How Big Can Europe’s Internet Companies Get?

It is not surprising that Paris-based Criteo, an ad tech company that prices and supplies personalized advertising in real time for its e-commerce clients, had an upsized IPO on NASDAQ in late October.Worldwide digital ad spending topped $100 billion in 2012, according to eMarketer.  And digital ad expenditures are projected to nearly double between 2012 and 2016, increasing to $163 billion from $87.3 billion. Digital ad spending is in fact growing faster than total media ad spending and will drive overall growth in ad spend. That is because as more people become Internet and mobile Internet users, marketers across the globe are expected to continue to increase their budgets for online and mobile advertising.

If the pundits are right, the effectiveness of those ads will depend largely on personalization and other types of effective targeting. It is little wonder then, that companies that understand how to operate in this new environment like France’s Criteo, Germany’s Adtelligence, the UK’s Unruly Media, and Israel’s Outbrain, are generating lots of excitement.

These ad tech companies plus others including Buzzing, Viewster, Rank Above, Perform Group and Populis, will all present at NOAH Conference, an annual event focused on late-stage Internet companies; this year it is expected to attract some 2,000 attendees.

The theme of the 2013 conference is, “How big can Europe’s Internet companies get?” In online verticals such as advertising, travel, commerce and gaming it appears that even the largest of Europe’s Internet companies have not even started to realize their potential. With significant growth possibilities still ahead they could well reach new heights.

The advertising market is a prime example. Worldwide digital advertising spending levels — including online and mobile advertising spending — represented 21.7% of the total spent on ads in all media this year and is set to account for more than one-quarter of all ad spending. That means more than three quarters of the global advertising market is still up for grabs.

Online leisure and unmanaged business travel in Europe was $246 billion in 2012 but only about 42% of the business is currently conducted online, according to a forecast in the European Online Travel Overview, Eight Edition, by PhoCusWright, a research company specializing in global travel.

In commerce, too, the biggest opportunities are yet to come. In 2012 more Europeans consumers bought videos/DVDs, music, event tickets and computer software online than offline. And Europe will be the largest eBook market in the world by 2017, with revenues of $19 billion, according to Forrester Research. It predicts online retail sales in Europe will reach €191 billion by 2017, up from €112 billion in 2012, reflecting an 11% compound annual growth rate over the next five years.

And, despite impressive growth in countries such as Germany, Britain and France, online commerce still only represent less than 14% percent of overall commerce in these key European markets, so the largest part of the market is still offline. The same is true for the U.S. market (see the chart).

Online gaming is no exception. Even though a report by Digi-Capital, an investment bank that specializes in mobile and games, predicts that mobile and online games could grow the total global video games market size to $83 billion, the sector will still only represent 55% of the total market’s revenue.

“Looking at all these numbers, one message is clear, Internet is the largest parallel economy and there can only be one question: Are you with or are you against us? Co-opetition for bricks and mortar has to be the answer for survival for the incumbent businesses," says Marco Rodzynek, a partner at Noah Advisors, the corporate finance firm behind NOAH.

For start-ups the opportunity is big, so the ambitions for companies need to be big as well. “We at NOAH look at companies addressing sizeable market opportunities with quality products and bullet-proofed execution plans. Ninety percent of the companies we see are operating in too small niches or have product features which do not justify a company,” says Rodzynek.

While the projected growth and the opportunity in digital advertising is huge, Rodzynek warns that success is not guaranteed. “Criteo has it all: market leadership, a global business, growth, a large underlying market size, a super management team and even profits, which should convince the most critical U.S. investor,” he says. “However, to get to the next level, the Google type of positioning, Criteo needs to get either exposure to users or diversify its business to other online marketing tools. Just to be in the middle between advertisers and publishers is long term not attractive as we have seen with the affiliate marketing players, like TradeDoubler.”

Keeping up with the pace of change is not easy. Unruly Media COO Sarah point points to a recent Adobe study in which 76% of marketers said their work has changed more in two years than in the past 50. (See the story about Unruly Media on page 6.) Part of what is driving the change in advertising is the fact that 1.4 billion people, or one in five people around the world, went online via their mobile devices last year. Mobile usage has helped drive Internet adoption in Asia-Pacific, Latin America, the Middle East and Africa. So, marketers have begun to allocate a larger portion of their advertising budgets to the mobile ad market in recent years.

And how. Worldwide mobile ad spending is forecast to increase to $36.9 billion by 2016, up from $13.58 billion in 2013, according to eMarketer. The Asia-Pacific region previously had the largest mobile ad expenditures worldwide, primarily due to advanced mobile advertising markets in Japan and South Korea. However, consumers are rapidly adopting smartphones and tablets in the U.S. and marketers there are taking advantage of growing mobile ad opportunities, causing North America to surpass Asia-Pacific last year with $3.9 billion in mobile ad spending. And in 2015 an expected surge in mobile ad investments in Western Europe will push Asia-Pacific to third place.

eMarketer is predicting that rapid mobile Internet adoption combined with the continued development of mobile ad networks and greater choice of mobile ad formats will significantly enhance how marketers use mobile to engage consumers, especially in North America and Western Europe. Facebook’s and Twitter’s mobile advertising streams, as well as mobile’s potential for audience targeting, will also attract marketers.

On-line Travel

In online travel, “mobile is actually growing the online pie — as it offers a novel platform to those who normally wouldn’t book online,” says Luke Bujarski, PhoCusWright’s director of research.

Online travel companies in Europe are vying for a bigger share of the digital pie. Amsterdam-based Booking.com, which is now owned by the U.S.’s Priceline, covers over 350,000 properties, features 24 million reviews and 10 million photos on its site, and offers 24/7 customer service in over 40 languages' it's a dominate force in the market. European players in niche markets, like HouseTrip, which is presenting at NOAH, are also building booming European Internet businesses. And the number of online travel start-ups eager to grab their share of domestic markets is mushrooming. In Russia, for example, Ozon’s travel site competes for business with a whole crop of new entrants, including Ostrovok, OneTwoTrip, Travelmenu.ru, Traveltipz.ru, anywayanyday, tutu.ru, Travelatte and Oktogo.

But online adoption of travel varies widely across European markets, so success is not equally distributed. The UK, Scandinavia and France have a higher proportion of people who book online versus through traditional channels, says Bujarski. Spain and Italy are still somewhat behind when it comes to online travel booking adoption as “the Internet connectivity is not quite there and the overall channels for e-commerce are less developed,” he says. And, high rates of unemployment and depressed local economies are making things worse in these markets.

Germany is a special case. “There are very high rates of travel and the country has a high GDP but the amount of travel booked online is relatively low compared to the UK,” says Bujarski. “There are a few reasons for that: Germans tend to buy packaged travel, they stick to tradition and book their vacation packages with traditional travel agencies.”

Thomas Cook, a traditional globally-focused travel agency with an online presence, has stated that it hopes to achieve 50% web penetration by 2015, says Bujarski. What’s more, the barriers to entry for new travel brands to enter this market are high since established players like Booking.com and Expedia have big marketing budgets.

It is tough to get people to come to new sites, especially when competing with big, established brands. Airlines have also gained increasing share of online bookings as they bombard the market with loyalty programs and new web channels to bring customers directly to their websites, Bujarksi says.

Hotels potentially hold the biggest promise for growth for new entrants. While established online travel agencies brands currently dominate this online segment, PhoCusWright says it believes metasearch and service updates made available directly by hoteliers could influence market dynamics and the online split between direct and intermediate bookings.

Expedia earlier this year acquired a 61.6% equity stake in Trivago, a German metasearch company that focuses on hotels, for approximately €434 million in cash. Trivago compares more than 600,000 hotels across 140 booking sites in more than 30 countries and 23 languages. Expedia is hoping the acquisition will allow it to expand into the European online travel market, taking business away from Priceline/Booking.com, which uses Kayak, a U.S.-based travel metasearch engine. Kayak has changed the way people search for and book flights and is now expanding to offer complementary services directly, like hotel and adventure bookings. These developments could cut into new entrants' online traffic.

At the same time, content is becoming a big factor, says Bujarksi. When people go to TripAdvisor’s site they get hotel reviews, which is seen as a value add for the customer, so that, too, could hurt upstarts that don’t have the means to offer similar services.

The overall European online travel market is growing an average of 10% a year, says Bujarski. “There is a lot of remaining capacity to move online. But how it is all going to go, nobody really knows for certain. Tour operators will continue to have successes with bricks and mortar stores, particularly in smaller markets, for some time to come.”

As with advertising and online travel, mobile is changing e-commerce in Europe, which is home to successful e-commerce giants such as Asos and Zalando. Europeans have become expert at adapting e-commerce models to individual markets and building out to other markets in rapid succession; and some of the biggest opportunities for e-commerce companies are in emerging countries.

That said, since only about 14% of global shopping is done online so far, e-commerce has by no means reached its peak in even the most developed markets. Start-ups still haven't figured out what to do with 75% of the market. The way to capture those purchases will be through mobile, predict venture capitalists Informilo interviewed. Today nearly half of local shopping starts on a mobile browser and approximately one in three mobile transactions are actually done in a store.

Forrester Research data shows that more than half of European online buyers have already used a tablet or mobile phone in the past three months to support a purchase in some way. Its mobile commerce forecast for 2012 to 2017 predicts that mobile ecommerce revenues across Europe will rise from €1.7 billion in 2011 to €19.2 billion in 2017, reaching 6.9% of sales and changing the face of retail.

Mobile payment services are being merged with gift cards and loyalty and rewards programs, potentially transforming shopping more in the next few years than the Internet changed retail so far because it will impact everything people buy.

So what will the future of shopping look like? Online-only stores such as Warby Parker and Fab will open bricks and mortar outlets. No more worrying about redeeming coupons or loyalty points — anything you have earned in the online or offline world will be digitally recorded and automatically deducted at time of purchase, no matter where you buy. Since payments are mobile they will no longer be tied to old-fashioned cash registers, freeing sales assistants inside stores to help customers check out and pay from the aisle or the changing room. Window shopping will take on a whole new meaning: city dwellers out for a stroll will scan items on mannequins with their mobile devices and click to buy and ship, even if the high street store is closed for the day.

Relevant location-based shopping experiences will become the norm, meaning customers will be able to skip waiting in line, by ordering remotely and picking up their food or favorite drink in-store.

In this new omni-channel world, merchandise and promotions will not only be consistent across all retail channels, adapting to consumers who want to use different channels simultaneously, the offers will be personalized according to a specific consumer’s purchase patterns, social network affinities, website visits, loyalty programs, and other mined data.

Creating an omni-channel shopping experience for consumers presents opportunities for established companies like PayPal and Google as well as for start-ups.

But when it comes to global e-commerce — whether it is selling physical goods or providing new types of mobile payments — it is all about execution, adaptation to local markets and who has the deepest pockets.

The key to the success of Rocket Internet, a Berlin-based incubator which scouts for successful business models and then clones them in new markets, has been good execution and deep pockets coupled with a very focused local approach. Rocket is currently operating over 50 such companies in Europe, Asia and South America.

The market traction enjoyed by Zalando, a global hybrid Zappos and Asos clone that has a valuation of €3.6 billion and is now active in 14 European markets, can be partly attributed to heavy TV advertising. (The company started life as a Rocket Internet company.) Zalando, which is expected to go public, built its brand in its home market through a deal with Germany’s ProSieben-Sat.1, a mass media company that operates commercial television and premium online platforms and generates some €1.5 billion in TV ad revenues per year.

In a maturing TV ad market, ProSiebenSat.1 was actively searching for new growth segments to leverage its excess ad inventory and decided to take an innovative approach by selling prime time ad spots to start-ups at a discounted rate plus revenue share and equity stakes.

Zalando is among the start-ups that originally took the media company up on its offer. Now the German TV giant is running a contest at NOAH for the second year in a row, giving away millions of euros worth of ad spots to other start-ups. It now operates a division called Seven Ventures that takes majority stakes in start-ups targeting the German market and tries to help make them market leaders through TV advertising. (See the story about this year’s Seven Ventures contest on pages 12 and 13.)

While Rocket Internet companies make up a healthy percentage of e-commerce plays from Europe it would be wrong to paint the Continent as the land of copycats. Innovative European companies like Asos and Net-a-Porter helped pioneer fashion e-commerce and became global champions. France’s vente-privee.com, which now generates over $1.5 billion in revenues, gave birth to the flash sales model which has since been copied around the globe.

Europe is also creating category leaders in gaming. One of the most successful, SuperCell, a three-year-old company which just sold 51% of its stakes for $1.5 billion, attributes its success to a “tablet-first" approach to its popular games, Clash of Clans and Hay Day.

The growth of mobile gaming is upending the business model based on the sale of games — and the devices used to play them. The new approach is to give away games for smartphones or tablets and then to earn revenue from in-game purchases, advertising and other add-ons. (See the story about gaming in Europe on pages 5 and 6.)

“Mobile has fundamentally disrupted the games market across sectors globally,” Digi-Capital Founder Tim Merel says in a report. “For games, the transition to free-to-play and communal gameplay is changing sector dynamics, delivering up to 10x-20x revenue uplifts for market leaders.”

He says he believes mobile Internet could create up to $11 trillion in value globally by 2025, across all industries, not just games. “Mobile Internet-connected devices, mobile broadband subscriptions, mobile data usage and mobile apps growth are driving disruption across all tech related markets,” he says. That is the challenge, for Europe’s Internet companies, and the opportunity.

 

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