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INFORMATION MARKET OBSERVATORY


STRENGTHS AND WEAKNESSES OF ELECTRONIC INFORMATION SERVICES IN THE EUROPEAN UNION


Luxembourg, December 1993
IMO Working Paper 93/6 Final


Table of Contents

Tables
Table 1: Electronic Information Service Revenues, billion ECU
Table 2: Strengths and Weaknesses of the EU Electronic Information Services Sector
Table 3: Strengths and Weaknesses of US Electronic Information Services
Table 4: Strengths and Weaknesses of Japanese Electronic Information Services
Table 5: Multimedia Industries; Strengths(a) and Weaknesses by region, 1992.

STRENGTHS AND WEAKNESSES OF ELECTRONIC INFORMATION SERVICES IN THE EUROPEAN UNION

This Working Paper provides an overview of the findings of a study that was undertaken in the second half of 1993 by the Policy Studies Institute on behalf of the Information Market Observatory. The study is based on desk and field research of the EU market and of the US and Japan. Interviews were undertaken in the EU with some 40 key informants, which included market actors, public policy makers and industry commentators. Interviews were also conducted in the US and Japan.


The views expressed in this report are those of the IMO secretariat and do not engage the Commission of the European Communities

1. Introduction

The Information Market Observatory (IMO) has undertaken a study on the competitiveness of electronic information services in the European Union, concentrating on existing strengths and weaknesses.

The study addressed a number of key questions. These were:

The scope of the survey covered market indicators, industrial performance and business strategy, both of small and medium-sized enterprises (SMEs) and large industrial conglomerates; infrastructure analysis (with particular emphasis on telecommunications); and public policy at both the national and European Commission level. In addition, the study invited recommendations for future actions. The focus was mainly on that component of the market which provides services to "professional" users. The survey did not cover the EFTA states, nor the countries of central and eastern Europe.



2. Market size and trends

In terms of total population, the EU with a current population of about 344 million has a relative advantage in terms of market size compared with the US (252 million) and Japan (124 million). In reality the EU market is currently a series of unevenly integrated national markets, and is at a competitive disadvantage to the US and Japan, when sheer market size is taken into account.

US providers of electronic information services currently derive an estimated 30 per cent of their revenues from international sources, mainly from text and bibliographic services, a market sector in which the EU is highly dependent on US sources. The US information services industry nonetheless needs to maintain a strong presence in the EU and Japan if it is to take advantage of the emerging opportunities in these markets.

Table 1 gives an overview of the size of the electronic information services industry, in the EU, US and Japan, in revenue terms. Revenues derived from US information services have increased significantly since 1988, whereas within the EU revenues have not been growing at the same rate, which accounts for the current sizeable revenue gap between them.

Table 1: Electronic Information Service Revenues, billion ECU

          1988     1989     1990     1991     1992  

EU         2.5      2.8      3.1      3.3      3.6  
USA        5.0      6.0      6.9      8.2      9.6  
Japan      0.7      1.0      1.2      1.3      1.3  
Source: European Commission Information Market Observatory, 1993 In 1992, EU-based hosts and information providers generated worldwide sales to an estimated value of 3,6 BECU, an increase of 7 per cent over 1991. Sales of real-time services grew by an estimated 6 per cent, while online retrospective services appear to have grown much more slowly. In contrast, growth rates of CD-ROM production have been very high.

The US turnover for electronic information services is over two and a half the size of the EU's. The US has almost twice as many database producers as the EU (1,111 in the US in 1991 relative to 651 in the EU) and almost twice as many gateway services (461 to 252). There has been some slow-down in the rate of growth of the industry in the US in the early 1990s. This is certainly in part related to the recession. It may also reflect a maturing of the domestic market.

The EU market is almost three times the size of the Japanese market (1992 figures). However, in proportion to Japan's population or GDP they are roughly equivalent. Until 1991 the Japanese market had been exhibiting faster growth, which partly reflected its earlier stage of development. In the four year period 1988-1991, the Japanese market increased its relative size significantly. However, the market growth for database services in 1991/92 was adversely affected by the unstable conditions of the financial industry, and by the recession in other activity sectors. According to MITI, the turnover of database services decreased from 1,315 billion ECU in 1991 to 1,303 billion ECU in 1992. 76 per cent of these revenues came from on line information services.

More detailed information on market size and trends is provided in the IMO's 1992 Annual Report, which is available free of charge on request from: the IMO secretariat, Commission of the European Communities, DG XIII/E1, B4/020, Jean Monnet Building, L-2920, Luxembourg. Tel. 4301-33721, Fax. 4301-33190.



3. Electronic Information Services in the European Union

Competitiveness can be assessed at various levels - product, firm, industry -and using various indicators. At the industry level, indicators of competitiveness include measures of domestic and global market share, and on this basis the US is substantially more competitive than the EU in the electronic information services sector. At the level of the firm, market share is also an appropriate measure, as is profitability. These two factors will depend on the efficiency of the firm, the characteristics of its products and the extent of its market power.

The market for local, niche services in the EU remains strong and has considerable potential for development. The market fragmentation, due to the diversity of culture, language and institutional frameworks, is both a weakness and a strength. It is a weakness because it prevents a critical level of mass demand being formed which would enable firms to benefit from economies of scale in production and distribution. The fragmentation also hampers the creation of a truly common market for EU information services. It is a strength because it provides a strong basis for continuing niche markets for firms - there is clearly significant demand across all sectors for local services in the national language.

To the extent that language differences inhibit scale economies but offer some potential advantages in terms of niche markets and/or entry into new markets, there has been a tendency for EU companies to form strategic alliances with firms in other countries, including US players. There has also been a spate of acquisition activity, an important recent example being the acquisition of Data-Star, one of Western Europe's leading distributors of on-line information services in the areas of business and biomedicine, by the US owned Knight Ridder. Knight-Ridder is the owner of DIALOG Information Services against whom Data-Star had been struggling to compete and retain its market share. The acquisition doubled Knight-Ridder's presence in the European market.

Merger and acquisition activity is a significant force in the European information market as industry actors seek to integrate information production and distribution activities. The number of vendors active in the European market is gradually declining and is predicted to fall from around 7,000 firms in 1991 to no more than 5,500 by 1995.

Concerns that such activity leads to increasing domination by US providers can be countered by arguments that this can actually improve the level of service offered to users and thereby improve the overall efficiency (and competitiveness) of European enterprises. US partnership in R&D activities is also a real advantage to many European hosts, for whom there would otherwise be insufficient capital available. Collaboration seems to work particularly well for small and medium sized enterprises as it gives them real distribution power. There is little evidence to show that a loss of ownership by EU players inevitably leads to a loss of presence in the marketplace. Clearly, even where an information provider is owned by a global player, control of local distribution and personnel needs to be carried out at the local level. For example, one of the biggest world suppliers of corporate information, of US parentage, derives thirty per cent of its total revenue from Europe and employs 3,500 people within the European Union.

From the supply side, the EU electronic information service sector is characterised by a small number of large firms and many smaller firms. In general, European companies are smaller, less vertically integrated and more nationally orientated than their US counterparts. EU information providers are nevertheless strong in certain sectors, such as chemicals, pharmaceutical and financial services.

Management, innovation and flexibility are key strategic resources for small and medium sized enterprises (SMEs) and thus the nature and quality of the information and data used can make an important contribution to their competitiveness. SMEs are less likely to have in-house R&D departments or information centres. This means that they are potentially more dependent on external information services than their larger competitors. The quality, density and complementarity of the various sources of information are paramount. In some Member States, particularly France and Spain, there is growing support for the increased use of intermediaries, for example information brokers, to overcome the difficulties faced by the SMEs. It is believed that such intermediaries can help to reduce the costs of information and at the same time try to ensure its reliability.



3.1 Main strengths and weaknesses as identified by interview respondents

Several key factors which were perceived to improve the competitiveness of EU electronic information service providers, were identified by the key industry informants. These included quality and reliability, reputation/brand image, product range, price, product differentiation, user friendliness, geographical/market spread, marketing and after-sales support, and exclusive distribution rights.

The relative importance of these factors depends upon the product, the company and the market in question, but it was clear from the interviews that if price and quality had to be ranked, quality would come first.

The interview respondents identified several perceived strengths and weaknesses of EU players in the global market place for professional information services. These are set out in Table 2 below:

Table 2: Strengths and Weaknesses of the EU Electronic Information Services Sector

Strengths

Weaknesses _________________________________________________________________ __________



4. Electronic Information Services in the US

The US electronic information industry is the largest in the world. It has developed over a longer period and benefited from the advanced technological level of the US. Its large scale domestic market has been a competitive strength in the past, but as it may have tended to lead to some neglect of the specific needs and demands of local markets overseas, it could ultimately prove to be a weakness. The strength, in terms of the innovative role traditionally played by the market can also be potential weakness when private sector/government cooperation is important. This could become increasingly relevant as computer and telecommunication technologies converge, particularly with regard to the proposed development of a US information "superhighway", or National Information Infrastructure (NII). Clearly, the European Union will also need to coordinate activity across Member States, which might turn out to be more difficult.

In the US, discussion of a NII raises major possibilities for the development of a new information industry, or even a new 'information age', and also raises a number of major questions as to the form that this new information industry and infrastructure may take. The issues are of central importance, not only to the industry participants themselves, who see the potential for a new set of markets possibly worth billions of dollars, but to the development and organisation of the rest of the economy and to the development and organisation of society. These are issues that the EU and Japan will also have to confront.

Table 3 below sets out the key current strengths and weaknesses of US electronic information services, as perceived by interview respondents.

Table 3: Strengths and Weaknesses of US Electronic Information Services

Strengths

Weaknesses



5. Electronic Information Services in Japan

The Japanese electronic information services sector has grown rapidly throughout the 1980s and has strong further potential, both at home and overseas. Language remains the greatest issue in the development of the sector and it is expected that the focus will remain on the domestic market in the next period. With a population of over 120 million there is enough scope to realise economies of scale for database production and distribution. Furthermore, whilst language may have acted as a barrier for further development of the sector, it has also prevented foreign firms entering the domestic market and has thus provided Japanese companies with a breathing space in which to get established. From the user perspective, the Japanese situation may be comparable with western Europe, but behind that of the US. From the supply-side, the industry is still developing, reflected in the general lack of profitability in this sector. Its strongest potential for international sales may lie in the first instance in the South-East Asian market. Table 4 summarises the main strengths and weaknesses of Japanese electronic information services.

Table 4: Strengths and Weaknesses of Japanese Electronic Information Services

Strengths

Weaknesses

6. Future scenarios

The main emphasis of future development is likely to be the continuing convergence of the media, computer, telecommunications and consumer electronics into one global information industry. President Delors has called for the creation of a European information infrastructure - the "Eurogrid", a 20-year infrastructure project for broadband cabling to businesses and homes, to boost European information providers and hardware/software producers, and to develop a massive information network market and infrastructure. This would serve as the artery of the EU economy and so stimulate the information industry and give a powerful impetus to the development of new needs. Much of the joint venture and acquisition activity discussed in section three (above) has reflected this trend and has tended to cross traditional sector and media lines as firms have sought to position themselves to take advantage of the opportunities presented to them by multimedia technologies. In the US, media conglomerates such as Time Warner have plans to invest heavily in fibre optic cables, in addition to telephone companies like AT&T, which will facilitate the global transmission of data, voice and video into consumer's homes.

Such recent collaborations, as between Bell Atlantic / TCI and NYNEX / VIACOM, indicate the scope for synergy between the telephone and cable TV networks, as well as the growing concern for content control. Microsoft, via its stake in CONTINUUM, is also increasing its level of content control, by acquiring the rights to musea collections.

6.1 Scenarios

Different speculative scenarios can be concluded for the development of information networks in the European Union over the next twenty years:

High investment scenario:

activity: large scale private and public investment in information superhighways as part of the upgrading and extension of Trans-European networks for telecommunications, transport, energy links etc. -for example the proposal to develop a common information space.

benefits: claimed to be advantageous for market stimulation, job creation, strengthening of EU capacity in strategic hardware and software technologies, modernisation of industrial sectors, linkage of less favoured regions to EU core industrial areas; completion of a `European Nervous System' linking public agencies in the EU and facilitating policy coordination; integrated and strategic partnership maximising resources from private and public sectors; ability of EU to match US and Japanese efforts and avoid further competitive disadvantage in EIS and spin-off benefits for the rest of the economy.

problems: massive cost of investment, especially given public sector financial constraints across EU; need for long range commitment of resources by governments and private sector partners over two decades - highly problematic given the electoral and business cycles and the diversity of pressures from other policy areas (EMU, migration, environment, security); problem of putting all eggs in one technological basket - for example, fibre optics - when a more modest approach might be more effective, for example, greater exploitation of data compression techniques to increase capacity of copper cable systems.

Low investment scenario:

activity: fragmented infrastructural development, with private sector operators in the lead, concentrating on cabling and software investment that will reap maximum commercial returns over the short and medium term; low level of public investment and strategic input, and avoidance of active policy measures to stimulate demand and facilitate advanced technology investment.

benefits: incremental infrastructural improvement at much lower cost than the common European space scenario, new market opportunities for software and hardware producers, improved telecommunications links for major population centres and for key business and political centres.

problems: tendency for increasing the gap between 'information-rich' and `information-poor' in terms of regional and sectoral imbalances; rural areas, peripheral urban areas and small and medium sized enterprises are likely to be disadvantaged as modernisation focuses on growth regions and sectors and on major businesses and capital cities; lack of strategic dimension to telecommunications development and lack of integration with other policy goals and initiatives; EU likely to fall significantly behind US and Japan.



6.2 Key technologies

From the current perspective, the key technologies for further development of information usage are the following:

Interactive Multimedia

Data Compression Network software User-friendly interfaces Integrated telecomms, TV, video and computing equipment Fibre optics

6.3 Interactive multimedia

One of the future key technology/product as stated above will be interactive multimedia.

Table 5 (see below) offers an assessment of the strengths and weaknesses of the EU, USA and Japan (the 'Triad') in terms of the elements needed to develop successful interactive multimedia (IMM) applications. Interactive multimedia (IMM) products offer the possibility of combining text, sound, and still and moving images in digitised form to present information in new and potentially stimulating ways. The enormous storage capacity of optical discs, amplified by advances in compression performance, makes the technology an ideal carrier for multimedia products.

The table was compiled by members of the European Commission's Inter-Service Group of Analysis of Industrial and Technological Strategies; it contains subjective ratings (on a scale 1-5) which represent the consensus view of the Group as to the relative strengths of each Triad member. While the European Union has undoubted strengths in information content, it is comparatively weak in two key areas which are needed to release the full potential of interactive multimedia products and services: computing and consumer electronics. Table 5: Multimedia Industries; Strengths(a) and Weaknesses by region, 1992.

                                 Europe     USA     Japan  ___________________________________________________________  

Computing                        X          XXXXX   XX  
Consumer electronics             XXX        XX      XXXXX  
Telecommunications               XXXX       XXXXX   XXXX  
TV, film, music                  XXXX       XXXXX   XX  
Publishing, information          XXX        XXXXX   ?  
Image companies                  XX         XXXX    XXXX  
Services                         XXXX       XXXXX   ?    


(a)Regions are rated according to their strength in multimedia-related aspects of their information industry   base. 
Source: The European Commission's Inter-Service Group of Analysis of Industrial and Technological Strategies,   
Brussels, 1992.  ___________________________________________________________  


7. Conclusions

Several strengths, opportunities and threats for EU electronic information services have been identified in this paper. The potential strengths include the following features: The opportunities for the EU are as follows: The main threat to the EU appears to be an overall tendency to focus only on EU markets, thereby disregarding the opportunities posed by globalisation and the development of new markets (for example, eastern Europe, Asian Pacific Rim, etc.)

The objectives for the EU should be as follows:

Throughout the interview series it was clear that there was no problem in identifying desirable outcomes but many of the policy prescriptions were very long-range. The main recommendations were:

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