How big is the UK’s internet economy?

I am entirely unable to understand Boston Consulting Group’s much publicised claim that the “internet economy” contributes 8.3% of UK GDP. They do not define what they mean and I cannot reconcile it with the numbers. Most of the discussion in their document is of online retail so that is clearly important, but lets start with a key question.What exactly is divided by GDP to get this 8.3%? It would not make sense for it to be sales, because sales cannot meaningfully be compared to GDP (a useful comparator would be value added, or possible profits). On the other hand it is very hard to find internet related numbers that add up to 8.3% of GDP any other way.

Retail sales are obviously going to be an important part of the answer. The UK does have a high proportion of online sales, which in the last 12 months (to February 2012) reached 9.1% of retail sales and a total of £31bn. While this looks impressive, it means that all online retail combined manage about three quarters of Tesco’s UK sales (and less than half Tesco’s global sales).

The real problem is that £31bn of sales, much of which is low margin (because the internet makes price comparisons easy) means an online retail value added that is, at best, going to generate a lot less than that of the UK’s £1,500bn GDP. There is about another £4-5bn from online advertising. We could add telecoms to that, but voice and SMS are not internet services, so we will still be well short of the £120bn or so GDP share claimed. Where does the remaining £100bn or some come from?

I am also very sceptical about claims for continued high growth. With internet access available to 82% of households, most people who want to shop online can, and a high proportion of sales of the products best suited to online sales are already sold online.