The Internet Is the Electricity of the 21st Century

15. 3. 2017

The goal of IT is to add value to all sectors
of the economy.

The Internet influences the Czech society and economy of 21st century like no other technology or innovation. According to Eurostat, about 70% of population accesses the Internet on regular basis, which is only slightly below the EU average. For a business here it is almost unthinkable not to be online. 96% of businesses state they have a cable connection and 80% have their own web pages. As the Internet is growing, the economy benefits as a whole, including retail and manufacturing, not only the IT sector. The growth of IT should not be seen as a mean to its end; after all, the goal is to add value to all sectors of the economy.

The Czech Internet Development Association’s data show just how important the Internet economy is; the added value is more than 350 billion CZK, 6.3% of jobs and rising. Sectors of the economy directly connected with the Internet amount to 3% of GDP, roughly about 115 billion CZK—more than financial services, insurance, or agriculture.

The indirect economic influence of the Internet is even higher. To illustrate its importance, the International Telecommunication Union uses electricity as an analogy. In its study from 2008 it points out how difficult it is to measure exactly the influence of ICT on the state’s economy; just as electricity, its use is ubiquitous but hard to measure as its influence is mostly indirect. Neither electricity nor the Internet does have a one-time, measurable impact on the economy; it has more to do with the way they change organization of the society, processes in companies and behavior of the people. The Irish government used the electricity analogy as well, when they made a decision in November 2014 to invest half a billion euro of government support into the development of optical cable network with the aim to provide Internet access to 600 thousand households and 100 thousand companies. The Irish Minister of Communications Alex White declared it as a “giant infrastructure project akin to rural electrification in the last century.”

Each and every investment into one part of the Internet economy brings an important ripple effect to other sectors of ICT and beyond. The Internet economy comprises of many sectors, from the “core” ones, such as the development and administration of online services and media, to e-commerce, network infrastructure, data centers and other hardware. Direct impact on other sectors of the economy is brought by Internet companies’ demand for real estate, transportation and other services; indirect impact can be brought about by an increased competitiveness or by a change of business models. The impact on the “traditional” companies can be either positive, e.g. cutting the costs, or negative, if the market gets disrupted with the arrival of new, often cheaper and more efficient competitors.

The Internet economy’s long-term growth and positive results are also illustrated by the examples of the successful investments into Czechbased companies. Intel Capital, the investment fund of the world’s biggest computer processor maker, pursues an investment strategy which supports the growth of not only select companies but of the ICT sector as whole. In return that leads to an increased demand for the products of the mother company. The growth of the Internet economy is in investor’s strategic interest.

When Intel Capital acquired a stake in the portal at the beginning of the new millennium, it resulted in the Internet development in the Czech Republic and in increased online access for households and businesses. That went hand in hand with increased demand for PCs and for high-speed Internet access. Intel did not make the amount of the transaction public, but when it sold its stake to Warburg Pincus fund seven years later, the value of was estimated at about 2.5 billion CZK and the return on investment certainly doubled many times over. The turnover of the number-one on the Czech Internet market,, at around the same time was 1.5 billion CZK and its profit before taxes (EBITDA) was almost a half a billion CZK. Both figures have almost doubled since. Every year Seznam. cz pays half a billion in taxes and in health and social insurance.

A couple of years later, Intel Capital pursued a similar investment strategy, along with other funds, in their 52 million USD investment into AVG, the antivirus company. It became the first Czech company to be floated on NYSE exchange. The main strategic goal in the development of online security solutions was to mitigate the fear of users from real or perceived threats on the web and to further support the demand for and the growth of the Internet economy. The earnings of AVG, today having more than half of its operations outside the Czech Republic, were 400 million USD last year, with profit after EBITDA topping 140 million USD. The number of users has reached 140 million worldwide; its Czech competitor Avast can boast with 230 million users. Czech Statistical Office registers nearly 70% of households with the Internet connection, a significant increase from 20% in 2005.

Year 2008 saw an investment in, which undoubtedly kick-started e-commerce in the Czech Republic with repercussions felt in traditional sectors of the economy, ranging from the sale of books, electronics, and clothes to grocery deliveries. Transportation and logistics benefited correspondingly. Maybe less apparent, but profound nevertheless, is the empowerment of the consumer; increased competition has led to lower prices, higher quality of customer services and warranty terms.

The number of e-shops in the Czech Republic today is the highest per capita in Europe. The total number is, according to the Association for E-commerce, 37 thousand, which is on par with much bigger and more developed market in the UK. Statistically, there is one e-shop per ten Czech-registered companies; the actual share among merchant companies is higher and about a quarter of them does its business online. Five years after the strategic investment the was valued at 6 billion CZK. The turnover of e-shop market last year was at 70 billion CZK, 50 billion for goods and 20 billion for services.

The most recent investment of Intel Capital— an acquisition of a stake in a Czech company GoodData—indicates the further direction of the Internet economy development. Roman Staněk’s company focuses on analysis of the so-called big data. The data analyzed at present come from companies, but near future will almost certainly bring data from mobile devices, automobile sensors, home appliances, industrial processes and construction industries. Global economy is set to earn from the so-called “Internet of things” 15 billion dollars in the next 15 years, Ericsson predicts.

Mobile connectivity goes hand in hand with this trend. Ericsson estimates the amount of transmitted data on the mobile networks to grow eight-fold by 2020. An average smartphone will transmit an average 3.5 GB compared to today’s 900 MB. Majority of the data will comprise of video broadcast, which demands high quality connectivity and network stability. Decent infrastructure will of course be required and new frequencies for mobile operators are being discussed on the European level. The most feasible frequencies are under 1GHz, which, thanks to its physical properties, enables fast coverage of large area with mobile broadband. Countries like Britain, Germany, Finland, Denmark, France, Netherlands, Luxembourg or Switzerland plan to provide frequency at 700 MHz, currently being used by digital TV, for such purposes.

The impact of mobile broadband on business does not lie only in the sector of digital products but in the companies themselves and in the way business is done on a general level. When LTE coverage of the Czech Republic is finished, it will be possible for business to set up a branch anywhere in the covered area and establish an immediate, problem-free communication. LTE will be a key technology for the carmakers as well—connected cars can not only stream cartoons for kids to keep them entertained, but online satellite navigation with real time information about traffic situation will become the standard.

Several studies have tried to analyze the benefits of mobile and landline broadband connectivity for the economy. Almost all of them support correlation between the broadband connectivity and GDP growth and job market increase. Nina Czernich and her team from the University of Munich analyzed 25 OECD countries and came to the conclusion that an increase in broadband coverage by 10% results in a GDP growth by 0.9–1.5% per capita.

The World Bank in a study conducted in 2009 reached similar, even more optimistic conclusions. A study by a consulting firm Arthur D. Little, telecommunication infrastructure equipment manufacturer Ericsson and Chalmers University of Technology on a sample of 33 OECD countries has shown that a doubling of the connection speed brings about 0.3% growth of GDP.

A development of network infrastructure then brings about a direct growth in other segments of IT industry. High-speed Internet connection enables practical usage of cloud services. The sector of data centers in the Czech Republic is quite well developed and is growing fast. Just recently, has invested 200 million into its own data center. As the infrastructure is being developed and the capacity of data centers is growing, new digital products and services are being introduced, thus providing support for the core online segment of the Internet economy.

Above mentioned services clearly show that an investment into any segment of the Internet economy creates a domino effect of growth in related industries. Added value for the whole of the economy is increasing. It is thus a very positive sign that European and other funds will contribute to the building of the infrastructure necessary for the further growth of the Internet economy. Apart from the structural funds, the new Juncker’s Commission is planning to invest over 300 billion EUR into infrastructure projects and the Internet development is set to receive a substantial part of this package. It will help to meet a political goal that by 2020 one half of European households has Internet access with speed of at least 100 megabits per second, and all of the households are to be connected with the speed of at least 30 megabits per second. There seems to be an agreement on the European level that these goals cannot be achieved without the contribution from government coffers.

Internet infrastructure is definitely not a bad target for similar investments, when it comes to spending of public money. The benefit for the economy is beyond any doubt and a high-speed Internet connection to every house is far easier to sell to the public than a new motorway in their back yard. It comes then as a bit of a surprise that the investment into broadband is not being widely discussed in the Czech political arena and the Internet has not really been picked up as a political topic so far. In the neighboring Germany the elected representatives go about the Internet affairs rather differently—the coalition agreement dedicates the whole of two and half pages to the importance of the Internet. A change can be hoped for when the new plan for the development of the next generation network (NGA) appears on the Czech government’s agenda—so far it has been set for the beginning of the next year.

Jan Klesla

Deputy Editor of the Economy section of Lidové noviny daily. As a journalist he specializes in the topics of the Internet, IT and telecommunication, especially in relation with investment and regulation.

Ondřej Malý

Member of the Council of the Czech Telecommunication Office.

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