1. Antonin Arlandis Stéphane Ciriani How firms interact and perform in the ICT ecosystem ? March 2011

2. Presentation based on the following publications 1. « Les opérateurs de réseaux dans léconomie numérique. Lignes de force enjeux et dynamiques » (A. Arlandis, S. Ciriani and G. Koléda, Coe-Rexecode working paper No 16, 2010) 2. « How firms interact and perform in the ICT ecosystem? » (A. Arlandis and S. Ciriani, 2010, Communications and Strategies No. 79)

3. The Layer Model (Lombard (2008), Fransman (2007)) Layer 4: contents producers Layer 3: Internet intermediaries Layer 2: Network operators Layer 1: Technology producers NBC, Canal +, TF1,Time Warner, Walt Disney… AT&T, BSkyB, BT, Comcast, France Télécom, Verizon, Vodafone… Alcatel-Lucent, Apple, Huaweï, Nokia, RIM, Samsung, Toshiba… Amazone, eBay, Google, Yahoo … Networked elements (switches, phones, computers…) are produced in Layer 1 Layer 2 contains network operators such as telecom, cable & sat operators Layer 3 features Internet intermediaries (search engines & e-commerce) Content production firms are located in Layer 4

4. The main dynamics at work within the ICT ecosystem Network operators & networked elements providers are now considering new businesses and growth opportunities within Layer 3 (Orange buys Dailymotion, Microsoft launches Bing to enter the market of search engines…) Internet development (access and services) offers new business opportunities and new sources of revenues for content providers and Internet intermediaries When ICT firms innovate (by rising the R&D intensity ratio) the whole ICT ecosystem (and beyond) can benefit from the diffusion of goods and services (the launch and diffusion of Smartphones increases mobile operators and content providers revenues) Layer 4 Layer 3 Layer 2 Layer 1

5. Layer 1 is ruled by Asian companies and Layer 3 has the higher rate of growth and is ruled by American firms Calculations are based on a database providing financial information on 347 companies accounting for 80% of ICT global market capitalization; revenues are in millions of 2005 US dollars (Data source : Reuters)

6. There is an unbalance between profitability and investment needs Operating income to salesCAPEX to sales Content producers9.9%5.1% Internet intermediaries14.5%6% Network operators12%17.5% Technologies6.6%6.1% Most of Internet intermediaries spreading worldwide (Amazon, eBay, Google, Facebook…) are American companies Internet intermediaries achieve the highest profitability within the ICT Industry The development of an effective advertising business model is driving a migration of value from Europe to the USA Within the whole ICT ecosystem, Network operators play a key role in investment through their capital expenditures (network deployment and upgrade…) European carriers may enter Layer 3 which is the most profitable : high profitability can be a strong incentive to develop such business models Data source : Reuters 2008

7. The economics of Net Neutrality : the (possible) benefits and the losses Restriction for Network operators to use price discrimination amongst Internet intermediaries, to manage their trafic and to block access to networks Network Neutrality concerns now starting to rise in Europe while in the United States it has been a contentious issue for several years Search engines enable interactions between consumers and advertisers and derive their revenues from advertisers E-commerce firms cater both the sellers and the buyers. Advertisers/ Websites/ buyers Internet intermediaries Network operators End users

8. The impact of net neutrality on the ICT industry and the market economy : some indications and empirical results Economic literature (Economides and Tag (2007), Hermalin and Katz (2007)) shows that Net neutrality increases industry surplus Econometric estimations show evidence that Internet penetration rate is positively correlated with content producers revenues and Internet intermediaries revenues There exist a positive relationship between operators investments and content producers revenues (as an evidence of a cross-Layer synergy or dependence) There are cross-Layer synergies among network operators, Internet intermediaries and network operators and content producers Our data analysis suggests that increasing competition within ICT services markets had a positive impact on Internet intermediaries revenues Most of the Internet intermediaries are American firms while network neutrality regime is likely to benefit the American economy

9. Policy implications for Europe to foster ICT driven economic growth European policies have been primarily focused on promoting competition Network neutrality is likely to continue to benefit US market economy while value creation is spilling out of European weakening industry Asian companies are continuing to gain market shares in the first Layer ICT companies in the USA are performing higher R&D investments than European companies Policy in Europe should focus on inducing firms to invest in ICT capital In Europe, major investments are likely to be realized by network operators Investments in fibber deployment will have positive effects on GDP growth Our estimation show that investment ranging between 20 and 30 billions Euros would lead to a rise of 0.2 point of GDP per year during a period of 5-10 years

10. Thank you! Contact : aarlandis@coe-rexecode.fr sciriani@coe-rexecode.fraarlandis@coe-rexecode.fr sciriani@coe-rexecode.fr