New Winners and Losers in the Internet Economy
In a stressed US economy, employment in the Internet ecosystem is growing at an impressive rate, with small companies especially benefiting, according to a new study by Professor John A. Deighton and research associate Leora D. Kornfeld.
Although much of the United States still struggles to recover from the 2008 economic crisis, the online world defies that bleak economic picture—the Internet continues to put a growing number of Americans to work.
"In a very flat economy … the Internet ecosystem has grown at an impressive rate."
Direct employment in the US Internet ecosystem has doubled in those four years, with 1 million new jobs added to the million that already existed in 2007, according to a recent study commissioned by the Interactive Advertising Bureau, Economic Value of the Advertising-Supported Internet Ecosystem.
The study was directed by John A. Deighton, the Harold M. Brierley Professor of Business Administration at Harvard Business School. The study's principal investigator was HBS research associate Leora D. Kornfeld.
"In a very flat economy, where the economy as a whole has been stagnant, the Internet ecosystem has grown at an impressive rate," Deighton says.
When indirect employment is calculated into the number of jobs that depend directly on the existence of the Internet, the study estimates that 5.1 million people owe their livelihoods to it. The report, which relies on data from 2011 and the first two quarters of 2012, is a follow-up to an IAB study based on 2007 data, back when, as is sometimes forgotten, MySpace was bigger than Facebook.
The most recent study provides a detailed look at the growth of the Internet over the last few years in a variety of areas, from online publishers and retailers to social networks and gaming sites.
Job growth on the Internet stands in sharp contrast to the US economy as a whole, which has suffered from high unemployment for years. The report found that the gross domestic product of the Internet ecosystem sector grew by 56 percent in a period when overall GDP grew by only 5 percent.
"Through the years of the 'Great Recession' and the very slow climb back, the businesses that live on the Internet have been a conspicuous exception to the general pattern of unemployment and business revenue stagnation," the report states.
Rise of the 'less glamorous'
Among Internet-related businesses, growth was swift within organizations that the report terms the "consumer-facing layer," companies having direct contact with consumers including Facebook, YouTube, and Twitter.
Yet job growth was even stronger in what the report calls the "less glamorous layer" that supports those big brand names, such as digital advertising agencies, ad networks, ad exchanges, customer analytics firms, listening platforms, and other firms both large and small, many of which are charged with crunching the data that these social media networks produce.
"I'm sure it's true that more people work with the data that Twitter generates than actually work for Twitter," Deighton says. "We use a tree metaphor [in the report]. If you look at a tree, you see its leaves and flowers, the most visible features. By analogy, when you look at the Internet, the thing you see is Facebook. But for it to flourish, it depends on branches. The real surprising growth was in those branches, in the firms that used the data that was produced by the consumer-facing firms."
In the past four years the consumer-facing layer added more jobs than the consumer support services layer—365,000 compared to 245,000—but it grew at a slower pace (70 percent) than the support services layer (229 percent).
"The consumer support layer is thus the unsung hero of the last four years of US innovation," according to the report. "Consumers get the benefits of the Internet at low cost, and often for free, because entrepreneurs are building out analytical tools and support services to run them leaner, and to create new revenue sources that let even free services be profitable."
In fact, many of the mega-players, including Microsoft, Google, and Yahoo!, saw slower job growth than did smaller entrepreneurial ventures. Sole proprietors and super-small firms enjoyed some of the biggest employment gains: For example, as many as 35,000 full-time equivalent jobs were created around app development, and many of those apps were produced by small self-starter companies.
Together, smaller firms contributed 375,000 full-time equivalent jobs of the 2 million Internet-related jobs, and this work included people selling products on Amazon, eBay, and Etsy as well as self-employed web designers, freelance writers, and computer programmers.
"Mobile is getting a lot of attention, but we're not seeing mobile as a big employer yet."
"You might go so far as to say that four or five years ago, the beneficiaries of the Internet economy were very large companies like Cisco and Google, while today the major beneficiaries are smaller, more entrepreneurial companies and self-employed people," Deighton says. "It used to be that a little company hoped to have an exit strategy where it could be bought out by a larger company. There's less of that going on now."
Mobile not a big employer—yet
The mobile Internet is a relatively new phenomenon that is likely to continue to blaze a new trail in the online frontier. Smartphones, which were barely a blip in the earlier study, outsold personal computers in 2011, and yet in terms of employment, mobile is still in its infancy.
"Right now mobile is getting a lot of attention, but we're not seeing mobile as a big employer yet," Deighton says. "We think mobile will be a very big part of the [employment] growth in the years ahead with the transmission of medical data, location data, and even data about our pulse rates. Companies are going to find a lot of uses for that data."
The bittersweet side of the online employment picture is the possibility that the Internet may be contributing to the plague of unemployment found in other industries, including newspaper publishing and even manufacturing, as certain work once done in the physical world is performed more efficiently in the virtual world.
"Jobs are going away from many traditional sectors, and they aren't coming back," Deighton notes. "It's certainly a whole new world."