America’s Shrinking Presence on the Global Internet

WHITE PAPER

America’s Shrinking Presence
on the Global Internet
Opportunity - Strategy - Reality

by Eric J. Gerritsen, Global Internet Advisors, Palo Alto

www.globalinternetadvisors.com

I. 1998-2008: THE DE-AMERICANIZED INTERNET
Thirsty for American Kool-Aid:

In the last 10 years the Internet has radically de-Americanized with profound strategic
consequences for Internet CEOs, boards, VCs, investment bankers, government policy
makers, and the entire U.S. economy.

Over the next 10 years the most money, the largest audiences, and the biggest
opportunities for Internet growth will happen outside the United States.

This reality is poorly understood. As a result most American Internet CEOs are leaving big
money on the table, short-changing their investors, and limiting employee opportunity.

Without effective global strategies CEOs will never achieve maximum company scale,
full revenue potential, or the high valuations that reward category leaders.

On the bright side, American Internet CEOs who do rapidly grasp this permanent new
reality – and who develop dynamic strategies to engage with it – will create world-leading
firms, generate greater revenues and profits, and deliver superior returns to investors.

Tapping the revenue potential of these gigantic new global markets is the number one
driver of Internet company value for the next five years.

This remarkable situation only recently became true. When I first got involved in
the American Internet in 1998, fresh off eight years in Asia, the Internet was an
overwhelmingly American phenomenon.

IN 1998:

• Over 50% of the world’s Internet users were in the United States.
• Revenues were almost exclusively derived from American sources.
• All the leading companies – Yahoo, AOL, Lycos, Infoseek,CompuServe,
Altavista, Microsoft, Netscape – were American.
• Internet IPOs were all American.
• Key driver technologies – browsers, search engines, directories, e-commerce
platforms, advertising networks – were all American.

Outside the United States the 1998 version of the Internet exuded a particularly American
quality: young, brash, anarchical, risk-taking. Flashy entrepreneurs fueled this image.

In 1998 European and Asian companies were caught flat-footed. From Tokyo to London
media and telecom executives scrambled to partner and do deals with American Internet
firms in the hope that some of the fairy dust would rub off. A lot of people drank a lot of
American Kool-Aid.

Fast-forward to today and only 15% of the world’s 1.4 billion Internet users are American.1


2 © Copyright 2008 | Global Internet Advisors

Major signposts are being passed on this journey of Internet de-Americanization. This
year China moved ahead of the United States to become the country with the largest
number of Internet users – 235 million2 – forecast to grow to 375 million3 users by
2012. China added 90 million new users in 2007 alone.4 At 19%
penetration China has a lot of potential for further growth over the
next decade; at 71% penetration, America’s Internet population is
saturated.5

On the wireless Internet the non-U.S. numbers are just as striking:
in 2010 only 11% of the world’s 779 million wireless Internet users
will be American.6 Only 12% of Americans use their phones to
access the Internet, versus 78% of Japanese who do.7

Beyond China:

The rise of the Global Internet is not just a China story. India will be the next 100 million
user Internet country and could grow as high as 500 million users by 2012, according to
targets recently set by India’s Telecom Minister A. Raja.8

The Global Internet is even much more than a “Chindia” story. Vietnam’s Internet
population is predicted to increase threefold to 30 million by 2010;9 Russia and Brazil
both grew over 700% between 2000-2007;10 and Africa and the Middle East – both
largely absent in Internet 1.0 – grew by over 1000% in the last eight years.11

At the same time that America’s Web footprint is shrinking the American Internet is falling
behind in terms of technical sophistication. Broadband penetration in the U.S. has fallen
to the 25th position globally and is 15th among advanced OECD countries.12

Domains go global:

Another primary indicator of the
de-Americanization of the Internet AMERICA’S GLOBAL POSITION AT A GLANCE:
is the critical area of domain • Percentage of global Internet users that are American – 15 i
registrations. Of the 168 million • Year in which non-U.S. paid search market is bigger than the U.S. – 2009 ii
domain names registered globally • Percentage of global wireless Internet users that are American – 11 iii
• America’s share of estimated $500 billion global e-commerce market in 2008 – 34% iv
only 38% are owned in America.13 • America’s Internet population rank – #2 v
• Percentage of global domain names owned and operated in America – 38 vi
The fastest-growing domains • American search query volume as percentage of global total – 26 vii
• Percentage of Google’s Q2/08 revenues that came from non-U.S. sources – 52 viii
are non-.com domains, including • Rank, globally of U.S. broadband penetration – 25th ix
country-code top-level domains • Percentage of YouTube users that are in America – 25 x
like .de (Germany) and .cn (China),
and new top-level generic domains
like .eu (Europe) and .asia (pan-Asia).
China domains, for example, grew to 12.4 million registrations in 2008.14

Another domain-industry development that bodes for further Internet de-Americanization
is ICAAN’s plan to allow for local language extensions in Chinese, Arabic, etc.



This could lead to an explosion of non-Roman language activity as businesses make
their offerings truly local. The advantages are obvious. For example, if a Chinese vendor
wanted to sell cars to Chinese people in Beijing would he rather own “beijingcars.com”
or “ ”(“beijing.cars”)?

Against this backdrop of Internet de-Americanization many governments and non-U.S.
players feel that the Root File (the Internet basic “address book”) should be managed by
a neutral group like the United Nations or the International Telecommunications Union
and not the U.S. Department of Commerce.

What if China wanted to create its own Root File for the Chinese Web?

Search - New International Players:

Another key Internet sector that is rapidly de-Americanizing is search. Google has made
a spectacular sprint across the globe in recent years to be the search leader in most
countries, but it is far from clear that its strength is unassailable.

In China, Baidu leads with an impressive 60 percent market share;
Google sits in second with 25.9 percent.15 In Russia, Yandex is
the leader; in Korea Naver leads.16

Four out of the top 10 search engines used globally are now non-
U.S. players and Baidu is the third-largest search engine in the
world – ahead of Microsoft.17

In query volume – the number of searches done by users and a key industry metric – the
United States represents only 26% of global search activity.18

Social media goes global - quickly:

In the red-hot social networking sector only 21% of the global user base of 506 million is
American.19 The majority of Facebook users, the world’s largest social network, are not
American.20 Half the “Tweets” on Twitter come from non-American users.21 Friendster has
88% of its users in Asia22 and almost half of LinkedIn’s users come from outside the U.S..23

Internet CEOs have no choice but to adapt to these new international realities.

II. MONEY FOLLOWS USERS
U.S. ﬁnanciers missing the party?:

As Internet action grows overseas local ﬁnancial groups have stepped up with money
and international stock exchanges are offering serious alternatives to a NASDAQ offering
– the ultimate Web 1.0 status symbol.

Since Google’s spectacular 2004 IPO, the largest Internet IPO globally has been from



Hangzhou, China-based Alibaba, which raised a whopping $1.5 billion in its Nov., 2007 IPO.24

Notably, this money was raised on the Hong Kong Stock Exchange – not on the NYSE or
NASDAQ. One third of the 15 Chinese Internet IPOs since 2004 (that collectively raised
$5.1 billion) listed in China.25

In venture capital the size of non-U.S. Internet deals has also become impressive. In April,
2008 Japanese telecoms firm Softbank invested $430 million26 in Beijing-based Oak Pacific
Interactive, owner of leading Chinese social network Xiaonei, dwarfing the $240 million that
Microsoft invested in Facebook.

For American Internet VCs these trends should be particularly
distressing as they try to find and fund the next round of $100
million Internet companies.

This new value creation and exit cycle – where Chinese Internet
companies get funded by Chinese money; serve Chinese users;
exit on Chinese stock exchanges or get sold to other Chinese
companies – leaves no oxygen for American VCs, investment
bankers, and stock exchange operators.

With the rise of Asia on the Internet we can expect an increase in intra-Asian expansion
activity like Baidu launching its search engine in Japan and Softbank investing in social
network Xiaonei.

We will also likely see more activity from Asian and European Internet companies buying
U.S. operations, like Rakuten buying Linkshare, Daum buying Lycos, and Russia’s SUP
buying LiveJournal.

Direct Asian financial investments from Asia into U.S. Internet companies – like Hong
Kong’s Li Ka-Shing (one of Asia’s richest men) investing $60 million in Facebook27 – can
also be expected to happen more often.

These developments are a net positive for U.S. Internet entrepreneurs. Asia can be a
valuable source of development capital and foreign buyers could represent a new source of
exits for American Internet firms, particularly during this period of closed IPO markets.

International revenue outstrips U.S.:

As Internet audiences grow faster globally than in the United States advertising and
e-commerce revenues are following.

America’s share of global B2C e-commerce is expected to be only 34% of the roughly
$500 billion in revenues expected in 2008.28

In Q2 2008, for the first time, Google reported more (52%)29 revenue from outside the U.S.



than at home and Google is not alone: for the full financial year 2007 Yahoo got 32%30 of it
revenues from non-U.S. sources; eBay 51%;31 Amazon 45%;32 and Cisco 46%.33

For ad-supported firms in particular these figures can be expected
to grow substantially. Of the $106 billion to be spent on online
advertising by 2011 less than half ($45 billion) will be spent in the
United States.34 China leads the pack again on adspend growth
rates, growing by 50% this year.35

Beyond China the fastest growing regions for global online
adspend this year will be Central and Eastern Europe and the
Middle East and Africa with average annual growth rates of 42.1%
and 29.8% respectively.36

III. U.S. INTERNET EXPERIENCE ABROAD:
1998-2008 – a mixed bag:

The results of the last 10 years of international expansion by U.S. Internet companies
have been very mixed, with the singular exception of Google, and have rarely created
market leadership positions.

In China eBay has tried and failed to knock off Chinese rival Taobao; Yahoo has tried
and failed to overcome Chinese portals Sina and Sohu; and Google has tried and failed
to close the gap with local search champ Baidu.

Other notable examples in specific international Internet sectors where non-U.S.
companies lead include:

• Bebo, which leads both MySpace and Facebook in Europe.
• Huawei, which leads Cisco in infrastructure in China.
• Rakuten, which leads Amazon in online shopping in Japan.
• NTT, which leads everyone in Japan’s wireless Internet.
• Mixi.jp, which leads Facebook by a huge margin in Japan.
• Xiaowei and Zhanzuo, which beat MySpace and Facebook in China.

In the social network market Asia is the prize but Asia will be a tough nut to crack for
companies like MySpace with 61% of its users in the United States.37

In Japan MySpace is 1/10th the size of the leader Mixi.jp38 and as of June, 2008 Facebook
only had around half million users in Japan.39 Neither company has made much progress
in China. Local social media players Naver, Daum, and Cyworld dominate Korea.

Moving ahead in places like China, where foreign-ownership restriction laws prohibit
control, has been difficult for American firms. Yahoo and eBay have had to take minority
stakes in their China-equivalent sectors: Yahoo owns 39% of Alibaba; and eBay owns
49% of Tom Eachnet, a JV with Tom Online.


But giving up control is not necessarily a bad thing.

Yahoo Japan, controlled by Softbank of Japan, has been a notable international success.
It sits in the number one position in Japan with revenues of $1.8 billion in 2007 and a
public market capitalization of $19.7 billion.40

Lessons:

If the last 10 years of American Internet company international expansion has taught one
thing it is that global plans need to be baked in to overall strategy from the beginning.

Waiting two or three years to take control of international opportunities is a mistake.
Competitors watch everything happening in the American market and American firms that
wait will usually find that when they do go overseas their market position is occupied by
fast-moving, plugged-in local firms. Facebook’s experience in China is a good example.

Another common mistake has been to confuse strategy with localization. Language
localization is hugely important but is a second-tier consideration.

Strategy comes first, including an understanding of fundamental objectives; cultural fit;
user experience needs; partner and alliance possibilities; local economics; competitive
grid; M&A opportunities; local pricing; executive and technical talent availability; and
government regulatory environments.

Perhaps the more fundamental mistake has been to see international Internet traffic as
less valuable than U.S. traffic and somehow deserving less attention and investment.

No doubt monetizing U.S. traffic has been easier, and on a per-capita basis U.S. eyeballs
are generally more valuable, but the simple math says that international traffic in toto is
worth more.

IV. CONSEQUENCES AND THE NEXT 10 YEARS
Who should care?:

American Internet CEOs & board members should have a deep interest in understanding
how the permanent de-Americanization of the Internet affects their companies.

Can a CEO get away with targeting only the American (15%) portion of the total available
market? If not, “What is the global strategy?”

For board members of U.S. Internet companies the globalization of the Internet poses
some real challenges. To begin with, board-level international experience in Internet
markets is thin on the ground. This makes it difficult for boards to judge CEO product
and commercial strategies around international growth.



Parochial venture capitalists:

For VCs the de-Americanization of the Internet presents some sobering challenges,
particularly for VC firms that do not have the scale, talent, or ability to source, fund, and
develop overseas deals.

Of the roughly 800 VC funds operating in the United States only a handful have full-time
partners and offices in places like India, China, Vietnam, or the Middle East/Africa. Less
than five percent of American VC money under management goes into foreign deals.41

For American investment banks hoping to take American Internet companies public the
future is bleak. In the second quarter of 2008 there were no VC-backed IPOs in America.

This has not happened since 1978 and by the time the American IPO market turns
around financial centers like Hong Kong, London, Singapore, Shanghai, or Dubai with
less stock exchange regulation, promising local companies, and local investor support
may have permanently changed the Internet IPO landscape.

For policy makers in Washington the shrinkage of America’s presence on the global
Internet should be deeply worrying. Tax dollars, technological edge, employment
opportunities, and prestige are all seeping overseas.

American lawmakers have actively made matters worse since
the dotcom crash with the introduction of Sarbanes-Oxley and
the passage of restrictive immigration laws that make it harder
for foreign nationals to come to the United States and be
entrepreneurs or complete graduate studies.

American lawmakers interested in tax receipts should also worry
that it has taken only 13 years (from Netscape’s IPO in 1995) to
go from near total American dominance and leadership on the
Internet to a de-Americanized Internet.

America’s declining (relative) position on the global Internet has also exposed a dangerous
macroeconomic fallacy that argues that American standards of living can withstand
competition from abroad by moving to ever-higher value industries like the Internet.

Thirteen years is not enough time to recoup the economic benefits of industry investment
and leadership. By comparison it took the American car industry exactly 100 years (from
the Model T in 1908) to lose a similar global leadership position.

SWOT:

American Internet industry strengths are many. The United States still leads in creating
innovative ways for consumers to use the Internet. Up to now, most non-U.S. Internet
success stories have been copycats or iterations of America-developed ideas.

The English language is another strength and opportunity that American Internet
companies have that is among the least appreciated.



English remains by far the dominant language on the web, with 430 million42 users
versus 276 million for Chinese. This is particularly true in view of the rise of India and the
widespread use of English as a second language in Asia, Africa, the Middle East, and
Latin America.

Australia, Canada, New Zealand, the U.K., and Singapore are all wealthy and attractive
English-speaking markets where U.S. firms can do well through effective localization.
Excellence in Global English markets should be a cornerstone of any effective U.S.
Internet firm’s international strategy.

While the potential for growth is strong, so are the challenges. Americans are respected the
world over as expert marketers but the next generation of Internet marketing challenges
– selling to fragmented, multilingual global markets – will be unfamiliar territory for most
U.S. marketing executives and represents a strategic weakness.

China remains a daunting challenge.
International Expansion Sequence While the numbers surrounding China’s
Internet are huge and compelling
Old School New School
it is not at all clear that these are
Launch product/service
See what happens
Launch product/service
See what happens necessarily the strongest revenue and
Discover a lot (most?) traffic is international
Ignore it because you don’t know what to do with it
Discover a lot (most?) traffic is international
Immediately decide on a strategy to monetize and grow this traffic profit opportunities for American firms.
Stay ‘focused” on U.S. priorities Decide if your product/service has an American or Global future
Competitors see good idea - start to run
2-4 years later decide to go international
If Global, define separate China, Japan, India, South-East Asia strategies As soon as a good idea rears its head in
Define Global English strategy
Go somewhere understandable like Canada or UK
A year or more later look at Asia
Define select Eurozone territory strategies
Execute international strategy in parallel to U.S. efforts - mark territory
Silicon Valley it is copied in China (over
Result: lost market share; lost revenue;
lower valuation; fewer strategic options
Cede no ground to competitors
Take all the marbles - Be happy
200 YouTube copycat sites alone!).
Result: greatest revenue; biggest audience; thwarted competition;
highest valuation; most strategic options India may make a better target for some
U.S. firms over the next two years.

Summary:

The Global Internet has undergone a profound process of de-Americanization over the
last 10 years and 2008 will be remembered as a watershed moment when the balance
of Internet power shifted permanently overseas.

Either CEOs adopt rapid and effective international expansion and execution strategies
or their companies will be marginalized to ever-smaller pieces of the Global Internet.

The good news is that the next ten years will be the Golden Era of the Global Internet.
Opportunities are huge. Major new companies and thousands of small and medium
sized-companies will be born. Great wealth will be generated.

Many of those companies will not be American and much of that wealth will not be
denominated in dollars.

Whether American, Asian, or European the most wealth will go to companies with the
best global strategy.

Eric J. Gerritsen is Principal of Global Internet Advisors, a Silicon Valley-based international strategy consulting firm.
Gerritsen is a former VP-International of Lycos Inc. and can be reached at eric@globalinternetadvisors DOT com.



SOURCES
Sources (Box):
i http://www.internetworldstats.com/stats.htm
ii https://mm.jpmorgan.com/stp/t/c.do?i=2082C-248&u=a_p*d_170762.pdf*h_-3ohpnmv
iii http://www.etforecasts.com/products/ES_intusersv2.htm#1.0
iv https://mm.jpmorgan.com/stp/t/c.do?i=2082C-248&u=a_p*d_170762.pdf*h_-3ohpnmv
v http://www.internetworldstats.com/stats.htm
vi http://www.verisign.com/static/044191.pdf & http://www.webhosting.info/registries/country_stats/US?ob=DOMNET&oo=ASC
vii http://www.comscore.com/press/release.asp?press=1802
viii Google
ix http://www.websiteoptimization.com/bw/0704/
x Alexa.com

Sources (Body Text):
1 http://www.internetworldstats.com/stats.htm
2 http://www.internetworldstats.com/stats3.htm#asia
3 http://www.idc.com/getdoc.jsp?containerId=prUS21303808
4http://www.nytimes.com/2008/07/26/business/worldbusiness
6 http://www.etforecasts.com/products/ES_intusersv2.htm#1.0
7 https://mm.jpmorgan.com/stp/t/c.do?i=2082C-248&u=a_p*d_170762.pdf*h_-3ohpnmv
8 http://www.pib.nic.in/release/release.asp?relid=39035
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18 http://www.comscore.com/press/release.asp?press=1802
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20 http://www.usatoday.com/money/industries/technology/2008-02-10-social-networking-global_N.htm
21 http://www.alexa.com/data/details/traffic_details/twitter.com
23 http://www.alexa.com/data/details/traffic_details/linkedin.com
24 http://www.chinalawandpractice.com/Article/1777234/Alibabacom-hits-gold-as-second-largest-internet-IPO-ever.html
25 GIA research
26 http://venturebeat.com/2008/04/30/xiaonei-the-facebook-of-china-raises-430m-better-funded-than-facebook/
27 http://kara.allthingsd.com/20071130/facebook-nabs-60-million-investment-from-li-ka-shing/
29 Google
30 Yahoo
31 eBay
32 Amazon
33 Cisco
34 http://www.networkworld.com/news/2008/062508-idc-global-online-ad-spending.html
37 http://www.washingtonpost.com/wp-dyn/content/article/2008/06/23/AR2008062302094.html
40 Yahoo
41 National Venture Capital Association
42 http://www.internetworldstats.com/stats7.htm



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