Europe’s overlooked technology sector is thriving

In terms of market capitalisation, the sheer scale of the leading US technology companies is extraordinary: the combined equity value of Facebook, Amazon, Apple, Netflix, Google and Microsoft is currently around $4 trillion, an eighth of the S&P 500 Index. [1] China has also produced giant, fast-growing technology leaders: Alibaba and its spin-offs, and Tencent.

Where is Europe among the global technology elite? The continent’s failure to produce a mass-market business with global scale is frequently cited as a sign of weak entrepreneurial culture, and culturally symptomatic of its venture capitalists’ lack of vision and ambition.

Perhaps. But for one thing it is untrue to say that Europe has not produced massmarket technology winners. Spotify was founded in Sweden, although is listed in the US, and is the global leader in music streaming, [2] while Skype, though owned by US parents since 2005, was founded in Europe.

This aside, the US and China have been far more successful in building huge platform businesses in social media, advertisingfunded search and on-demand video. This is largely because success in these fields is founded on access to scale via a huge domestic market. As a group of fragmented, distinct markets, Europe could never offer such a hospitable environment.

A DISTINCTIVE YET THRIVING TECH SECTOR

But in other areas, Europe has enjoyed significant successes. Given the difference between the US and China on the one hand, and a more fragmented Europe on the other, it is not surprising that Europe’s technology sector looks very different and its successes lie in alternative areas.

A key area of strength is in business-tobusiness segments – Germany’s SAP is an example of a global leader in enterprise software, with annual revenues of about €25 billion and a market cap of almost €140 billion, [3] while Interxion, one of our portfolio holdings, dominates the European data centre market (see page 10).

B2B markets tend to be niches rather than bigger sectors such as social media, but they are frequently global and can offer huge potential for growth and returns. France’s Dassault Systèmes, another of our holdings, is the leading global supplier of product design and manufacturing software, and since 2010 has more than doubled its revenues to €3.5 billion [4] – yet few Facebook users will ever have heard of it. Madrid-listed Amadeus is the world’s biggest provider of search and booking services to airlines and travel companies, with a market share approaching 40%. [5]

In areas such as medical technology, Dutch electronics group Philips, founded in 1891, has transformed itself into one of the world’s leading health technology companies, having exited its legacy lighting business. Medtech is a field in which European R&D is producing a large crop of innovative start-ups and university spinouts – thus Oxford Nanopore, for example, is challenging Illumina in gene sequencing, a market expected to grow seven-fold over the medium term.

Although Amazon and Alibaba dominate online retail, European businesses have been pioneers in areas such as appbased takeaway food and are building international groups both organically and via acquisitions. Just Eat and Takeaway.com – founded in Denmark and the Netherlands respectively – are leading European consolidators. Uber by comparison was a late entrant to the market for home food delivery.

FINTECH AND PAYMENTS LEADERS

If the nature of the US and Chinese markets has ensured they have been best-placed to produce certain types of technology champion, the same is true of Europe. In some sectors, such as food marketplaces, national champions have emerged and only then consolidated into European groups to capture greater economies of scale. In others, such as retail financial services, issues of culture and regulation mean companies do not expand across borders. But even so, the leading players have built attractive and highly profitable businesses: Finecobank in Italy and Avanza in Sweden.

The development of tech-based financial services in Europe – and especially the emergence of venture capital-backed startups – highlights another advantage Europe boasts: the willingness of its regulators to allow disruptive innovation.

Regulation has worked to the advantage of European technology companies before. In online gambling, European entrants gained an early lead after 2000 while US regulators suppressed internet gaming. In financial services, the willingness of European regulators, especially in the UK,to encourage innovation to satisfy client needs has led to a flourishing fintech sector.

Europe leads in areas like app-only banks, with private players such as Monzo, Revolut and N26 acquiring millions of customers among younger consumers – and planning US launches – while London-based Transferwise, founded by two Estonians, has created a huge retail foreign exchange platform. OakNorth has helped automate credit decisions on small business loans and is now among the most highly valued fintechs in Europe. It recently announced a $440 million investment from Softbank’s Vision Fund, valuing the company at $2.8 billion. [6]

In another key financial sector, payments, Europe has also produced successes: in March, Worldpay, a major European player, was acquired by US firm FIS in a deal worth €43 billion including debt, [7] while the Dutch e-commerce and point-ofsale payments company Adyen listed in Amsterdam last year and has a value of nearly €20 billion. [8]

COMPETING SUCCESSFULLY

Europe’s tech sector may not have created competitors to the US consumerfacing platform businesses that dominate our idea of what success looks like for technology companies. But that is because Europe differs from both the US and China. It is the distinctive characteristics of the European market that dictate where the strengths of its technology sector will lie, and where conditions are favourable European leaders are competing successfully on a global scale.