4.

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Chapter 4

The digital economy, new business models and key features

This chapter discusses the spread of information and communication

technology (ICT) across the economy, provides examples of business
models that have emerged as a consequence of the advances in ICT,
and provides an overview of the key features of the digital economy
that are illustrated by those business models.

The statistical data for Israel are supplied by and under the responsibility of
the relevant Israeli authorities. The use of such data by the OECD is without
prejudice to the status of the Golan Heights, East Jerusalem and Israeli
settlements in the West Bank under the terms of international law.

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4.1 The spread of ICT across business sectors: the digital economy

All sectors of the economy have adopted ICT to enhance productivity,

enlarge market reach, and reduce operational costs. This adoption of ICT
is illustrated by the spread of broadband connectivity in businesses, which
in almost all countries of the Organisation for Economic Co-operation and
Development (OECD) is universal for large enterprises and reaches 90% or
more even in smaller businesses.

Figure 4.1. Enterprises with broadband connection, by employment size, 2012

Fixed and mobile connections, as a percentage of all enterprises
% All Large Medium Small
100
95
90
85
80
75
70
60
50
40
N
R

EX
N

K
E

U
D

C
E

T
N

L
X
A

E
K

N
P

L
T
N

ITA

L
L

SW

NO

PO
CH

AU

AU
DN

CZ
GB
BE

PR

GR
HU
ES
LU

SV
ES

CA

DE
NL

IR
FR
IS

SV

JP
FI

M
For Australia, data refer to 2010/11 (fiscal year ending 30 June 2011) instead of 2012. For
Canada, medium-sized enterprises have 50-299 employees instead of 50-249 persons
employed. Large enterprises have 300 or more employees instead of 250 or more persons
employed. For Japan, all businesses with 100 or more persons employed instead of 10 or
more, 100-299 instead of 50-249, and 300 or more instead of 250 or more. For Mexico,
data refer to 2008 instead of 2012 and to businesses with 20 or more persons employed
instead of 10 or more. For Switzerland, data refer to 2011 instead of 2012.
Source: OECD (2013), OECD Science, Technology and Industry Scoreboard 2013:
Innovation for Growth, OECD Publishing, Paris, www.oecd.org/sti/scoreboard.htm based
on OECD ICT Database and Eurostat.

The widespread adoption of ICT, combined with the rapid decline in

price and increase in performance of these technologies, has contributed
to the development of new activities in both the private and public sector.
Together, these technologies have expanded market reach and lowered costs,
and have enabled the development of new products and services. These
technologies have also changed the ways in which such products and services
are produced and delivered, as well as the business models used in companies

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ranging from multinational enterprises (MNEs) to start-ups. They also

support activity by individuals and consumers, and have led to the creation
of new payment mechanisms including new forms of digital currencies. The
advent of the Internet brought major changes first to the entertainment, news,
advertising, and retail industries. In those industries, the first major digital
players initially started from traditional business models, adapting them to
better end-user equipment (both inside and outside organisations) and more
extensive interconnection through the Internet.
For example, online retailers initially adapted the business model of
brick-and-mortar stores by selling traditional physical goods (for example,
books) digitally. Online intermediaries that allowed the discovery, sale,
and purchase of goods and services such as vehicles, homes, and jobs were
another early category. Other digital players specialised in the online selling
of traditional services (for example, online insurance brokers). Retailers
then began selling digital products and services, like downloadable and
streaming music and movies, executable code, games, and services based on
data processing, increasingly blurring the line between goods and services
as businesses continued to develop. Online advertising similarly started from
traditional advertising business models, becoming more sophisticated as the
potential of digital technology became fully integrated into the industry. New
online services enabling a sharing and service economy have also appeared,
allowing people to rent out their homes, vehicles and skills to third parties.
As technology has advanced and costs of ICT have continued to fall, ICT
has proven to be general-purpose technology that has become embedded in
and central to the business models of firms operating across the economy.
Businesses across all sectors are now able to design and build their operating
models around technological capabilities, in order to improve flexibility and
efficiency and extend their reach into global markets. Businesses across all
sectors have changed the way their business is conducted by taking advantage
of advances in communications and data processing capacity to lower
transaction costs and extend their reach into global markets.
These advances, coupled with liberalisation of trade policy and reduction
in transportation costs, have expanded the ability of businesses in all sectors
to take advantage of global value chains in which production processes can be
geographically dispersed in locations around the world to take advantage of the
features of local markets. For example, in sectors relying heavily on technology
and research and development, design and production can be managed
centrally, while the assembly can be fragmented in different countries to take
advantage of skilled labour and local resources.
Sectors as diverse as retail, logistics and education have changed and
keep changing due to the spread of ICT:

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• Retail: The digital economy has enabled retailers to allow customers

to place online orders (often fulfilled from a local store) and has
made it easier for retailers to gather and analyse data on customers,
to provide personalised service and advertising. It has also enabled
retailers to manage logistics and supply stores with products, which
has had a significant, positive impact on productivity.
• Transport and Logistics: The logistics sector has been transformed
by digital economy, which enables the tracking of both vehicles and
cargo across continents, the provision of information to customers
and facilitates the development of new operational processes such as
Just In Time delivery in the manufacturing sector. Vehicle telemetry
also helps maximise fuel efficiency, ensure efficient use of the
transport network and support fleet maintenance activities. The
information collected by fleets can also be used to create datasets
with commercial value.
• Financial Services: Banks, insurance providers and other companies,
including non-traditional payment service providers, increasingly
enable customers to manage their finances, conduct transactions and
access new products on line, although they still continue to support
branch networks for operations. Better use of data also allows growth
in customer insights and associated products, such as personalised
spending analysis, which can be used to generate advertising revenue.
The digital economy has also made it easier to track indices and
manage investment portfolios and has enabled specialist businesses
such as high-frequency trading.
• Manufacturing and Agriculture: The digital economy has enhanced
design and development, as well as the ability to monitor production
processes in factories and control robots, which has enabled
greater precision in design and development and ongoing product
refinement. The products being produced are also increasingly
knowledge-intensive. In the automobile industry, for example, it is
estimated that 90% of new features in cars have a significant software
component. On farms, systems can monitor crops and animals,
and soil/environmental quality. Increasingly, routine processes and
agricultural equipment can be managed through automated systems.
• Education: As the digital economy spreads, universities, tutor
services and other education service providers are able to provide
courses remotely without the need for face to face interaction through
technologies such as video conferencing and streaming and online
collaboration portals, which enables them to tap into global demand
and leverage brands in a way not previously possible.

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• Healthcare: The digital economy is revolutionising the healthcare

sector, from enabling remote diagnosis to enhancing system efficiencies
and patient experience through electronic health records. It also allows
opportunities for advertising, for example of drugs and other treatments.
• Broadcasting and Media: The digital economy has dramatically
changed the broadcasting and media industry, with increasing broadband
access in particular opening new avenues for delivery of content for
traditional media players, while also enabling the participation in
the news media of non-traditional news sources, and expanding user
participation in media through user-generated content and social
networking. The digital economy has also enhanced the ability of
companies to collect and use information about the viewing habits and
preferences of customers, to enable them to better target programming.
As digital technology is adopted across the economy, segmenting the
digital economy is increasingly difficult. In other words, because the digital
economy is increasingly becoming the economy itself, it would be difficult, if
not impossible, to ring-fence the digital economy from the rest of the economy.
Attempting to isolate the digital economy as a separate sector would inevitably
require arbitrary lines to be drawn between what is digital and what is not. As a
result, the tax challenges and base erosion and profit shifting (BEPS) concerns
raised by the digital economy are better identified and addressed by analysing
existing structures adopted by MNEs together with new business models and
by focusing on the key features of the digital economy and determining which
of those features raise or exacerbate tax challenges or BEPS concerns, and
developing approaches to address those challenges or concerns.

4.2 The digital economy and the emergence of new business models

The digital economy has given rise to a number of new business models.
Although many of these models have parallels in traditional business,
modern advances in ICT have made it possible to conduct many types of
business at substantially greater scale and over longer distances than was
previously possible. This section discusses several prominent examples of
these new business models. Some of these business models may complement
each other and in some cases overlap with each other (for example, payment
services could be described under e-commerce or under cloud computing).
The business models discussed below are by no means exhaustive. Indeed,
just as innovation in the digital economy allows the rapid development
of new business models, it can also quickly cause existing businesses to
become obsolete. The types of business discussed include several varieties of
e-commerce, app stores, online advertising, cloud computing, participative
networked platforms, high speed trading, and online payment services.

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4.2.1 Electronic commerce

Electronic commerce, or e-commerce, has been defined broadly by the
OECD Working Party on Indicators for the Information Society as “the
sale or purchase of goods or services, conducted over computer networks1
by methods specifically designed for the purpose of receiving or placing of
orders. The goods or services are ordered by those methods, but the payment
and the ultimate delivery of the goods or service do not have to be conducted
online. An e-commerce transaction can be between enterprises, households,
individuals, governments, and other public or private organisations” (OECD,
2011). E-commerce can be used either to facilitate the ordering of goods or
services that are then delivered through conventional channels (indirect or
offline e-commerce) or to order and deliver goods or services completely
electronically (direct or on-line e-commerce). Although e-commerce covers
a broad array of businesses, this section provides an illustration of some of
the more prominent types.

4.2.1.1 Business-to-business models

The vast majority of e-commerce consists of transactions in which a
business sells products or services to another business (so-called business-to-
business (B2B)) (OECD, 2011). This can include online versions of traditional
transactions in which a wholesaler purchases consignments of goods online,
which it then sells to consumers from retail outlets. It can also include
the provision of goods or services to support other businesses, including,
among others: (i) logistics services such as transportation, warehousing, and
distribution; (ii) application service providers offering deployment, hosting, and
management of packaged software from a central facility; (iii) outsourcing of
support functions for e-commerce, such as web-hosting, security, and customer
care solutions; (iv) auction solutions services for the operation and maintenance
of real-time auctions via the Internet; (v) content management services, for the
facilitation of website content management and delivery; and (vi) web-based
commerce enablers that provide automated online purchasing capabilities.

4.2.1.2 Business-to-consumer models

Business-to-consumer (B2C) models were among the earliest forms
of e-commerce. A business following a B2C business model sells goods or
services to individuals acting outside the scope of their profession. B2C models
fall into several categories, including, for example, so-called “pureplay”
online vendors with no physical stores or offline presence, “click-and-mortar”
businesses that supplemented existing consumer-facing business with online
sales, and manufacturers that use online business to allow customers to order
and customise directly.

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The goods or services sold by a B2C business can be tangible (such as a

CD of music) or intangible (i.e. received by consumers in an electronic format).
Through digitisation of information, including text, sound, and visual images,
an increasing number of goods and services can be delivered digitally to
customers increasingly remote from the location of the seller. B2C e-commerce
can in many cases dramatically shorten supply chains by eliminating the need
for many of the wholesalers, distributors, retailers, and other intermediaries that
were traditionally used in businesses involving tangible goods. Partly because
of this disintermediation, B2C businesses typically involve high investment in
advertising and customer care, as well as in logistics. B2C reduces transaction
costs (particularly search costs) by increasing consumer access to information.
It also reduces market entry barriers, as the cost of maintaining a website is
generally cheaper than installing a traditional brick-and-mortar retail shop.

4.1.2.3 Consumer-to-consumer models

Consumer-to-consumer (C2C) transactions are becoming more and
more common. Businesses involved in C2C e-commerce play the role of
intermediaries, helping individual consumers to sell or rent their assets
(such as residential property, cars, motorcycles, etc.) by publishing their
information on the website and facilitating transactions. These businesses
may or may not charge the consumer for these services, depending on their
revenue model. This type of e-commerce comes in several forms, including,
but not limited to: (i) auctions facilitated at a portal that allows online bidding
on the items being sold; (ii) peer-to-peer systems allowing sharing of files
between users; and (iii) classified ads portals providing an interactive, online
marketplace allowing negotiation between buyers and sellers.

4.1.2.4 Growth of e-commerce

The Internet facilitates transactions such as ordering goods and services.
This means that many transactions that would have taken place without the
Internet can be conducted more efficiently and at less expense. In addition,
the Internet has expanded the reach of smaller businesses, enabling them
to reach markets that would not have been possible to reach without its
existence. As a result, the number of firms carrying out business transactions
over the Internet has increased dramatically over the last decade.
For example, e-commerce in the Netherlands has increased as a share
of total company revenue from 3.4% in 1999 to 14.1% in 2009. Similarly,
between 2004 and 2011 this share increased from 2.7% to 18.5% in Norway
and from 2.8% to 11% in Poland. Based on comparable data, as illustrated
in the chart below, e-commerce is nearing 20% of total turnover in Finland,
Hungary, and Sweden, and 25% in the Czech Republic (OECD, 2012).

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In 2012, B2C e-commerce sales were estimated to exceed USD 1 trillion

for the first time. During 2013, they are estimated to grow an additional
18.3% to USD 1.298 trillion, with the Asia-Pacific region surpassing North
America as the top market for B2C e-commerce sales (Emarketer, 2013). It
is worth mentioning that at the moment B2C e-commerce represents a small
fraction of overall e-commerce, which is mainly made of B2B transactions.
Global B2B e-commerce, particularly among wholesalers and distributors,
was estimated to be approximately USD 12.4 trillion in 2012 (WTO, 2013).
According to other estimates made by the International Data Corporation,
the size of total worldwide e-commerce, when global B2B and consumer
transactions are added together, equalled USD 6 trillion in 2013.

Figure 4.2. Turnover from e-commerce, by enterprise size, 2012

As a percentage of turnover in enterprises with 10 or more persons employed
All Large Medium Small
%
35

30

25

20

15

10

0
E
X
L
E
R
N
N
R
U
A

L
L
A
P
N
T
D
T
T

L
S
EX
ITA

C
K

K
IR

BE
IS

PO
CZ

SW

AU
AU

ES
PR
ES
GB

NO

DN

SV
LU

GR
US

FR
DE
HU

FI

SV

NL

Where available, firm size classes are defined as: small (from 10 to 49 persons employed),
medium (50 to 249), large (250 and more). Sector coverage consists of all activities in
manufacturing and non-financial market services, but for Australia (where Agriculture,
forestry and fishing is also included) and the United States (all market services are
included but management of companies and enterprises – NAICS 55). For Australia, data
refer to the fiscal year ending 30 June 2011 (2010/11) instead of 2012; for Denmark and
Germany they refer to 2010; for Mexico, data refer to 2008 and include only businesses
with 20 or more persons employed.
Source: OECD (2013), OECD Science, Technology and Industry Scoreboard 2013:
Innovation for Growth, OECD Publishing, Paris, www.oecd.org/sti/scoreboard.htm based
on OECD, ICT Database; Eurostat and national sources, June 2013.

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4.2.2 Payment services

Paying for online transactions traditionally required providing some
amount of financial information, such as bank account or credit card
information, to a vendor, which requires a high degree of trust that is not
always present in the case of an unknown vendor, particularly in the case of a
C2C transaction. Online payment service providers help address this concern
by providing a secure way to enable payments online without requiring the
parties to the transaction to share financial information with each other.
A payment service provider acts as an intermediary (typically using
a software-as-a-service model) between online purchasers and sellers,
accepting payments from purchasers through a variety of payment methods,
including credit card payments or bank-based payments like direct debit or
real-time bank transfers, processing those payments, and depositing the funds
to the seller’s account. Electronic payment systems offer a number of benefits
for users, such as (i) protection against fraud, since the seller and buyer do not
exchange sensitive information; (ii) faster delivery of payment compared with
traditional payment methods; and (iii) in many cases, the ability to transact in
multiple currencies. Payment service providers typically charge a fee for each
transaction completed, which can be either a fixed charge or a percentage
of the value of the transaction, though some payment service providers also
charge monthly fees or setup fees for certain additional services.
A number of other alternative online payment options are in use as well,
including:
• Cash payment solutions, in which a customer buys online, and pays
in cash with a barcode or payment code at participating shops or
settlement agencies, offering a way for customers unwilling to use
other online payment methods to make online purchases in a secure
manner.
• E-wallets or cyber-wallets, which are previously charged with
credits and can be spent online as an alternative to the use of a credit
card. These are often used for micropayments because the use of a
credit card for frequent small payments is not economical.
• Mobile payment solutions, which encompass all types of technologies
that enable payment using a mobile phone or smartphone, including,
among others, mobile card processing using card readers connected
to smartphones, in-app payments for virtual products, and near-field
communications solutions which use short-range wireless technology
to exchange information.
As discussed in Chapter 3, the digital economy has also given rise to
virtual currencies that can be used to purchase goods and services from

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businesses that agree to accept them, acting as an alternative to payment

services. In some cases, exchanges have arisen to allow purchase and sale of
these virtual currencies for real currency.

4.2.3 App stores

The growth of Internet access through smartphones and tablets has
caused an increase in the frequency of use of online services and the
development of application stores, a type of digital distribution platform for
software, often provided as a component of an operating system. Application
stores typically take the form of central retail platforms, accessible through
the consumer’s device, through which the consumer can browse, view
information and reviews, purchase and automatically download and install
the application on his/her device.
Accessibility to application stores varies. Some application stores are only
usable by consumers with a particular device. These stores may represent the
sole way for users of that device to obtain applications, or may represent one
of several possible means for users to obtain applications. Some application
stores are accessible by consumers of any device using a particular operating
system. Others are usable by consumers with service contracts with a particular
network operator. Finally, certain others are freely accessible and are not
dependent on the type of device, proprietary software, or service provider.
App stores will typically include both applications developed by the
business operating the app store (typically, an operating system developer,
device manufacturer, or telecommunications network provider), or by a third-
party developer. Applications may be downloaded for free or for a fee. Free
applications may be supported by advertising. In addition, applications are
increasingly moving to a “freemium” model, in which basic functionality is
provided for free, but customers may pay for additional content or features.
An application store will typically feature applications produced by
developers in multiple countries. In addition, while many app stores are
targeted at customers in particular geographic markets, applications are often
cross listed on multiple app stores targeted at multiple geographic regions.
Use of application stores is growing rapidly. Gartner, Inc., an information
technology research and advisory company, estimated that downloads from
app stores would reach 102 billion in 2013, up from 64 billion in 2012.
Total revenue from app store purchases was expected to exceed
USD 26 billion in 2013, an increase of 31% over the total in 2012. As noted
above, free applications are becoming increasingly prevalent, and are expected
by 2017 to account for 94.5% of total downloads, with in-app purchases
accounting for 48% of total app store revenues.

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4.2.4 Online advertising

Online advertising uses the Internet as a medium to target and deliver
marketing messages to customers. Internet advertising offers a number of
advantages over traditional advertising. For example, many Internet advertisers
have developed sophisticated methods for segmenting consumers in order to
allow more precise targeting of ads. Many Internet advertising publishers have
also developed ways for clients to monitor performance of ads, tracking how
users interact with their brands and learning what is of interest to current and
prospective customers. Online advertising takes a number of forms, the most
prominent of which are display ads, in which an advertiser pays to display ads
linked to particular content or user behaviour, and search engine ads, in which
an advertiser pays to appear among Internet search results.
Online advertising involves a number of players, including web publishers,
who agree to integrate advertisements into their online content in exchange
for compensation, advertisers, who produce advertisements to be displayed
in the web publisher’s content and advertising network intermediaries, who
connect web publishers with advertisers seeking to reach an online audience.
Advertising network intermediaries include a range of players, including
search engines, media companies, and technology vendors. These networks
are supported by data exchanges, marketplaces in which advertisers bid for
access to data about customers that has been collected through tracking and
tracing of users’ online activities. These data can be analysed, combined, and
processed by specialist data analysers into a user profile.
In advertising-based business models, publishers of content are frequently
willing to offer free or subsidised services to consumers in order to ensure a
large enough audience to attract advertisers. The most successful advertising
companies have been those that combine a large user base with sophisticated
algorithms to collect, analyse, and process user data in order to allow targeted
advertisements. While traditional advertising involved payment for display
of ads for a specified period of time, with little way to monitor visibility or
user response, online advertising has given rise to a number of new payment
calculation methods, including cost-per-mille (CPM), in which advertisers
pay per thousand displays of their message to users, cost-per-click (CPC),
in which advertisers pay only when users click on their advertisements, and
cost-per-action (CPA), in which advertisers only pay when a specific action
(such as a purchase) is performed by a user.
Internet advertising is rapidly growing, both in terms of total revenues
and in terms of share of the total advertising market. PwC estimates that
Internet advertising reached USD 100.2 billion in 2012, which represented
17% growth from the previous year, and a 20% share of the total global
advertising market. The market for Internet advertising is projected to grow
at a rate of 13% per year during the period from 2012 to 2017, reaching

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USD 185.4 billion in 2017. Internet advertising would by that point become
the second-largest advertising medium behind television advertising, with a
29% share of the overall global market. Within the online advertising market,
search advertisement holds the greatest share at approximately 42% in 2013,
and is expected to continue to hold in excess of 40% of the market through
2017, although both mobile and video advertising are projected to grow
substantially by 2017 (to 15% and 8%, respectively) (PwC, 2013).

4.2.5 Cloud computing

Cloud computing is the provision of standardised, configurable, on-demand,
online computer services, which can include computing, storage, software,
and data management, using shared physical and virtual resources (including
networks, servers, and applications).2 Because the service is provided online
using the provider’s hardware, users can typically access the service using
various types of devices wherever they are located, provided they have a suitable
Internet connection.
The resources to which cloud computing customers are granted access
are not stored on a single computer. Instead, they are on many networked
computers that are available to everyone who has access to that “cloud”
of computing resources (which, depending on the cloud, could be a single
organisation, a community of organisations, the general public, or some
combination thereof). The system copies each user’s data and software to
other servers, which allows it to allocate requests for hardware resources to
whatever physical location is best able to satisfy the demand efficiently. Each
user has access to a large amount of computer resources when needed, and
only when needed. This redundancy ensures that the failure of one machine
will not lead to loss of data or software.
Cloud computing often provides customers with a cost effective
alternative to purchasing and maintaining their own IT infrastructure, since
the cost of the consumer resources is generally shared among a wide user
base. The advantages of cloud computing are largely driven by economies of
scale in setting up the infrastructure and maximising server usage by sharing
space among clients whose needs for space and processing power may vary
on a flexible basis.
The most common examples of cloud computing service models are:
• Infrastructure-as-a-service: In the most basic cloud-service model,
providers of infrastructure as a service (IaaS) offer computers –
physical or (more often) virtual machines – and other fundamental
computing resources. IaaS clouds often offer additional resources
such as a virtual-machine disk image library, raw (block) and
file-based storage, firewalls, load balancers, Internet Protocol (IP)

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addresses, virtual local area networks (VLANs), and software

bundles. The customer does not manage or control the underlying
cloud infrastructure, but has control over the operating system,
storage, and deployed applications, and may be given limited control
of select networking components (e.g. host firewalls).
• Platform-as-a-service: Platform as a service is a category of
cloud computing services that provides a computing platform and
programming tools as a service for software developers. Software
resources provided by the platform are embedded in the code of software
applications meant to be used by end users. The client does not control
or manage the underlying cloud infrastructure, including the network,
servers, operating systems, or storage, but has control over the deployed
applications.
• Software-as-a-service: A common form of cloud computing in
which a provider allows the user to access an application from various
devices through a client interface such as a web browser (e.g. web-
based email). It can be provided either to business customers (B2B)
or individual customers (B2C). Unlike in the old software vendor
models, the code is executed remotely on the servers, thereby
freeing the user of the necessity to upgrade when a new version is
available – the executed version is always the latest, which means
that new features go instantaneously to market without friction. The
consumer generally does not manage or control the underlying cloud
infrastructure, including the network, servers, operating systems,
storage, or individual application capabilities, with the possible
exception of limited user-specific application configuration settings.
Other X-as-a Service (XaaS) concepts include content or data:
• Content-as-a-service: Where rights are obtained and software is
provided to allow content to be embedded by purchasers, content can
be purchased as a service. This has been used particularly in the case
of user-created content.
• Data-as-a-service: Data from multiple sources can be aggregated
and managed by a service provider, so that controlled access to
that data can be granted to entities that may be geographically
and organisationally removed from each other, without each entity
needing to develop or acquire the infrastructure necessary to prepare
and process that data.
In the consumer markets, many cloud services (e.g. email, photo storage,
and social networks) have been provided free of charge, with revenue
generated through advertising or the sale of data on user behaviour, or on a
“freemium” basis in which basic services are provided for free and expanded

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services require payment. Other consumer cloud services, such as web

hosting or hard drive backup, are sold on a monthly subscription basis. In
B2B markets, cloud services are most typically sold by subscription, although
“pay as you go” models are increasingly available.

4.2.6 High frequency trading

High frequency trading uses sophisticated technology, including complex
computer algorithms, to trade securities at high speed. Large numbers of
orders which are typically fairly small in size are sent into the markets at
high speed, with round-trip execution times measured in microseconds. The
parameters for the trades are set with algorithms run on powerful computers
that analyse huge volumes of market data and exploit small price movements
or opportunities for market arbitrage that may occur for only milliseconds.
Typically, a high-frequency trader holds a position open for no more than a
few seconds. In other words, high frequency trading firms profit mostly from
small price changes exploited through small, but frequently executed trades.
Because trades are conducted entirely electronically, high frequency
trading generally does not require personnel in the country where the
infrastructure used to make trades is located. The implementation and
execution of successful trading strategies depends on several factors, including
the development of algorithms for trading, as well as writing programmes to
monitor losses and performance and to automatically shut down trading to
avoid fast-accruing losses. In addition, high frequency trading depends on the
ability to be faster than competitors, which means that it is extremely sensitive
to latency. As a result, the location of the server is extremely important to
the business, with servers located close to the relevant exchange providing a
meaningful advantage over servers located farther away. As a result, financial
institutions offer installation of trading engines directly adjacent to their own
infrastructure, minimising network latency.

4.2.7 Participative networked platforms

A participative networked platform is an intermediary that enables users
to collaborate and contribute to developing, extending, rating, commenting on
and distributing user-created content. User created content (UCC) comprises
various forms of media and creative works (written, audio, visual, and
combined) created by users. A range of different distribution platforms have
been created, including text-based collaboration formats such as blogs or wikis,
group-based aggregation and social bookmarking sites, social networking sites,
podcasting, and virtual worlds. Social networking applications are possibly
the best known participative networked platform but the same model is also
used in other areas, like fashion design, toy design, and computer games just to

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name a few. In general, UCC is created without the expectation of profit. The
participative platform featuring the UCC, however, may monetise the UCC in
a variety of ways, including through voluntary contributions, charging viewers
for access on a per-item or subscription basis, advertising-based models,
licensing of content and technology to third parties, selling goods and services
to the community, and selling user data to market research or other firms.

Box 4.1. Diversity of revenue models

The diversity of businesses in the current digital economy is illustrated by the

variety of ways in which businesses turn value into revenue. The most common
revenue models include the following:
i. Advertising-based revenues. One version of this model offers free or
discounted digital content to users in exchange for requiring viewing
of paid-for advertisements. Other models rely on providing advertising
through mobile devices based on location or other factors. A third type
concerns social media websites or platforms who typically build up a
large online user community before monetising their captive audience
through advertising opportunities.
ii. Digital content purchases or rentals. Users pay per item of download –
for instance, e-books, videos, apps, games and music would fall into this
category.
iii. Selling of goods (including virtual items). This category, which overlaps
to a degree with (1), would include online retailers of tangible goods
but could also cover online gaming, where users are offered a free or
discounted introductory product but are also offered purchasable access
to additional content or virtual items to enhance the experience.
iv. Subscription-based revenues. Examples include annual payments for
“premium delivery” with online retailers, monthly payments for digital
content including news, music, video-streaming, etc. It could also include
regular payments for software services and maintenance such as anti-
virus software, data storage, customer “help” services for operating
systems, and payment for access to the Internet itself.
v. Selling of services. This category overlaps with (iv) but would include
traditional services which can be delivered online such as legal services
(e.g. e-conveyancing), financial services (e.g. brokerage), consultancy
services, travel agency etc. It would also include a large range of B2B
services linked to enterprises who provide core Internet access and act
as Internet intermediaries (web hosting, domain registration, payment
processing, platform access, etc.).

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Box 4.1. Diversity of revenue models (continued)

vi. Licensing content and technology. Again, this category overlaps with
(iv) and (v) but might typically include access to specialist online
content (e.g. publications and journals), algorithms, software, cloud
based operating systems, etc., or specialist technology such as artificial
intelligence systems.
vii. Selling of user data and customised market research. Examples include
Internet service providers (ISPs), data brokers, data analytics firms,
telemetrics and data gained from non-personal sources.
viii. “Hidden” fees and loss leaders. There may be instances in integrated
businesses where profits or losses may be attributable to online
operations but because of the nature of the business, cross-subsidy with
physical operations occurs and it is difficult to separate and identify
what should be designated as ‘online revenue’. An example might include
online banking, which is offered “free” but is subsidised through other
banking operations and fees.

4.3 Key features of the digital economy

There are a number of features that are increasingly prominent in the

digital economy and which are potentially relevant from a tax perspective.
While these features may not all be present at the same time in any particular
business, they increasingly characterise the modern economy. They include:
• Mobility, with respect to (i) the intangibles on which the digital
economy relies heavily, (ii) users, and (iii) business functions as a
consequence of the decreased need for local personnel to perform
certain functions as well as the flexibility in many cases to choose
the location of servers and other resources.
• Reliance on data, including in particular the use of so-called “big data”.
• Network effects, understood with reference to user participation,
integration and synergies.
• Use of multi-sided business models in which the two sides of the
market may be in different jurisdictions.
• Tendency toward monopoly or oligopoly in certain business models
relying heavily on network effects.
• Volatility due to low barriers to entry and rapidly evolving technology.

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 4. THE DIGITAL ECONOMY, NEW BUSINESS MODELS AND KEY FEATURES – 85

4.3.1 Mobility

4.3.1.1 Mobility of intangibles

Development and exploitation of intangibles is a key feature of the
digital economy. This investment in and development of intangibles is a
core contributor to value creation and economic growth for companies in
the digital economy. For example, digital companies often rely heavily on
software, and will expend substantial resources on research and development
to upgrade existing software or to develop new software products.
This heavy reliance on intangibles can be present even where technology
is incorporated into a business model primarily to manage wholly tangible
resources. For example, an online retailer may develop a multi-layer digital
activity to manage a logistic platform including warehouses and shipping
capacity. As businesses evolve, the relative importance of these intangibles
frequently grows, resulting in further concentration of value in the
intangibles. Under existing tax rules, the rights to those intangible assets can
often be easily assigned and transferred among associated enterprises, with
the result that the legal ownership of the assets may be separated from the
activities that resulted in the development of those assets.

4.3.1.2 Mobility of users

Advances in ICT and the increased connectivity that characterises the
digital economy mean that users are increasingly able to carry on commercial
activities remotely while traveling across borders. An individual can, for
example, reside in one country, purchase an application while staying in a
second country, and use the application from a third country. Challenges
presented by the increasing mobility of consumers are exacerbated by the
ability of many consumers to use virtual personal networks or proxy servers
that may, whether intentionally or unintentionally, disguise the location at
which the ultimate sale took place. The fact that many interactions on the
Internet remain anonymous may add to the difficulty of the identity and
location of users.

4.3.1.3 Mobility of business functions

As noted above, improved telecommunications, information management
software, and personal computing have significantly decreased the cost of
organising and co-ordinating complex activities over long distances. As a
result, businesses are increasingly able to manage their global operations
on an integrated basis from a central location that may be removed
geographically from both the locations in which the operations are carried out
and the locations in which their suppliers or customers are located.

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One impact of these changes has been an expansion of the ability to

access remote markets, which has substantially increased the ability to
provide those goods and services across borders. This has been illustrated
by the dramatic growth of international trade in ICT services in recent
years. In particular, since 2000, the share of Computer and Information
services on world exports of services doubled from 3% to 6%, while that of
Telecommunication services increased from 2.2% to 2.3% (OECD, 2013).
For the OECD, the combined share of Computer and Information and
Communication services rose from 5.7% to 9.0% of total service exports.
Several important shifts in the provision of ICT services have occurred in
recent years. India has quickly become the leading exporter of ICT services,
followed by Ireland, the United States, Germany, and the United Kingdom.
China as well became one of the major exporters. These six countries
together represent about 60% of total exports of ICT services.
In addition, technological advances increasingly make it possible for
businesses to carry on economic activity with minimal need for personnel
to be present. In many cases, businesses are able to increase substantially in
size and reach with minimal increases in the number of personnel required
to manage day-to-day operation of the businesses (so-called “scale without
mass”). This has been particularly true in the case of Internet businesses,

Figure 4.3. OECD and major exporters of ICT services, 2000 and 2012
Billions of USD and percentages of total world exports of ICT services
Communication Computer and information Total value, 2000
USD billions
13.5
12.7
8.0
7.3
7.0
4.4
3.1
2.8
2.8
2.7
2.7
2.5
2.4
2.3
1.9
1.3
1.2
1.0
1.0
0.8
0.8
0.7
0.7
0.6
0.4
0.4
0.3
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.0
50
Magnified
3
Percentage of world ICT services exports
40
2
30
1
20
0
10
L
S

E
N
N
R
T
C

R
N
T
L
L
EX

L
K

K
PO

NZ
CH

IS
AU

CZ

ES
PR
KO

TU
DN

SV
GR
JP
HU

SV

0
D
L
A
U
R
N
D
N
A
R
E
L
P
ITA

N
R
T
X
S
L
S

E
N
N
R
T
C

R
N
T
L
L
EX

L
K

K
IR

BE

PO

NZ
CH

IS
SW

RU

AU

CZ
AU

ES
PR
ES
GB

IS

NO

KO

TU
DN

SV
LU

GR
US

FR
DE

CH

FI

JP
HU

SV
CA
IN

NL

Data for Canada, Finland, Iceland, Israel, Mexico, Norway, Slovenia, Turkey and the United States refer
to 2011 instead of 2012. For Luxembourg and Kuwait refer to 2002 instead of 2000, and for Denmark to
2004. Exports of computer and information services are not included for Mexico.
Source: OECD (2013), OECD Science, Technology and Industry Scoreboard 2013: Innovation for
Growth, OECD Publishing, Paris, http://dx.doi.org/10.1787/sti_scoreboard-2013-en.

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 4. THE DIGITAL ECONOMY, NEW BUSINESS MODELS AND KEY FEATURES – 87

which have in many cases quickly amassed huge numbers of users while
maintaining modest workforces. As a result, the average revenue per
employee of top Internet firms, as shown in Figure 4.4, is substantially higher
than in other types of businesses within the ICT sector.

Figure 4.4. Average annual revenue per employee of the top 250 ICT firms by sector,
2000-113
USD thousands
1 000 Internet
900
Software
800

700 Telecommunications

600
Semiconductors
500
Communications
400 equipment
300 IT equipment
200
Electronics & components
100

0 IT services
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: OECD (2012), OECD Internet Economy Outlook 2012, OECD Publishing, Paris, http://dx.doi.
org/10.1787/9789264086463-en.

The ability to manage business centrally while maintaining substantial

flexibility over the location of business functions has increased the ability of
businesses to spread functions and assets among multiple different countries.
While such globalisation of business among larger organisations is certainly
not a new phenomenon, the spread of the digital economy, combined with
the growing importance of the service component, as well as reductions in
trade costs due to trade and investment liberalisation and regulatory reforms,
have helped to remove logistical barriers and increase the pace at which such
globalisation is possible. Technological advances have also permitted greater
integration of worldwide businesses, which has increased the flexibility of
businesses to spread their activities among several locations worldwide,
even if those locations may be distant from each other and from the physical
location of their ultimate customers. In addition to improving the flexibility
of larger, more established organisations, advances in information and
communications technology have made it more possible for even small and

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mid-sized businesses to reach global markets from their inception. In short,

global interconnectedness has grown to unprecedented levels.
Advances in technology have improved access to real-time market
information and business analytics, and have improved communications
within and between firms. These improvements have improved the capacity
of businesses to manage their global operations on an integrated basis, with
individual group companies exercising their functions within a framework
of group policies and strategies set by the group as a whole and monitored
centrally. Improved telecommunications, information management software,
and personal computing have significantly decreased the cost of organising
and co-ordinating complex activities over long distances, and enabled the
creation of new and more efficient business models. This integration has
made it easier for business to adopt global business models that centralise
functions at a regional or global level, rather than at a country-by-country
level. Even for small and medium enterprises (SMEs), it has now become
possible to be “micro-multinationals” that operate and have personnel in
multiple countries and continents.
As worldwide operations have become more integrated, production
processes increasingly take place as part of global value chains in which
various stages of production are spread across multiple different countries,
and are performed by a mix of independent and affiliated suppliers.
Businesses are increasingly able to choose the optimal location for productive
activities and assets, even if that location may be distant from the location
of customers or the location of other stages of production. In addition, rapid
advances in information and communication technology have meant that
services such as data entry, information processing, research, and consulting
can increasingly be carried out remotely. These functions can be carried out
by related parties, or, if a business determines that it is more advantageous to
outsource the function, by an unrelated service provider.
There are limits to this flexibility, however. In general, fragmentation
of activities among multiple locations involves trade-offs between lower
costs for the activity itself and higher transaction and co-ordination costs. In
addition, skills and talent remain a critical resource in the digital economy.
Although many functions can be performed with limited personnel,
managers, developers, software architects, and designers, among other
key functions, remain instrumental. As a result, location of many of the
substantial functions of a digital business must occur in locations in which
these key people are willing to work. Further, although digital services can
substantially expand the reach of businesses, these digital services often
require a massive investment in infrastructure components. For example,
cloud computing providers must build “server farms” of interconnected
computers, and while there may be some flexibility as to where these

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 4. THE DIGITAL ECONOMY, NEW BUSINESS MODELS AND KEY FEATURES – 89

resources are located, concerns like access to inexpensive and reliable

sources of power and cooling may heavily influence the choice of location. In
addition, in many businesses the user experience is meaningfully improved
by proximity to the core infrastructure.
The result is that there are often compelling reasons for businesses to
ensure that infrastructure resources are placed as close as possible to where
key markets of users are, so that users experience less latency, shorter lag
time, and higher quality. In addition, in some businesses, the need for a
tangible presence in a jurisdiction for regulatory reasons may also limit
choices about where to locate infrastructure and business activities.

4.3.2 Reliance on data

It is common in the digital economy for businesses to collect data about
their customers, suppliers, and operations. For example, the use of a product
or service by a user may provide data about the user that has value to the
business as an input either in improving existing products and services or in
providing products and services to another group of customers.
Data can include both personalised data and data that is not personalised,
and can be obtained in a number of ways. In the case of personal data, as
mentioned in Chapter 3 (3.1.5 Use of data), it can be obtained directly from
customers (for example, when registering for an online service), observed
(for example, by recording Internet browsing preferences, location data, etc.),
or inferred based on analysis in combination with other data. It is estimated
that sources such as online or mobile financial transactions, social media
traffic, and GPS co-ordinates generate in excess of 2.5 exabytes (billions of
gigabytes) of data every day (World Economic Forum, 2012). The dividing
line between personal and non-personal data is not always clear; however,
as data obtained from multiple private and public sources will frequently
be combined in order to create value. A recent study quantifies the value
of the Data-Driven Marketing Economy (DDME) and looks at the revenues
generated for the US economy. The study found that the DDME added
USD 56 billion in revenue to the United States economy in 2012 and notes
that the real value of data is in its application and exchange across the DDME
(Data-Driven Marketing Institute, 2013).
Although the use of data to improve products and services is not unique
to the digital economy, the massive use of data has been facilitated by an
increase in computing power and storage capacity and a decrease in data
storage cost, as shown in Figures 4.5 and 4.6, which has greatly increased the
ability to collect, store, and analyse data at a greater distance and in greater
quantities than was possible before. The capacity to collect and analyse data
is rapidly increasing as the number of sensors embedded in devices that are

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90 – 4. THE DIGITAL ECONOMY, NEW BUSINESS MODELS AND KEY FEATURES

networked to computing resources increases. For example, while traditional

data collection for utility companies was limited to yearly measurement,
coupled with random samplings throughout the year, smart metering could
increase that measurement rate to 15 minute samples, a 35 000 time increase
in the amount of data collected (OECD, 2013). This has manifested itself in
particular in the concept of “big data”, meaning datasets large enough that
they cannot be managed or analysed using typical database management
tools. The value of the ability to obtain and analyse data, and big data in
particular, is increasingly well documented by market observers.

Figure 4.5. Estimated worldwide data Figure 4.6. Average data storage cost for
storage consumers 1998-2012
9 000 60
56.30 HHD SSD
8 000
50
exabytes (billions of gigabytes)

7 000
40
6 000 40

5 000
CAGR 2005-2015: 51% 30
4 000 CAGR 1998-2012: CAGR 2007-12:
-39% -51%
3 000 20

2 000
10
1 000
1
0 0 0.05
20 5
20 6
20 7
20 8
20 9
20 0
20 1
20 2
20 3
20 4
15

19 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
20 8
20 9
20 0
20 1
12
0
0
0
0
0
1
1
1
1
1

9
9
0
0
0
0
0
0
0
0
0
0
1
1
20

19

Source: OECD (2013), “Exploring Data-Driven Innovation as a New Source of Growth: Mapping the
Policy Issues Raised by ‘Big Data’”, OECD Digital Economy Papers, No. 222, OECD Publishing, Paris,
http://dx.doi.org/10.1787/5k47zw3fcp43-en.

For example, in a 2011 report on big data, the McKinsey Global Institute
estimated the value that could be created through the analysis and use of
big data at USD 300 billion in the health sector in the United States and at
EUR 250 billion in the general government sector in Europe. The same report
estimates that use of big data could generate a total consumer surplus of
USD 600 billion. Big data has substantial application in targeting government
aid and services as well. It has been used, for example, to monitor refugee
movements following natural disasters, in order to ensure that health
risks could be accurately predicted and aid could be well targeted (World
Economic Forum, 2012).

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The McKinsey Global Institute Report notes five broad ways in which
leveraging big data can create value for businesses:
i. Creating transparency by making data more easily accessible in a
timely manner to stakeholders with the capacity to use the data.
ii. Managing performance by enabling experimentation to analyse
variability in performance and understand its root causes.
iii. Segmenting populations to customise products and services.
iv. Improve decision making by replacing or supporting human decision
making with automated algorithms.
v. Improve the development of new business models, products, and
services.

4.3.3 Network effects

Networks effects refer to the fact that decisions of users may have a direct
impact on the benefit received by other users. A simple example of this is the
introduction of the fax machine. While a single fax machine had no utility by
itself, users choosing to purchase a fax machine received the benefit of the
decisions of earlier users to purchase a fax machine, in the form of the ability
to communicate through this new technology with an existing network of
potential counterparties.
These network effects are an important feature of many businesses in
the digital economy. Network effects are seen whenever compatibility with
other users is important, even where the primary purpose of a particular
technology may not be to interact with others. For example, a widely-adopted
operating system will generally have a larger amount of software written for
it, resulting in a better user experience. These effects are known as positive
externalities, meaning situations in which the welfare of a person is improved
by the actions of other persons, without explicit compensation. For example,
when additional people join a social network, the welfare of the existing
users is increased, even though there is no explicit agreement compensation
among the users for this improvement. Externalities can also be negative.
For example, as an increasing number of persons use a communications
network at the same time, congestion may decrease the value to each user of
the network, with no compensation among the affected parties (Easley and
Kleinberg, 2010).
Some network effects come from users’ marginal utility to each other:
the more users there are, the higher the value created is. A simple example
is a media sharing site, in which all content is generated by users, and the
experience of users is enhanced as additional users join and share content.

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Where a business model encourages interactivity among users, it tends to

encourage these network effects. For example, in certain business models,
network effects come from a competitive advantage gained from the critical
mass of buyers and sellers. A retail site may develop an architecture that
encourages users to review and tag products. These user reviews enhance the
ability of users to make informed choices, while product tagging improves
their ability to find products relevant to their interests.
Other network effects derive from vertical integration, relying on
synergies between different layers or different applications to create added
value and consolidate market position. This is particularly illustrated by the
trend toward the “Internet of Things”, in which companies deploy software
in many devices and objects, and leverage this web of infrastructure to sell
goods or services either to the owners of those devices or to advertisers.
In this model, hardware and software infrastructure becomes a privileged
channel to get in touch with end users and to create value by monetising their
attention (advertising-based business models), the data that flows from them,
or the externalities generated through network effects, or through selling
them goods or services.

4.3.4 Multi-sided business models

A multi-sided business model is one that is based on a market in which
multiple distinct groups of persons interact through an intermediary or
platform, and the decisions of each group of persons affects the outcome for
the other groups of persons through a positive or negative externality. In a
multi-sided business model, the prices charged to the members of each group
reflect the effects of these externalities. If the activities of one side create
a positive externality for another side (for example more clicks by users
on links sponsored by advertisers), then the prices to that other side can be
increased.
An example of a multi-sided business model involving positive
externalities for different sides of the market is a payment card system, which
will be more valuable to merchants if more consumers use the card, and
more valuable to consumers if more merchants accept the card. Similarly,
an operating system is more valuable to end users if more developers write
software for it, and more valuable to software developers if more potential
software purchasers use the operating system.
A negative externality from one side for another side (e.g. displays of
intrusive and unattractive advertising banners) can be offset by a lower price,
or even no charge or a reward for the users. The classic case in which one
side experiences negative externalities from the other side’s participation
is found in the media industry. In that case, a company attracts users by

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providing content (television or radio programming, a magazine, a trade

publication, a phonebook, or a newspaper) for free or at a cost less than
the cost of production. The media company displays advertisements to its
readers/listeners/viewers and earns revenue from advertisers whose ads it
displays. Alternatively, it might earn revenue from selling information about
its readers/listeners/viewers to interested parties.
The rise of the digital economy made multi-sided business models more
prevalent in a cross-border context. In this regard, two key characteristics of
multi-sided business models in the digital economy should be noted:
• Flexibility: The nature of digital information and the infrastructure
of the Internet greatly expand the facility to design and implement
multi-sided business models. Resources such as content, user
data, or executable code can be stored to create value long after
they have been produced. This specific nature of digital resources
makes them an asset in business models where the different sides
of the market can be created then dynamically adapted based on
evolving technology, the latest expression of consumer demand,
and a firm’s position on the market. In addition, as discussed below,
digital technology has enhanced the ability to collect, analyse and
manipulate user and market data, which has allowed platforms to
enhance the value to one side of a market of the participation of the
other side of the market.
• Reach: The digital economy also makes it easier to locate the
different sides of the same business model in different countries.
Whereas many traditional multi-sided business models such as
broadcasting paid for by advertising, or shopping malls were
confined to a limited perimeter due to physical constraints or to
regulations, over-the-top businesses in the digital economy can
more easily connect two sides that are located far from one another
to maximise value on each side. For instance, resources designed
to collect data can be located near individual users, whereas the
infrastructure necessary to sell this data to paying customers can be
located elsewhere.
The digital economy features two prominent categories of multi-sided
business models. First, a business can operate several applications that
provide complementary services. This creates two types of synergy: on
the one hand, the various activities pool their resources such as executable
code, content, or user data; on the other hand, the activities may be put into
a package that is more attractive for users. Second, vertical platform models
are used to make resources available for third-party developers so as to
attract their creativity as part of open innovation strategies. A platform is
often the result of the large-scale development of an application that gets

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commoditised. For example, a company may develop a social networking

service, using internally produced applications to attract consumers and
funding operations through the sale of advertising. The company may also
choose to open an application programming interface (API) which allows
developers to easily implement applications using the platform. Access to
the API minimises the developers’ initial investment and facilitates their
access to the market of consumers that use the platform. The participation
of the developers, in turn, enhances the user experience, thereby further
strengthening the company’s position in the marketplace.

4.3.5 Tendency toward monopoly or oligopoly

In some markets, particularly where a company is the first actor to
gain traction on an immature market, network effects combined with low
incremental costs may enable the company to achieve a dominant position in
a very short time. This ability to gain traction can be enhanced where a patent
or other intellectual property right grants one competitor the exclusive power
to exploit a particular innovation in a particular market. The impact of these
network effects tend to lead to this result, for example, where companies
provide a platform or market in which users on one side of the market prefer
to use only a single provider, so that value to those users is enhanced when
a single standard is chosen, and the price that can be charged to the other
side is enhanced because the platform becomes the only means of access to
those users. Ease of adoption of a new platform means that some players, as a
result of customer choices compounded by network effects, have been able to
rise to a dominant market position extremely quickly. In some cases, despite
the volatility outlined below, companies have been able to leverage that
market position to secure dominance. In markets that feature this tendency,
network effects are magnified. It should be noted, however, that in the digital
economy, many networks operate simultaneously, with the result that in
many cases competition in a monopolised market may be influenced by other
markets, which combined with the reduced entry barriers, can moderate
monopoly power in the first market.

4.3.6 Volatility
Technological progress has led to progress in miniaturisation and a
downward trend in the cost of computing power. In addition, neither an
Internet end user nor in many cases the service provider are required to pay a
marginal price for using the network. These factors, combined with increased
performance and capital expenditure have markedly reduced barriers to entry
for new Internet-based businesses. These factors have combined to foster
innovation and the constant development of new business models. As a result,
in short periods of time, companies that appeared to control a substantial part

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 4. THE DIGITAL ECONOMY, NEW BUSINESS MODELS AND KEY FEATURES – 95

of the market and enjoyed a dominant position for a short period of time have
found themselves rapidly losing market share to challengers that built their
businesses on more powerful technology, a more attractive value proposal,
or a more sustainable business model. Due to the fast pace of innovation, the
few companies that have managed long-term success typically have done
so by investing substantial resources in research and development and in
acquiring start-ups with innovative ideas, launching new features and new
products, and continually evaluating and modifying business models in order
to leverage their market position and maintain dominance in the market.

Notes

1. E-commerce includes orders made over the Internet, through an extranet (a

network where outside business partners, supplier or customers can have limited
access to a portion of enterprise intranet/network), or through an electronic data
interchange (EDI – a proprietary electronic system used for exchanging business
data over networks).
2. Cloud computing is defined in the report of the US National Institute of Standards
and Technology (NIST) as ‘‘a model for enabling ubiquitous, convenient,
on-demand network access to a shared pool of configurable computing resources
(e.g. networks, servers, storage, applications, and services) that can be rapidly
provisioned and released with minimal management effort or service provider
interaction.’’
According to NIST, the cloud model is composed of five essential characteristics:
• On-demand self-service: A user can unilaterally act without requiring
human interaction with each service’s provider.
• Broad network access: Capabilities are available over the network and
accessed through standard mechanisms that promote use by heterogeneous
client platforms (e.g. mobile phones, laptops, and PDAs).
• Resource pooling: The provider’s computing resources (e.g. storage,
processing, memory, network bandwidth, and virtual machines) are pooled
to serve multiple users using a multi-tenant model.
• Rapid elasticity: Capabilities can be rapidly and elastically provisioned.
• Measured Service: resources use can be monitored, controlled, and
reported providing transparency for both the provider and consumer of the
utilised service.

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96 – 4. THE DIGITAL ECONOMY, NEW BUSINESS MODELS AND KEY FEATURES

3. The ICT Top 250 list is a well-established list compiled by the OECD since 2002.
The sources used to identify the top ICT firms include Business Week’s Information
Technology 100, Software Magazine’s Top 50, Forbes 2000, Washington Post 200,
Forbes Largest Private Firms, Top 100 Outsourcing, World Top 25 Semiconductors.
The list relies on financial reports available publicly. The OECD defines ICT
activities as production of goods or services “primarily…intended to fulfil or enable
the function of information processing and communication by electronic means,
including transmission and display” and therefore ICT firms are those that produce
the equipment, software and services that enable those activities. Each of the top
250 firms is classified by ICT industry sector: i) communication equipment and
systems; ii) electronics; iii) semiconductors; iv) IT equipment and systems; v) IT
services; vi) software; vii) Internet; and viii) telecommunication services. Note that
these figures describe total revenue earned, rather than net profits.

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Addressing the Tax Challenges of the Digital
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OECD (2014), “The digital economy, new business models and key features”, in Addressing the Tax
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DOI: https://doi.org/10.1787/9789264218789-7-en

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