McKinsey Report: 18 New Arenas for Competition, from Streaming to Space

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Report Title 

The Next Big Arenas of Competition (PDF version) — McKinsey Global Institute

Published

October 23rd, 2024

Most Useful For

Boards, C-Suite, R&D, M&A, Strategy

Data Sources and Definitions

McKinsey takes a longitudinal approach to analyzing industrial data across the world’s 3,000 largest companies using a 15-year span between 2005 and 2020 to delineate a decade boundary and ensure consistent, well-established data.

Arenas, as opposed to industrial sectors, are where the biggest bets are being made in R&D and the locus of much new value creation. The 18 arenas in the report are hyper dynamic. For example, collectively they were generating just nine percent of the total data sample’s economic profit in 2005. By 2019, they made about half (49 percent) of economic profit. And importantly, they are sort of the “stellar nurseries” for future startups or rising stars. By the same token, arenas are also typically dominated by giants. And on the globally geo-competitive stage, the 18 arenas are currently dominated by two geographies: the US and Greater China.

But what specifically makes an arena an “arena”? 

Arenas are not industries. For example traditional retail banking is an industry, but not a very dynamic one. However, payments (think fintech) is an arena. Or, construction is an industry, but modular construction is an arena.

Arenas have these special characteristics:

• Enable new entrants as early-stage innovators (think Tesla in EVs)
• Spawn giants who grow faster than traditional firms (think Amazon for e-commerce)
• Concentrate actors into fierce competition in red shark infested waters
• Scale globally; e.g., ½ of arena revenues are generated outside firm’s home region.

McKinsey also identifies a “secret sauce” for arenas which they call the “creation potion” made up of three components:

1. Step-change disruptive innovations in technology or business models; e.g. generative AI
2. Escalatory investments, those mutually compounding ones made by companies within an arena that spawn self-reinforcing cycles of growth; e.g., the current AI arms race, and
3. A sizable expanding market where early demand enables rapid value creation. OpenAI’s chatGPT stimulating demand all the way up the value chain benefiting players like NVIDIA is a prime example of this rapid expansion phenomenon. 

Those ingredients produce an arena, which is a mode of hyper-competition characterized by fast growth and high dynamism, or what they call “shuffle rates,” where companies can quickly go from #10 in a category to #1 in a decade’s time — or vice versa.

Key Findings

• The 18 arenas of tomorrow will generate $29 to $48 trillion in revenues by 2040 and $2 to $6 trillion in profit. (See “One Great Chart,” below, for a list of the 18 arenas along with expected growth rates.)

• For this summary, I’ll highlight three of the 18 arenas: electric vehicles, streaming video, and space.

The Electric Vehicles Arena

Several factors make this sector into an arena of tomorrow. On the step change front, breakthroughs in battery tech over the past decade pushed the average range of EVs from 130 kilometers (80 miles) to 340 kilometers (210 miles). Lower-cost EV models lowered the average purchase price from $55,000 to $37,000 USD, making the lifetime cost of ownership on par with internal combustion engine (ICE) cars. Plus, the mandates from EU countries banning ICE sales along with incentives in Canada, New York and California created a tipping point in demand. R&D spending is, as expected in an arena, very high, with Tesla outspending even Ford and Toyota with $4 billion in 2023, which is $2,200 per car.

By the numbers:

• EV sales estimated to quadruple from 13 million in 2023 to 31-46 million by 2030
• Revenue for commercial and consumer combined will go from $590 billion to $2.5 trillion.

There is fierce and intensifying competition with Chinese brands leading the way. For example, Chinese market leader BYD surpassed Tesla in global EV sales last year and in China, almost 30% of new passenger cars are EVs. OEMs like BMW and Ford report significant EV sales growth. 

The factors that are working against an outright hockey stick for EVs, and possibly making this not an arena in the future are:

The Streaming Video Arena

Streaming video is one of the identified spinoff arenas, a highly competitive and dynamic part of the wider video and audio entertainment sector. Netflix is the dominant story making up 27 percent of global subscription sales with Disney, Hulu, Amazon and YouTube capturing the same amount when they are combined. M&A has consolidated.

By the numbers:

• Poised to grow from $160 billion in 2022 to $510 billion (even $1 trillion) in 2040 depending on the CAGR hovering between 6 percent to 11 percent
• As a share of the overall video entertainment market, streaming is set grow from 24 percent to 43 percent
• Global households that stream video grow from 670 million in 2022 to 1.0-1.4 billion in 2040
• Spending per household grows from global average of $10/mo to $40/mo by 2040.

Behind those numbers are some variable factors such as the pace of growth in developing countries, the shift from cable fees to streaming ones, higher-priced subscriptions from bundled offerings like Hulu, Disney+ and ESPN+. Particularly up for grabs is where streaming and sports go together. The NFL and FIFA have struck rights agreements with providers like Amazon, Peacock, etc. Lastly, have you noticed your Amazon Prime doesn’t go as far as it used to? Ads are the new revenue multiplier. It’s now common for AmazonPrime viewers to see ads, and Netflix and others are rolling out ad programs.

The dampening or inhibiting factors on all this growth to consider are:

The Space Arena

This arena is characterized by exponentially decreasing launch costs for reusable launch vehicles like those developed by SpaceX, the miniaturization of satellites creating mega-constellations like StarLink that have spawned a new breed space-based services such as Chinese mining company Origin Space that collects space junk in orbit and plans to start commercial asteroid mining by 2045. We’re even seeing the rise of space tourism with Crunchbase listing 13 active startups such as Florida-based Space Perspective.

Recent milestones include India’s Chandrayaan-3 landing on the moon with just a $74 million budget (a smaller budget than the Hollywood film “Interstellar”!) and Saudi Arabia and Peru’s space initiatives, the latter creating a program called “Internet para Todos” for rural internet connectivity.

By the numbers:

• Private investment into this area now at $290 billion
• 600 startups operating here (up from 250 in 2010)
• 1,800 companies have taken private equity investments.

State sponsored civil applications in space are being pursued by the big traditional aerospace firms, but new entrants with specific applications such as climate monitoring or disaster recovery are making inroads. Similarly, security and defense/intelligence applications are in this arena where incumbents like Northrop Grumman, Lockheed Martin, Boeing, Raytheon know how to work the federal contract process, but there is room for startups to pick away at vertical niches as government procurement has become easier to navigate.

The market expansion aspect of this arena is exemplified by players that are achieving scale and virtuous network effects that may effectively lock out other competitors. Clearly Musk’s companies  fit this winner take all dynamic. This arena’s total revenue is projected to reach $1.1 trillion to $1.8 trillion by 2040.

One Great Chart

Questions to Discuss with Your Team

• How much of our current investment portfolio is covered (or not) by these arenas?
• Where do our current business units intersect with any of these emerging arenas? 
• What about our partners and customers, can we help them play better in these arenas?
• Do any of the arenas pose significant threats (or opportunities) for us?
• Do we have the resources to invest in and compete in any of these environments?
• Do we have the talent we need to succeed in any of these highly competitive arenas?
• Do we have the culture of agility and experimentation needed for these arenas?
• Should we build, buy, or partner with others to gain access to these arenas?
• What are the social implications of these arenas, and how must we mind the legal and ethical implications?
• How can we apply our data and AI to gain real time insights into these fast moving markets and stay poised to make strategic bets?

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