Who’s making money on the Internet? Comparing ROIC across Internet sectors

[Commentary] One of the background questions in Internet policy debates concerns what and who contributes value to the overall system and who extracts profits. In a perfectly functioning market, profits will reward innovation, investment, and the creation of value for users; unfortunately, there exist very few perfect markets.

A number of things distort market efficiency; government policy is certainly one such thing, and market power is another. Return on invested capital (ROIC) is a very good way to evaluate competition, profitability, and leverage in capital-intensive industries. According to Morningstar, firms with 15 percent or more ROIC for a number of years are most likely have a “moat” that protects them from competition. So let’s look at three sectors: content creators such as Disney and Viacom, who create the movies and TV shows that we stream into our homes; network services firms such as Comcast and AT&T, who provide us with broadband networks; and Internet “edge services” such as Netflix and Google, who connect network users with content and services.