24 Sep 2021

Internet: World Wide Ebbs & Flows

Contributor(s): Citi Global Insights
For the internet sector, regulation has been the story of 2021, particularly in China. In a new report, summarized here, Citi Research’s Alicia Yap and her global colleagues take a closer look at the likelihood of this continuing into next year and at other drivers of this key sector.

China’s internet sector has been one of the talking points of the year after a series of regulatory actions. Some of the key themes for the internet sector globally are set out in the report, as follows:

  • A new norm of slower – but healthier – top-line/profit growth in China
  • Closer regulatory scrutiny in Korea; intensified competition and influxes of capital funding in CEEMEA and Latam, balanced by the rise of internet giants in Southeast Asia with growing super-app ecosystems
  • A growing investable universe in India; and sustainable, balanced growth with continued innovation in the US.

Heading into the end of the year, the report says, the focus is likely to be on the following:

  • Data protection and user security in China
  • Intensified competition coupled with investment opportunities in emerging regions such as SE Asia, Latam and CEEMEA
  • Normalizing trends and opportunities after two years of pandemic disruption.

China in focus

In light of recent regulatory tightening related to concerns about monopoly market power, data/user security and the protection of minors in gaming and workers in the gig economy, along with new “common prosperity” initiatives, China’s internet industry is likely to enter a new normal of slower but healthier top-line and profit growth.

Given the size and influence of China’s internet industry, it perhaps was to be expected that the government would step in to regulate any market behaviors deemed to be anti-competitive or potentially harmful to society or the national interest.

Some consequences of the anti-monopoly action are set out as follows:

  • Internet companies will gradually open up their platforms to each other and future major M&A and consolidated stake investments will be significantly reduced;
  • Monetization ramp could be more gradual and result in slower top-line growth, or push out margin improvement;
  • 2nd tier companies are likely to benefit through possible market share gains while overall competition will become less intense and more orderly and will be focused on innovation and efficiency improvements rather than on heavy subsidies or forced exclusivity.

Korea issues

Political agendas could transform into legislation or administrative action directed at the internet sector around the presidential election in March next year. Such news flow could disappoint those who believe the Korean government is broadly supportive of the internet and fintech industries.

Potential risks globally

The report points to some potential downside risks for the global internet sector too. These include on-going regulation and potential new rules and guidelines, geo-political risks and U.S./China tensions, delays of US IPO activities and uncertainty of future ADR listing status, intensified cross-border competition, and on-going disruption from Covid-19 variants.

The full report also provides a global wrap-up, with dedicated sections on Japan, the U.S., India, Latin America and others. For more information on this subject, please see Global Internet - Trends & Opportunities into 4Q21 Amid Regulatory Backdrop first published on September 1.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

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