Today’s arenas stand out from other industries in six ways.
— Arenas captured an increasing share of economic profit. In 2005, arenas generated $55 billion, or 9 percent of total global economic profit, while other industries generated $549 billion, about 90 percent of the total. By 2019, arenas were generating $250 billion—half of total global economic profit. Comparing 2005 economic profit rankings with those from 2019 and 2020, every arena except industrial electronics moved up.
— Arenas attracted outsize levels of investment for innovation. Arenas’ share of R&D investment was already high in 2005 and remained high for 15 years. Sixty-two percent of US business R&D spend went to arenas and arena-adjacent industries in 2005; that figure increased to 65 percent by 2020. Semiconductors and electrical components accounted for the largest share, followed by biopharmaceuticals and software.
— Arenas enabled new entrants to grow. In 2020, 33 percent of arenas’ total market capitalization was held by companies that had been “outsiders” in 2005—that did not exist, had market caps of less than $3.5 billion, or existed but were not yet meaningful competitors in those arenas. In comparison, businesses new to non-arena industries held just 15 percent of total market cap. New players tended to enter during early stages of arena formation when competitors identified innovations that met customer demands as targets for investment. This competition led to arenas’ characteristic dynamism.
— Arenas spawned giants. Arenas were more likely than non-arenas to give rise to the world’s largest companies. In 2020, 74 percent of arenas’ total market cap was held by companies with market caps greater than $50 billion, compared with 47 percent for other industries. Fifty percent of arenas’ total market cap was held by companies with market caps greater than $200 billion, compared with only 15 percent for other industries. Large companies were also more likely to be in arenas. Of the companies with market caps above $200 billion, more than half belonged to arenas, even though arenas represent only one-fifth of the overall sample by number of companies. In 2005, just one of the top ten companies was in a future arena—Microsoft, with a market cap of $278 billion. By 2020, eight of the ten were in arenas, with market caps ranging from $511 billion to $1.7 trillion.
— Arenas tended to be more concentrated. Concentration was observed at certain times in arenas; for example, the top ten players in five arenas (cloud services, consumer electronics, consumer internet, EVs, and payments) accounted for at least 90 percent of 2020 arena market cap and revenues in our sample. At the same time, competitive pressure to innovate remained. Investments that improve products or take advantage of network effects can have increasing returns, requiring leaders to continually innovate to retain prominence. Arenas’ industry structures are rarely static or stable in the long term. Escalatory investments and their exceptional returns for arenas can inspire fierce competition in markets that already have high levels of innovation, provoking step changes in technology and business, which can disrupt the ranks of winners.
— Arenas were more global. On average, 50 percent of arena revenues were generated outside companies’ home regions, compared with 42 percent for non-arena companies. Companies in arenas were also much more likely to be multinationals. Sixty-eight percent of arena companies derived more than 20 percent of their revenues from countries other than their own. By contrast, about half of non-arena companies took in more than 20 percent of revenues from other countries. The software arena is particularly global. Its four largest companies by 2020 revenues—Microsoft, IBM, Oracle, and SAP—generated almost 60 percent of their revenues outside their home countries.
The origins of arenas
To help us identify future potential arenas, we examined how today’s arenas originated. We observed three elements that, when combined, were likely to result in high growth and high dynamism and to generate an arena. The three ingredients, which we call an “arena-creation potion,” are business model or technology step changes, escalation incentives for investments, and a large or growing addressable market.
• Business model or technology step changes.
Technology performance and adoption are often modeled as idealized S-curves. When a technology capability undergoes a step change, adoption starts off slowly, reaches an inflection point when it accelerates, then flattens out as the technology reaches maturity. Although real-world technology capabilities and adoption do not perfectly adhere to this S-curve, we observe technology step changes in our arenas, for example, the innovations in lithium-ion battery technology that enabled the production of EVs at scale. Business model step changes can also result from technology that shifts commercial models (who pays for what and how) for products or services, thereby disrupting existing market structures, as occurred with e-commerce and with video and audio entertainment (streaming).
• Escalatory incentives for investments.
Companies that leverage investments to not only produce more products but fundamentally change and improve their products can boost their competitive position and rapidly gain market share. Such investments are features of specific types of spending, such as marketing, R&D, and certain capital expenditures. As companies advance their capabilities in this way, they tend to also improve long-term margins and see returns increase with scale. As a result, competitors also have a strong incentive to invest, beginning an “arms race” in which they iteratively invest to scale and scale to invest, causing a simultaneous escalation in capabilities. This pattern accelerates growth and the kind of market share jumps that are typical of arenas and eventually can limit the ability for new entrants to enter the arena unless a new technology or business model step change again opens up the playing field.
• Large or growing addressable market.
Companies tend to reach large or fast-growing markets either by already playing in sizable markets where demand growth continues to outstrip the rest of the economy or by displacing share of an existing large market with a superior product or service. The companies in our arenas that played in fast-growing markets took advantage of technology and business model step changes to accelerate value creation. These markets typically already had revenue pools of more than $100 billion in 2005, and companies competing in them made escalatory investments that improved efficiencies or broadened capabilities. These arenas included biopharmaceuticals, industrial electronics, information-enabled business services, consumer electronics, payments, semiconductors, software, and video and audio entertainment. Together, they recorded 5 to 13 percent revenue compound annual growth rates (CAGRs) from 2005 to 2020. Companies that displaced share of existing large markets achieved rapid growth by launching novel categories of products or services, taking shares from existing markets or unlocking latent demand. These companies’ industries include cloud services, consumer internet, e-commerce, and EVs. Their revenue grew at a 13 to 33 percent CAGR from 2005 to 2020.
The three ingredients of the arena-creation potion produce an escalatory mode of competition, which results in high growth and high dynamism. The continuous investments characteristic of escalatory competition typically build heightened competitive capabilities and globally relevant scale. Competition in these settings can be like a tournament with a huge prize to the winner, but it is not a lifelong crown, because a new round of competitive escalation often begins just as the last one is settling. This dynamic contrasts with more traditional modes of competition, which involve initial entry costs and additional investments to increase production quantity that result in more localized and slower-moving market dynamics.
Additionally, the arenas of today have generally benefited from the overall trend toward digitization. This recent era of digitization provided fertile ground for the emergence of significant arenas. Global internet connectivity enabled e-commerce players to connect buyers and sellers worldwide, offering customers the ability to purchase goods anytime, anywhere. Digitization also revolutionized video and audio entertainment—particularly streaming video—by shifting media consumption away from movie theaters and CDs to homes and mobile devices.
Continual exponential improvements in the cost of processing and communicating information created an extended S-curve. Digitization facilitated global markets and scaled distribution platforms. Software-driven business models, characterized by low variable costs and strong network effects, created a powerful battleground for escalatory investment. Unsurprisingly, most of today’s arenas are deeply rooted in the digital economy.
The Arenas of Tomorrow
Building on insights from existing arenas and their characteristics, we have identified 18 potential future arenas that together could generate $29 trillion to $48 trillion in revenues and $2 trillion to $6 trillion in profits by 2040 (Exhibit E2). In terms of economic impact, these arenas could grow from approximately 4 percent of GDP in 2022 to 10 to 16 percent by 2040. This equates to an 18 to 34 percent share of total GDP growth.
Such shifts in GDP share are hallmarks of arenas: a similar analysis of today’s arenas reveals that sample companies increased their equivalent share of GDP from 3 percent in 2005 to 9 percent in 2020.
The Potential Future Arenas
The potential future arenas can be categorized into three groups:
1. Continuing arenas: Current arenas that are expected to evolve and expand into tomorrow’s arenas.
2. Spin-off arenas: Subsegments of existing arenas that may grow significantly, developing into standalone arenas.
3. Emergent arenas: Completely new areas not directly tied to today’s arenas but displaying early signs of the three “arena-creation potion” elements: step changes in technology or business models, escalatory investment incentives, and large or growing addressable markets.
Continuing Arenas
1. E-commerce: Companies that sell goods through digital channels and fulfill them directly.
2. Electric vehicles: Manufacturers of battery, plug-in hybrid, and fuel-cell EVs.
3. Cloud services: Providers of on-demand cloud infrastructure and platform-as-a-service solutions.
4. Semiconductors: Designers and manufacturers of semiconductors, microchips, and integrated circuits, as well as suppliers of semiconductor manufacturing tools.
Spin-off Arenas
5. AI software and services (spin-off from software): Companies offering AI-driven software and services, excluding the necessary hardware.
6. Digital ads (spin-off from consumer internet): Platforms enabling advertisers to target consumers digitally.
7. Streaming (spin-off from video and audio entertainment): Providers of on-demand internet video entertainment.
Emergent Arenas
8. Shared autonomous vehicles: Operators offering shared services with autonomous vehicles.
9. Space: Providers of space infrastructure and services for commercial and state-sponsored purposes.
10. Cybersecurity: Companies specializing in protecting systems from unauthorized access, modification, or destruction.
11. Batteries: Manufacturers of rechargeable batteries for EVs and energy transition technologies.
12. Video games: Developers and distributors of games for consoles, PCs, and mobile platforms.
13. Robotics: Producers of robots and providers of robotics solutions across industries.
14. Industrial and consumer biotechnology: Developers of biotech-enabled products for sectors like agriculture, alternative proteins, biomaterials, biochemicals, and consumer goods.
15. Modular construction: Companies managing the modular construction process, from design to assembly, using volumetric modules.
16. Nuclear fission power plants: Builders of nuclear power facilities for fission-based energy generation.
17. Future air mobility: Operators of advanced air transport services, including eVTOLs (electric vertical takeoff and landing vehicles) and delivery drones.
18. Drugs for obesity and related conditions: Companies producing GLP-1 drugs and other treatments targeting obesity and associated conditions like diabetes.
Each of these arenas exhibits the potential for significant growth, leveraging innovative technologies, evolving business models, and expanding market opportunities.
Five of today’s arenas—biopharmaceuticals, consumer electronics, information-enabled business services, industrial electronics, and payments—may lose their arena status. These sectors are unlikely to sustain the level of growth and dynamism required to evolve into the arenas of tomorrow.
Additionally, there are industries classified as almost-emergent arenas. These industries exhibit some characteristics of arenas but face uncertain growth or dynamism prospects, making it less likely for them to develop into full-fledged arenas. However, predicting the evolution of arenas is inherently imprecise, and these potential arenas could still present substantial opportunities. Examples of almost-emergent arenas include clean hydrogen, lower-carbon materials, products and services for older adults, nuclear fusion, renewable generation equipment and infrastructure, sustainable fuels, virtual reality and augmented reality, and Web3 (including decentralized finance).
An analysis of current and future arenas highlights three pivotal factors that may influence the development of tomorrow’s arenas. These factors extend beyond modeling uncertainties and play a fundamental role in shaping technological evolution, investment patterns, and demand sources. They include:
• Geopolitical developments, which affect regulation of innovation and technological regionalization.
• Advancements in AI technology, along with its adoption across various industries.
• The pace of the green transition, which seeks to mitigate climate change and could drive demand in several markets.
The 18 arenas identified as potential arenas of tomorrow have the capacity to be even more transformative than the 12 arenas of today. They could reshape how data is consumed and processed, redefine health and wellness, and revolutionize interaction and communication. These arenas may also introduce new life opportunities while raising important societal questions, such as the ethical implications of data and privacy and the need for businesses to prioritize inclusivity and sustainability.
Understanding the origins, evolution, and societal impact of these arenas provides valuable insights into the trajectory of societal progress. This report offers an initial perspective on where the most significant growth and dynamism might occur and guidance on updating these views as the future unfolds. A compendium at the end of the report outlines the quantitative growth possibilities and dynamism prospects for each of the 18 potential arenas of tomorrow.
