The 6 drivers of $700B mobile internet

December 8, 2014

(This post first appeared on TechCrunch)

Mobile internet is all about big numbers. Revenue will more than triple to $700B by 2017, there was over $19B invested and $94B exits in the last 12 months, average sector returns were up to 15.6x all of the money invested over the last 3 years, public stock market returns were up to 78% in the last year, and there are 32 “billion dollar” mobile internet companies already. Understanding what’s driving these big numbers is critical for entrepreneurs, investors and corporates, so let’s dig in (and you can read more in the free 48 page summary and full 538 page Mobile Internet Investment Review Q3 2014).

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1. Revenue to grow >3x to $700B by 2017

Digi-Capital forecasts mobile internet will deliver $700B revenue in 2017, more than tripling last year’s $200B. mCommerce will remain dominant, with over half a trillion dollars in sales. The other top earners are $74B consumer apps, $53B enterprise mobility, $42B mobile adspend and $11B wearables.

Mobile internet all sectors This is the Asian century, so it’s not surprising that the largest region for mCommerce growth will be Asia with almost half of global mCommerce at $230B. America ($144B) and Europe ($113B) remain massive growth markets, but Alibaba’s swing to 42.9% mobile sales from less than 10% a year ago shows Asia’s strength today.

mCommerce Consumer apps will deliver over $70B revenue by 2017, but will grow beyond the dominant mobile games market. Mobile games drove ¾ of all mobile apps revenue last year despite having only 40% of downloads, but other sectors (such as social, where Facebook’s revenue growth is all mobile) could take over half the market by 2017. Where in-app purchases work brilliantly for games, App as a Service business models are starting to deliver significant growth across sectors.

Consumer apps

2. Record $19.2B invested in last 12 months

Mobile internet startups raised a record $19.2B private investment (excluding IPOs) in the 12 months to Q3 2014, up 232% on the corresponding year to Q3 2013. The big money went into mCommerce ($4.2B), travel/transport ($3.3B), utilities ($1.8B) and games ($1.1B), with 10 other mobile internet sectors raising over half a billion dollars each (food & drink, enterprise/B2B, social, tech, advertising/marketing, messaging, medical, photo & video, music and finance).

Mobile internet investment - 19.2B invested

3. Total exits (M&A + IPOs) rocketed 7x to record $94B in last 12 months

Mobile internet exits (trade exits – i.e. M&A – and IPOs) rocketed 7x to $94B in the 12 months to Q3 2014. The massive Facebook/WhatsApp trade exit made the biggest splash, but a hot IPO market took 39% of all exits (50% excluding WhatsApp).

Mobile internet trade exits and IPOs (last 3 years)

5 sectors delivered over $5B, including messaging ($25.8B or $4B excluding WhatsApp), games ($18B), social networking ($17.7B), food & drink ($7.7B) and lifestyle ($5.1B). Another 9 sectors saw over $1B, with utilities ($3.3B), music ($3.1B), enterprise mobility/B2B ($2.4B), finance ($2.3B), advertising/marketing ($1.7B), travel/transport ($1.3B), photo & video ($1.2B), navigation ($1B) and mCommerce ($1B).

Mobile internet trade exits and IPOs (last 12 months)

4. Early stage exit returns up to 15.6x

Billion dollar exits might be impressive, but VC and growth equity investors (and their institutional backers) care more about exit returns. So rather than how many dollars you receive, focusing instead on how many dollars you get back for every dollar invested. Early stage investors typically hold investments for at least 3 years, and the 3 year average return on investment for mobile internet to Q3 2014 was 3.5x. That doesn’t sound exciting, until you realise this is the return on all the cash invested in all 27 mobile internet sectors over the last 3 years. Compared to comparable VC/private equity benchmarks of less than 1.2x, 3.5x is nothing short of spectacular.

Mobile internet exit returns on investment

But averages don’t tell the full story, as there were even higher 3 year returns for navigation (15.6x), messaging (15.4x or 2.7x excluding WhatsApp), social networking (15x), lifestyle (11.4x), games (9.9x), appstore/distribution (9.1x), food & drink (6.7x), music (4.4x) and entertainment (3.5x). Although shorter than the typical investment timeframe (as most investors don’t exit within a year), mobile internet 12 month exit returns accelerated dramatically to average 4.9x, with individual sectors returning up to 36.9x on that basis.

5. Public stock market sectors returned up to 78% in last 12 months

Institutional investors have seen their faith in mobile internet justified, with the Digi-Capital Mobile Internet Index of 78 public companies in and around mobile internet giving a 28% return in the last 12 months (versus 20% for the S&P 500). There have been even stronger performances across the 15 individual Mobile Internet Sector indices, with Travel/Transport (78%), Social Networking (45%), Navigation (43%), Messaging (40%) and Games (39%) outperforming the All Mobile Internet (28%) return, and Tech (27%) just below it. However it hasn’t all been plain sailing, with underperformance by Lifestyle (13%), Food & Drink (3%), Enterprise/B2B (-4%), Music (-5%), Entertainment (-23%), mCommerce (-43%), AppStore/Distribution (-51%), Advertising/Marketing (-56%) and Utilities (-67%).

Mobile internet investment - public market returns

6. 32 “billion dollar” mobile internet companies worth total $163B

Sector averages are great, but Digi-Capital’s Mobile Internet Billions list analyses the 32 “billion dollar” companies which added $11.4B shareholder value in Q3 2014 alone. That’s $125M value added every day of Q3 to reach a combined $163B valuation. While some are household names such as Twitter and WhatsApp, you might not have heard of others like Colopl and Momo.

Mobile internet billions

The companies listed all have substantial parts of their business from mobile internet, but exclude mobile infrastructure (e.g. Qualcomm), device (e.g. Apple) or substantial but minority mobile internet businesses (e.g. Tencent with WeChat). The valuations come from a mix of stock markets, acquisitions and fundraising rounds.

As well as adding huge value collectively, there has been a lot of movement in the rankings. Daumkakao (merger of Daum and Kakao) leapt 15 places to become worth $9.5B, followed by Mixi, Square, Tango and AirWatch. Youzu Interactive, Momo, Com2Us, Gumi, Kabam and FunPlus are new to the list, while DeNA, King, GREE, Gungho, Pandora, Waze, Zillow, Snapchat and CyberAgent all lost places.

Mobile internet billions - up, new,down

The diversity of the Mobile Internet Billions companies is as impressive as its scale, spanning games (12), social (5), messaging (4), music (2), utilities (2), enterprise (1), lifestyle (1), mCommerce (1), navigation (1), photo & video (1), productivity (1) and transport (1) sectors. The next “billion dollar” company could come from any sector.

Mobile internet billions - what do they do Geographically the list is dominated by Asia (15) and America (13). Although Asia has the most Mobile Internet Billions companies, they are divided between Japan (8), China (5) and South Korea (2). Europe has Finland (1), Sweden (1) and UK (1), with Israel (1) the only Middle Eastern entry. Looking forward to the 2015 list, our analysis shows Asia’s domination will increase and spread more broadly across the region.

Mobile internet billions - where are they

Mobile Internet first mover advantage is more extreme than in any other technology market in history, so dominating quickly has been worth its weight in gold. Measured by shareholder value added per year since founding, WhatsApp ($4.4B per year), Twitter ($3.7B per year), Uber ($3.4B per year), LINE ($3.3B per year), Daumkakao ($2.4B per year) and SnapChat ($1.5B per year) have outperformed for their investors. If value continues to be added at this rate, the Mobile Internet Billions list could be worth $200B next year.

Mobile internet billions - how fast have they added shareholder value What next?

Past success is not always a good guide for future investment in any sector, so Digi-Capital’s Mobile Internet Investment Quadrant highlights opportunities where revenue outperforms investment/consolidation activity (see Methodology). We see Major Opportunities in mCommerce, AppStore/Distribution, Advertising/Marketing, Enterprise/B2B, Wearables, Business, Education and Books, Hidden Gems in Navigation, Games and Entertainment, and Exit Opportunities in Social. There are still Selective Opportunities in Health & Fitness, Music, Photo & Video, Messaging, Lifestyle, Travel/Transport, Utilities and Finance. This analysis does not guarantee any one sector or company will be a good or bad investment.

Mobile Internet Investment Quadrant The last 12 months have been incredible for mobile internet, but our analysis shows the best is yet to come for entrepreneurs, investors and corporates (and you can read more in the free 48 page summary and full 538 page Mobile Internet Investment Review Q3 2014).

About Digi-Capital: Digi-Capital advises mobile internet, games and digital clients in America, China, Japan, South Korea and Europe