UK’s position in the digital economy

You could be forgiven for having mixed feelings about the digital economy in this country. Debate in and around the tech industry in recent months has been dominated by two distinct interpretations of its long-term prospects.

The first sees the UK, particularly London, as a world-class centre for internet businesses, second only to Silicon Valley for the quality of companies, services and products that it fosters and produces.

The second is, more than anything, a rebuttal of the first, characterised by claims of a “bubble” that has been generated by the media as well as politicians eager to bask in the reflected glory of hip, intelligent companies.

In fact, according to some proponents of this second point of view, the UK lacks the necessary funding, talent and supporting infrastructure to take advantage of the massive opportunities afforded by the evolution of the internet and the technology that goes with it.

But who is closer to the mark?

According to data from the Technology Strategy Board, “the internet economy” is already a crucial pillar of the country’s overall economic strength and is rapidly growing in importance. The government body’s figures show that growth currently stands at 10 per cent a year and that it will account for 10 per cent of total UK GDP by 2016. The computing and telecoms, software and data, broadcast and publishing industries together already contribute more than £100 billion.

There are many areas in which UK digital businesses are world leaders, including finance, fashion and e-commerce

Despite this, the new chief executive of Tech City UK, Gerard Grech, says that optimism should be tempered with a sense of realism. “Think about this: today there are about 1.2 billion smartphones in the world. There will be three billion by 2017. So many more people will be able to access the internet. And the more people become part of the network, the more competitive it becomes. The opportunities are endless, but we have to continue to invest in skills, and entrepreneurs and their businesses to make sure we become a powerhouse. It’s about competing and building job growth,” he says.

Mr Grech, whose organisation is tasked with serving as the link between the government and the UK technology industry, says that a number of recent developments have been significant steps in the right direction. The IPO (initial public offering) of Just Eat, which became the first UK company to list on a new “high-growth segment” of the London Stock Exchange in April, is just one. Developments around “tech talent visas” and London-based Balderton Capital’s announcement that it will invest $305 million in “Series-A” tech companies in Europe offer further cause for encouragement.

The case for the importance of the digital economy to the UK is made stronger by data released by Tech City UK, which shows that between 2009 and 2012, 83,000 new technology, digital and media jobs were created in London, while the number of tech and digital companies grew by 76 per cent.

London also has a strong claim to be considered home to the second most significant cluster of digital businesses in the world. It boasts 582,000 people employed in the tech sector, whereas New York, widely considered to be its nearest competition, has a total of 262,000 jobs in the industry.

James Wise, who as principal at Balderton Capital, will oversee some of the company’s investment in digital businesses, says there are many areas in which UK digital businesses are world leaders, including finance, fashion and e-commerce, but adds that there remain others in which we’re off the pace.

“With particular regard to new web technology and software, the UK lags behind in terms of skills. London has a highly educated workforce. But we don’t have that same concentration of specialist skills. When it comes to infrastructure, human capital is the most important thing and that’s where we could improve,” says Mr Wise.

Another often-cited limitation of the digital economy in the UK is the lack of interest in technology companies on the public markets. King, the computer games company that made Candy Crush, is based in the UK, but chose to float on the US NASDAQ in March.

Mr Wise mentions NaturalMotion (bought by Zygna for $527 million) and DeepMind (sold to Google for $400 million) as recent examples of British companies that could have opted for a growth-boosting IPO in the UK, but didn’t.

“Now that’s starting to change,” he says. “The EIS [Enterprise Investment Scheme] scheme is encouraging people to put more of their assets into businesses and some government funding is being used to create accelerators. That’s encouraging.”

Ironically, Mr Wise’s advice for individual companies hoping to seize the opportunities offered by the digital economy is not to think of themselves as “digital” per se. “What we’re seeing is that there is no longer the idea of a distinct online world and offline world or even mobile versus desktop. Those lines are being blurred to the point where we’re constantly online, and people’s interactions with the offline and online world need to be seamless. As a company, you need to take a holistic approach,” he concludes.