August 22, 2009
So, just how big is “the internet economy”? And how big is it likely to get?
John Quelch, a past Dean of the London Business School who is now a professor at Harvard Business School, and his HBS colleague John Deighton worked with Hamilton Consultants to answer that question for the Interactive Advertising Bureau. Quelch summarizes their findings on the HBS site, explaining that he and the team approached the question in three ways:
1. Employment value. The Internet employs 1.2 million people directly to conduct advertising and commerce, build and maintain the infrastructure, and facilitate its use. Each Internet job supports approximately 1.54 additional jobs elsewhere in the economy, for a total of 3.05 million, or roughly 2 percent, of employed Americans. The dollar value of their wages is about $300 billion, or around 2 percent of U.S. GDP.
2. Payments value. The direct economic value the Internet provides to the rest of the U.S. economy is estimated at $175 billion. It comprises $20 billion of advertising services, $85 billion of retail transactions (net of cost of goods), and $70 billion of direct payments to Internet service providers. In addition, the Internet indirectly generates economic activity that takes place elsewhere in the economy. Using the same multiplier as for employment, 1.54, then the advertising-supported Internet creates annual value of $444 billion.
3. Time value. At work and at leisure, about 190 million people in the United States spend, on average, 68 hours a month on the Internet. A conservative valuation of this time is an estimated $680 billion.
Prof. Quelch adds that “…internet also helps the economy by fostering innovation, entrepreneurship, and productivity, particularly among small businesses that create most new jobs in the U.S. In addition, larger companies in this sector, such as Cisco, Google, or Adobe, have been a haven of relative stability through the current economic downturn and boost the U.S. balance of trade through their global sales.” (The full report is here.)
But as genuinely impressive as these numbers are, it’s important not to let them distract us from the (even) larger likely impact of the web. Roy Amara’s much-repeated caution– “there is a natural human tendency to overestimate the impact of technology in the short run and underestimate it in the long run”– seems to me to apply here absolutely. Prof. Quelch’s snapshot of the internet economy is terrifically clarifying and helpful. But as it is composed of a multiplicand (direct web/equipment revenues) and a multiplier (jobs/activities supported by the core), it’s critical to remember that as the core grows, the multiplier is likely to grow as well– and for an appreciable time, anyway, likely faster..
By analogy, consider telecommunications. From their humble beginnings on the benches of Morse, Bell, Marconi, and Farnsworth, wireline and wireless telecoms services and equipment around the world have grown to sales of $1.9 trillion in 2008 (Dataquest). A very big number indeed.
But when we stop to think about the businesses that telecoms have enabled or transformed– retailing, transportation, finance, entertainment… effectively every sector– we realize that the real impact of telecommunications is much, much bigger than the $1.9 trillion that they gross. In 2008, the global sales of just the top 250 retailers (into every aspect of whose operations, in front of and behind the counter, telecoms have been woven) were $3.25 trillion (Deloitte); entertainment, well over $1 trillion now is projected by PwC to grow to nearly $2 trillion by 2012; and the world’s freight bill, even in the challenged economy of 2008, was over $ 4 trillion (World Bank)… and on and on. While it’s difficult precisely to denominate it, it’s seems clear that a great deal of the $70+ trillion (PPP) to which the world’s GDP had grown by 2008 (IMF) is at least in important part a result of the connectivity– and with it the coordination, the conquered complexity, the confidence– that telecoms have provided.
Which is to say that, while fortunes were made investing in wires, transmitters, and the direct provision of services with them, many, many more fortunes were made doing what that infrastructure enabled. For every Marconi, there was a Sarnoff, a Paley, and a Goldenson; and for each of them, a Sloan, an Ogilvy, and a Woodruff; and for each of them… You get the point.
Surely the same phenomenon accrues as the web weave its way into our lives. Or perhaps I should say “the phenomenon continues,” as there’s a way in which the internet is “just” an extension of telecoms (though, as my old man used to say, “there are differences in degree that amount to differences in kind”). In the end, the semantics don’t so much matter.
What matters is recognizing that the multiplier that Prof. Quelch and his colleagues used– the 1.54 he cites above– is unlikely to be static. It’s likely to grow as the internet insinuates itself more deeply into our lives and our economy; it’s likely to grow manifestly.
And as it does, the experience of telecoms suggests that, while there will continue to be growth in (and money to be made in) internet-specific businesses, the the larger and faster-growing opportunities, at least in aggregate, lie in what the net enables, in what we can do with the web.
Put another way, the IAB report is a powerful reminder that all of us in organizations– for-profit or not-for profit; however seemingly far removed for the web– need to be thinking about ways that we can use the internet to transform our products and services. Because that transformation will happen; if not by us, to us.