Review, Trends, and Drivers

The German Internet Industry 2009–2012

Review, Trends, and Drivers << Abb. #

Executive Briefing

The joint study carried out by eco – Association to show both current market development possibil of the German Internet Industry and Arthur D. Litt- ities and interconnections by systematically break le systematically records the German Internet in- ing down the Internet industry. dustry for the first time. Using the ADL-eco layer model, it sheds light on the complexity as well as Another part of the study examines trends and mar- the size of the industry and covers important indica- ket development drivers in the Internet industry. tors pertaining to the future development These were identified and analyzed in interviews of market segments. with carefully selected industry experts. Besides technical innovations such as IPv6, the study sheds Four interconnected layers explaining the division light on the topic of open innovation and the effects of labor and value-added chains are identified and of changing user behavior. As part of the analysis, described in detail. In order to determine the indi- the study pinpoints questions pertaining to the cators for the particular segments, a quantitative potential for change in these areas. online survey was carried out. The study is the first Contents

Executive Briefing 2

Foreword 4

Greeting 6

1. Introduction 8

2. German Internet Industry Review 2009: Market Segments & Players 12 2.1 Market Segment Delimitation 12 2.2 Size of the Internet Industry 14 2.3 Business Climate in the Internet Industry 16

3. Market Indicators for the German Internet Industry Segments 17 3.1 Internet Backbone 18 3.2 Mobile Telephony Access Networks 22 3.3 Fixed Network Access Networks 25 3.4 Internet Access 27 3.5 Internet Exchanges 29 3.6 Housing / Hosting 31 3.7 Domain Service Provider 33 3.8 Online Applications 35 3.9 Online Advertising 38 3.10 Online Platforms and Web Portals 41 3.11 E-commerce 43 3.12 Internet Content 47

4. Trends and Market Development Drivers 49 4.1 IPv6 – Benefits for the Economy and Consumers 49 4.2 Open Innovation 52 4.3 Usage Trends and Effects 56 4.3.1 Current Developments 56 4.3.2 Mobilization of the Internet 57 4.3.3 Touch Screens 61 4.3.4 Web Oriented Architecture 61 4.3.5 Internet as Moving Image Medium 63 4.3.6 Microblogging / Lifestreaming 63 4.3.7 Social Networks 64 4.4 Media Use and Company Marketing 68 4.5 Challenges for the Internet Industry 70

5. Conclusion and Outlook 72

6. Method and Random Sampling 74

Bibliography 76

Imprint 78

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 3 Foreword

Foreword However, for some time thereafter, the Internet was seen as a gadget or a fad by The development of Internet protocols the postal services who were responsib- began 40 years ago. The Internet as a le for telecommunication at that time, communication medium for science ca- and it was not taken seriously in politics. me to Germany 25 years ago. Shortly af- Some politicians and industries such as ter the fall of the Iron Curtain 20 years the music and film industries are just ago, the Internet was commercialized, realizing which developments have by- and almost 15 years ago eco – Associati- passed them without leaving a mark, on of the German Internet Industry was even though for a long time Germany founded under the name “eco Forum had been ahead of the other European e. V.” The Mosaic browser marked the countries when it came to Internet deve- actual beginning of the triumphant suc- lopment. cess of the World Wide Web in 1993 due to the fact that its graphics abilities ma- Despite all adversity, the Internet is now de it possible to put completely different firmly established and has an increasin- content on the Internet. These milesto- gly important role in the economy while nes form the basis of an unmatched de- its influence reaches the entire economy. velopment of an entire industry, not only in Germany. Despite the fact that the Old business models in many areas of Internet industry had been heavily ruled traditional business therefore have by technology during its economic first had to either be completely reconside- steps until 1993, content on the WWW red or have risked losing out to new me- was still rare and Internet access was so- dia. Constantly new business opportu- mething meant for companies; the name nities have been created, new areas are “eco Forum” chosen at its founding was reached by the Internet, and an end is supposed to indicate a wide application not in sight for a long time – while, of of new technologies and stood for “elect- course, every end is a new beginning. ronic commerce Forum.” Due to these conditions, it has been difficult to bring order into such a dynamic system, make comparisons possible, recognize trends early, and identify the respective driving forces.

Page 4 | The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little Foreword

As the Association of the German In- We certainly hope that the study will not ternet Industry, we see it as one of our only help our members and will not on- tasks to provide an overview befitting ly be an indispensable tool for business the significance of the Internet industry development and evaluation but that it and to define the fundamentals in order will also close a gap for the entire mar- to be able to provide a complete indust- ket that we believe has been present un- ry review pertaining to market size and til now. business climate. eco as the Association of the German In- The present study was carried out in col- ternet Industry committed to the econo- laboration with Arthur D. Little. We mic, political, and technical concerns of created a layer model based on the Inter- its members. We see it as our obligation net value-added chain organized by par- to provide food for thought and to sup- ticipants and market sectors. At the sa- port our members as well as the govern- me time, with this study we created an ment with expert advice in this “new instrument that will allow a repeat study world”. at a later time which will provide a basis for data comparison. Current trends will We would, of course, be very happy if be captured separately for each edition this study were the reason for your fu- in order to point out the different are- ture cooperation with eco. as that have an influence on the Internet economy itself.

We are anxious to see how the first review of the Internet industry in Germa- ny will be received and how lawmakers and companies will react to this syste- matization and to the results of the stu- Prof. Michael Rotert dy. We always appreciate constructive suggestions. Chairman of the Board eco – Association of the German Internet Industry

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 5 Greeting

Greeting In the meantime, an industry has evolved around the actual Internet When the Internet came to Germany access that reaches from network infra- 25 years ago, nobody dared make a pre- structure, services, applications, and diction as to how important it would be- aggregation to user content. The Internet come in the future. The Internet was at industry has in an unprecedented way first seen as a science network, but not ignited creativity and inventiveness in before long it set off on a triumphant numerous young entrepreneurs and in march that is still carrying on today. traditional companies from neighboring The diffusion of Internet usage in Ger- industries as well. New services and many is still taking place at a very fast new content are created as we speak. pace and today almost every PC or lap- Even though just a small number of top is connected to the Internet. Even them are conquering the mass market, mobile phones are, for the most part, as a result, the telecom, IT, media and equipped with fast Internet access. One electronics enterprises, aka the TIME of the last Internet-free bastions, televi- industry, have changed. They have sion, is also turning into a gateway to already been in the middle of a huge the Internet these days. No entertain- transitional phase for several years that ment electronics maker would forgo out- brings with it chances as well as risks fitting their new models with an Inter- for the players. net interface as well as preinstalled applications / widgets. So, the three most The consequences for the participating important screens, PC, mobile phone, industries are an increasing number and TV are connected to the Internet. of mergers on the one hand, but also Moreover, with the trend of “Internet of interesting growth potential from new Things,” all imaginable objects of daily services and business models on the use are being connected to the Internet. other. Enterprises from all areas of the This enables their own communication Internet industry as well as companies that will become part of our daily lives from rather traditional TIME industries in the future. are trying to participate in this growth and launch profitable services for end customers or business customers. Apple, for instance, made a dramatic comeback from tough years and

Page 6 | The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little Greeting

revolutionized the global music industry transaction services, and online adverti- at the same time with the development of sing were rated by the respondents as in- the Internet portal iTunes as a legal pay- creasing fast. This is where the changes ment model. Now, the entire industry is happening to the TIME industries are offering such services. The iPod has being noticed most. But also upstream become a large family of products with sectors, such as the applications market, the iPhone as its derivative which offers are seen as increasing or increasing fast telephony as a side product, and keeps by the majority of the participants. its focus on IP based applications. Many of our customers and business However, even in upstream value-added partners from the Internet industry are layers there are innovative, groundbrea- the drivers and engines of these develop- king developments without which an ments. The growth of the Internet end customer service would not be possi- industry is owed to their creativity and ble. This is where the heart of the Inter- their willingness to take risks. Their net industry is, and its importance optimism, unwavering even through cannot be overexaggerated. the recession, reflects the strong economy built in the last years. As co-authors The present study is the first to focus on of this study we hope that the Internet surveying all value-added layers of the industry will continue to be a driving German Internet industry. During the force, and will contribute to a positive period of May to June, 2009, around economic climate with its economic 700 companies as well as experts from performance. politics and business were surveyed about trends and developments. With this in-depth analysis, we have been able to gain unprecedented insight into the German Internet industry. The result is more than encouraging: Even with the financial crisis in the background, the business climate in the German Jürgen Morath Internet industry, except the landline market, is very positive. Especially Director Arthur D. Little e-commerce, online platforms,

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 7 1. Introduction

1. Introduction • A direct effect besides revenue and employment effects is the stimulation of The Internet industry in Germany has investment. 1 Moreover, a strong Inter- developed into its own economic sector net industry has a multiplicator effect and reflects the infrastructure of the mo- due to fast and inexpensive communi- dern information society as a whole. The cation possibilities and innovative pro- industry is continually growing in im- ducts, and thus initiates new economic portance, at the same time it permanent- activity in traditional as well as new ly paves the way in both, businesses and business fields. the government, for the economy to work efficiently as a whole. It is changing the • Indirectly, it generates chances for fu- societal communication and entertain- ture development and positions Ger- ment habits at a rapid pace. The first e- many as a business location with a fu- mail was received in Germany in 1984. ture. A further indirect effect is the fact Since then, these developments have ex- that the acceptance of new Internet panded the limits of the TIME industries based services in our society introduces (telecom, information, media, and elect- a paradigm shift and guarantees the ronics) and their share of the world eco- prerequisites for the future growth of nomy has permanently grown. the Internet industry as well as the economy as a whole. In Germany, the Internet industry has The Internet become a central factor for winning lo- industry is a central cality advantages through direct and in- factor in promoting direct effects (Illustration 1). Germany as a location.

1 Direct effects see Katz et al. 2009

Illus. 1

Advantages for the Location Germany through the Internet Industry

Higher Contribution to the GDP from the Internet industry and related 1 Earnings economic sectors; additional tax revenue

Increase in employment rate and human capital valorization through Contributions DIRECT Employment 2 Effect the development of future oriented skills to the GDP

Investment Location investments; foreign and national Incentive private and public investors Location 3 Promotion – Advantages Securing the Future Less expensive and fast communication for the economy overall; for Germany of the Economy paths for cooperation and production; access to innovative, attractive forms 4 as a Whole for economic activity; strengthening innovation ability Strengthening the brand of the location; Image Strengthening the Brand INDIRECT positioning as economic location of the future; Drivers 5 making the location attractive for living and working in the region of the Location

Societal New networks are created and act as incubators 6 Response for societal development (e. g. education and entertainment)

Page 8 | The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little 1. Introduction

There are still The growing importance of the Internet • According to BMWi 3, in rural are- white patches on industry is clearly noticeable when one as around three quarters of the the broadband looks at the indicators in the context of households can theoretically access a coverage map. the connection of at least 1 Mbit / s. Due to keyword “Internet.” Both broadband ac problems with the measurement of the- cess and the number of Internet users oretical accessibility (e. g. actual dis- are constantly growing. With yearly tance of a dwelling to the nearest dis- two-digit growth numbers, Germany has tribution point, actual thickness of the already reached a very high saturation copper twin wire) one has to realisti- level. Nevertheless, there are still gaps cally assume a smaller value. Espe- in broadband coverage which need to cially the supply of broadband to small be filled. This is made clear by the sta- and medium-sized companies in rural tistics: areas continues to remain problematic.

• According to the Federal Network • The number of Internet users in Agency, there were around 21.2 mil- Germany has tremendously grown lion broadband connections with a from 6.5 percent of the population over transfer rate of at least 2 Mbit / s at the 14 years of age in 1997 to 28.6 percent end of the year 2008 in Germany. Out in 2000 and 55.3 percent in 2004. In of that, 4 million have a performance the first quarter of 2009, 67.1 percent of 10 Mbit / s. 2 However, this is a DSL of all German citizens were online. monoculture because only 7.5 percent What is remarkable is the fact that me- of these broadband connections are anwhile even the numbers of occasio- based on technologies such as cable, nal and regular users are almost the wireless, or satellite. same (see Illustration 2 on the numbers pertaining to regular Internet users).4

2 see BNetzA 2009 3 see BMWi 2009c

Illus. 2 4 Measured against the numbers of occasional users, see Eimeren / Frees 2009

Media Consumption is Shifting to Internet and IP Related Services, in Germany at the Expense of Radio / Print, in the UK Consumption is Growing Overall

Media Consumption UK Media Consumption Germany

Hrs. / Week / Citizen Hrs. / Week / Citizen 2.1 54.0 54 New 54 Radio / Trad. TV1 1.6 Radio/ Internet Internet 52 Print TV 52 Print TV Penetra- Use 3.0 Internet 3 tion 2.3 49.4 50 Use 50 48.5 –2.3 1.3 –1.2 Internet 48 47.2 Penetra- 48 0.5 0.4 2 46 tion 46

44 Traditional New TV + Internet 44 Traditional Internet 42 Media +6.7 42 Media +2.7 +0.1 –1.8 40 40 Total Total Total Total 2004 2007 2004 2007 Source: Exane BNP Paribas, Arthur D. Little Analysis 1) New TV includes IPTV and services like YouTube. 2) Increased usage due to increased Internet penetration. 3) Increased usage due to existing Internet users.

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 9 1. Introduction

An especially high growth was recently The study jointly conducted by eco and recorded for the category “Internet users Arthur D. Little systematically analyzes over 50.” Between 2006 and 2009 their the relevant trends and players in the numbers grew by about 9.5 percent ye- German Internet industry for the first arly, while the growth rate for 14 to 49 time and gives decision makers the most year-olds grew by only 2 percent yearly, important facts and information. As a due to very high Internet acceptance in result, Internet industry players are gai- the previous years (see Illustration 3). ning the following advantages: Online services are accepted more and As a whole, the daily time spent on the • Based on the results, they can properly more – new busi- Internet continues to increase tremend- assess their chances and expectations ness models and ously. The media usage behavior is conti- in the context of the market develop- customer applica- nually shifting towards the Internet. The ment of either their market segment or tions are in predictions made by eco and Arthur D. the entire Internet industry. demand. Little for the time period up to 2012 are an increase in time spent on the Inter- • They can gain insight in regards to net by 4.6 percent per year. That increa- important future trends and seize op- ses media consumption as a whole from portunities in the Internet industry. 13 percent to 19 percent. As shown in Il- At the same time, they receive back- lustration 2, this development is signifi- ground information about theirs and cantly impacting radio and television. other relevant value-added layers.

Internet users understand better and better how online services work and acceptance is growing. This development is demanding more from network operators as well as service providers who are active on the Internet: New business models and customer applications are in demand. Illus. 3

Internet User Numbers in Germany

50 Total CAGR 3.5% 60+ 40 50–59 30 40–49

20 30–39 Age Groups in % Age Groups 10 20–29 Total Users in Millions Total

14–19 0 2006 2007 2008 2009 2010 2011 2012

Source: AGOF, Federal Network Agency, ARD / ZDF Online Studies, Arthur D. Little Analysis

Page 10 | The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little 1. Introduction

• They can better identify their competi- Based on the Arthur D. Little – eco lay- tive position in the segments relevant er model of the Internet industry, Chap- to them and work out their respective ter 3 takes a detailed look at the indivi- potential opportunities. dual elements and players. Special atten- tion is given to submarket delimitations, Moreover, the study offers an integral players, overlaps, trends as well as ex- overview of the market size, employment pectations and outlooks. and business climate. Chapter 4 is devoted to three current In Chapter 2, the Arthur D. Little – eco topics and gives insight into important layer model systemizes the Internet in- developments: dustry based on the Internet value-added chain according to players and submar- • Key technology: IPv6 kets. The team quantifies the entire market and its layers and gives a detailed in- • Enabler: Open Innovation sight into the business climate and market development expectations. • Internet usage trends and effects

The results are based on a large amount The statements are mainly based on of data collected from managers and em- qualitative expert interviews with lea- ployees of companies in the German In- ders and managers from the German In- ternet industry. The data was collected ternet industry. by eco and Arthur D. Little in the sum- mer of 2009. Chapter 5 wraps up with a summary of meaningful conclusions about the industry.

Illus. 4

Use of Media in Germany

Average Use (Minutes) per Day 500

Mobile 400 Services

300 Internet

Radio 200

Newspapers / 100 Magazines

TV / Video 0 2006 2007 2008 2009 2010 2011 2012

Sources: SevenOneMedia, ARD / ZDF, Arthur D. Little Analyse

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 11 2. German Internet Industry Review 2009: Market Segments & Players

2. German Internet Industry Moreover, the Arthur D. Little – eco l The Arthur D. Review 2009: ayer model based on the Internet value- Little – eco layer Market Segments & Players added chain 5 helps to clearly systemi- model helps to ze the Internet industry. Illustration 5 clearly systemize 2.1 Market Segment Delimitation shows the core activities of the compa- the Internet nies and presents related segments that industry. The classification of all industry relevant can be defined as part of the Internet services and products is the first step to industry in the broader sense. a sound analysis and evaluation of the German Internet industry. A clear deli- The value-added chain begins with the mitation of related industries and a sys- makers of operating and technical infra- temization of its activities are therefore structure equipment. It includes the en- required. tire spectrum of network operators and service providers as well as intermedia- The Internet industry consists of the ries and dealers. It also includes makers operators of the individual networks of terminal equipment. as well as companies offering services through the Internet. However, content The Internet industry in the strict sen- producers or providers of services that se includes any enablers who enable the cannot primarily be obtained online are operation of services. In the layer model, not part of the Internet industry. the Internet industry in the strict sense includes four interconnected layers (Illustration 6):

5 see Zerdick et al. 2001

Illus. 5

Internet Industry Value-Added Chain

NETWORK INFRASTRUCTURE SERVICES & AGGREGATION & INTERNET END INFRASTRUCTURE ELEMENTS APPLICATIONS TRANSACTION CONTENT DEVICES & OPERATION PRODUCT/SERVICE

SERVICE CONTENT INFRASTRUCTURE INFRASTRUCTURE INTERMEDIARIES / END DEVICE PRODUCERS / PRODUCERS / MAKER OPERATOR DEALERS MAKERS PROVIDERS PROVIDERS PLAYER

Internet Industry in the Strict Sense

Internet Industry in the Broad Sense

Page 12 | The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little 2. German Internet Industry Review 2009: Market Segments & Players

Level 1: • Layer 1: • Layer 3: Network infrastructure and Network infrastructure and operation – Aggregation and transaction – Players operation This layer includes players who offer sta- in this layer use services from layers 1 and tionary or mobile access to the Internet 2 in order to aggregate layer 4 contents Level 2: by offering transmission paths and access and make contents on layer 4 accessible. Services and points. This infrastructure is the basis of Moreover, they are responsible for the applications any type of Internet services and is used initiation and execution of transactions by private users and companies as well as with other products. Some examples of Level 3: providers in other Internet industry layers. e-commerce providers in this layer are Aggregation and Companies in these segments are access mobile.de, bol.de, Scout24, Spreadshirt, transaction providers such as Deutsche Telekom, Amazon or eBay in the B2C domain or Vodafone, Versatel, regional carriers wlw.de in the B2B domain. Online Level 4: such as NetCologne, Internet access platforms such as studiVZ, XING or Internet content providers such as 1&1, congstar, and Google and also online advertising Alice / HanseNet, Internet backbone / companies such as IP Deutschland, transit providers such as Deutsche Online Solutions Group or metapeople, Telekom, Level 3, Verizon, Interoute, and transaction services such as PayPal KPN or Telefónica and last but not least and ClickandBuy are found in this layer. Internet exchanges such as DE-CIX. • Layer 4: • Layer 2: Internet content – Players in this layer Services and applications – Players in this generate content and offer it for marketing layer run off the network infrastructure on the Internet. Internet content is any and enable companies and private persons media content available on the Internet. to put a multitude of services and contents This content is offered both web based as on the Internet. Their business encompass- well as recycled by offline media and for es among other things the administration different platforms and services. Compa- of Internet addresses, the uploading of nies in this layer are web originating Internet pages as well as the provision content producers such as Netzeitung, of functionalities and processes on the Ehrensenf and Hobnox, and in addition Internet. In this category are housing / traditional media companies offering hosting providers such as STRATO, Host online content such as Springer, Europe or Global Switch, online applica- Bertelsmann or SevenOne Media. More- tions providers such as salesforce.com over, for several years, of course, users and Google Apps as well as domain themselves have been generating content providers such as Denic, VeriSign or on the Internet, which has become a large domainFACTORY. portion of the Internet content in general (“user generated content“).

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 13 2. German Internet Industry Review 2009: Market Segments & Players

The Internet industry in the broader sen- Along the chain of the different players In 2008, sales se also has the following segments (see of the layer model, one can see clear ten- attributed to the Illustration 5): dencies in relation to the characteristics, Internet industry size and number of companies. Due to in Germany, in the • Infrastructure elements in the form of scaling effects and minimum size requi- narrow sense of the cables, transmission routes, wireless rements, in the low layers there are of- term, amounted devices, transmission technology, ten only few suppliers with a large num- to a total volume hardware firewalls, etc. are offered by ber of employees who generate high sa- of approx. 46 billion many makers such as Ericsson, Nokia les with Internet services. In the higher euros. Siemens Networks, Cisco, Intel, layers, the number of companies that Huawei and Alcatel-Lucent tend to have a small numbers of employees and fewer sales is increasing. • End devices that represent the connection to the user, for instance desktop 2.2 Size of the Internet Industry PCs, notebooks, smartphones, tablet PCs or similar technology, are market- In 2008, the sales volume of the Internet ed by makers such as Nokia, Motoro- industry (in the strict sense) in Germa- la, Apple, Samsung, Sony Ericsson ny was around 46 billion euros. As se- and LG en in Illustration 7, 22.5 billion euros of this amount are accounted for by e-com- • Standard software such as browsers, merce activities in layer 3 “Aggregation shop software or content management & Transaction.” In contrast to the other systems, and security software. market segments, in this case the value creation share was calculated against the total sales of 637 billion euros. 6

6 see BMWi 2009a Illus. 6

ADL – eco Layer Model

LAYER CORE ACTIVITIES / KEY PLAYERS -

INTERNET PRODUCERS OF TRADITIONAL USERS 4 CONTENT WEB ORIGINATING CONTENT MEDIA COMPANIES

AGGREGATION ONLINE ONLINE TRANSACTION E-COMMERCE 3 & TRANSACTION ADVERTISING PLATFORMS SERVICES Minimum Size

SERVICES & HOUSING / HOSTING ONLINE APPLICATIONS DOMAINS 2 APPLICATIONS SERVICES

NETWORK / INFRASTRUCTURE INTERNET INTERNET BACK- INTERNET ACCESS ACCESS NETWORK 1 & OPERATION EXCHANGES BONE / TRANSIT PROVIDER PROVIDER PROVIDER (FIXED & MOBILE) +

Page 14 | The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little 2. German Internet Industry Review 2009: Market Segments & Players

The stationary and mobile Internet ac- yees, whereas the largest share goes to cess in the layer “Network Infrastruc- the e-commerce segment. Next are Inter- ture & Operation” reaches 15.5 billion net access providers, content providers, euros, online advertising 3.7 billion eu- network access operators (referring to ros (in the layer “Aggregation & Tran- the Internet) as well as online adverti- saction”). All other segments are much sing companies. smaller compared to the total sales. In Germany, over As seen in Illustration 8, we can classify 6,000 companies Layer 2 with the special B2B market over 6,000 companies in Germany as be- can be categorized “Services & Applications” has a share of longing to the Internet industry (exclu- as part of the 4 percent of the Internet industry mar- ding e-commerce and Internet content Internet industry ket volume and acts as enabler between providers) in the strict sense. Most of in the narrow sense infrastructure layer 1 and downstream them fit the classification fixed network of the term. layers 3 and 4. In contrast to the other Internet providers. In second place, the- layers, this is a very special market with re are online platforms, followed by a smaller market volume. housing / hosting service providers. Be- sides that, there are several thousand A clear classification of the employees companies active in e-commerce espe- to the respective segments of the Inter- cially; however, the exact number can- net industry is proving problematic be- not be determined. cause in many cases a significant number of the activities of a company cannot be completely allocated to the Internet industry. Arthur D. Little and eco assume that in the entire German Internet industry (in the strict sense) there are between 200,000 and 250,000 emplo-

Illus. 7

German Internet Industry Sales (2008)

Sales* by Layer in Percent; Total: € 45.7 billion

100 Internet Online 11 % Backbone 14 % Advertising 3 % 80 Online- Housing / 59 % Platforms Hosting 60 Fixed Network 77 % Internet 40 83 % E-commerce* 16 % Domains

20 Online Mobile 25 % Applications 12 % Internet 0 Network Infrastructure & Services & Aggregation & Operation Applications Transaction € 17 billion € 1.7 billion € 27 billion

Source: Federal Network Agency, EITO, OVK, BMWi, Gartner, eco, Arthur D. Little Analysis *Assuming an average value added (transaction etc.) by the Internet of 5% to B2C and 2% to B2B sales, excluding Internet content.

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 15 2. German Internet Industry Review 2009: Market Segments & Players

2.3 Business Climate in the mate is expected. The business develop- The business Internet Industry ment for housing / hosting as well as climate in the applications in layer 2 is viewed as German Internet The German Internet industry proves mostly positive as well. Illustration 9 industry is very to be unimpressed by the current eco- shows that a better business climate is positive. nomic crisis, the business climate is ve- only predicted for segments in layer 3. ry positive. The market expectations for Between 29 and 42 percent of the res- the coming year based on the current pondents expected a “strong upward“ business results are generally positive trend for e-commerce, online platforms, (see Illustration 9). transaction services, and online advertising. With the exception of fixed network and mobile access market segments, the res- The outlook for content providers (layer pondents predicted a markedly positive 4) was also positive, even if it was not as development in the individual segments. optimistic as for aggregators and tran- (More on the specifics of the individual saction service providers. segments in Chapter 3.)

In comparison to other infrastructure services such as Internet backbone and Internet access provision, in layer 1 the estimates for future prospects were especially positive for Internet exchanges. However, the prospects for companies in the area of Internet relevant parts of mobile access networks are relatively level, whereas in the fixed network area a further worsening of the business cli-

Illus. 8

Number of Companies in the German Internet Industry (2008)

Total: 6,000 Companies (Excluding E-Commerce and Internet Content Providers)

Transaction Service Providers Mobile Internet Providers 1% Domain Service Providers Internet Exchanges <1%

Internet Backbone Providers 3 % 4 % 5 % Online Advertising 7 % Providers Fixed Network 42 % Online Application Internet Providers 8 % Providers

13 % Housing / Hosting

Service Providers 17 %

Online Platforms

Page 16 | The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little 3. Market Indicators for Segments of the German Internet Industry

3. Market Indicators for Segments • How is the negotiation power of the of the German Internet Industry players within the segment developing in comparison to the value-added lay- Chapter 3 offers a more detailed analy- ers upstream and downstream? sis of the individual segments of the In- ternet industry and gives answers to the • How is the competition structure different questions pertaining to the in- developing in regards to the market dividual segments. The following questi- participants? ons become evident: • How is the competition structure • How are the segments specifically developing in regards to price levels? distinguished from each other? • How are the initial costs developing • How is the development of the in the individual segments? segments evaluated by the market participants themselves? • How is the entire structure developing between the segments and what trends • What are the differences between will have a particularly strong impact the short-term market development on the market in the future? expectations and the medium-term prospects?

Illus. 9

Average Expectations of the Overall Market Development in Germany, Comparison

Internet Backbone –16 % –19 % 34 % 9 % Mobile Phone Access Networks – 7 % –14 % 21 % Fixed Network –17 % – 37 % 17 % Access Networks LEVEL 1 LEVEL

& Operation & Internet Access Provision – 9 % –17 % 40 % 7 %

Internet Exchanges 63 % 13 % Network Infrastructure Network

Housing / Hosting Services – 2 % – 4 % 50 % 11 %

Domain Services – 6 % –12 % 41 % 10 % LEVEL 2 LEVEL Services & Services

Applications Applications – 3 % 43 % 32 %

Online Advertising – 7 % –12 % 38 % 29 %

Transaction Services 58 % 42 %

LEVEL 3 LEVEL Online Platforms –1 % –7 % 32 % 30 % Transaction Aggregation & Aggregation E-commerce – 4 % 52 % 36 %

Internet Content – 3 % – 8 % 46 % 14 % strong increase LEVEL 4 LEVEL Content Internet sharp decrease decrease no change increase

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 17 3. Market Indicators for Segments of the German Internet Industry

3.1 Internet Backbone In regards to transferring data packets Without the between the networks of different pro- operators of the The Internet backbone providers and viders, we differentiate between the pri- backbone structure, their fiber networks are the backbone of cing model “peering” and “transit.” the Internet as we the Internet. Illustration 10 shows how With transit, the provider buys connec- know it would be the wide area backbone networks of the- tivity to all the other networks on the impossible. se companies connect the subnetworks Internet worldwide. This model is al- and access networks. The IP transport so called “upstream,” and it is calcula- networks and the wide area networks ted by data volume. However, providers as well as the subnetworks form the ba- of the same size use the very popular sic infrastructure of the Internet. Due to settlement-free data exchange between high data rates of up to several hundred ISPs, a method called “peering.” This Gbit / s, these networks are now exclu- practice is based on the assumption that sively based on fiber networks. The pro- in networks of the same size the data duct portfolio of the backbone provider exchange volume is symmetrical and begins with dark fiber, a product that therefore any payment model would on- consists of leasing out only the “dark ly create unnecessary costs. Regarding (unlit)” glass fiber cable. It also includes the exchange of data packages between more complex services which consist of providers of different sizes, however, an providing a secure high speed data cable asymmetrical data exchange is assu- between two points and offering tech- med. The smaller provider is sending nical support. The value-added by the more data packages through the network backbone providers consists of leasing of the larger provider than vice versa. the glass fiber infrastructure as well as However, in the past, the size of a pro- providing the services and data trans- vider has proven to be an incorrect refe- mission services that go with it. Without rence parameter: for example, a provi- the operators of the backbone infrastruc- der with many end / business customers ture, the Internet as we know it would can create significantly less traffic than not be possible because the multitude a provider specializing in online gaming of autonomous networks first have to because the data volume for the trans- be connected to one another in order to mission of video files is several times enable the flow of data in the first place. larger than that of a document.

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With transit the exchange of data pack important hubs, frequently across bor- ages takes place at contractually estab- ders. On the other hand, most network lished points of transfer through “pri- access providers have IP backbones at vate interconnects”, and with peering it different grades with which they can takes place at Internet exchange points transport the traffic of other providers. called Internet exchanges (see Chap- These providers are companies such as ter 3.5) by connecting to a switch inf- HanseNet, Vodafone, or Deutsche Tele- rastructure. That is where the most ef- kom. Within the backbone segment, the- ficient peering takes place: All provi- se providers have a key function because ders can peer settlement-free since only they bundle the traffic of the Internet ac- the infrastructure costs of the exchange cess providers in their concentrator net- German Internet point have to be paid by the connected works and thus “process” it to be trans- backbone opera- market participants. mitted through the backbone routes. tors‘, sales total around So the smaller ISP pays for data tran- Based on this definition, one can make 2 billion euros sit through the network of the larger ISP the assumption that in Germany there per year. in order to reach connectivity to all the are around 300 Internet backbone ope- market participants who are not direct- rators. This number includes many com- ly reachable through the next exchange panies operating only regionally who point. possibly only maintain a point-to-point radio connection as a backbone (connec- The companies active in the backbone tion). Sales generated by these compa- segment are on the one hand specialized nies including the transit from IP traffic providers such as Interoute, Invitel is roughly 2 billion euros per year. or Telefónica Deutschland, who provide long distance lines with IP transit business models. They operate transre- gional glass fiber networks between the

Illus. 10

IP Transport Network Hierarchy

Long-Distance Traffic Backbone

Regional Subnetworks

Access Networks (Fixed and Wireless)

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The surveyed companies of this type had The respondents are counting on a The respondents a large overlap rate with three other seg- slightly positive trend for the backbone are expecting a ments of the Internet industry. Over two infrastructure market in Germany by slightly positive thirds (68 percent) claimed to also be ac- 2012 (see Illustration 11). In the short- development of tive as Internet access providers. This term (2009 / 2010), a slightly better busi- the overall market results from technical overlaps as well ness climate is expected than for the for backbone as other synergies. Over 60 percent of entire period up to 2012. Some market infrastructure in the Internet backbone companies addi- participants explain this with the very Germany by 2012. tionally provide housing / hosting servi- tough competition in the last years. ces due to the fact that there are synergies between operating a glass fiber in- The respondents evaluated their own frastructure and the directly connected bargaining power as relatively steady. data centers. Moreover, 48 percent pro- However, there is a slight tendency to ex- vide domain services. Overlaps are sig- pect a deterioration of one’s own positi- nificantly smaller with other areas and on in comparison to the market parti- layers within the Internet industry. Less cipants in other segments. What spoke than 25 percent of the backbone provi- volumes in this context are the expecta- ders were active especially in layers 3 tions in regards to the developments of and 4. A vertical integration into the lay- market participant numbers: ers of aggregation and transaction or Over two thirds (69 percent) are expec- Internet content is simply too far away ting a decrease in the number of market from the core competence for the opera- participants, almost half (46 percent) tion of infrastructure. are expecting a rather moderate cooling. Only 8 percent are expecting an increase.

Illus. 11

Internet Backbone – Indicators

Total Market 2009–2010 – 13 % – 19 % 38 % 6 %

Total Market to 2012 – 19 % – 19 % 31 % 13 %

Bargaining Strength – 14 % – 7 % 14 % 7 %

Number of Market Participants – 23 % – 46 % 8 %

Prices – 15 % – 85 %

Advance Costs – 21 % – 36 % 21 %

sharp decrease decrease no change increase strong increase

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The numbers are clearly pointing to Among the Internet backbone providers, a market consolidation. This seems the estimates on the business climate plausible in light of a maturing market are relatively steady. Most of the with IP traffic becoming a commodity respondents, however, expect a market product. An example of this consolida- consolidation as well as a strong price tion is the takeover of the regional glass competition. They are also expecting a fiber operator BreisNet by Versatel in price drop at the access service level. April 2009. Other takeovers will sure- The developments in this segment will ly follow. probably not be able to be compensated by the slightly growing demand, which This consolidation process is also reflec- in turn accelerates the market consolida- ted in the opinions pertaining to price tion trend. The first signs were already development in the backbone market. visible in the last years, and according All respondents are expecting falling to the opinions of the respondents will prices, 15 percent even significant pri- continue as seen. As a result of this ce decreases. A part of the price decre- development, some providers active on ase in the opinion of the respondents is the market today will disappear from due to the simultaneous decrease of ini- the market, other players will try to tal costs (glass fiber, switching technolo- expand their product portfolio which gy, transceiver, etc.). More than half (57 will lead to a further competition percent) expects the industry to see a de- intensification in the bordering market crease, while only about a fifth (21 per- segments. cent) expects an increase in inital costs. This estimation is based on the assumption of scaling effects caused by growing demand which can be met due to technical development without additional investments in the backbone business.

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3.2 Mobile Telephony Access Networks Though the volume of voice services is declining, it accounted for 77 percent of Mobile telephony network operation is mobile telephony sales for 2008. Simple clearly a section of the telecom indust- texts (especially SMS) continue to be a ry. It is relevant to the Internet industry very popular application but cannot be insofar as it is marketed both for voice included in the calculation for the actu- communication and text communica- al Internet relevant sales. Based on this, tion as well as for mobile Internet ac- eco and Arthur D. Little estimate a sales cess. Mobile phone access networks are volume for 2008 of 2.1 billion euros for (1) primarily bi-directional voice and mobile data services / mobile Internet. data communication in (2) public networks using (3) radio waves for access The mobile Internet constitutes the The mobile Internet (4) location independent and (5) most- fourth largest sales in the Internet indus- is the fourth largest ly country wide, (6) made possible by a try. In this segment, the market struc- sales block in the limited number of operators. 7 Telecom ture in regards to the number of com- Internet industry. companies connected to end customers panies on the market has a significant- through their own networks are defi- ly larger oligopolistic character. Despite ned as mobile phone operators. They use the fact that it is made more flexible by their network infrastructure themsel- a multitude of virtual network operators ves in order to provide telecom services, (MVNOs) and service providers, it is not and / or provide these to Mobile Virtu- significantly open. This is especially the al Network Operators (e. g. BASE). MV- case for mobile Internet services, howe- NOs act as resellers without their own ver, not for mobile voice services. Mobi- network infrastructure on this market. le broadband offered by the German mobile phone network operators T-Mobile, Currently, mobile broadband is on the Vodafone, O2 and E-Plus are becoming advance: Mobile data services, espe- increasingly user-friendly, meaning lo- cially mobile Internet access via UMTS wer prices that increase acceptance and cards for notebooks, USB sticks or usage of mobile Internet services. Com- smartphones (iPhone among others) are pared internationally, however, Germa- in great demand. According to the Fede- ny still has a lot of catching up to do. A ral Network Agency and the mobile pho- glance at Austria shows what potential ne operators, by the end of 2009 there broadband services have: There, already will be already 12 million registered re- 39 percent of all connections are based gular UMTS users and around 4 million on broadband technology. 10 UMTS notebook card users. According to EITO 8 (2009) the total sales volume for mobile phone services in Germany in 2008 was about 22.1 billion euros. Dialog Consult / VATM is talking about a market size of 25.6 billion euros for 2008. 9

7 see Jakopin 2006

8 see EITO 2009

9 see Dialog Consult / VATM 2008 10 see Arthur D. Little 2009

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Random sampling shows a large overlap in this optimism for the phase up to with other layers and segments of the 2012, 14 percent are expecting a strong Internet industry. Approximately 75 downward trend for the overall market. percent of the participants are active as fixed network providers as well as Inter- As far as the appraisals for the bargai- net access providers. The fact that mobi- ning power of mobile phone providers le phone companies along the value-ad- as opposed to other subsections of the ded chain are looking for new revenue Internet industry are concerned, they streams is also reflected in the survey seem to be mostly positive. The results results. Over 40 percent of the mobi- are speaking for an improved bargai- le phone providers offer online applica- ning position triggered by the growing tions, online platforms, and domain ser- competition among mobile end device vices. The interlacing with e-commerce makers as well as the increasing econo- is less, but still relevant (29 percent), In- mic relevance – boosted by diffusion – ternet content (29 percent), online adver- of the mobile Internet to the industry as tising (14 percent) as well as transaction a whole. services (14 percent). Moreover, there are signs for a further The market development appraisal is market consolidation since 40 percent of showing a highly interesting change for the respondents are expecting that the the mobile phone access networks seg- number of market participants will fall. ment in the coming years. The study par- In the near future, no other transactions ticipants are expecting a positive market are expected from the four large provi- development for the business years 2009 ders. However, a consolidation is very and 2010; roughly one third (29 percent) probable for service providers and vir- are even expecting a strong upward tual network operators, and therefore in trend for the overall market. As seen in regards to the variety of providers from Illustration 12, there is a marked change the customer perspective.

Illus. 12

Mobile Telephony Networks – Indicators

Total Market 2009–2010 – 14 % 29 %

Total Market to 2012 – 14 % – 14 % 14 %

Bargaining Strength – 17 % 33 %

Number of Market Participants – 40 %

Prices – 80 %

Advance Costs – 25 % – 50 %

sharp decrease decrease no change increase

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The results also show that the mobile far as the range of applications and qua- phone provider margins for mobile lity is concerned. The providers also broadband will develop nicely: Although influence the market development by re- 80 percent of the participants expect fal- ducing usage barriers by means of less ling end consumer prices, the simulta- expensive flatrate oriented pricing. End neous expectation of falling inital costs devices and mobile services are made balances everything out. That means the more attractive by using open innova- effects of the continuing competition can tion strategies. The end device makers be balanced by price reductions in the and mobile phone network operators loaded fixed network capacities or in the open their application environment and infrastructure. give independent developers the opportunity to offer their applications to cus- The outlook on the market development tomers. As a result, innovations coming for mobile phone and access networks is from outside the company can be appro- influenced by a number of trends trig- priated or at least incorporated and mar- gered by competition and technologi- keted in a win-win constellation through cal developments. Especially the mobile application stores. broadband services that due to the grow ing network coverage outside of areas Mobile phone access networks are beco- Mobile phone with a high population density, a larger ming more and more relevant to access networks number of end devices and falling pri- the Internet industry and open the are becoming more ces are no longer only attractive to busi- door to numerous new application user and more relevant ness customers but also to private cus- experience enriching possibilities. for the Internet tomers, build the foundation for a rapid That creates a complimentary interac- industry and make development in the area of mobile Inter- tion with the other Internet industry seg- numerous new net usage. ments. As the study results show, the fu- applications ture outlook for this market segment are possible. On the one hand, one can see an evo- consistently realistic-optimistic. lution of the Internet usage since the consumers are growing accustomed to using the mobile Internet and are using social networks and indirect communication to stay in touch on the go. On the other hand, this trend is forced by the distribution of Internet capable end devices which offer the costumer a mo bile, comfortable, and innovative operation. The iPhone for instance, even if it is not a mass market end device yet, leads to a clear shift and rise in expectations on the part of the customer, as

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3.3 Fixed Network Access Networks Characteristic of companies within the fixed network access networks segment The operators of fixed network access is the fact that they can provide their networks have a pivotal part in provid own infrastructure to their customers ing Internet access in general. This seg- as “managed” or “unmanaged,” that ment includes all companies that have means either with clearly defined ser- built their own wired networks and use vice parameters or under “best effort these for telecom service provision such criteria.” Some of these providers have as data and IP services or put them at their own access network that also in the disposal of third party providers. Ei cludes a concentrator, 11 however, this ther they offer their services to the end more often than not has to be increa- customer directly or they sell their inf- sed by leasing “unmanaged” infrastruc rastructure at the access service level. tures. Moreover, they may have to buy Customers at the access service level are capacity from backbone providers. usually virtual infrastructure providers or service providers who only have a ru- The access network provider spectrum dimentary or no physical telecom infra- reaches from providers with national co- structure at all (see next chapter). Mo- verage (see previous chapter) and cable reover, providers of fixed network access network operators (Kabel Deutschland, networks often are each other’s custo- Kabel BW, Unitymedia) to city and re- mers in order to increase their reach. gional carriers who have their own su- The individual advance provisioning binfrastructure and operate with diffe- products are not differentiated at this rent technologies such as copper, wires point. The core characteristic of these or glass fiber (such as NetCologne, He- providers is the fact that they can provi- LiNet, M-net or EWE). There are also de access at different levels to end custo- providers such as COLT, QSC or Lamb- mers without needing additional outside daNet, who primarily specialize in busi- infrastructure (see also Chapter 3.4). ness customers. The sales volume for segments, fixed network access network and Internet access (see Chapter 3.4) was 13.4 billion euros in 2008.

11 The concentrator bundles the datastream of a few to many access network owners for the downstream transport through IP backbone. The concentrator is connected to the DSLAM (DSL switch in the main distribution rack) on the access side, and on the network side it is connected to the BRAS (broadband access server).

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There is an unusually large overlap for market. Thus, the overall prognosis is fixed network access network providing negative. It does show, however, that so- companies, with Internet access provi- me fixed network access network providers (80 percent). The operators of ac- ders see a chance potential for further cess networks also market Internet ac- market growth. cess to end costumers. Numerous access network operators are also active in the In regards to the development of their layers of Network Infrastructure & Ope- own bargaining strength, the respon- ration as well as Services & Applica- dents are expecting a slight decline as tions. With the exception of Internet ex- opposed to the participants upstream changes, there were overlaps of 31 per- and downstream from them in the va- cent up to 45 percent in the segments on lue-added chain. each of the two layers to be seen. The price battle in this market segment The appraisals of the respondents in re- seems to be getting worse according to gards to the development of the market the opinions of the respondents. Fifty- in these subsegments allow the progno- six percent are expecting falling pri- sis that in the coming year as well as up ces, 6 percent are even expecting plum- to 2012 a decrease of the total market meting prices. None of the respondents volume is to be expected (see Illustrati- are expecting a raise in prices in the co- on 13). Roughly one third of the respon- ming years. At the same time, 47 per- dents are expecting a moderate market cent believe that inital costs such as buy- downturn by 2010. While the majority ing backbone bandwidth or buying swit- is expecting a downturn or even a sharp ching technology will not be subject to downturn, all the same, 17 percent are fluctuations. still counting on a market upturn. For the market evaluation up to 2012 a similar picture arises, whereas here 41 percent are even expecting a shrinking Illus. 13

Fixed Network Access Networks – Indicators

Total Market 2009–2010 – 17 % – 33 % 17 %

Total Market to 2012 – 18 % – 41 % 18 %

Bargaining Strength – 6 % – 50 % 25 %

Number of Market Participants – 13 % – 38 % 25 %

Prices – 6 % – 56 %

Advance Costs – 13 % – 20 % 13 % 7 %

sharp decrease decrease no change increase strong increase

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Moreover, the majority of the respon- 3.4 Internet Access dents are expecting a market consolidation. Due to high and only slightly Internet Access Providers (IAP) provi- decreasing cost burden and massive de the end customer with services, con- pricing pressure, the maximizing of tent and technical services for the use scaling advantages is a decisive competi- of the Internet. Access service users can tion factor. On the one hand, this will thus use Internet services by means of take place with takeovers and market a packet switched Internet connection. consolidations, on the other hand, For this purpose, access providers use providers will also realize scaling their own and / or outside infrastructure effects through network sharing and (see previous chapters). So this catego- strategic relationships. ry includes providers with their own net- The fixed network works who market access all the way to access networks Currently providers are expanding ca- the end customer but also pure resellers market segment pacities in order to attain higher bit ra- who do not have their own network inf- will also be tes for the provision of broadband. The rastructure but merely have dial-in ser- confronted with increased demand for example for video vers. high investment content can only be met by increasing requirements. broadband capacity. Products like Next Typical examples of resellers in Germa- Generation Networks (NGN) that ensure ny are providers such as ecotel and 1&1. quality all the way to the customer are Due to their cost structure, most of them not yet available on the market. Against offer more than pure Internet access. all expectations, VDSL has so far not IAPs obtain their revenue primarily been able to assert itself in the access from selling Internet access to private network or the access field. So the fixed and business end customers. Often, this network access networks segment will pure access service is coupled with other also be confronted with high investment products in the form of Internet services requirements in the future. such as e-mail or website hosting. The product portfolio often includes fixed network and mobile telephony and more sophisticated communication services such as teleconferencing.

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In this segment, we identified a 59 The Internet access provider segment percent overlap with housing / hosting will also be affected by a market service providers. In contrast to the consolidation. The results are indicating other segments of the Network Infra- a decrease in the number of market structure & Operation layer, the IAPs participants. Almost one fifth of the are often more specialized. Activity in respondents are expecting a sharp layers 3 and 4 is very low for Internet decrease, whereas two fifths are access providers. expecting a moderate decrease.

The evaluation given by the respondents The respondents’ expectations in regards to the development of the in regards to the development of market overall turned out to be slightly inital costs (fees, broadband prices, positive in this segment (see Illustration switching technology) correspond with 14); for the development up to 2010, a the expectations in regards to price similar picture is given as for the development: Although only 9 percent expectations for 2012. are expecting a sharp decline, more than half (52 percent) are predicting A similar, slightly positive picture a moderate reduction in inital costs. is painted for the appraisal of the Altogether the expectations in this own bargaining strength. This can segment are lower inital costs, however, be explained by the strong pricing even with lower sales, margins are competition in the upstream layers. expected to remain the same.

As far as the price development is concerned, there is general consensus among the respondents and the results are pointing in the direction of falling end customer prices.

Illus. 14

Internet Access Provision – Indicators

Total Market 2009–2010 – 8 % – 18 % 45 % 3 %

Total Market to 2012 – 11 % – 16 % 35 % 11 %

Bargaining Strength – 6 % – 11 % 34 % 3 %

Number of Market Participants – 18 % – 36 % 24 %

Prices – 18 % – 42 % 3 %

Advance Costs – 9 % – 52 % 15 %

sharp decrease decrease no change increase strong increase

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Internet providers will continue to bund- As a rule, Internet exchanges were and le Internet and telephony products more are founded nationally or regionally in and more. “Stand-alone broadband ac- order to create a public peering point. cess” is already strongly declining. The Thus, national transit costs are avoided trend is towards more complex services when all national / regional providers such as bundling Internet access with are connected. The individual provider TV and video services. is left with only transit costs for international traffic and the traffic that cannot Internet access The majority is expecting a positive be handled at the exchange point. operators are overall market development for the co- expecting a market ming years. This also applies to an im- Some of the large players on this mar- growth despite provement of one’s own bargaining ket are the Internet exchanges in Lon- falling prices. strength. In contrast to the fixed net- don (LINX), Amsterdam (AMS-IX) and work access networks subsegment, the the German DE-CIX in Frankfurt. Fol- providers are expecting a growing mar- lowing at a distance are smaller ex- ket despite falling prices. change points in other European metro- politan areas such as Milan, Madrid and 3.5 Internet Exchanges Moscow. As far as capacity is concerned, DE-CIX is currently the leading Internet Internet Exchanges (IX) enable data ex- exchange worldwide. change from networks of different backbone providers. There is a difference Other important IXs in Germany are lo- between public and private exchange cated in Berlin, Hamburg, Dusseldorf, points. The public ones offer any infra- Nuremberg, and Munich. The market structure operator a connection if the overall currently reaches a volume of provider fulfills a few requirements, the roughly 9 million euros in yearly sales. grand requirement being an individual, The sales, however, corresponds to a unique identification through an autono- very high traffic volume that will be at mous system number (ASN) that can be 1 TB / s at the end of 2009 in Frankfurt Respondents applied for at the Réseaux IP Européens alone. Eighty-three percent of the Ger- from the segment (RIPE). Whereas in Europe exchange man traffic is handled by the IXs in Internet Exchanges points are regularly public and managed Germany. are expecting a by cooperative oriented operators, in the considerable USA the exchange points are managed The majority of respondents from market growth. privately by commercial companies. The the Internet exchanges reported major costs for the operation of public exchan- overlaps with other segments in layers ges are usually carried by flat rates paid 1 and 2. According to that information, by the participating providers to the ex- 64 percent of them are also active as change point operator for the connection housing / hosting service providers, to the switch infrastructure of the Inter- 82 percent as domain providers and net exchange. 73 percent as Internet access providers.

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The respondents’ expectations for the The overall demand is pointing to a years 2009 / 2010 as well as for the leveling development. Notable is the fact period up to 2012 are for considerab- that some smaller network operators le market growth (see Illustration 15). are currently seeking to be connected to In regards to developments in their own public peering points again. Some lar- bargaining strength in contrast to other ge network operators, however, want to subsegments, half of the respondents stay connected but are not necessarily predicted an improvement, while the planning to peer. Nevertheless, an incre- other half expected stagnation. ase in data amounts is still to be expected. That is why the predictions for the The respondents are in agreement about overall market are very positive. The developments in regards to the number expected decrease in access product of market participants: All of them ex- costs allows the margins in this segment pect an increase in the number of pu- to grow according to the respondents; blic peering point providers. At the sa- however, the competition pressure may me time, they are expecting rising pri- have the opposite effect in the long run. ces and falling costs for access products. These estimates reflect the current deve- lopmental stage of the market because the market is in a growth phase. Mean- while, scaling effects on the market for access products seem to lead to lower production costs. This especially holds true for the hardware needed for the IP connection like routers and switches (see also Chapter 3.1, Internet Back- bone).

Illus. 15

Internet Exchanges – Indicators

Total Market 2009–2010 75 %

Total Market to 2012 50 % 25 %

Bargaining Strength 50 %

Number of Market Participants 100 %

Prices 67 %

Advance Costs – 67 %

decrease no change increase strong increase

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3.6 Housing / Hosting • Hosting, however, is the act of storing and possibly providing applica- All services and applications available tions and services on a server in a da- on the Internet are stored on servers in ta center. The server hardware is nor- so-called Internet data centers. The stu- mally not owned by the company that dy looked only at data centers that offer uses the hosting service. If a customer their services to private as well as busi- has access to his own server exclusive- ness customers. Data centers within ly put at his disposal, one speaks of a companies were not included. The servi- dedicated server. The processors’ per- ces can be divided into housing / coloca- formance, however, also makes it pos- tion and sible to install several virtual servers hosting. on one physical server, which then can be used by different customers (for in- • Housing is the act of housing one’s ser- stance, using the virtualization soft- ver in an external data center and con- ware VM a virtual server can be emu- necting to the network there. If at least lated). If storage for a website includ- one rack is used for the company’s ing applications like web shops and hardware and the infrastructure ne- databases is provided on a web server, cessary to operate the server is pro- one speaks of “webhosting.” Large provided by the data center, the term viders on the market in the B2C field “colocation”is used. Besides providing are for example 1&1, STRATO and the space, and possible racks for one or Hetzner, and in the B2B field Host Eu- more servers, the service portfolio in- rope, Interxion and Interoute. cludes connection to the Internet, power supply, and air conditioning as well as security systems and support services. Companies that have specialized in this segment include Equinix, Global Switch, MESH ,and e-shelter. Illus. 16

Housing / Hosting Services – Indicators

Total Market 2009–2010 – 5 % 53 % 7 %

Total Market to 2012 – 3 % – 3 % 47 % 16 %

Bargaining Strength – 10 % 31 % 4 %

Number of Market – 9 % – 40 % 17 % 8 % Participants

Prices – 6 % – 37 % 15 % 6 %

Advance Costs – 15 % 28 % 7 %

sharp decrease decrease no change increase strong increase

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Furthermore, in this segment the pro- 16 percent are even expecting a sharp The large demand vision of hosting services is of great im- increase in sales. The big demand for for housing / hosting portance. These are field specific appli- housing / hosting services is especially services is driven cations and business applications such being pushed by developments in the by developments as CRM or ERP systems or dealer soft- fields Software as a Service (SaaS) and in SaaS and cloud ware in the automobile industry. Compa- Infrastructure as a Service (for instance computing. nies in this field are for instance DATEV cloud computing; s. Chapter 3.8). and Fiducia. Some large IT systems companies such as IBM and Accenture of- As far as the expectations in regard to fer hosting services. Normally, however, pricing are concerned, the weight is put these are not offered on the free market on falling prices. The background is pro- but are coupled with further reaching vided by the fact that webhosting is now services. Especially in this segment, it is seen as a commodity and its price will difficult to sharply distinguish the com- slightly decrease due to the numerous panies from companies in the online ap- providers, minimal start-up hurdles, plications segment. and small differentiation possibilities. As far as the costs for access products The market for housing / colocation / hos- are concerned, half of the respondents ting services is characterized by the (50 percent) are expecting no changes, imbalance in the size of the providers. 35 percent are expecting rising or stron- Next to the few large players who opera- gly increasing costs. te their own data centers and are completely independent, there are numerous The “hottest” topic in this segment is companies ranging from very small to currently the improvement of energy ef- medium-sized who often resort to colo- ficiency in the data centers. Solutions cation offers from the large companies. are constructional measures or chan- In the study, 44 percent of the respon- ging the cooling concept. Great savings dents reported that they operate their on energy costs can be attained by the own data center. The total number of use of virtualization software and more companies in this segment is estimated efficient hardware with lower power con- at roughly 2,000. Especially among the sumption. Across the industry, the ave- larger providers, a consolidation wave is rage load on servers is estimated at just expected. Almost half (41 percent) of the 10 to 30 percent of the available compu- respondents are therefore also expecting ting power. By vitalizing the server, the a decreasing number of providers (see Il- load on the hardware can be strongly in- lustration 16). creased without excessively increasing the power consumption. The importance Based on the study, sales for this seg- of this segment for the Internet industry ment in 2009 are estimated at almost will therefore continue to grow overall, one billion euros, and the growth fore- and the demand for external computing cast for the coming years is predicting power or hardware will grow dispropor- a very dynamic development. Sixty per- tionately. cent of the respondents are expecting an increase in sales by 2010 and by 2012,

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3.7 Domain Service Provider • The registrars hold the position of a mediator between the end customer In this segment, we put together opera- and the registry. In most cases, they tors of domain name services, registry take in the registration of a domain and resellers. The market can be subdi- and forward the necessary information vided into a primary and secondary sec- to the responsible registry. tion: Currently, in Germany there are around • Not yet existing domains are sold on 230 companies listed with DENIC as the primary market. registrars, such as EPAG Domainser- vices, United Internet respectively 1&1, • Already existing domains are traded Key-Systems or InterNetWire. There on the secondary market. are, however, numerous other providers who enable a domain registration as re- The primary market is shaped by a large sellers. number of providers. The product portfolio typically includes not only the do- The primary market currently counts main registration but also related ser- 2,000 providers. It is hard to make any vices: Sixty-three percent of the respon- statements about the sales volume be- dents offer housing / hosting services at cause registrar sales can for the most the same time, and 45 percent also act part not be separated from additional as Internet access providers. services offered together as a bundle.

On the primary market, one distingu- Worldwide, the generic Top Level Do- ishes between “registry” and “regist- main (gTLD), .com, not bound to a coun- rar”: try, is clearly in first place with over 80 million registrations. 12 Next are 13 mil- • The registries handle the administra- lion registrations each for the count- tion and operation of the related top ry codes (ccTLD) .de, for Germany, and level domains. In Germany, this func- .cn, for China. This is a clear indication tion is held by DENIC. Other registra- that Germany is very important in the tion places are for instance VeriSign global Internet industry. The total num- for .com and .net as well as EURid ber of registered domains in this count- for .eu. ry amounts to 20 million. Included here are domains registered under the TLD .de, and also under other TLDs such as .com, .net, .org, .biz and .eu.

12 see WebHosting.Info 2009

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Based on this, and using average prices, The global market leader on the secon- the sales for the primary sector domain dary market is the German Sedo. service providers in Germany can be Additionally, in this sector the trade estimated at roughly 250 million eu- platforms of NICIT IT-Solutions and ros. 13 NameDrive have established themselves in this country. The sales on the secon- In contrast, already registered domains dary market were at 20 million euros in are traded on the secondary market. 2008, and Sedo holds an estimated 90 This typically is done with fixed pri- percent of the market share. ce offers, and in the past years auctions New top level have established themselves as an ef- The results of the survey are clearly domains will give fective price finding tool. A further op- pointing to positive expectations for the segment portunity for the monetarization of un- business development in the German additional growth used, meaning registered but not used domain trade. In the short-term, half of impulses. domains, is the so called “domain par- the respondents (50 percent) are predic- king.” When the domain is requested, ting an increase in sales, and by 2012 a neutral page with a sale note and key- the expectations are even better (see Il- word oriented advertisement is shown. lustration 17). These above average high The domain owner can determine the expectations can be explained by the keywords in advance. steadily rising number of registrations. Moreover, the committee responsible for top level domains, ICANN, has approved the introduction of new TLDs such as .CITY, .COMPANY, or .BRAND.

13 see DENIC 2009, WebHosting.Info 2009, EURid 2009

Illus. 17

Domain Services Providers – Indicators

Total Market 2009–2010 – 9 % – 9 % 47 % 3 %

Total Market to 2012 – 3 % – 15 % 35 % 18 %

Bargaining Strength – 3 % – 21 % 35 % 7 %

Number of Market Participants –3 % – 26 % 19 % 13 %

Prices – 3 % – 45 % 7 % 3 %

Advance Costs – 6 % – 22 % 13 % 6 %

sharp decrease decrease no change increase strong increase

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The first registrations for the new do- 3.8 Online Applications main endings are supposed to be available towards the end of 2010 and will gi- Online applications have been growing ve this segment additional growth im- in popularity for some time both in the pulses. business world and among private users. Application programs of different perfor- In regards to bargaining strength, the mance spectra made available on the In- respondents are looking into the future ternet basically have the following cha- with lots of optimism: Thirty-five per- racteristics in common: Installation, cent are expecting an improvement, 34 configuration, maintenance and updates percent are at least not expecting any are handled through a service provider changes. and through a server. The users do not own the software / application (as oppo- The lower prices trend seems to conti- sed to the conventional licensing system) nue, a similar development is also ex- but only pay for the use and service ma- pected for the access services layer, de available online. which is pointing to a continued profita- bility. Typical offers also include services like the integration of new applications into To summarize, the companies in the existing systems. In such cases, provi- domain trade are looking at the future ders often take on a consulting function optimistically. (for instance Accenture). Several scena- rios come to mind, including archiving and storage, staff planning and place- ment, e-procurement, file management systems, sales management.

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The advantages of online applications During the course of the last decade, for the user are typically lower infra- the audience for application solutions structure, operation and maintenance has also changed. They used to be inte- cost, shorter implementation period, resting mainly for larger companies but cost control, and good scalability. Access due to lower cost in the last few years, to broadband Internet is normally a ma- they have become affordable for SMEs jor prerequisite for using online appli- and private users as well; on the other cations. hand, makers have recognized this ni- che and have developed attractive pro- The history of online applications since ducts for these segments as well. the middle/end of the last decade has been marked by both terms “Application In Germany, there are a number of on- Service Provider” (ASP) and “Software line applications, as shown in the fol- as a Service” (SaaS), recently joined by lowing provider examples: cloud computing. ASP was still a classic, client-server structure hosted by third • Inxmail offers e-mail marketing party providers; SaaS solutions software; were developed on the basis of existing web technology. ASP was similar to • amiando operates a platform for simple managed server solutions with a online ticket sales; few web applications and limited client ability – customer specific individuali- • salesforce.com and WiredMinds zations were possible only within limits. provide a sales assistants for SaaS offers these options with multip- entrepreneurs and companies; le client ability and individual interfaces for the individual customers. • Google Apps offers a range of products for almost any use you can think of, not only for business use but also for private users. Illus. 18

Online Applications – Indicators

Total Market 2009–2010 – 6 % 43 % 33 %

Total Market to 2012 44 % 31 %

Bargaining Strength – 7 % 44 % 20 %

Number of Market Participants – 16 % 49 % 14 %

Prices – 32 % 25 % 5 %

Advance Costs – 9% – 21 % 23 % 2 %

sharp decrease decrease no change increase strong increase

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The online The market size of SaaS and similar pro- are slightly improving for the period up applications ducts in Germany is currently estima- the 2012. Accordingly, the online ap- segment offers the ted at 436 million euros. 14 In the stu- plications segment is offering the par- best outlook to dy, all providers of online applications ticipants the best outlook for the future market participants also reported that they are active in the within the German Internet industry. in the German housing / hosting sector. This is not sur- Internet industry. prising since all applications require the Therefore, it is not surprising that the re- hosting of central software. What is in- spondents are expecting a development teresting in this segment is that hosting just as good in regards to their bargai- providers extend the range of their offers ning strength development in contrast by including SaaS in order to be present to segments upstream and downstream in a growing market with high margins. on the value-added layers. Consolidation Due to this tendency, these companies tendencies in this segment are not noti- will inevitably and increasingly compete ceable. Further innovative services will with classic software developers. flood in with more newcomers on the market. Sixty percent of the surveyed providers of online applications also provi- However, the price development recei- de Internet access. Apparently, the pro- ved mixed evaluations. This reflects dif- viders of access services are moving on fering price developments in the indivi- the value-added chain towards the custo- dual subsegments that are caused by the mers in order to couple their offers with different development stages of the pro- SaaS, for example, in order to increa- duct life cycle. The majority of the ser- se the share of wallet on the part of the vices are new and have not reached the customers. Thirty-seven percent of ap- stage where an intense price competition plications providers are also active on is taking place. the backbone market. Another piece of background information is the fact that Generally, the increase in communica- services such as cloud computing gene- tions connection performance improves rally require a high-speed data connec- the application sectors of online appli- tion by means of which the operators of cations. Especially, developments in glass fiber infrastructure can offer the the mobile Internet sector enable mo- customer advantageous online applica- bile SaaS and cloud computing. There- tions. So, offering online applications in fore, in the near future, products can one form or another is an attractive di- be expected that are even more custo- versification opportunity for the owner mized for mobile use. Another growth of a high performance infrastructure. driver is the growing cloud performance The market success for online applica- which makes the shift to virtual proces- tions, however, is very much a solution ses and functions more and more attrac- driven business. tive. SaaS and Cloud developments are also pointing to an even better manage- The development of the business clima- ability and control of business processes te for the coming years is seen by the re- through these channels. spondents very much in a positive light. In the short-term, the respondents are expecting a growing to strongly growing market. Moreover expectations

14 Experton Group 2009

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The market for applications such as The display only comes up when the res- SaaS or cloud computing is very much pective keyword was entered in the que- given growth potential by the sample ta- ry field. With keyword advertising, the ken in this study. The SaaS model has search engine providers typically use already proven itself as an alternative an auction model which means that, to the traditional licensing models. The the text display of the highest bidder is current push into the SoHo and priva- listed first. In Search Engine Marke- te user sectors will further fire up the ting (SEM), besides keyword adverti- growth in this subsegment of the Inter- sing there is also Search Engine Opti- net industry. mization (SEO). This is not necessari- SaaS as an alterna- ly direct advertising; however, it heavily tive to traditional 3.9 Online Advertising influences the success of companies on licensing models is the Internet. The goal is to place a par- further driven by The Internet has established itself ticular website as far up as possible in the advancements within the population. Due to steadily the search result list. Companies that made with SoHos growing online time, advertising on the have specialized in SEO are for instance and private users. Internet was increased significantly. The ABAKUS Internet Marketing and SU- most popular form of advertisement is MO. (Spending for SEM measures, how- banner ads. Within these banners, tra- ever, was not taken into consideration ditionally the ad message was displayed here.) statically as a picture (JPG), however, for some time now the developments are The third largest advertisement format going toward video (GIF or flash). Next on the Internet is affiliate marketing. to these in-site formats where the ad Typically, there are three parties invol- space is built into the structure of the ved in these partner programs. An af- website, on-site formats in the form of filiate network acts as the intermedia- pop-ups that temporarily cover the actu- ry between e-commerce operators (mer- al content of the website have taken root. chant / advertiser) and website operators The largest marketers for these adver- (publisher / affiliates). Its task is to me- tisement spaces are United Internet Me- diate between advertisers and adverti- dia, InteractiveMedia and, SevenOne sing spaces on websites that are relevant Media. 15 thematically and contentwise to the products being advertised. The compensa- Besides advertisement of websites, tion of the affiliates by the merchant is search engines (as explained in Chapter normally success oriented. Typical bil- 4.3) are increasingly the focus of advert ling models are Pay Per Sale (PPS), Pay isers. The search engines relevant in Per Lead (PPL) and Pay Per Click (PPC). Germany, Google, Bing and Yahoo! of- Billing is handled by the network opera- fer the option of displaying search term tor who receives a sales dependent oriented, paid text ads next to search commission from the website operator. results for the entered search term. Large affiliate networks in Germany are zanox, affilinet, SuperClix and adbutler.

15 see AGOF 2009

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The Internet has been able to establish • E-mail or newsletter: E-mail senders itself as an advertising medium at the get advertising companies together cost of traditional media. As a result, with providers of online marketing. the online marketing segment is steadily They have an intermediary function growing while traditional media have to and offer their customers an effici- deal with shrinking advertising funds. ent and inexpensive platform for com- The total investments from advertisers munication and business at the same in the three subsegments listed in a stu- time. dy conducted by the Online Marketing Circle (OVK) amounted to 3.648 billi- • Microblogging services such as Twitter, on euros, 16 of which 1.904 billion eu- which were originally designed for the ros went to classic online advertisement dialog oriented real time communica- (banner ads). For keyword advertise- tion. However, currently they are used ment, they spent 1.476 billion euros, for by a growing number of companies for affiliate marketing, 308 million euros. advertising purposes despite display li- Other advertisement formats on the In- mitations such as a maximum of 140 ternet are: characters per message. The messages are, for example, notifications for up- coming auctions, coupon codes or new sales, which are sent to the exact target group.

16 see OVK 2009

Illus. 19

Online Advertising – Indicators

Total Market 2009–2010 – 14 % – 14 % 29 % 29 %

Total Market to 2012 – 10 % 48 % 29 %

Bargaining Strength – 11 % 42 % 16 %

Number of Market Participants – 15 % – 15 % 25 % 10 %

Prices – 15 % 25 % 5 %

Advance Costs – 6 % – 6% 28 % 6 %

sharp decrease decrease no change increase strong increase

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In the sample of the online advertising The price level is mostly expected to segment, the largest overlap is with the increase slightly. A similar picture content provider sector (40 percent). Ad- emerges in regards to inital costs: The ditional activity sectors were mentioned percentage of those who expect the same less, for example online platforms (27 cost level is also at 54 percent. If the percent) and housing / hosting services expectations come true, there probab- (23 percent). ly will not be a change in margins worth speaking of. The survey result shows that not even In the long-term, the economic crisis can dampen the Online advertising is therefore a long- online advertising mood of the online marketers. There is term growth market. The attracti- is a growth market. still quite a bit of euphoria in the sector ve, younger target groups are reached (see Illustration 19). The significant in- through the Internet rather than through crease of 25 percent in online advertise- classic print and TV media. The online ment spending from 2007 to 2008 will advertising trend is going in the direc- probably not repeat itself in 2009; how- tion of social networks where the adver- ever, the expected 10 percent is compa- tising potential is still comparatively un- rably high. A little optimism is noticea- developed. Due to steady improvements ble with our respondents in regards to in web controlling, advertisements are short-term growth, whereas a growth more and more customized to the indivi- increase is expected by 2012. dual user. In this sense it is possible that the approach taken by performance mar- The good forecast in the otherwise sta- keting will gain significance; the goal of gnating to declining overall advertising performance marketing is to measure market is generating interest from other the reaction / transaction with the user. potential providers. It is therefore not Whereas the users used to be addressed surprising that the majority are expec- unspecifically en masse, in the future ting a rise in provider numbers. target groups will be addressed specifically, the “right” user will be the focus, The confidence in the sector is also re- and billing models will go in the direc- flected in the evaluation in regards to tion of success orientation. Due to the the bargaining strength in contrast to advancing broadband, the types of for- other market participants. Only 11 per- mats used are also changing. Video for- cent are guessing that their position may mat use is currently soaring. From 2007 weaken. A rising bargaining strength is to 2008, its growth was at 236 percent. expected by 42 percent of the study participants and 16 percent are even expecting a strong improvement.

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3.10 Online Platforms and Web Portals A search engine is a program used for finding documents / websites and can Online platforms and web portals can- also be seen as a portal. The main parts not neatly be distinguished from each of a search engine are the creation and other. Web portals are used for the pur- maintenance of an index, the processing pose of an easy search for information of queries, as well as the processing in the form of links, usually sorted by of the query results. Next to e-mail topic. The goal is to help the user get communication, search engines are started on a subject. There is practically by far the most often used application. no limit to the organization thereof. According to the ARD / ZDF-Online Portals range from city portals such as studie 2009, 82 percent of all online meinestadt.de, koeln.de, to political users now use a search engine at least topics, such as the European Union por- once a week. 17 In Germany, Google is tal europa.eu, to extensive collections the definite market leader with a market of special knowledge such as the portal share of 80 percent of all search queries. KworkQuark.net about particle physics. Following at a distance are Bing, the Especially the large German portal sites newest search service from Microsoft, such as gmx.de or t-online.de often inte- Yahoo!, and the search function from grate services like e-mail account admi- t-online. nistration or a search engine.

17 see Eimeren / Frees 2009

Illus. 20

Online Platforms – Indicators

Total Market 2009–2010 – 3 % – 14 % 24 % 22 %

Total Market to 2012 41 % 38 %

Bargaining Strength – 3 % – 6 % 30 % 6 %

Number of Market Participants – 3 % – 17 % 40 % 9 %

Prices – 8 % – 31 % 17 %

Advance Costs – 3 % – 21 % 21 % 3 %

sharp decrease decrease no change increase strong increase

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While with portals the focus is the ac- In regards to their bargaining strength, cess to information, online platforms the participants predicted a slight trend target interaction and communication. towards an increase. The necessary tool like forums, chat systems or the option to publish one’s own The number of market participants will content (user generated content) are pro- develop in a positive manner according vided by the platform operator. Well to the opinions of the respondents. known types of platforms are online communities and social networks (see As far as the price development is con- Chapter 4.2). Large German platform cerned, the expectations tend to be mo- providers are for instance sevenload.de, re negative. Looking at the inital costs, XING, Wikipedia.de but also flirt pa- the study results show no expectations ge providers like PARSHIP.de. Another of big changes. special case of online platforms are electronic marketplaces which we categorize The future outlook of the segment web as e-commerce due to the fact that they portals and online platforms is overall are transaction oriented. positive. Especially the large commercial providers will be likely to count on The sample in the segment platforms rising member numbers. and portals shows it is heavily interlo- Ripening business cked with other segments of the Internet The further development of search en- models and more industry. About half of the respondents gines will continue to be exciting. Even revenue sources are (48 percent) are simultaneously active if not much will change about Google’s leading to positive in the applications sector. There are al- strong position in the near future, the market outlooks by so large overlaps with the segments con- question remains which market share 2012. tent providers (40 percent), e-commerce Bing will conquer (it was launched for (39 percent), and housing / hosting (30 the public in June 2009). Due to the percent). recent cooperation of Microsoft and Yahoo!, which includes the future use As seen in Illustration 20, the market of Bing through Yahoo! which is no forecasts for 2009 / 2010 were evalua- longer operating its own search engine, ted ranging from neutral to positive. A Google might get serious competition sharp decline of the market volume is in the long term. only predicted by 8 percent of the study participants. However, almost half of the respondents are expecting a moderate (24 percent) to strong growth (22 percent) of the market overall. For the evaluation by 2012, a markedly more optimistic view is shown, which may be due to ripening business models and a growing number of revenue sources.

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3.11 E-commerce • Operator: Based on the initiators, one can distinguish between the buyer side The sector with the highest sales volume and the seller side. There are regularly in the German Internet industry is one or few buyers and a large number e-commerce, a subsector of e-business. of sellers.

• E-business includes any kind of busi- • Type: Vertical marketplaces cover a ness transactions where electronic certain branch whereas horizontal communication is used by the transac- marketplaces have specialized in of- tion partners for business initiation, fering products and services covering agreement or delivery of services. multiple branches.

• E-commerce exclusively refers to the • Organization: The platform operator sector of electronic trade, in other handles data management and admin- words, market transactions. The em- istration on a common system. With phasis here is on the sales of products the decentralized model, the operator and services over the Internet. These provides an integrated platform, but products can be delivered offline as the data maintenance is handled by well as online (in the form of digital the users / providers. products). This includes not only the trade with end customers (B2C sec- • Access limitation: Is the access and tor) but also business between compa- use in principle open to anyone, we nies (B2B-commerce), and transactions speak of “open” market places. In con- with authorities (A2B). trast, in a closed market the operator places access limitations. The most frequently seen trade platforms for e-commerce are web shops. B2B and C2C market places are abun- However, electronic marketplaces are dant. In the B2B sector, market places also important. They are “virtual mar- for the electronic procurement of pro- kets based on Internet technology for the ducts and services over the Internet are completion of market transactions.” 18 In very common. Central online platforms contrast to portals, with electronic mar- for bidding procedures have established ket places the overall transaction sup- themselves with both companies and in- port is the focus and not primarily the creasingly with government agencies as initial business contact information. well. Examples are the ThyssenKrupp Auctions and direct price negotiation or Module “Strategic Sourcing” or the price catalogs have established themsel- federal government platform evergabe- ves as price finding methods. Market- online.de. The most well known examp- places can be described using four diffe- le of a C2C marketplace is the auction rent criteria: platform eBay.

18 see Gabler 2009

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The Internet offers consumers an un- The sample for this segment showed equalled market transparency for the overlaps with other segments. They were comparison of products and prices. especially significant with applications Whereas there used to be a marked dif- (39 percent) and online platforms (34 ference between the groups of peop- percent). Other overlaps were with the le who only gathered information and content provider segment (29 percent) those who really placed an order, shop- and housing / hosting (25 percent). ping on the Internet seems to be gaining trust. According to the BMWi and TNS The study results show that e-commer- The survey Infratest study, at the end of 2008, 63.3 ce will continue to grow. In no other seg- results show that percent of all Internet users were In- ment are the predictions as clear on the e-commerce will ternet shoppers.19 Online shopping is market development. Fifty-three percent continue to grow. not only lucrative from the consumer’s of the respondents are expecting a mode- perspective. Many small retailers who rate and 31 percent a significant growth. otherwise only have a very small draw The predictions up to 2012 are marked area are using their online store as a luc- by even more optimism (see Illustrati- rative, additional sales channel. on 21).

Even if online shopping is gaining There is a similarly optimistic outlook significance for end consumers, the for the evaluation of the bargaining driving force is the trade between strength. Almost one third of the parti- businesses. TNS Infratest bases its cipants (28 percent) are expecting a big estimation on a study conducted by improvement, about half (49 percent) Global Industry Analysts and concludes are expecting a moderate improvement. that the market volume for e-commerce is 637 billion euros. From that amount, As far as the number of market partici- 562 billion euros (roughly 90 percent) pants is concerned, the majority of the goes to the B2B sector, which equals respondents are set for an increase. 10.4 percent of the global share.20 In the sector of B2C e-commerce, Germany No clear trend is visible in regards to is not only the leader in Europe with 75 price development. Thirty-four percent billion euros in sales, but in the global think that the current level will probab- per capita comparison also beats the ly remain unchanged. USA (906 euros) and Japan (681 euros) with 913 euros. The expectations are also balanced when it comes to inital costs.

19 see BMWi 2009b

20 see BMWi 2009b

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The good forecasts for the overall mar- With live shopping, typically only one ket and the relatively small entry barri- product is offered at a (very) low price ers will apparently convince more and for a short period of time, usually only more companies of the advantages of e- for one day. Since the supplier buys in commerce. But what trends will drive e- mass, he can offer a price advantage to commerce in the future? his customers and often sell the product under the manufacturer’s recommended Currently, terms like mass customiza- retail price. Suppliers in Germany are tion, club and live shopping come up in for example guut.de and preisbock.de. the context of e-commerce future. Even if these concepts are no longer comple- With club shopping, exclusivity is the tely new, companies see growth in these key. A registration is typically possible business models. by invitation only or by member recommendation. The goods include high qua- The concept of mass customization is a lity brand name articles that are sold at hybrid of mass and individual produc- a limited amount well below retail price. tion. The user can put together a custo- Usually the goods are remaining stock. mized product through online product Some names are brands4friends.de, configuration. Successful examples are BuyVIP.de and vente-privee.com. Dell, spreadshirt.de and mymuesli.de.

Illus. 21

E-commerce – Indicators

Total Market 2009–2010 – 4% 53 % 31 %

Total Market to 2012 – 4 % 51 % 40 %

Bargaining Strength – 8 % 49 % 28 %

Number of Market Participants – 2 % – 10 % 48 % 19 %

Prices – 5 % – 33 % 24 % 2 %

Advance Costs – 2 % – 23 % 16 % 12 %

sharp decrease decrease no change increase strong increase

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As these results show, e-commerce still A bank transfer regularly takes time has an unexploited potential. Especially which in turn prolongs the delivery time. German medium-sized companies lag A large number of potential customers behind here. According to the study “IT refuse to pay by credit card for various and E-Business and SMEs 2008”, across reasons. With providers like PayPal, the board, slightly less than one third of ClickandBuy or giropay, Internet users the companies use online shops in their have new payment methods that are user B2B or B2C business. 21 friendly and at the same time secure for both sides. Although, according to a stu- The growing use and acceptance of In- dy by ibi research, e-payment is not yet Acceptance of ternet based transaction services (e-pay- popular and only 8 percent prefer this transaction services ment) could turn out to be growth dri- method of payment. 22 For small value as well as an vers for e-commerce. Especially in B2C goods, the willingness to use this me- increase in e-commerce, there are some disadvan- thod is growing. Up to a price of 100 eu- security are future tages to the classic payment model that ros almost half (46 percent) of the res- growth drivers for could have a negative impact on online pondents would use e-payment. 23 e-commerce. trade. With paying before receiving there is a certain risk involved for the buy- Another factor that would speed up ac- er. This is a deterrent especially with ceptance and use of e-commerce offers is unknown suppliers. An invoice based the security aspect. Many Internet users payment option is often not accepted by are meanwhile sensitized to the dangers the seller for the same reason. of data disclosure on the Internet. This applies, on the one hand, to the ordering process in itself, on the other hand, to the payment process. Security can be increased through the use of the so-called trust services. This includes clear identification systems, data encoding and counterpart verification.

22 see ibi research 2008

21 see IBM / Impulse 2008 23 see ibi research 2008

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3.12 Internet Content The study results show that Internet content providers are also active in other In- Due to increasing bandwidth in the ac- ternet industry segments: Eighty-three cess sector, especially audiovisual con- percent of the respondents reported that tent has become enormously popular on they provide housing / hosting or do- the Internet. Web 2.0 has tremendously mains besides content. Furthermore, 58 increased user generated content – even percent are also active in the online ap- if more often than not a profitable busi- plication sector and 42 percent in the ness model is lacking. Internet content platform sector. As can be expected, the- has established itself with media consu- re is a strong connection between these mers and consistently takes away adver- individual subsegments that can be ex- tisement revenue from classic print TV plained with the fact that existing inf- and radio media. rastructure already in place (especially hosting infrastructure) will allow for a There are basically two types of professi- relatively quick addition of the subseg- onal entries on the Internet: one, net ori- ment Internet content. ginating content, and the other, entries made by classic media enterprises. The study participants in this subseg- Web original producers create content ment have a positive view of the de- on the Internet and for the Internet ex- velopment of the overall market: For clusively and distribute it on the web. 2009 / 2010, the respondents are expec- Such formats include blogs, wikis, ting for the most part a moderate market InternetTV, podcasts / audiopodcasts, growth. There is even more optimism vodcasts / videopodcasts, e-mail and so- for the period up to 2012 (see Illustrati- cial networks. Well known companies on 22). or pages in this sense are, for example, Ehrensenf, Elektrischer Reporter, Also the development in regards to their netzpolitik.org, Heise, Carta, YouTube, own bargaining position is seen in a and Clipfish. rather positive light by the respondents: Over one third (36 percent) are expec- The category “classic media enterpri- ting a moderate improvement, 13 per- ses” encompasses those companies that cent are expecting a strong one. Across primarily operate publishing media or the board, the study participants are ex- produce for them. They make the bulk pecting an increase in the number of of their money by producing and distri- market participants. buting content for the press, radio, film and / or music. For some of these companies the Internet has become an additional distribution channel. Classic media enterprises like these include companies such as Bertelsmann, Hubert Burda Media, M. DuMont Schauberg Group, ProSiebenSat.1 Media or ARD / ZDF. Their content can be viewed at least in part on the Internet in the form of websites, through media libraries, as live stream or InternetTV or MP3.

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 47 3. Market Indicators for Segments of the German Internet Industry

As far as price expectations are con- The Internet meanwhile offers an enor- The balanced as- cerned, the opinions are rather balan- mous market for digital content of sessment of pricing ced, which to a certain degree reflects any kind. Thus, it provides a unique in the Internet the uncertainty pertaining to profitab- market platform for the sale of content. content sector le business models. There is no clearly The common voice of the study partici- reflects the insecuri- recognizable trend pertaining to inital pants clearly speaks for the development ty pertaining to costs either. of this market segment. This growth is profitable business driven particularly by the continuing tri- models. In this market segment, the main trends umph of the mobile market and also by (as in all other segments as well) inclu- increasing bandwidth which makes ac- de the production of customized content, cess to Internet content easier and ena- especially for mobile end devices and ap- bles new formats. Many classic content plications. There is also the continual providers – but increasingly all market expansion of video content (video on de- participants – are faced with a growing mand) of different media platforms. On competition that has a huge potential for the other hand, there is more and mo- innovation. The Internet content market re experimenting with business models: therefore looks very exciting. for instance, trying to entice site visitors to buy premium content. For audiovisual content, this is certainly easier than with pure information such as news that spreads quickly and is published again at another place on the Internet. In this context, there is a current search on all sides for accepted payment methods and providers (micropayment).

Illus. 22

Internet Content – Indicators

Total Market 2009–2010 – 4 % – 9 % 35 % 11 %

Total Market to 2012 – 2 % – 7 % 57 % 17 %

Bargaining Strength – 10 % 36 % 13 %

Number of Market Participants – 20 % 40 % 10 %

Prices – 30 % 23 % 2 %

Advance Costs – 2 % – 26 % 19 % 2 %

sharp decrease decrease no change increase strong increase

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4. Trends and Market 4.1 IPv6 – Benefits for the Economy Development Drivers and Consumers

The Internet and its developments have The developers of the Internet technolo- direct and indirect effects on the over- gy did not foresee the growth rate of the all economy. Moreover, the medium In- Internet user numbers. The Internet pro- ternet itself is in a permanent state of tocol 4 (IPv4) is set up for a total of 4 bil- change. This chapter covers three issu- lion addresses. For a long time, peop- es that currently strongly influence the le thought that would be sufficient, but German Internet industry and the ef- they are running out. The first scientists fects thereof. already predicted at the beginning of the nineties that the IPv4 address space • Key technology: IPv6 would not suffice and began to develop a new version that finally reached the pu- • Enabler: Open innovation blic as IPv6. Considering a world population of 6.8 billion people, the address • Internet usage trends and effects problem becomes clear in the context of phone access development, especially These topics are analyzed based on qua- mobile phones (see Illustration 23). lified expert interviews with industry Currently, around 5.37 billion addres- executives. The issue of open innovation ses / numbers are necessary for the tele- is also analyzed with the help of the on- phone system worldwide. line survey results.

Illus. 23

Development of Mobile Telephony and Fixed Network Customer Numbers Worldwide Mobile Phone and Fixed Network Users 5,000

3,750 Mobile Phone Fixed Network

2,500 Million Users

1,250

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: International Telecommunication Union (ITU), ICT Development Index (IDI) 2008

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 49 4. Trends and Market Development Drivers

Many technical tricks were necessary in However, the number of 4 billion addres- order to delay the final introduction of ses will soon be reached 24, if we project the new version (IPv6) which increased the expected growth and calculated at the whole dilemma since security and least two addresses per connection hard- stability suffered. An example would be ware and PC per user. What must be ta- the allocation of dynamic IP addresses ken into consideration as well is the con- that are assigned to the user by the ser- stant increase in appliances connected vice provider for the duration of a sessi- to the Internet (“Internet of Things” – re- on causing additional coverage and stor frigerators, TVs, etc.) and the numerous age requirements due to regulatory re- servers on the Internet. IPv6 enables quirements. Another example is the 340 sextillion addresses, an address address translation of private addres- space almost inexhaustible compared to ses to international ones (NAT, Network today‘s benchmarks. 25 Address Translation). The latter is more effort, slowing down networks and requiring additional functionality and household connection components. 24 The exact time to the transition from IPv4 to IPv6 Thus, the new address system has many can be checked down to the second at http:// penrose.uk6x.com/ or a dynamic display can be advantages. First of all, the goal is to installed in the browser (see Hurricane Electric give everybody the opportunity to have IPv4 Exhaustion Counters). For instance, on Oc- tober 28th, 2009 at 10:30 pm, the countdown to access to the Internet, which would not the central register exhaustion was 749 days, and be possible with the current address 1,191 days, 2 hours, 28 minutes and 30 seconds to the exhaustion of regional addesses based on space. With IPv4 neither China nor IPv4. Theoretically, after that no more Internet India would have a chance to provide addresses would be available. sufficient Internet addresses. 25 In other words this would be 600 quadrillion (one six and 17 zeros) addresses per square mil- limiter of earth surface or 2128 addresses (instead of 232 before).

Illus. 24

Internet User Numbers Worldwide from 1995 to 2008

2,000.0 25.0

Million Users 1,500.0 18.8 Percent of World Population

1,000.0 12.5

Users in Millions 500.0 6.3

0 0 Population Percent of World 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Internet World Stats 2009

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The IPv6 address To make a long story short, the IPv6 is • Internet of Things and mobile flexible space offers the a change in the technical foundation of sensor network support that manage appropriate the Internet, a change that should not be crisis situations and help with tasks technological noticed by the user. Nevertheless, for the such as building control for energy foundation for economy and the Internet user, it is ad- management; growth, future vantageous. An example is the broad- developments, band initiative taken by the government: • Interactive, Internet based television; and permanent Within the framework of this invest- innovation. ment, every new technical acquisition • Vehicle communication (Car2Car and has to be IPv6 compatible in order to Vehicle-to-X communication) between maintain stability and communication vehicles and also between vehicles infrastructure investment protection in and other services enables an efficient, the future. The IPv6 address space of- safe, and resource saving traffic flow fers the appropriate technological foun- control; dation for growth, future developments and permanent innovation. Application • Integrated security mechanisms at areas that depend on IPv6 infrastruc- network level; ture to be competitive include: • Mobility and better flexibility for • Home networking and telemedicine; participants and the option for an “always-on” functionality across • Internet of Things; network borders;

• Car2Car communication, • More cost efficient and resource saving traffic telematics; network operation as well as plug & play for many end devices through • Intelligent building control, sensor automatic configuration. networks (smart metering). Furthermore, the decided broadband ex- In contrast to IPv4, IPv6 opens up new pansion has no future without IPv6. Due opportunities for applications: to the adopted investments within the framework of the broadband initiative, • Simple and sophisticated Internet tele- IPv6 technology has to be introduced ac- phony, online collaboration and other ross the board. 26 interactive services through a global addressability of all participants;

26 Detailed information on the national IPv6 plan of the German IPv6 Council at: http://www.ipv6council.de/aktionsplan.html.

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4.2 Open Innovation Cooperation along the value-added chain holds the highest risk potentials in res- Open innovation, including stakeholders pect to the creation of new competitors, in the innovation process, is widespread as seen in the example of Apple from the in the Internet industry and especially perspective of the telecommunications there it is done efficiently and effectively. network operators. As a mobile phone The Internet becomes a vehicle and a operator partner, Apple attacked the va- driver for open innovation processes in lue-added layer of these companies when other industries as well. Apple claimed a portion of the proceeds from the total usage of the users. Next The outstanding characteristics of the to the cooperation with upstream and Internet industry have always been downstream value-added layers, the in- its innovation diversity and speed. tegration of consumers in the innovation Many layers of the Internet industry process is a priority for the Internet in- go through a rapid succession of chan- dustry because monetization decides on ges, driven equally by product, process end customers. and service innovations, but also by business model changes. Google, eBay, An example of open innovation in the YouTube or Apple are only a few compa- Internet sector is the iLabs Initiative of nies picked as examples that have dis- the Norwegian fixed and mobile phone ruptively changed the competition land- network provider Telenor. Telecommu- scape globally as well as in Germany on nications network operators that want a large number of product and service to avoid a cannibalization of their core markets. Due to its dynamic creation business (voice telephony and simple da- history on the one hand and the effici- ta services) often have a hard time with ent forms of communication and coope- Internet oriented innovation. Especially ration on the other, the Internet industry opening up to potentially substitutive is especially innovative and an industry or partially cannibalizing services is so- that has involved stakeholders in the in- mething that often happens too late. The novation process since its beginnings. example of Telenor illustrates how established providers can try to include ex- Open innovation is defined as a compa- ternal partners in the development of ny internal innovation ability increase new products. In 2007, Telenor started through opening the idea generation pro- iLabs as a research project with its pri- cess and the innovation filtering and rea- mary purpose to find out how open sour- lization process to stakeholders who are ce can be used for the innovation of ser- actively. 27 Companies have always asked vices in mobile telephony. Incentives for themselves how innovations would turn participation were created in the form out best and how they should be steered. of development funds and free API As a result of the advancement of Inter- libraries (iLibs; for the iLabs see: net based interaction options and the in- www.ilabs.no). genuity of companies on the Internet and the consumer electronics environment, the open innovation process is intensely discussed.

27 see Chesbrough 2003; Picot / Doeblin 2009

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A first result from iLabs is shown in Il- The increasing readiness of the users lustration 25 in the form of the “mobile to participate in development proces- toolbox” of the iLabs that includes a few ses and for instance rate products on- APIs and test tools. These enable parti- line supports the trend for open innova- cipants to take part in select social net- tion. Companies in the Internet industry works through the mobile end device, increasingly use this trend to impro- to develop mobile applications on Java ve the user friendliness of websites. Vi- ME end devices or to publish beta mobi- sitors used to be studied for the purpo- le services. Feedback from users is then se of website optimization only implicit- used to improve the application architec- ly through web controlling systems, but ture. now within the framework of open innovation, web controlling data are linked Open innovation promises advantages with qualitative visitor surveys and that both in the form of additional sales by helps to ensure a user friendly experi- way of commercializing their products ence. and through cost savings and differentiation. Faster, less expensive and more precise products and services that meet the customer’s demands are surely on the wish list of many companies. At the same time, the importance of open innovation is owed to the fact that even corporations, especially from the telecom and media sector, cannot compete with the multitude of free developers in order to appropriately enrich and develop the relevant applications and services. Real exceptions in this respect so far have only been some leading IT companies. Illus. 25

Open Innovation at Telenor – The iLabs Concept

micro feed micro iLabs Janus picasa reader chatter Talk service academia providers

pico micro iLabs browser blogger

end users developers Face- iLabs HTML ATOM XMPP book UI server

iLibs APIs iLabs mobile toolbox

eZ Picasa Google blogger Face- Talk book Source: Telenor

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However, a company cannot readily ini- The study shows that the companies The companies tiate open innovation processes since of- in the German Internet industry are al- within the German ten company internal information has ready set up for innovation: Over 50 per- Internet industry to be published, thus potentially disclo- cent of respondents report that they use are clearly sing information to competitors. Com- over 10 percent of sales for product deve- innovation panies must therefore first build up the lopment and innovation and devote over oriented. appropriate basic understanding pertai- 5 percent of their employees to this task. ning to the organization culture. Ibra- In 15 percent of the companies, over 20 him Evsan, founder of sevenload, sums percent of the employees devote them- it up: “No open mind, no open innovati- selves to innovation (see Illustration 26). on.” Opening up for insights from sta- This reflects the innovation power of the keholders promises advantages, but al- Internet industry in contrast to other in- so holds extensive risks and only makes dustries. Large telecommunications net- sense in certain constellations of an in- work operators for instance only invest novation project, a company and a com- around 2 percent of sales in research petitive situation. and development. In this sector, innovations are traditionally bought from infrastructure producers. In the self-perception of Internet companies, innovation is rated with high importance.

Ibrahim Evsan sevenload founder

“Without an open mind, there is no open innovation.”

Illus. 26

Innovation in the German Internet Industry

0 % – 2 % 2.1 % – 4 % 4.1 % – 10 % > 10 % Revenue 23 % 22 % 31 % 24 % for R&D / Product Innovation

0 % > 0 % – 5 % 5.1 % – 20 % > 20 % Employees 15 % 40 % 30 % 15 % in R&D / Product Innovation (very) very low average high high Self Estimation of Innovative Strength 14 % 35 % 37 % 14 %

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At the same time, around 50 percent As seen in Illustration 28, companies rate the innovative power of their own assign different levels of importance to company as high or very high. However, the different forms of collaboration. Fif- less than 30 percent of the respondents ty-eight percent see partnerships at the affirm that they had entered their own national level as “important” or “very market as pioneers. Rather, over 50 are important”, local / regional ones, how- late followers in their respective sector. ever, are only important to 48 percent, This result clearly deviates from the self- and international ones to one third (31 evaluation pattern as pioneering com- percent). This result proves the existing panies reported in the innovation litera- limitations of the Internet market al- ture. 28 The companies seem to be self- so caused by language barriers as seen critical and they seem to recognize the from the German perspective. At the sa- importance of continuous innovations. me time, the Internet has the effect that Consequently, the open innovation ap- purely local / regional aspects of bund- proach has a great reception in the Ger- ling business activities in one place that man Internet industry: At 47 percent, al- are characteristic of transitional indus- most half of the study participants rate try clusters seem to be of subordinate open innovation for their own company importance to the German Internet in- There is a high as important to very important. dustry. degree of integration within the The number of companies that have ad- Moreover, for 55 percent, partnerships German Internet vanced with their own open innovation and cooperation with companies in other industry. activities is a little lower: Seventeen per- layers of the Internet industry are more cent report that they already put this ty- important than cooperation with com- pe of innovation into practice. A further panies in the same layer which at the sa- 10 percent are preparing this at a con- me time are potential competitors (37 ceptual level (see Illustration 27). percent, also Illustration 28). In 43 percent of the cases, the cooperation is also primarily with other online companies, while 46 percent include online and offline companies equally. These results illustrate the high linkage within the In-

28 see Gerpott / Jakopin 2008 ternet industry.

Illus. 27

Open Innovation in the German Internet Industry

not (very) very important little average important important Importance of Open Innovation 19 % 13 % 21 % 31 % 16 % no first initiatives thoughts plan project active Status of Open Innovation 17 % 41 % 15 % 10 % 17 %

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4.3 Usage Trends and Effects • 92.6 percent of 14- to 29-year-olds

4.3.1 Current Developments • 81.0 percent of 30- to 49-year-olds

The Internet has moved into almost all • 51.6 percent of 50- to 69-year-olds30 areas of our lives be it private, business or public life. The use of the Internet Among Internet users, numerous dif- falls into very different categories. After ferent and in part also opposing trends the rapid diffusion of usage, users are are to be found in the type of usage. In found in all societal segments indepen- principle, education correlates positively dent of age group, social class or sector. with the use of the Internet and the use The use of the Internet continues to of more complex application areas. A re- spread in Germany at a fast pace. The cent study conducted by the research percentage of Internet users in Germany group Wahlen concluded that 92 per- has gone up to 67.1 in 2009, that is an cent of Germans with a higher educa- increase by 2 percent from 2008 (see tion entrance qualification use the Inter- Illustration 29). 29 net, whereas the group with a secondary school leaving certificate reached 83 per- The highest growth potential for the con- cent. Eimeren / Frees (2009) also found tinued diffusion of the Internet among distinct differences here by employment the German population is currently in level. Accordingly, working people and the older generation. The Internet is people in apprenticeships use the Inter- used regularly by: net significantly more often than the un- employed or retired.

29 see Eimeren / Frees 2009 30 see Eimeren / Frees 2009; regularly = Internet us within the last four weeks Illus. 28

Importance of Collaborations in the German Internet Industry

Local / regional Partnerships – 12 % – 15 % 21 % 27 %

National Partnerships – 15 % – 8 % 40 % 18 %

International Partnerships – 11 % – 19 % 22 % 10 %

Collaborations within the Same – 17 % – 14 % 26 % 11 % Segment of the Internet Industry Collaborations with other Segments – 13 % – 14 % 36 % 19 % of the Internet Industry primarily offline primarily online

Online vs. Offline Collaboration Focus – 23 % 42 %

sharp decrease decrease no change increase strong increase

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In the long run, The fact is that timewise the Internet use 4.3.2 Mobilization of the Internet mobile Internet is increasing. This rapid growth among will not replace other things is driven by the currently Better devices, higher bandwidth, and traditional fixed typical usage trends: most of all more inexpensive rates are network broadband turning the mobile Internet into a mass access. • Mobilization of the Internet phenomenon. But mobile Internet will not be able to replace traditional fixed • Internet as a moving picture medium network broadband access – both types of utilization will coexist to serve both • Web oriented architecture needs.

• Touch functionality Mobile Internet is an example of a technology that has for the most part already • Microblogging / lifestreaming completed the hype cycle –starting with the beginning euphoria on the market, • Social networks to the disillusion phase, to the realistic perception and sustained growth. When These trends are elaborated here as UMTS licenses were auctioned in 2000, follows. especially tri-level prognoses about mobile Internet use led to high bidding at the license auctions which amounted to almost 50 billion euros. After the Inter- net bubble had burst in 2001, the disillusion phase began, and the technology did not hit the mass market for another few years.

Illus. 29

Development of Internet Use in Germany

80 %

70 %

60 %

50 %

40 %

30 %

20 %

10 %

0 % 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

use the Internet occasionally have used the Internet within the last four weeks Source: Eimeren / Frees 2009

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The initial spark in Germany was struck As this trend continues, the Internet will in 2008 and the realistic growth poten- become even more mobile in almost all tial was able to be explored on the mass application areas. Mobile daily use ser- market. Better devices, more broadband vices are the current topic because ma- and especially more inexpensive rates ny things that were previously only pos- are making mobile Internet accessible sible from the computer on the Internet to the mass market. With the market can also be done on a cell phone. It is ex- introduction of iPhone, Android and pected that Internet industry companies Openmoko, the migration of the home and mobile end device makers will bring PC to small, portable computers such as new products to the market in rapid suc- tablet PCs or netbooks and the cell pho- cession. ne has become reality. Now, it is possible to use Internet services fast and espe- The new connection technology of the cially anywhere and anytime. LTE (Long-term Evolution) generation theoretically makes mobile download speeds of 100 Mbit/s and better possible. They significantly enlarge the spectrum of mobile applications. Once this becomes reality in a few years’time, there will be barely any services one will not be able to access from a mobile Internet connection. Germany will

Frank Rosenberger CEO Consumer, Vodafone “Mobile phone applications are more Germany and more important to customers. Our Joint Innovation Lab Platform is a unique and outstanding answer to this trend. With our platform, the developers’ applications can reach over a billion people regardless of operating system, mobile phone type or network.”

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probably be trailing behind in the ex- Mobile broadband with LTE will be pansion of LTE as the case with the ex- available in Germany in the medium pansion of UMTS / HSPA. Regulato- term only in high population density ry authorities will assign the necessary areas. However, in some Scandinavian frequencies for this utilization purpose countries comprehensive LTE services only gradually. Furthermore, the invest- cover will be available for the mass mar- ment requirements due to Germany’s si- ket already in 2010. ze are higher than in smaller countries. Also, investments may be driven up due Despite the fact that mobile Internet of- to the assignment of certain unadvanta- fers numerous advantages in contrast to geous frequency bands. fixed network services, in the long term, mobile Internet will remain a complementary product to the fixed network In- ternet due to high production costs on the supply side.

Dr. Peter Meissner Next Generation “Regulatory agencies must timely Mobile Network release sufficient frequencies which Operating Officer allow for a cost-effective and all-encom- (NGMN) Alliance passing provision of next generation mobile telephony standards (LTE and later IMT advanced) because the avail ability of mobile high speed / broadband access has a significant effect on the at- tractiveness of business locations, not only on a national level, but also compared to international standards.”

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Illus. 30

Bluebox: The Physical Limits of Mobile Access In areas of high density, mobile telephony Technology networks of all high speed / broadband standards are reaching their physical limits at a population Mobile access technology is currently growing penetration rate of over 40 percent. Moreover, the significantly faster than access technology based on production costs for mobile broadband are signifi- fixed networks. According to Informa, the cantly higher than the costs of fixed network opera- mobile data traffic is supposed to grow 25-fold tors. Mobile broadband will therefore coexist with by 2012. A complete replacement of the fixed fixed network broadband access as a complementa- network, however, is physically not possible. ry product.

In the long term, mobile broadband will not be able to fulfill the growing demand for broadband, since the current network is not set up for flat rate charges.

HSDPA Notes Capacity Limitations

Mobile Broadband Maximum • After the activation of the third operator Penetration Capacity frequency, the network capacity cannot be increased infinitely. There is a physical limit 50 % 2 1st Operator Beyond Capacity estimated at 1–2 access points per km in 2nd Operator urban areas. rd 40 % 3 Operator • Resulting in a capacity limit of HDPA networks approx. 34 % (for instance in Cologne, the limit is 1 Mbps 30 % services for a maximum of 35 % of the users).

approx. 23 % • Potential short-term solutions might use indoor 20 % CPEs (for example UMA, femto), in the longer term 3G frequency refarming. approx. 11 % 10 % • The capacity model shown left is based on the following assumptions: 0 % – User bit rate of 1Mbps 0 1 2 3 4 5 6 – 40-fold overbooking Cologne – 75 % indoor usage – 1.5 locations per km2 2 Population Density in Thousands per km – 3 sectors per location

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4.3.3 Touch Screens Another application area for touch screen monitors currently still in the Touch screens will After the first touch screen had been early stages is the presentation technolo- enter many aspects developed by the company Elographics gy. So far, it has been seen on TV shows of our daily lives. (electronic graphics) in 1974 31, monitors where presenters discuss more or less sensitive to touch have been spreading complex topics. Numerous application at a very slow pace. The introduction of areas for this technology are found on iPhone and Google Phone has propelled the Internet, such as kiosk systems for the touch screen into the mass market moderating Internet based conferences due to its use for Internet navigation. The or for operation control with Internet ac- 2008 / 2009 generation touch screen de- cess. These devices are also gradually vices were very popular on the mass mar- reaching the mass market. ket because of their excellent user friendliness. 4.3.4 Web Oriented Architecture

In the future, this technology will not on- Another development regarding the use The trend towards ly be found in mobile end devices, but also of the Internet which has a profound ef- web oriented in other areas of daily life. Electronics ma- fect on the Internet industry is the trend architecture has nufacturers and software producers are to “web oriented architecture.” This re- profound effects currently placing touch screen monitors. fers to the shifting of processes as well on the use of the as hard and software functionalities to Internet and the • Tablet PCs (HP, Dell, Toshiba, the Internet. Today, business customers Internet industry. Fujitsu Siemens and others) as well as private customers pull away from the classic, isolated working envi- • eBook reader (Sony, Amazon) ronment and move to an integrated, virtual environment. • Smartphones (Nokia, Apple, LG, Samsung, Sony Ericsson, RIM and others)

• Operating systems (Microsoft Win- dows 7, Mac OS X support for the multi touch trackpad)

31 Elographics Computer Touch System, invented in 1974 by Dr. Samuel Hurst

Georg Zedlacher Marketing Leader Central Europe, Dell

“Cutting edge software combined with touch screen hardware offers evident user advantages to customers. They will shape the PC market in the coming quarters of the business year.”

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• On the private customer market, pro- • On the business customer market, grams or storage or a combination of “cloud computing”, “grid computing” both are offered online. as well as “Software as a Service” are currently big growth markets. The de- • Hardware functionality velopments in these segments of the B2B telecommunications market are • Dropbox32 is an online storage heading in the direction of on-demand provider. Private customers and everything-as-a-service concepts. can store their files from any Internet access and secure • Hardware functionality – Data them better that way. At the center capacities are not set up in- same time, they have flexible ternally but rather leased as need- access. ed from a cloud computing provider. Advantages for the company are • A combination of hard and soft- availability and cost transparency. ware functionality • Software functionality – Software • Google Docs33 is an Office does not run on internal compa- competitor that offers the ny EDP but is rather leased from a main functions of the Office SaaS provider. Thus, the compa- programs free of charge or ny no longer requires a license and client for browser operation pays only for the use of the soft- and thus enables word process- ware. ing in spatially separated workgroups. Web oriented architecture enables access to functionalities independent of • Spotify.com34 is an Internet specific platforms, anytime, anywhere, jukebox for entertainment pur- and mobile as well. poses that allows you to listen to millions of songs anytime as Managed services are an obvious growth audiostream for a monthly fee. market in the ICT communications solu- The user does not need to store tions sector. In the coming years, cloud the tracks on his / her own hard computing will become more attractive drive. for a large number of applications and will be the preferred solution for many application projects. “The advantages are all too evident – an agile and scalab- le IT infrastructure combined with low cost,” says Dr. Jürgen Hernichel, Exe- cutive Chairman of COLT in Germany and Managing Director for COLT Nort- hern Region.

32 www.dropbox.com

33 www.docs.google.com

34 www.spotify.com

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4.3.5 Internet as Moving Image Medium 4.3.6 Microblogging / Lifestreaming

The Internet is currently turning into People and companies use microblog- a moving image medium, driven by ging applications like Twitter to distri- technology leaps and evolution due to bute small pieces of information with demand. entertainment value. The instant aggregation of information from different on- Videos are In 2009, 62 percent of all onliners in line activities on one platform is a trend more and more Germany were watching videos through called lifestreaming, which indicates the interactive and the video portals or media libraries and future development of Internet use. online video view- watched live or time-delayed television ing experience is on the Internet. 35 This signals a growth Microblogging applications such as better for the user. of 7 percent in comparison to 2008. Twitter directly inform users through Apart from the trend for Internet video updates from sources that they chose as an entertainment medium, Internet themselves. The user receives a constant users will not only release their videos flow of updates about friends and ac- to the public, but will also process them quaintances on the one hand, or compa- and tag or mark interesting parts. Thus, nies and politicians on the other. Photos, videos are becoming increasingly inter- videos, press releases or pod- and video- active and the “online video” experience casts are also used. is becoming more attractive to the user. Lifestreaming includes microblogging Companies must react to this trend be- and takes it to the next level, where ad- cause the customer dialog via video will ditional information about the user’s on- find its way into the web presence of ma- line activities is automatically aggrega- ny companies. Different companies are ted and published. currently planning product descriptions in the video format (for instance, video • Microblogging / lifestreaming appli- ratings at Amazon) or investor presenta- cations are gaining increasing ac- tion conference calls as videocast. There ceptance. Users are getting more and is a strong trend in online marketing in more used to talking about the private the direction of moving pictures. sphere via lifestreaming in order to SevenOne Media and Nielsen Media manage their social relationships and Research are reporting distinct sales in- to generate an online reputation. crease rates with online moving picture The actor Ashton Kutcher already has advertisements. This growth will even 3.9 million followers (virtual fans) on significantly speed up when this seg- Twitter as a forum for his thoughts and ment has reached a higher maturity le- opinions. This trend is strengthened vel. by mobile applications that enable “always on” and that make it easier to Also the professional level of UGC web- constantly put new information on the sites, which include professional (premi- Internet or retrieve information about um) content in what they offer, is going others. up. One of the most characteristic examples is the video-on-demand service of YouTube.

35 see Eimeren / Frees 2009

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 63 4. Trends and Market Development Drivers

• Microblogging is the main trend this Managing these aspects is becoming mo- year for companies as well. Informing re and more important for a company or interested stakeholders by microblog- even a person. Service providers such as ging is one of the most promising PR the reputation management service, channels. In the future, this direct flow Revolvermänner, are already gaining of information will be indispensable importance. They make it possible to be for communication with investors. coherently represented on the Internet Politicians will not be able to do with a clearly recognizable online iden- without staying in direct contact with tity. 36 voters / stakeholders via a blog or a Twitter account. Moreover, microblog- 4.3.7 Social Networks ging is used as a distribution channel to present the newest sales and Currently, 51 percent of German Inter- products to interested target groups; net users are members of a social net- Lufthansa and Twitter illustrate this: work. This changes communication and Lufthansa has 9,720 followers (virtual keeping in touch among the populati- fans), which is a target group for on on a daily basis and therefore it also special ticket sales and advertisement changes the daily business conducted by in general. Compared to Ashton companies at different levels. The ope- Kutcher’s 3.9 million fans, of course, ning of source codes, the convergence companies are trailing far behind. of networks and the mobile use of social networks are the main trends of 2009. Due to the amount of available informa- The greatest challenge still is to find tion, it will become increasingly impor- business models that work. Social networks tant to take care of one’s own reputati- turned the online on on the Internet, this is the case for “The increasing use of social networks world into a more companies as well as users who are for impacts on many levels of the Internet user driven, dyna- instance applying with a company. The industry.” Some of the most well-known mic, connected, and core issues will be: large social networks in Germany inclu- interactive world. de wer-kennt-wen, StudiVZ, MySpace, • Is the online identity distinct? Is there Facebook, and XING . They are part of clear information about the brand the Internet evolution: “They created core? a user driven level, a dynamic, linked, and interactive online world.” 37 • What is the result when the name is entered into a search engine?

• Do self-perception and the perception by others match?

36 see www.revolvermaenner.com

37 see Arthur D. Little 2006

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At the end of 2008, social networks had Thorsten Vespermann (XING) com- already reached 51 percent of online ments: “Social networks will grow suc- users, that means every second user ac- cessfully when they offer their target cesses social networks for private or groups a real added value. Members ap- even professional Internet use. 38 Com- proach business networks and leisure pared to the previous year, the social oriented networks with different expec- network range has gone up by a remar- tations. Those who want to be successful kable 13 percent. That is the highest in- in business should simply listen to their crease in the large European markets community when it comes to developing studied by the market research company their product.” Nielsen. Facebook Germany grew at an average growth rate of 180 percent bet- Innovative services increase the draw by ween 2007 and 2009 and increased its linking social networks with other tech- user numbers to 3.8 million. A further nology such as GPS and mobile telepho- growth in membership and increasing ny and will facilitate a further spread. length of stay can be expected. An above Utilization of social networks is beco- average growth rate was especially noti- ming more intense and takes more time. ced for the members aged 54 and over. According to a Nielsen study, the time spent online on social networks has gone up from 3.1 percent to 7.5 percent since December 2007.39 Conservative predictions made by Datamonitor market researchers for Germany from the point of view of the overall market indicate increases of 20 percent for usern- umbers and sales alike.

38 see Nielsen 2009. That puts Germany clearly 39 see Nielsen 2009 behind the reference markets USA (67 percent), Japan (70 percent), UK (69 percent), France (67 percent), Italy (73 percent) and Spain (75 percent) – however, for these markets, Nielsen also includes professional use (at work) while the data for Germany is based on Internet use at home.

Thorsten Vespermann Director Corporate Communications “Social networks will grow successfully XING AG when they offer their target groups a real added value. Members approach business networks and leisure oriented networks with different expectations. Tho- se who want to be successful in business should simply listen to their community when it comes to developing their product.”

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Apart from the well-known large com- analogous environment is 32 and 28 munities, there are also many social net- people, respectively. Participants in the works in the form of “vertical” commu- study reported that they would theoreti- nities i. e. specialized on certain topics cally only call 9 percent of their – as well as wikis or blogs. Numerous Facebook contacts, 4 percent of their existing Internet portals launch network LinkedIn acquaintances and 0.3 functions primarily in order to tie in the percent of their Twitter followers to ask user and to achieve a long-term positio- them out for a beer 40 . So the social ning in the market niches of the Inter- online networks seem to have a rather net industry. However, parallel to this small effect on the real local networks. granulization and differentiation, network convergence increases. More of- Social networks increasingly improve Social networks ten now, networks are being opened in their application options on mobile end are increasingly the form of data exchange and the cen- devices. Examples are Flickr, Facebook, used anytime and tral administration of user information, MySpace, Twitter or YouTube who pro- everywhere through for instance reducing redundant entries vide their services customized for small mobile access. and therefore entry barriers. Examp- displays so that the main functions (for les are the applications Atomkeep or instance, checking profiles on Facebook lifestream.fm, as well as FriendFeed. or uploading photos on Flickr) can be With these platforms, the user can be used from the mobile device almost any- present in several social networks (such where and anytime. Due to the spread as Facebook and LinkedIn) and bundle of social networks, makers of end de- his / her profiles and activities from over vices also jump on this bandwagon and 60 social networks. The omnipresence provide products that make the mobile of the leading communities is under use of social networks easier. Examples pinned by widgets and the integration are YouTube Cams by Casio, Samsung in other well-liked applications (for or Kodak. According to the market re- instance Facebook Connect). Marc searcher Nielsen, among mobile phones Ziegler, CEO of Mediencluster NRW, the iPhone heads the range with 13 per- is convinced that the future belongs to cent of social network users, followed by these applications: “Besides profiles BlackBerry (9 percent) and Motorola (5 linked across networks, there will be percent). Communications service pro- more and more of these intelligent links viders are also launching products cus- and complementary services in the tomized for the use of social networks. future.” The aim is, on the one hand, to draw the users of these networks and, on the Due to social networks, contacts and other hand, to generate traffic on their interaction between Internet users is networks. The mobile telephone provi- growing. However, the question remains der O2 enables users to send or check how much value they add to relation- status updates via SMS. Other coopera- ships outside the networks. For examp- tions of this type are to be expected in le, a current study of 18- to 24-year-olds the near future. concludes that they maintain an average of 88 contacts in their social networks. At the same time, the number of “real” friends and work colleagues in their

40 see Smith 2009 based on UK market data

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Social networks are attempting to gene- Social networks increase interaction op- rate revenue by using different business tions by including bidirectional com- models. Advertisements, premium mem- munication in the form of instant mes- bership fees, usage fees, item shop and saging, SMS, or voice services such as upselling are the main options for com- Skype / VoIP lifestream enablers like panies, operating on the market inde- Facebook connect. Moreover, User Ge- pendently. For outside companies soci- nerated Content (UGC) is increasingly al networking is used predominantly for integrated in social networks, or UGC customer retention. Typically, the busi- portals are changing in the direction of ness model of one’s (own) social network social networks. requires subsidy. The original operators of social networks, on the other hand, Finally, social networks can be seen as depend on a business model that gene- part of the already described open in- rates actual revenue and they have to do novation trend because they make it ea- so on the basis of their reach. Lopsided sier for outside players to participate in financing of social networks on the ba- the innovation process and they themsel- sis of advertising alone, however, has be- ves propagate an opening of the develop- en challenged by many analysts and mo- ment process. Examples are Facebook or re creativity and multimodality is called open operating systems for mobile end for in order to generate revenue. But des- devices like Android or Openmoko. pite these estimations, Facebook (in the USA), according to their own information,, has already reached the break-even- point in September 2009, which shows that business models based on advertising alone can be feasible as well. Accor- Advertisement based ding to a current comScore study, one business models – fifth of all Internet ads can already be next to “freemium” found on social networking webpages. models – continue Marc Ziegler of Mediencluster NRW to be the most emphasizes this as well: “Ad-based busi- important ones in the ness models continue to be the most im- social media scene. portant business model. In the social media environment, however, a so called ‘freemium’ model like XING will prevail in which basic services are free and premium services are paid. And yet, premium services will only be able to take hold if there is a certain exclusivity, a must-have character of the network.”

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 67 4. Trends and Market Development Drivers

4.4 Media Use and Company Marketing looking for interesting and extraordinary stories for their programs and platforms, The evolution of Internet use puts huge and at the same time budgets are shrin- challenges before the marketing of com- king. This is exactly the gap that can be panies of any kind, but it also offers op- filled by companies offering material that portunities for growth in online and off- is incorporated into the program seam- line marketing. lessly without it being advertisement. All the offices of a corporation worldwide Sven Herold, Global Head of Media Re- will act as the correspondent offices that lations, Television and Global Communi- can participate with local stories, a net- cations at SAP AG, comments on the fu- work that almost no television broadcas- ture influence of companies on the media: ting company can boast with. SAP main- “Companies will be tomorrow‘s televisi- tains a worldwide reporter network with on broadcasting companies as soon as the TV journalists from the respective coun- Internet replaces the classic TV distribu- tries. They not only deliver stories they re- tion channels. I expect this development searched and footage material, but they to take place in the next five to ten years work together closely with the local TV at the most. Global corporations have to broadcasting companies at the respective completely change their thinking for an location. Story research, production and effective communication with audiovisu- pitching come from a single source and al media. Classic PR was yesterday, to- are customized to the local, culture spe- day, companies have to produce content cific requirements of the stations. In this like television broadcasting companies in process, Internet servers provide not on- order to be successful in their communi- ly additional platforms but also replace cation. Classic TV storytelling and reuse costly satellites and enable the distributi- are playing an increasingly important ro- on of the material with virtually no time le. Focussing on repetition of the compa- loss. The only difference from a TV stati- ny name or filming classic advertisement on is the missing transmitting frequency. phrases will be less and less successful In the ‘new world’, however, that is no lon- with the broadcasters. Journalists are ger needed.”

Sven Herold Global Head of Media Relations, “Companies will be tomorrow’s Television and television broadcasting companies Global Communica- as soon as the Internet replaces the clas- tions, SAP AG sic TV distribution channels. I expect this development to take place in the next five to ten years at the most.”

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Besides this form of PR, there are other • “Going straight to where the target trends exclusively pertaining to the In- group already is.” Against the back- ternet: ground of decentralization of content and target group communication, com- • “Performance marketing” – with panies have to understand where the shrinking budgets, it is a winner in target groups are and how to deal with this time of crisis. Currently, those ad- this knowledge. While companies have vertisement channels are developed so far erected brand temples on the In- whose performance can be clearly ternet, they now will have to act right measured. Thus, companies will verifi- there where their customers are. ably optimize their performance and in that way get the most out of their bud- • Numerous companies have discovered gets. This in turn will entail that indi- that customer relationship manage- vidual advertising spaces will be scru- ment activities are carried out with- tinized in regards to their performance out their knowledge, for instance in the because advertisers want to see how form of Facebook groups organized by their spending can be linked to high- satisfied or dissatisfied customers. er sales. In the end, they will redistrib- ute their advertising budgets accord- • The incubation time of bad news has ingly: less money for traditional media become considerably shorter due to mi- (print, TV and radio), more money for croblogging and social networks. The performance marketing. tolerated reaction time for believable answers from companies pertaining • The already mentioned “Search En- to current developments through these gine Optimization” (SEO) has become channels is short. a significant standard item in marketing budgets of companies from all in- • Recommendation marketing is becom- dustries and sizes. Florian Matthias, ing increasingly important. Custom- Creative Head Online at Draftfcbi, ers trust their peer group more than all confirms this trend when he says: “If other players. Successful companies you are not listed on the first page, you will have to place their advertising are not relevant.” messages at this level.

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4.5 Challenges for the Internet Industry The shortage of venture capital is a serious problem for the German Internet in- The demands on Internet based business dustry. In 2008, only 251 million euros models are growing in regards to the re- of venture capital were invested. 41 Due alization of significant and fast revenue. to the low investment volume, industry In the end, noncapitalizable network ef- experts are currently observing a “brain fects are losing significance, at least drain” of successful entrepreneurs in from the investor’s point of view. the Internet industry, who move especially to the USA. In the context of the financial and economic crisis, the demands on the business “We are losing our Leonardos, peop- In the long run, models of the Internet industry have le who work on long-term projects, visi- only business changed in 2009. All business models onaries!” Ibrahim Evsan says, regret- models with an depicted, on the Internet in the end de- fully. He is the founder of sevenload, evident USP and pend on a far reach and intense utilizati- Germany’s most successful video-on- revenue producing on. However, focus now is placed on re- demand site. traffic will be ab- aching a positive cash flow fast; the pre- le to assert them- vious orientation towards a fast growth Since many startups still cannot show selves. of customer numbers and the realization how they will generate revenue, a signi- of network effects, is taking a back seat. ficant number of startups are driven in- Only business models uniting those as- to illiquidity because access to capital pects will get hold of the scarce venture is limited. The crisis, however, also has capital in the future as well. positive effects for some business models. With the recession, people increa- In the long term, only business models singly use the Internet to help them ma- with a straightforward USP, and above ke purchase decisions. This happens re- all with traffic that can be turned into gardless of whether the purchase in the money, will prevail. Numerous examp- end is made online or offline. For many les have shown that even half a million Internet users, e-commerce gains center users that cannot be capitalized on are stage. In this context, portals will be ab- no basis for successful business in the le to hold their ground that besides pro- long term. viding sufficient well-organized information to compare the available options will also offer added value and additional services. After all, 2009 has been a year of savings: spending has been cut. Business models and services that either save money or make money are becoming increasingly popular.

41 see Majuhnke 2009

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Regarding Internet business models and bordering digital media, it can already be said that – except for these smaller niches – it will be the business models financed through advertising that will take hold. In general, the point is: Busi- ness models have to be simple and cohe- rent. They must not push customers into business and IT processes, but rather focus on the user’s needs.

In order to survive in the highly dynamic competitive environment of the In- ternet industry, it is essential to take the above mentioned user trends and demands on business models into account. In no other industry, the entry barriers intended to ward off disruptive business models at the individual levels have been so weak, while the threat posed by newcomers has been so ubiquitous. The positive business climate of the sector primarily reflects the opportunities generated by these developments – for many companies, however, they will also hold significant risks.

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 71 5. Conclusion and Outlook

5. Conclusion and Outlook For the Federal Republic of Germany, the importance of the Internet industry In just under 20 years since its commer- keeps growing on a microeconomic sca- cial availability, a prospering industry le as well as on a macroeconomic scale. has developed around the communica- Sufficient coverage of living and working tion technology of the Internet, an indus- spaces with broadband Internet access is try that has already radically changed vital for the location appeal and the com- the private and business communication peting power of our national economy. behavior in many areas and is increasingly shaping the sociocultural and politi- As far as the second layer, Services & cal environment of modern society as a Applications, is concerned, it is evident whole. The influence new developments which potential must be developed for in the Internet industry have on our so- the future. The Internet is becoming the cial and economic activity has become central application platform, the central ever stronger and ever more noticeable. resource for storing and managing data and processes. The classic data proces- The innovative power of the industry is sing center is being replaced by the mod unbroken and will stay that way for the ern, connected and secure data center. next few years. The creative potential of But it will become necessary to promo- the Internet industry lies in the medi- te this form of information processing um-sized structure of the economic play- to gain more trust. At the same time, for ers. With very few exceptions, the decis- instance in the area of cloud computing, ive impulses mainly come from small standardization is necessary: A secu- to medium-sized companies. The Inter- re legal framework is needed, adjusted net industry is made up of many service to legally cover today’s form of commis- providers operating with divided wor- sioned data processing. Here, the mar- kloads. The value-added chains of the ket participants are asked to call for mo- companies close to infrastructure thus re practicable general conditions and a form the basis for almost all subsequent simply and well functioning value-added economic processes. In the near future, chain sequence. The same holds true for “all IP” will be the basis of all electronic the mobile Internet: Examples of m-pay- communication. ment standardizations in other countries show how this can fuel the acceptance While at the beginning of the Internet and usage of mobile payment systems age the Internet Service Provider ac- and therefore mobile commerce. Most ted purely as access provider, the clas- of the added value in today’s smartpho- sic ISP is rarely found anymore. Given nes lies in the personalization of applica- the specialization of the access business tions that can be customized by the user through addition or substitution, today’s according to his / her personal needs. ISP is undergoing the change to a provi- Depending on the operating system, the der of managed services. Besides access development of applications can be ea- services, they offer hosting services and sier in one case and harder in another, more and more integrated solutions for so that the consolidation of the operating industry, trade and service. Increasingly system market at the latest will be deci- clear structures are beginning to show ded with the question: Are there enough in regards to the cloud services trend. attractive applications for this machi- ne with that platform? The application stores of the end device producers are also crucial in this context. A large se-

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lection and clear functionalities will In this context, a number of institutions have a direct and positive effect on the – such as the Internet hotline operated sales of the respective hardware in the by eco in cooperation with The Volunta- future. ry Self-Monitoring of Multimedia Provi- ders (FSM) – and vigilant users are stri- The already classic e-commerce applica- ving to make the Internet safer. tions constitute a superstructure in relation to the infrastructure. Here, the nu- The overall picture of the Internet indus- merous private and business transac- try is shaped by optimism and expectations are taking place, transactions that tions of further growth. Almost all seg- by now have had the predicted revolutio- ments in the Internet industry are loo- nary influence on the New Economy. The king into a bright future. mature companies survived the burst of the dot.com bubble and they are shaping The Internet industry continues to hope a fast growing sector of the Internet infor business friendly regulations – just dustry with their products. E-commer- like the legal framework that for the last ce sales today (as it relates to this study) 20 years shaped an Internet of extensi- amounts to 83 percent of the total sales ve self-regulation and clear legal struc- for the layer Aggregation & Transaction, tures, which originated in Germany and and at 22.4 billion euros it is almost half became the foundation for the EU’s E- of the total sales of the Internet industry Commerce Directive. overall. Last but not least, online advertisement will not replace classic adver- With the present study of the Internet in- tising altogether, a two-digit growth can dustry we hope to provide an approach be expected here, too. The tendency: in- which clearly illustrates the Internet as novative and on the upswing. a medium and its importance for the national economy in all its facets. After all, The content market is literally exploding the study confirms what we have always although providers are still looking for believed – the economic future lies on sustainable business models after they the Internet. had failed to jump on the bandwagon for a long time. Here, the question will have to be answered how “plain content” can be turned into “paid content”. The mobile Internet might point the way.

One challenge that is tackled across all layers in the Internet industry is the issue of security. In the layer Services & Applications, data centers are trying to get certifications and ensure data security for their applications, while at downstream layers it’s an issue offen- ding of spam and malware, and providing secure m-payment, as well as legally impeccable content.

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 73 6. Method and Random Sampling

6. Method and Random Sampling Out of the 159 participants who provided additional information to statisti- The eco / Arthur D. Little study was ac- cal questions, 18.2 percent reported on companied by an online survey and in- companies founded between 2005 and terviews with experts which took place 2009. At 28.3 percent and 35.8 percent, between May and August 2009. The em- the share of companies founded between pirical data was collected via a written 2000 and 2004, and between 1990 and standardized online survey of German- 1999, respectively, was the highest. Al- speaking experts and executives from most 18 percent of the companies have companies in the Internet industry. The already existed for over 20 years; almost random samples were taken from the half of this group for over 30 years (see member and newsletter directory of the Illustration 31). eco association. Additionally, companies in Germany that are active in the Inter- The GmbH (46.6 percent) and the sole net industry were picked by searching re- proprietorship (23.9 percent) were the levant freely accessible directories and most frequently named types of compa- databases. A total of 6,322 e-mail que- nies who provided information about ries as well as another 3,986 mailed que- this fact (see Illustration). ries were sent to companies of the Inter- net industry, and in some cases several people from the same company were surveyed. After an e-mail reminder was sent out to the addressees contacted via e-mail, a total of 629 surveys were sent back filled out completely or for the most part and used for this study and its various evaluations. The return rate of 6.1 percent is low, but considering the volume of the questionnaire and the metho- dology of the survey, it is acceptable. Illus. 31

Companies Founded Type of Company Location

AG North 2005– 7.4 % Rhine- 30.3 % 18.2 % 2009 (plc) Westphalia GmbH 46.6 % Bavaria 16.8 % 2000– (Ltd) 28.3 % 2004 GbR (GbR) 8.0 % Hesse 16.2 % 1990– 35.8 % 1999 Einzelu. Baden- (sole 23.9% Wurttem- 8.1 % propiet.) berg before 17.6 % 1989 other 4.5 % other* 28.6 %

Source: eco/Arthur D. Little survey May–July, 2009. * Berlin, Lower Saxony, Rhineland-Palatinate and Hamburg at 4 % each, Saxony and Schleswig-Holstein at 3 % each, Thuringia and Brandenburg at 2 % each, Saarland, Saxony-Anhalt, Bremen and Mecklenburg-West Pomerania at around 1 % each.

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The company location for the majori- By definition, when we refer to the Ger- ty was either in North Rhine-Westpha- man Internet industry, we mean compa- lia, Bavaria, or Hesse. At 30.3 percent, nies that North Rhine-Westphalia was represented most. Further 16.8 percent and 16.2 percent of the participants were from • actively perform business in Germany; Bavaria or Hesse (see Illustration 32), 8 percent came from Baden-Wurtemberg. • make their entire or at least a signifi- Thus,the latter federal state percentage cant part of their sales or significant almost equals to the percentage of eco absolute sales with IP relevant prod- memberships. In contrast to that, North ucts and services; Rhine-Westphalia, Bavaria, and Hesse were clearly overrepresented, while Lo- • provide or enable IP relevant prod- wer Saxony was underrepresented. ucts / services that are directly related to the Internet. The study, however, The 178 respondents who filled out does not include Internet related prod- further personal information on the ucts and services of the second or third questionnaire are mostly employees who order (for example, an accounting firm have been working at their companies that makes its money working for In- for a longer period of time (58.4 percent ternet companies). more than five years); 22.5 percent reported to have been working at the com- • Sales of German companies made in pany between one to three years. Moreo- other countries are not considered in ver, 26.3 percent were CEOs, 31.6 per- this study, sales of foreign companies cent held an executive position, and 42.1 that are made in Germany are includ- percent were managers / project mana- ed in the estimates. gers.

In regards to age, the participants co- vered a “healthy” range, showing that the Internet industry is attractive to employees of all age groups: 16 percent were over 50, 36 percent between 40 and 50, 33 percent between 30 and 40, and 16 percent were between 18 and 30 years old.

The German Internet Industry 2009–2012 – Review, Trends, and Drivers eco / Arthur D. Little | Page 75 Bibliography

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