Report on the internet economy: Q3. 2002 I. Summary

01. 11. 2002.

I. Summary

In the third quarter of 2002, the GKI-Westel e-Economy Index, reflecting the role of the internet in the business world and the expectations of the corporate sector, remained on an upward trajectory, continuing the trend of the previous two quarters. Growing confidence is a prevalent phenomenon across the board in the business sector. The optimism of financial institutions has strengthened significantly, while the expectations of tourism-related companies have deteriorated slightly.

According to the results of the quarterly survey conducted by GKI Economic Research Co. in association with Westel Mobile Telecommunication Co. and Sun Microsystems Hungary, internet access in the category of domestic firms with over five employees increased from 72% to 76% year-on-year. 39% of these companies have their own websites, which reflects a slight rise from the previous year.

Last year was definitely a breakthrough year for ADSL-type internet connections. While in the third quarter of 2001 as low as 2% of businesses subscribed to ADSL service, currently 13% of companies with 5+ employees access the internet via ADSL. ADSL gained market share primarily at the expense of dial-up modem (in particular analogue) connections. As a result, the percentage of companies with dial-up connections (analogue or ISDN) dropped from 93% to 78% in the course of a year. At the same time, the percentage of companies with leased-lined internet access has been on the rise: 14% of companies that have internet access actually use this connection type.

The growth in broadband connections seems unstoppable. Based on corporate expectations, ADSL connection could expand to as high as 23% of companies within the next year, taking further market share from modem connections.

4-5% of companies with 10+ employees sell their products or services over the internet, and approximately the same percentage of businesses carry out some of their procurement transactions online. This rate is significantly below the average of the European Union. Within the EU,  the Scandinavian states are the leading nations in terms of online sales, in particular Sweden, where online sales accounted for 2% of the total sales volume in 2000. In Hungary, internet sales amounted to 0.1% of  total corporate revenues in 2001.

The most significant factors curbing the advancement of online sales include the following: lack of confidence in online transactions, loyalty to traditional sales channels and personal relationships, low rate of internet access at home, as well as a lack of computer and internet skills.

II. Detailed report

1. Growing optimism

As in numerous other research projects of GKI Economic Research Co., the results of this survey are synthesized in one index, called the  GKI-Westel e-Economy Index.

This sentiment index,  representing  the expectations of certain segments of the economy regarding the market impact of internet use and internet  applications, is  comprised of responses to four questions. The questions relate to the following issues: expectations regarding internet sales and procurement,  the impact of the internet on the market of the company, as well as the utilization of the internet in the present and in the future.

The GKI-Westel e-Economy Index, reflecting the expected  role of the internet in the business sector, continued to rise in the third quarter of 2002 (the revenue-weighted index value was 16.1 points on a scale ranging from -100 to +100), which  reinforces the return of confidence in the internet already signaled by the results of the previous quarter.

The expectations of companies in the industry, in services, as well as in retail and wholesale trade remained flat or edged up slightly from the previous quarter. As the summer tourist season came to a close, companies in the tourism sector voiced weaker expectations regarding short-term online sales, however, this was offset by the growing optimism of the financial sector.

The survey responses project a faster growth in the market share of  internet sales over the next twelve months than anticipated in the previous survey, but the growth rate will still remain slow.

2. Internet access and internet presence

According to the results of the quarterly survey conducted by GKI Economic Research Co. in association with Westel Mobile Telecommunication Co. and Sun Microsystems Hungary, internet access in the category of domestic firms with 5+ employees increased from 72% to 76% year-on-year. The fastest growth was seen in the category of micro- and small businesses. Compared with small businesses, larger companies were significantly more likely than smaller ones to have web access already a year ago.

Internet availability in the Hungarian business sector is not significantly lower than the average rate of the European Union. According to the December 2001 data of Eurostat,  89% of companies with more than ten employees had access to the internet in the EU, compared with 79% in Hungary. The Scandinavian states as well as Austria and Germany stand out within the EU, while Portugal is around the level of Hungary.

The results of GKI’s survey reveal that 39% of companies with more than five employees have their own websites,  only two percentage points more than in the third quarter of 2001. This means that about one in two companies with internet access has its own website.

In this respect, Hungary significantly lags behind the European Union, where 70% of businesses with more than ten employees present their companies and services on the internet. Germany has the highest percentage of companies with websites in the European Union: four in five German companies are present on the internet.

Last year was definitely a breakthrough year for ADSL-type internet connections. While in the third quarter of 2001 as low as 2% of businesses subscribed to ADSL service, currently 13% of companies with 5+ employees access the internet via ADSL. ADSL gained market share primarily at the expense of dial-up modem (in particular analogue) connections. As a result, the percentage of companies with dial-up connections (analogue or ISDN) dropped from 93% to 78% in the course of a year. At the same time, the percentage of companies with leased-lined internet access has been on the rise: 14% of companies that have internet access actually use this connection type.

The growth in broadband connections seems unstoppable in the segment under investigation. Based on corporate expectations, ADSL connection could expand to as high as 23% of companies within the next year, taking further market share from modem connections.

3. Internet commerce

While the gap between Hungary and the rest of the European Union is relatively small in terms of internet access, Hungarian companies lag far behind firms in other EU states as far as online business solutions are concerned. Hungarian companies tend to use the internet mostly for business correspondence and information gathering, and only a few carry out business transactions via the internet.

As low as 4-5% of companies with 10+ employees have websites capable of taking electronic orders, and approximately the same percentage of businesses carry out some of their procurement transactions online. Within the EU,  the Scandinavian states are the leading nations in terms of online sales, where 20-25% of companies take advantage of the internet as a sales channel (OECD data from 2000). The world wide web plays an even greater role in the area of procurement in these countries: in Sweden, Norway and Denmark, 35-50% of businesses purchase various products and services over the internet.

Due to the above described factors, the relative weight of internet commerce in the Hungarian economy is very low.  In 2001, internet sales amounted to 0.1% of  total corporate revenues. This percentage is only a fraction of the online sales in EU member states in 2000.  Sweden tops the list in this area as well: online sales accounted for 2% of the total sales volume in 2000.

The most significant factors curbing the advancement of online sales include the following: lack of confidence in online transactions (validity of contracts, reliability of deliveries, warranties),  loyalty to traditional sales channels and personal relationships, low rate of internet access (at home), lack of computer and internet skills, as well as insufficient knowledge in the field of online business opportunities.