Executive Summary

Expenditure on Internet software, hardware and services was worth around £3.59bn in 2000, and is predicted to grow to around £4.97bn in 2001. If spending on intranets and extranets is included, the total expenditure rises to around £6.99bn in 2000, increasing to £9.37bn in 2001. The fact that the Internet is an increasingly commercial medium for businesses can be seen from the fact that revenue from e-commerce and advertising is expected to grow by 59.1% in 2001.

This report considers business usage of, and spending on, the Internet. It also briefly covers related areas, such as intranets and extranets. The focus of the report is on two areas: business spending on Internet services (including connectivity); and software and business revenues from the commercialisation of the Internet (i.e. revenues from Internet advertising and e-commerce). Business spending on the Internet is increasingly focused on non-connectivity services and e-commerce activities, while the bulk of e-commerce revenue represents income from business-to-business commercial activities.

The Internet is moving from being a tactical device for improving communications between staff and those outside the company to a strategic device for improving a business's whole value chain. While most businesses are currently at the early stages of e-commerce adoption, a growing number are putting the Internet at the heart of their supply-chain operations and their customer-service activities. Such developments are largely confined to the larger organisations, which are still the most likely to have an Internet connection — especially a broadband connection. However, Internet uptake among small to medium-sized enterprises (SMEs) has grown rapidly since 2000, with the tendency to use the Web for e-commerce activities trickling down into smaller companies.

In general, the trends are positive for the further development of the Internet as a commercial medium. Factors that could act as a constraint on this trend are: a potential economic slowdown, which will restrict but not stop the process; legislation, that could limit ISP (Internet Service Provider) activities (such as the Tobacco Advertising Bill); and the slow progress being made by UK operators (especially BT and Oftel) is developing broadband services in the UK. Until broadband is fully developed in the UK, the development of new Internet-based business services such as ASPs (Application Service Providers), Internet-based peer-to-peer networking and the establishment of virtual corporations will be held back.

Key Note expects rapid growth in both e-commerce revenue and expenditure on Internet hardware, software and services in the next 5 years. The companies that are expected to dominate this market in the future are the multi-skilled, large computer services firms such as Accenture, rather than the Internet-focused, specialist services and software firms. As the Internet becomes intimately linked with a company's business strategy, so the major investors in the Internet will seek to use service firms that can advise on and develop their Internet activities in the context of their broader business strategies.

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