Digital Single Markets

Digital Single Markets Benchmarking Europe and the United States March 2010 Verso Economics Richard Marsh, Research Director Verso Economics Victoria House 58 Victoria Road Kirkcaldy KY1 1DQ

Executive Summary A Digital Single Market (DSM) will build a larger stage on which European businesses can perform and grow. The DSM will allow the EU to drive global technical standards and attract inward investment. These benefits have long been enjoyed by the US with a large domestic market, common technical standards and critical mass of global digital businesses. The number of digital jobs within Europe s largest companies is much smaller compared to the US and more than four fifths of Europe s digital jobs are in companies founded before 1950. The main reason for the digital jobs gap is that Europe has failed to keep pace with the US from the 1970s in creating digital business of scale. Europe has not created a digital company of scale for over a decade. There is a sharp contrast in productivity among younger companies; falling in Europe and rising in the US with European digital companies formed in the 1980s and 1990s much less productive than their US counterparts. The gap in the volume of large digital companies may be accompanied by an emerging gap in competitiveness. The story for telecommunications is very different with more jobs associated with large companies created in Europe compared to the US during the 1980s, the 1990s and throughout the last decade. This much improved performance can be linked to changes in public policy across Europe from the 1980s with the gradual liberalisation of markets. The European telecommunications sector is much closer to the conditions of a DSM, particularly in mobile telecommunications. Excluding telecommunications the digital economy in Europe has a handful of companies of scale. By contrast there are 66 digital companies within the 500 largest companies in the US ranging from Blizzard Activision producing video games, to VeriSign providing security services including digital certificates and Symantec developing antivirus software. If the digital economy were to follow the telecommunications sector and develop a longer tail of digital companies of scale, then this would add over 900,000 jobs. The additional jobs are most likely to arise with a flourishing and innovative digital economy where companies can grow to scale and increase their global competitiveness using the DSM as a platform. The potential benefits of closing the digital gap with the US isn t whether Europe can provide the next Google or Amazon.com. The estimate of an additional 900,000 jobs in the digital economy is the equivalent of over 40 Googles or Amazon.coms; the scale of opportunity is sufficient to open up specialist digital areas across Europe. The European telecommunications sector in Europe shows that movement towards a DSM can create jobs and improve choice and quality to end-users. The lack of progress towards a DSM within the digital economy shows that, without renewed focus, the reverse is true. 1

1 The Digital Single Market 1.1 An important reason for pursuing a Digital Single Market (DSM) is to build a larger stage on which European businesses can perform and grow. The DSM will allow the EU to drive global technical standards and attract inward investment from digital businesses around the world. 1.2 These benefits have long been enjoyed by the US with a large domestic market, common technical standards and critical mass of global digital businesses. This has allowed innovative digital companies in the US to move quickly from serving cities and states to 300 million potential consumers; often ultimately leading and shaping global markets. 1.3 Until recently Microsoft and IBM were the most visible signs of US dominance in global digital markets. But the US has increased the pace of innovation with a new generation of global digital companies including Google, Amazon.com, ebay and Yahoo!. These new digital companies have created nearly 100,000 jobs and quickly established themselves among the largest US businesses. 2 Digital Europe 2.1 It is difficult to build a hard measure of the likely benefits from developing the DSM across the EU, not least because the potential benefits are wide ranging. A reasonable estimate can be made by comparing the scale and development of the DSM in the US with Europe. 2.2 The Financial Times (FT) publishes the largest 500 companies, by market value, annually for both Europe (including Russia and Turkey) and the US (www.ft.com/ft500). The FT report includes market value, turnover, net income and employment. Company reports were also used to reference the year in which companies were founded 1. A number of companies became operations of scale only after changing their business models, often significantly after formation. 2.3 Digital companies were identified as sectors including technology, software and ICTrelated leisure and retail (including Amazon and ebay). Telecommunications companies, mobile and fixed line, were separately identified. Table 2.1 below shows the number of jobs in digital companies (excluding telecommunications) within the top 500 companies in Europe and the US by the decade in which the company was originally founded. 1 All dates were traced back to the original founding of the company; assumptions were made where new companies were created as the result of joint ventures or through the release of government assets to the market. 2

Table 2.1: Digital economy jobs within top 500 companies Before 1950 404,000 939,000 1950-1969 142,000 246,000 1970-1979 52,000 414,000 1980-1989 43,000 318,000 1990-1999 28,000 190,000 2000-2009 0 1,000 Total 669,000 2,108,000 Average age 55 years 35 years Weighted age 91 years 57 years NOTES: All employment figures rounded to the nearest thousand 2.4 In order to show the link between the DSM and growing companies of scale, Table 2.1 shows the current number of digital jobs allocated by the decade in which large companies were formed. The tables in this report do not show the number of digital jobs created in each decade. 2.5 The number of digital jobs within Europe s largest 500 companies is much smaller compared to large companies in the US. More than four fifths (82%) of Europe s digital jobs in Table 2.1 are in companies founded before 1950, this compares to just over half in the US (52%). Nokia and Ericsson are now both classified as primarily hardware companies rather than telecommunications. 2.6 Digital jobs in Europe are heavily influenced by larger older companies like Nokia and Ericsson. However the US also has a number of larger well established companies such as IBM. The main reason for the digital jobs gap is that Europe has failed to keep pace with the US from the 1970s in creating digital business of scale. 2.7 The creation of digital jobs in the US has been impressive with companies of scale formed throughout the 1980s and 1990s. One company started as recently as last decade, Crown Castle International, has established themselves among the largest companies in the US. Other digital companies that have expanded rapidly in the US, such as Google and Amazon.com, have relied heavily on consumer markets. 2.8 By contrast Europe has not created a digital company of scale for over a decade. Iliad was founded in 1999, based in Paris, but has significant involvement in fixed line telecommunications. Autonomy was founded in 1996, based in Cambridge, having built on research from the University of Cambridge. 3

2.9 Whilst recent growth in digital jobs in the US has focused on consumer markets, the limited growth in Europe has stronger links with telecommunications, the public sector and corporate markets. Both Europe and the US demonstrate a similar theme with new digital companies linked to the commercialisation of university research. 2.10 With the notable exception of Nokia and Ericsson, larger digital companies in Europe are mainly based in countries with larger domestic markets. For example, excluding Nokia (Finland) and Ericsson (Sweden), Germany, France and the UK account for nearly two thirds (65%) of digital jobs, from Table 2.1, 2.11 The data shown in Table 2.1 is repeated in the appendix showing turnover instead of jobs (Table A.2). The turnover figures show a similar pattern with Europe lagging the US in growing the digital economy. For Europe the weighted average age of companies is higher when weighted by turnover instead of employment whilst the reverse is true in the US. 2.12 This difference in weighted ages means turnover per worker is higher among older companies in Europe and higher among younger companies in the US. Combining jobs and turnover allows a measure of productivity, shown in Table 2.2. Table 2.2: Digital economy productivity within top 500 companies (turnover per employee) Before 1950 487,000 224,000 1950-1969 108,000 219,000 1970-1979 202,000 281,000 1980-1989 195,000 372,000 1990-1999 150,000 321,000 2000-2009 - 1,400,000 Total 352,000 266,000 NOTES: All figures rounded to the nearest thousand 2.13 Overall turnover per employee is higher in Europe compared to the US but this driven by digital companies formed before 1950. There is a sharp contrast in productivity; falling in Europe and rising in the US. This is of particular concern as European digital companies formed in the 1980s and 1990s are much less productive than their US counterparts. The gap in the volume of large digital companies may be accompanied by an emerging gap in competitiveness. 4

3 Digital Markets and Telecommunications 3.1 The story of the digital economy in Europe is very different when telecommunications is also considered. Table 3.1 shows the number of jobs in digital companies and telecommunications within the top 500 companies in Europe and the US by the decade in which the company was originally founded. Table 3.1: Digital and telecoms jobs within top 500 companies Before 1950 866,000 1,001,000 1950-1969 142,000 249,000 1970-1979 53,000 414,000 1980-1989 339,000 845,000 1990-1999 595,000 233,000 2000-2009 58,000 25,000 Total 2,052,000 2,767,000 Average age 45 years 35 years Weighted age 62 years 52 years NOTES: All employment figures rounded to the nearest thousand 3.2 With telecommunications included, Table 3.1 shows a similar story with the US outstripping Europe up until the 1970s, but from the 1980s the story becomes markedly different. More European companies of scale were created during the 1980s, the 1990s and throughout the last decade more jobs associated with large companies were created in Europe compared to the US. 3.3 The much improved performance of Europe compared to the US can be linked to changes in public policy across Europe from the 1980s. Telecommunications markets across Europe have gradually been liberalised since the 1980s. This has included the transfer of public assets, the opening up of domestic markets, cross-border mergers, acquisitions and joint ventures. 3.4 Deutsche Telekom has nearly a quarter of a million employees and formed in 1996 following the transfer of state-owned assets (Deutsche Bundespost) and subsidiaries include T-Mobile. Telecom Italia has over 70,000 employees and was founded in 1994 following the merger of several state-owned organisations telecommunications companies (including the Società Italiana per L'Esercizio Telefonico). 5

3.5 The European telecommunications sector is much closer to the conditions of a DSM (outlined in the DSM rationale), particularly in mobile telecommunications. The data shown in Table 3.1 is repeated in the appendix showing turnover instead of jobs (Table A.3). The turnover figures show a similar pattern with Europe lagging the US in growing the digital and telecommunications economy until the 1980s but overtaking the US from the 1990s. Overall productivity levels for large European companies are ahead of their counterparts in the US. 4 Quantifying Benefits 4.1 Excluding telecommunications the digital economy in Europe has a handful of companies of scale. By contrast there are 66 digital companies within the 500 largest companies in the US ranging from Blizzard Activision producing video games, to VeriSign providing security services including digital certificates and Symantec developing antivirus software. 4.2 Chart 4.1 shows the digital gap between Europe and the US with the largest digital companies placed in order of workforce size. The gap between Europe and the US becomes significant after the top 5 European companies (Ericsson is fifth). Chart 4.1: Employment in largest digital companies (US: 66 companies, Europe: 17) 400,000 350,000 300,000 Europe US 250,000 200,000 150,000 100,000 50,000 0 Digital Gap 1 6 11 16 21 26 31 36 41 46 51 56 61 66 SOURCE: Verso Economics, based on Financial Times data (2009) 6

4.3 If the digital economy were to follow the telecommunications sector and develop a longer tail of digital companies of scale, then this would add over 900,000 jobs. This calculation is based on matching the longer tail of US companies outside of the top 5 companies; IBM and Hewlett-Packard are historically large employers and it would optimistic to assume the scale of these companies could be replicated. 4.4 The top 5 digital companies in Europe account for 72.6% (486,000 jobs) of the digital jobs shown in Table 2.1 with the corresponding figures for the US much lower at 46.7% (984,000 jobs). If the remaining tail of companies in Europe (183,000 jobs) were to provide the same number of jobs in the US (1,125,000 jobs) then this would add 942,000 jobs. This would involve closing the digital gap indicated in Chart 4.1. 4.5 The additional jobs are most likely to arise with a flourishing and innovative digital economy where companies can grow to scale and increase their global competitiveness using the DSM as a platform. The longer list of US digital companies covers an eclectic range of activities from the digital certificates, video games and antivirus software outlined above to consumer and retail services delivered by Google, Amazon.com, ebay and Yahoo!. 4.6 Current smaller scale successes in Europe include Spotify, a music streaming service based in Stockholm and London. But emerging businesses like Spotify often struggle with disparate digital markets and until earlier this year some Spotify services were only available in Sweden, Spain, Norway, Finland, the UK and France. By contrast Spotify s US peers have ready access to a DSM of nearly 300 million consumers and this has been a key success factor for companies like Google and Amazon.com. 4.7 The potential benefits of closing the digital gap with the US isn t whether Europe can provide the next Google or Amazon.com. The earlier estimate of 900,000 jobs in the digital economy is the equivalent of over 40 Googles or Amazon.coms; the scale of opportunity is sufficient to open up specialist digital areas across Europe. 4.8 The European telecommunications sector in Europe shows that movement towards a DSM can create jobs and improve choice and quality to end-users. The lack of progress towards a DSM within the digital economy shows, that without renewed focus, the reverse is true. 7

Web links FT 500 The world's largest companies www.ft.com/ft500 Appendix Table A.1: Number of digital economy companies within top 500 companies Before 1950 5 8 1950-1969 3 6 1970-1979 1 11 1980-1989 4 22 1990-1999 4 18 2000-2009 0 1 Total 17 66 Average age 55 years 35 years Table A.2: Digital economy turnover ( Billion) within top 500 companies Before 1950 196.7 210.0 1950-1969 15.4 53.9 1970-1979 10.5 116.2 1980-1989 8.4 118.3 1990-1999 4.2 60.9 2000-2009 0.0 1.4 Total 235.2 560.0 Average age 55 years 35 years Weighted age 110 years 51 years 8

Table A.3: Digital and telecoms turnover ( Billion) within top 500 companies Before 1950 296.8 236.6 1950-1969 15.4 54.6 1970-1979 11.2 116.2 1980-1989 107.1 273.0 1990-1999 149.8 74.2 2000-2009 11.9 7.7 Total 592.9 763.0 Average age 45 years 35 years Weighted age 70 years 47 years 9