Global internet market capitalisation leaders: where is the EU?

Domination of Asian and US companies – market cap

With 11 US companies and 9 Chinese companies (in italics in Table I), from an EU viewpoint, the most striking element is the absence of any EU companies within these top 20 in 2018. If one compares this 2018 ranking with a 2012 ranking (Table II),[6] the picture remains the same (with obviously some companies going down and others going up) with only two exceptions (in bold in Table II): Experian (Ireland), ranking 16 in 2012, and the Otto Group (Germany), ranking 19. The two companies reached respectively a market cap of $16 and $10bn in 2012. Experian is a global information services company that provides credit services, analytical tools, and marketing services (www.experianplc.com/[7]). The Otto group is a globally operating retail and services group and one of the biggest e-commerce companies, mainly based in Germany and France but operating in more than 30 countries (www.ottogroup.com/en/die-otto-group/Facts-Figures.php)[8]. SAP (www.sap.com/index.html), a leading technology company that develops enterprise application software, although with an over US$136.63bn cap (2018: https://ycharts.com/companies/SAP and €23.76bn of revenues as of 2017[9], is not included in any of these rankings.

South African, e-commerce company Naspers is also missing from both 2018 and 2012 rankings, although the company reached a €64bn market cap as of 2014, and $104.19bn in 2018 (https://ycharts.com/companies/NPSNY/market_cap). Ant Financial, an online payment services provider, is a subsidiary of Alibaba, but was listed separately in 2017[10]. In spite of these minor differences the global landscape remains the same: a global market dominated by Asian (7 companies) and US companies (12). Within Asia, one can just notice the domination of China. Japanese companies (Softbank, Yahoo! Japan and Rakuten) and South Korean companies (NHN) disappeared from the Top 20.

Domination of Asian and US companies – revenues

Of course, as noted, market cap is far from being a perfect indicator. It reveals how the stock markets are anticipating the future of a company rather than properly assessing their economic strength. For instance, if one takes a look at the rankings, according to one of the simplest indicators, revenues (Table III), one can notice some differences, even if the landscape does not change drastically. Indeed, most of the companies are already present in the other rankings (neither Apple, Microsoft, nor SAP are included in Table III). Asian and US companies still dominate. One finds ten US companies, seven Asian and only two European companies, Odigeo and Zalando,[11] ranked 16th and 19^th, respectively. eDreams ODIGEO[12] (founded in 2000) is one of the world’s largest online travel companies and one of the largest European e-commerce businesses, operating under four online travel agency brands: eDreams, GO Voyages, Opodo, and Travellink. Zalando[13] (founded in, 2008) is one of Europe's leading online fashion platforms morphing into a multi-service platform. In contrast, the market cap of ODIGEO is low, US$0.7bn (under the “unicorn” threshold of US$1bn), Zalando had a market cap of US$13.5bn. Coming next, one finds, ASOS.com[14] (UK), ranked 28th, with a US$8.56bn market cap and US$1.4bn of revenues.

Domination of Asian and US companies – funding and access to finance

As noted in the introduction, the market caps of the top 20 companies outstripped GDP in 2017. The market caps of these leading companies have been ballooning as stressed by Crunchbase. Although there is no need to assume any mechanical link between market caps and capital markets, it is interesting to check whether the evolution of VC funding, for instance, echoes the evolution of markets caps. The answer is clearly positive:

According to projected data from Crunchbase, global venture capital deal and dollar volume in Q1 2018 eclipsed previous highs from Q3 2017, setting fresh quarterly records for post-Dot Com startup investment (Rowley, 2018)[15].

Now, if one takes a look at the active lead investors (see Figure 1), again one finds the same domination of Asian and US VC companies. As stressed by Rowley (2018): “what makes the top here – and just below the threshold for making it to the chart – are mostly just the usual suspects”. And the usual suspects are Asian and US companies: ten US companies, five Asian companies (Tencent, Softbank, Alibaba, IDG and Shunwei), one European company (from Switzerland: Index Ventures) and one Brazilian company (Canary). Rowley adds that these companies can be split into two major groups: established venture funds like Sequoia Capital and New Enterprise Associates (NEA), and corporate venture investors like GV (formerly Google Ventures), Tencent Holdings, Alibaba Group, and SoftBank. Again, these corporate venture investors are the leading IT companies: a self-enforcing virtuous circle?

Globally, VC funding nearly tripled between 2013 and 2015. China now, second only to the US (US$72.3bn in 2015), accounts for three times more investment than all the countries of Europe put together, raising total funding of US$49bn in 2015 (EY, 2016). The Atomico/Slush, 2017 reports notes an increase of the total capital invested over the last few years and a record-breaking 2017. However, the same report acknowledges that: “European countries still lag others such as the US and Israel in terms of capital invested per capita” (Atomico/Slush, 2017, p. 58).

Initial public offerings (IPOs)[16] of Chinese companies are even taking place on the New York Stock Exchange (NYSE), not on any EU stock exchange, not even in the UK.

Large IT companies are large R&D investors

As market cap can be a dubious indicator, one may try to see whether the strength of these companies translates into a significant level of R&D expenditures. These high technology-oriented companies are indeed lead investors. Meeker (2018, p. 40) stresses that tech companies responsible for “a growing share of corporate R&D and capital spending”.

As noted by the Scoreboard (European Commission, JRC, 2016, p. 54), stressing the magnitude of investments in “Software and Computer Services”:

The R&D growth rate of the Software & Computer Services sector is mostly due to the R&D growth of US companies such as Alphabet (22.4 per cent) and Facebook (80.6 per cent) and Chinese companies such Baidu (46.2 per cent). The German company SAP (16.6 per cent) is the fourth contributor to the R&D growth of this sector.

However, as highlighted by the 2017 Scoreboard (European Commission, JRC, 2017, p. 5), “Software and IT hardware the EU shows persistent weakness in most indicators such as size and R&D/firm or sales/firm (in particular compared to the US). The EU/non-EU gap in these latter […] sectors has widened over the last ten years”; with the notable exception of SAP. This is also in line with the previous tables; Experian appears as 1337 in 2016.

GAFA(M) (Google, Apple, Facebook, Amazon and Microsoft) and BATJ (Baidu, Alibaba, Tencent, and JD.com) companies are indeed large investors in R&D as illustrated in Table IV. However, their R&D expenditures are quite uneven as only three firms (Google/Alphabet ranked 1, Microsoft ranked 5 and Apple ranked 11) are among the top twenty of R&D investors, and only two (Facebook, ranking 3, and Yahoo!, ranked 6) in terms of R&D intensity.

Table IV adds the ranks of the companies within the top R&D investing companies to the ones listed in Table II (for 2017 only). However, to make the comparison more consistent across the three different sources, Naspers, Microsoft and SAP have been added to the 2017 data. The market cap of Ant Financial has been added to the market cap of Alibaba. Experian, although appearing only in the 2012 figures, has been added to the table.

Xiaomi is not listed among the top investors in this ranking as the company, being private, does not disclose data. The same holds for Airbnb, Uber and probably Uber’s Chinese major competitor Didi Kuadi. Neither Alibaba nor Naspers show up in the scoreboard. Their consolidated results (annual reports) do not give any indication about R&D expenditures. Subsidiaries may be an imperfect proxy. Youku Tudou was acquired by Alibaba Group in 2015, and ranks 1247 in the scoreboard (with €61.3m in R&D expenditure). Naspers owns about a third of Tencent (ranked 117th for R&D). However, e-commerce companies appear to have a much lower R&D intensity, for instance, only 0.6 per cent for Amazon.

Discussion

The rather weak position of the EU is roughly in line with the analysis of a sample of the so-called “unicorns”,[17] based on the same indicator, market cap (Simon, 2016a, 2016b). Asia and the USA were riding in front of the EU, although Atomico is more positive about how EU companies are performing in that field (Atomico, 2015; Atomico/Slush, 2017)[18], stressing that “Great companies can come from anywhere”. Experts, quoted by the Atomico State of European Tech 2017 report, deem that diversity of EU cultures is an advantage.

In contrast, one parameter that could contribute to this output of EU firms is the size of the market. As stressed by GSMA Intelligence (2016, p. 31):

A key challenge for European developers and internet companies is the lack of scale in national markets compared to for example the US, or emerging markets in Asia such as China and India.

Forge et al. (2012) emphasised the same issue, from another angle, in their case study of Amazon: “The more advantageous business environment in the USA was a key factor for Amazon’s successful start-up and growth in its first few years”. Indeed, the business environment does vary from countries with a highly favourable environment for doing business and innovation (for instance, Denmark is ranked 3rd for the ease of doing business in the World Bank Doing Business 2018 rankings) to countries with a less supportive one. The EU’s Digital Single Market strategy has been designed to address this imbalance, but it may take some time to yield solid results. Even with a harmonised legal framework, the EU regulatory framework may be less flexible than the US or the Chinese one, as illustrated recently by the debate around the impact of the new General Data Protection Regulation (GDPR, 2018)[19].

Even if the amount of funds available in Europe has been increasing over the past decade, there are still major obstacles to the EU capital market integration, as stressed by Veron (2015): “Major obstacles to capital markets integration remain untouched, including divergent accounting enforcement regimes, fragmented market infrastructure, or incompatible frameworks for the taxation of financial investments”.

Another feature of the explanation has to do with the strong growth of these leading firms and among them, especially the Chinese ones, with double digit growth. For instance, Alibaba, Tencent, and JD.com have kept an average quarterly growth rate of over 40 per cent during the past 10 quarters, in which Tencent and Alibaba both saw a 55 per cent revenue growth in 2017 (China Tech Insights, 2017b). Baidu did not fare as well but, nevertheless, did experience double-digit growth. The impact of this growth is clearly revealed whenever these firms are launch an IPO: Alibaba was the largest in 2014 (raising US$22bn), and it is predicted that Xiaomi may raise US$10bn and reach a US$100bn market cap (Custer, 2018). Meituan-Dianping (ranked 19th in Table I) is reportedly planning to go public with an offering that could push its valuation from the current US$30bn to upwards of US$60bn (Dowling, 2018).

As a final note, one should recall the strong links between Asia and the USA, and the strengths of the Asian communities in the US in Silicon Valley, for example. The USA–Asia relationship has been taking a growing share in global networking (De Prato et al., 2013). Relationships between China and the USA have intensified over the past decade, although this may be affected by the policies of the Trump administration.