Down to the wire

Marta Szczerba examines the UK's internet economy

Marta Szczerba examines the UK's internet economy.

To misquote Napoleon, the British have become a "nation of digital shopkeepers". The internet is ubiquitous in our lives - we communicate through Facebook, shop at asos.com and watch TV through iPlayer. 70 per cent of those with broadband confess that they couldn't live without it (Ofcom). But few realise that the UK's internet economy is now the fifth largest contributor to gross domestic product (GDP) - pumping in £100 million last year. This number is driven primarily by small to medium enterprises (SMEs) selling their products online.

Magnificent 7.2

According to a report commissioned by Google and written by The Boston Consulting Group, in 2009 the internet economy contributed more to the UK's GDP - £100 million or 7.2 per cent of the total figure - than the health, construction or education industries. The majority of this contribution comes from website purchases and charges by internet service providers. The rest comes from government spending and private investment in internet-related technology. Surprisingly, the UK is a net exporter where e-commerce is concerned, which certainly isn't the case with offline trade.

But the significance of the internet to the UK economy is even greater than the GDP percentage suggests. It doesn't include business-to-business e-commerce, such as payment providers (such as Paypal), domain-hosting firms or companies that speed up content delivery. The internet also contributes to the UK's economy through online advertising, which totalled £3.5 billion in 2009 and enabled many offline companies to sell more of their products. Furthermore, consumers benefit from researching products online and buying them offline (which is especially the case in the retail and travel sectors) and by consuming free online content, from newspapers to movies.

The internet has helped British SMEs flourish - indeed, many admit that they wouldn't be able to do their business without it. Thanks to the web, many companies have expanded geographically, without buying up bricks and mortar or creating a network of distributors (who often take a large cut of profits). For example, tartan company Scotweb sells 17,500 types of tartan (far more than any shop could stock) to a large base of customers, 80 per cent of whom are overseas. The business brings together craftsmen creating traditional Scottish artifacts, keeping an industry financially viable that might otherwise have disappeared.

Preparing for growth

SMEs don't only use the internet to take orders. Many report that using the internet has meant recruiting staff is easier, payment systems have been simplified, interaction with customers has increased and their marketing is more effective. Cheap online advertising has transformed many businesses - for example it has enabled Wiggly Wigglers, a company that sells composting worms, to grow from a family firm to an enterprise with an annual £2.5 million turnover.

The UK leads the OECD countries in online spending per capita, but internet penetration across the nation will need to be improved if the UK's internet economy is to grow effectively. One in five UK adults doesn't use the Internet, and so misses out on its benefits. The government has set a goal of universal access by 2015, appointing Martha Lane Fox (founder of lastminute.com) to spearhead efforts to get the "digitally excluded" online. However, as Lane Fox herself admits, doing so will be difficult due to spending cuts - the government expenditure now devoted to this aim is meagre. The UK also has comparatively slow broadband speeds - when 23 OECD nations were ranked, it finished near the bottom at 17. Only 15 per cent of UK subscribers have connection speeds above 5MB per second, compared with 65 per cent in South Korea. In order to improve the situation, the government recently announced that it would use £530m of BBC licence fee funds to roll out super-fast broadband to rural areas.

By 2015, internet business could represent as much as 13 per cent of the UK's economy. However, whether it does will depend on a multitude of factors. The first consideration is whether the UK will improve the quality of its broadband and get more people online. The growth of the internet economy will also depend on technological development; it will become more prominent once consumers can buy goods from vending machines or pay taxi fares with their smartphones. But customer confidence in online safety and privacy will need to be strengthened. As the internet becomes ever more omnipresent in our lives, serious failings in security systems could alter online consumers' current willingness to spend.

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