 3 Game consoles and other Internet-enabled devices 4 Domain name registration and trading and mirroring and content management Connected Poland 31

34 Internet stack (cont.) offering related services. Online communities. Consumers who both consume and produce content and services through the Internet, contributing to the development of social networking. Revenue from the Internet stack constitutes a significant share of the domestic economy (2.7 percent GDP). The access layer represents slightly less than 45 percent of the total sectorspecific revenue, taking into account Internet-related hardware, access service providers, and IT consulting services. Services and platforms account for less than 40 percent. The major share of revenue is generated by Allegro.pl and, to a much lesser extent, minor online shops. Less than 20 percent of revenue is generated by the infrastructure layer, which is focused on network building and maintenance. The share of sector-specific revenue in domestic GDP is slightly lower than in other European countries. 32 The Boston Consulting Group

35 Poland s Internet Economy Getting Bigger Despite its relatively small contribution to Poland s GDP, the Internet has become a major force in shaping the contemporary economy. The Internet economy has huge growth potential. Over the next five years, it will continue to develop twice as fast as GDP (14 percent per year in nominal terms). In 2015, it will be worth PLN 77 billion, or 4.1 percent of Poland s GDP. More aggressive estimates predict that it could account for as much as 4.9 percent of Poland s GDP in Consumer spending. We predict that consumer spending online (e-commerce) will be the driving force of the Internet economy and conservatively estimate its growth at 16 percent per year. In 2015, Polish Internet users will spend PLN 36 billion online, mostly on consumer electronics but also on multimedia products and cosmetics. Internet penetration will increase to 75 percent mainly due to consumer spending on mobile access and the growing popularity of smartphones. Exhibit 22. By 2015, the value of the Internet economy will grow to 4.1% of GDP Value in PLN bn CAGR (%) +14% 77 Government spending CAGR (%) 8 60 Investment Consumer spending Net exports 0 2.7% 4.1% Sources: EIU; Gartner; Ovum; BCG analysis. Connected Poland 33

36 A more aggressive estimate predicts annual online spending growth of 20 percent per annum driven by the rising popularity of online shopping and the expansion of the most popular product categories: media and books, house and garden, electronics, clothes, and food. E-commerce could account for 7 percent of Poland s retail trade. Business spending. Business spending on Internetrelated investment will grow at 9 percent per year. This will be driven by Internet-related equipment, so ware for non-telecom companies, and infrastructure investments made by telecom companies to reduce the gap with more advanced Internet economies. Public spending. According to conservative estimates, Poland will use only 50 percent of EU funds earmarked for infrastructure projects (in particular to improve broadband penetration). Internet-related public spending will grow at 8 percent per year until Import and export of goods and services. The balance of foreign trade in ICT goods and services has improved considerably, with the export-to-import ratio increasing from 29 percent in 2007 to 75 percent in Investment in Poland by global IT companies such as IBM, HP and Motorola should continue this trend so that the negative balance will be even lower in As Poland s Internet economy develops, the Internet will penetrate other market sectors, altering consumer behaviour, facilitating business expansion at home and abroad, lowering operating costs, and redefining the role of the offline sales channel. The Growing Importance of the Internet in the Development of Poland s Economy The growing role of the Internet follows on from the transformation of Poland s economy and its integration into the international economic system. The first stage of Poland s economic convergence restructuring in order to improve performance through higher quality production technologies and more foreign investment has, as in other Central and European countries, already finished. Poland s current economic growth can be largely Exhibit 23. Consumption will drive future Internet growth Size of the Internet economy in PLN bn % GDP % GDP % GDP Baseline (2009) Increase in Increase in consumption investment Increase in government spending Increase in net exports 2015 forecast Dynamic growth of (conservative) Internet commerce 1 Increase in government spending Increase in net exports 2015 forecast (optimistic) Sources: EIU; Gartner; Ovum; BCG analysis. 1 6% of Polish retail commerce by The Boston Consulting Group

37 explained by the transfer of EU funds and a growing active workforce, but both factors will diminish within the coming decade. EU funding will be reduced, while growth driven by workforce expansion will be increasingly unlikely in an aging society. EU predictions based on this aging population estimate that Poland s annual economic growth might fall below 2 percent a er 2020 and to less than 0.5 percent a er As a result, Poland must invest in human capital and use modern IT technologies if it is to maintain a high economic growth rate. Whether it maintains high growth or becomes a stagnant economy will depend on the development and adoption of modern technologies; in other words, it is directly linked to the growth rate of the Internet economy as well as the education level and quality of Poland s workforce, entrepreneurs and consumers. Connected Poland 35

38 Appendix Methodology The assumptions and analyses that form the basis for this report are outlined below. GDP The expenditure method of calculating GDP measures total spending on finished goods and services. Assumptions outlined in the main report are not repeated here. Consumption. Online spending includes spending on most goods and services. We checked our estimates against the IAB Europe/Google Consumer Commerce Barometer survey and household expenditure data. Spending on access includes consumers payments to fixed and mobile Internet-service providers, a relevant proportion (based on time spent online) of consumer spending on interface devices (such as computers or mobile phones), and consumer spending on infrastructure devices (such as wireless routers). Our estimates are based on research reports and data from Euromonitor, Gartner, the Office of the Telecommunications Authority of the Hong Kong Special Administrative Region (HKSAR) government, the Census and Statistics Department of the HKSAR government, and Ovum. Private Investment. We included a relevant proportion of fixed and mobile telecom investments, where the spending is related to building, maintaining, and facilitating broadband services. We included a portion of private investments in hardware, so ware, telecom equipment, and installation and development services by looking at the proportion of corporate-owned computers that have an Internet connection and of employees using an Internet connection, as well as expert interviews. Finally, we included all private investments in telecom equipment. Estimates are based on research by Gartner, the Census and Statistics Department of the HKSAR government, and telecom companies. We did not include an estimate for internally developed so ware, even though it probably represents a significant element of Internet-related capital expenditure, because too many assumptions would have been necessary. Government Spending. We estimated public spending on ICT, including hardware, so ware, telecommunications, and support services, based on research by Gartner, the Census and Statistics Department of the HKSAR government, and internal estimates. Net Exports. We estimated exports of e-commerce based on imports of e-commerce in major destinations (for example, the United Kingdom and mainland China) and imports based on the online traffic of foreign e-commerce websites available from comscore. We estimated imports and exports of ICT equipment based on data from the Census and Statistics Department of the HKSAR government. GDP Growth We estimated growth of consumption by projecting online consumer spending and spending on access. The consumer spending estimate is based on projections of the percentage of Internet shoppers, the total retail spending per person, and the percentage spent online. The access spending estimate is based on projections of the number of broadband subscriptions and the cost per subscription. 36 The Boston Consulting Group

39 Estimates of growth in investment are based on forecasts by the sources used to build the baseline estimate. e-intensity The overall international and regional indices are formed as a weighted mean of three sub-indices: enablement, engagement, and expenditure. The engagement sub-index is formed as an equally weighted mean of three further sub-indices: businesses, consumers, and government. All of the sub-indices are then formed as weighted means of several underlying metrics. (See the exhibit BCG e-intensity Index. ) Data is not available from the same source for every single metric and country for the international index. Where possible, we impute the missing data through regression, using metrics which are strongly correlated. For some metrics for countries without an OECD data set, imputation does not produce robust results. In these cases we calculate a score using aligned metrics from alternative data sources. We then transform these scores to align with the scale of the original index, using data points for countries that appear in both sources. This allows us to approximate the position of countries without an OECD data set on the international index. We transformed the data so that the indices would measure proportional differences in data. To ensure intuitive interpretation, we then transformed the indices and scaled them so that a reference value - the geometric mean of each index - was set to 100. We also tested how sensitive the country rankings were to changes in the weights and choice of metrics by carrying out a Monte Carlo simulation using random weights and variables. The inter-quartile ranges were very small when a metric was randomly omitted. The index is somewhat sensitive to different weightings. In each iteration of the Monte Carlo simulation, the weight of each of the metrics and sub-indices was randomly modified. The inter-quartile range for each country was small, but there were groups of countries with similar mean scores and overlapping inter-quartile ranges. For example, the analysis shows that the ranking for the Netherlands, the United Kingdom, and Finland cannot be easily distinguished. Connected Poland 37

40 BCG e-intensity Index Description of sub-indices and sample metrics Enablement (50%) Broadband penetration and average speed Development of Internet infrastructure. Metrics include: Broadband penetration (fixed and mobile) Average broadband speeds BCG e-intensity Index Engagement (25%) Extent to which consumers, businesses and government use the Internet Expenditure (25%) Online sales and online advertising Businesses Consumers Government Extent of Internet use by businesses. Metrics include: % of businesses that use the Internet % of businesses with a website % of businesses buying online Extent of Internet use by consumers. Metrics include: Internet users / population % of population that use the internet for communications, banking, gaming, shopping, etc Extent of Internet use by government. Metrics include: UN online service scores for availability of basic information, extent to which public can perform public service transactions online Extent of Internet access in schools Prevalence of Internet commerce. Metrics include: Online retail as a % of total retail Online advertising as a % of total advertising Source: BCG analysis. 38 The Boston Consulting Group

41 Note to the Reader Acknowledgements The authors are especially grateful to Edwin Bendyk for editing the text and his numerous contributions, Krzysztof Rybiński and Marcin Piątkowski for invaluable remarks, Paul Zwillenberg, David Dean, Marcin Przybylski, Tomasz Domżalski, Marcin Szałkow, Stanisław Knaflewski and Andrzej Wodecki for consulting, and Sebastian Christow for sharing data and materials for analyses. For Future Contact If you would like to discuss our analysis or findings, please contact one of the authors: Grzegorz Cimochowski BCG Warsaw Franciszek Hutten-Czapski BCG Warsaw Magdalena Rał BCG Warsaw Connected Poland 39

42 40 The Boston Consulting Group

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