PwC's Industry Gini Index

How ''winner-take-all'' is shaping US business

Do you ever get the feeling that just one or two uber dominant companies completely rule their respective industries?

Guess what: They do.

The nature of competition within a critical swath of industries - many industries, not just high-tech - has changed forcefully in recent years. In many respects, they’ve turned towards a winner-take-all reality. One industry winner, maybe two, and occasionally three are increasing the gap between themselves and the rest of the pack. For some, that change has been evolutionary and unstoppable; for others, not so much, at least not yet. At stake is everything from how businesses set strategy to which companies are even viable.

PwC’s Industry Gini Index

PwC’s new Industry Gini Index measures the strength of that all-or-nothing force. It takes inspiration from economists’ measure of income inequality in nations. The higher the index value the more unequal the distribution of income in a nation. Applied to enterprise value distribution within an industry, the higher the Industry Gini Index, the more dominant a few players are in that industry.

PwC’s Industry Gini Index is a barometer of the changing competitive landscape resulting from fewer businesses becoming more dominant in their industries; it captures the emergence of the digital network platform companies in the past decade. (See the full methodology below.) The index will be updated on a quarterly basis to reflect changes within industries.

The age of the ‘bionic company’

The companies that have contributed the most to recent US stock market gains are those leveraging digital network platforms, described by MIT professors Andrew McAfee and Erik Brynjolfsson as free, perfect and instant (“digital environments with near-zero marginal cost of access, reproduction, and distribution”) in their book Machine, Platform, Crowd: Harnessing our Digital Future. The book highlights the dominance of a few platform companies in users, data, patents, and consumer attention.

The leaders - dubbed bionic companies - leverage three new forms of capital:

  • behavior capital: the collection and modeling of data that tracks behaviors of people, companies, nature, and things
  • cognitive capital: algorithms representing the knowledge of the organization and its people that can be used to drive learning and decisions; and
  • network capital: the set of connection points with people and machines that an enterprise can use to develop and execute a successful strategy.

These forms of capital have digital bases that let them grow exponentially and reinforce one another. Maybe it’s not surprising, then, that six of the Industry Gini Index’s top seven industries are in Technology, Media, and Telecommunications (TMT). In fact, many of these TMT industries have seen just one business capture most of their industries’ growth in enterprise value since 2006.

“Rather than a rising tide lifting all boats, the influx of new products and innovation has instead manifested itself as more prosperity, but for fewer businesses.”

Other industries are not far behind in the push for winner-take-all, aided by digital network platforms and similar tech-oriented forces spreading into physical markets. Innovation- intensive Healthcare is one, and the digital revolution in Retail & Consumer makes it another.

Reinforcement for the trend

At the same time, 83% of Energy industries have fallen in the index as factors like shale bring more competitors into the ring before their likely shakeouts begin. In fact, forthcoming PwC research indicates that many of the industries now appearing to defy winner-take-all may see the trend prevail as the few companies that understand how to use the three new forms of capital begin to create more value and take share away from other players.

Many forces are at play - trends in antitrust enforcement, to name one - but the economics of digital networks drives towards the winner-takes-all phenomenon.

Could it happen in your industry?

What are the conditions that enable winner-take-all, and how does a company build the capital to become the winner? Will the winners see their prosperity last? For how long? What makes their network platforms vulnerable to being overturned?

Some well-known businesses that have combined digital network platforms with advertising have prospered in the winner-take-all environment, but they are seeing new breeds of competitors chip away at them and squeeze their online adshare. How can they renew their capital to sustain dominance? What can challengers do to fully supplant them?

And looking ahead, what does this tell us about which industries will be the next to turn towards winner-take-all? Will their winners find a tighter grip?

Business leaders need to consider the state of their specific industry to determine what the winner-take-all bionic company impact could be, or will be.

Offline-oriented businesses - or those that historically have been thought of as offline, such as transportation, dining and lodging - are already leveraging digital network platforms, and the Industry Gini Index indicates that many diverse industries across sectors are on winner-take-all paths. Can your industry be far behind?

Methodology

For the mathematically inclined

Data and industry classification

PwC’s Industry Gini analysis is based on enterprise value data provided by Capital IQ, covering businesses that have been traded on an exchange at some point in time. “Enterprise value” is the value of a business’s operations calculated as the market value of equity plus debt minus cash and equivalents (in effect, what it would cost to buy the operations outright). For industry categorization, Capital IQ’s “sub-industry” level is used due to its balance of uniformity and breadth of competitors within each sub-industry. Of 158 sub-industries, 94 had sufficient data.

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Scope and time period

Given the focus on industry dominance issues, the analysis covers each sub-industry’s top 10 businesses as measured by enterprise value, which captures the collective wisdom about a business’s strength. Analyzing competition issues requires limiting scope to competitors within a market, selected to be the US market, which constitutes a defined, critical segment with prevalent head-to-head competition. The analysis starts in 2006, the last year before the build up to the global financial crisis started impacting financial data, and ends 10 years later.

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Calculation

The Industry Gini Index is based on the Gini Coefficient, a commonly-used measure of inequality across a group. Published in 1912 by Corrado Gini, the Gini Coefficient is best known for uses in economic studies that measure income inequality within nations, and the underlying mechanics make it applicable across types of data. Its value ranges from 0 to 1, reflecting the extent that the group has perfect equality (0) or inequality (1). The index's Gini Coefficient calculations were run via the analytic equation developed by Angus Deaton, who won the 2015 Nobel Prize in Economic Sciences for related work. 

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Craig Scalise

US - IFS, PwC US

Tel: +1 (312) 298 2270

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