How large are UK e-commerce markets?
2.1 Recent industry research(5) shows that over one million people in the UK became Internet users for the first time during the third quarter of 1998. Fifteen per cent of the adult population in this country have now visited the World Wide Web. This puts us some two years behind the US, where web users now represent 37 per cent of the adult population, but ahead of Germany (ten per cent) and France (eight per cent).

2.2 The UK is also behind the US in the use of the Internet for commercial transactions, although on a par with Germany and Japan. As Figure 4 illustrates, e-commerce is still in its infancy in Europe. But latest published data from the International Data Corporation suggests that the value of Internet commerce in Western Europe will grow at an average rate of over 120 per cent up to 2002 - an estimate which they expect to revise significantly upwards shortly in the light of current research.

Figure 4 Internet commerce as a proportion of GDP (1998 estimate)

How do UK businesses measure up?
2.3 DTI benchmarking studies(6), which use primary research to benchmark the uptake and use of ICTs in the UK, US, Japan, Germany and France, show that we are on a par with the US and Japan in business ownership of PCs with modems, but we lag behind in the use of these for networking applications (see Figure 5).

2.4 The benchmarking studies have also revealed that, although we are behind the US, we are catching up. Business use of the Internet and web-sites grew by 37 per cent and 40 per cent respectively in the UK last year, compared with 5 per cent and 11 per cent in the US. That said, growth rates in Germany and France were even faster, albeit from a much smaller base.

Figure 5 Business uptake and use of digital technologies

2.5 The Competitiveness White Paper(7) announced that the Government would work to achieve a target of one million businesses wired up to the digital market place by 2002 - ie making regular use of external networking technologies such as the Internet. Figure 6 shows that our starting point is 12 per cent, or some 350,000 businesses - ahead of France and Germany but significantly behind the US and Japan, at 17 per cent each.

2.6 Figure 6 also highlights a significant difference between the performance of large businesses and SMEs in the UK. While at all levels we are ahead of Germany and France, our SMEs lag behind the US and Japan. Our large businesses however are world-leaders.

Figure 6 Proportion of business which regularly use external networking technologies

What will drive future development of the digital economy?
2.7 To a large extent, the faster UK growth rates highlighted above reflect a relatively later start by UK business. What can Government and business do in the UK to ensure that we continue to grow faster, and leap-frog ahead of the US and Japan?

2.8 That was the question posed by the Information Age Partnership, a group of over thirty Chief Executives from major international IT and communications companies, who came together in 1998 to advise the Government on the policy implications of the digital economy. To help answer it, the Information Age Partnership established a task group to identify the factors which are likely to drive future development of the digital economy, and to benchmark the UK's performance in each factor.

2.9 The task group took as its starting point the model developed by Spectrum Strategy Consultants in the annual Benchmarking Study commissioned by DTI (see Figure 7). This emphasises the wide range of factors which affect demand for digital products and services - including the existence of a dynamic and competitive indigenous supply industry. The task group collected a range of data to benchmark the UK's performance in each of the success factors identified in this model. This, along with further analysis by DTI, is set out in the appendix to this report.

Figure 7 Drivers of the Digital Economy

2.10 The broad picture which emerges from the detailed quantitative data in the appendix is one which shows the UK behind, but catching up with, the world leaders. In particular, it highlights a number of key strengths:

• A world-class IT and communications infrastructure. A recent EU benchmarking study found the UK had the most advanced infrastructure of all G7 economies other than the US, and was well ahead of the EU average. The UK's early lead on digital television - from early 1999 we will be the only country with digital services available on satellite, cable and terrestrial television - will help strengthen this leadership.
• Relatively low telecommunications prices - although we do less well on Internet access charges and PC prices.
• A regulatory structure which facilitates one of the most intensely competitive market-places in the world.

2.11 The following section sets out the Government's plans for accelerating the process of catch-up, and achieving its goal of making the UK the best place in the world to trade electronically.