Increasing opportunities: Public spending, support for SMEs and e-government services drive growth in the sector

Infrastructure spending and government investment in health and education are helping to drive growth in the Saudi Arabian information and communications technology (ICT) market, the largest ICT market in the region. Growth is occurring in a number of segments, such as IT services and data centres, as companies and especially government entities often have generous IT budgets.

The authorities have launched a range of initiatives aimed at encouraging the development of the market through, for example, Arabic web content production and software development. Internet use is expanding thanks to the rapid uptake of both mobile and fixed broadband, and speeds are set to increase as the country’s international connections grow and next-generation services such as long-term evolution (LTE) and fibre-to-the-home (FTTH) take off.

Internet

Internet penetration is expanding rapidly in the Kingdom, driven by an enormous increase in mobile broadband use (see Telecoms overview) as well as strong growth in fixed broadband subscriptions. According to figures from the International Telecommunications Union (ITU), the proportion of individuals using the internet in the Kingdom stood at 47.5% in 2011, up from 41% the previous year and 19.46% five years previously. This was well above the rate for the Arab world as a whole, at 29%, though significantly below levels in all of the other states comprising the GCC, where use ranged from 68% in Oman and 86.2% in Qatar.

Internet access in the Kingdom is available via five technologies in total, namely DSL, FTTH, WiMax, UMTS/HSPA and LTE. Third-quarter 2012 statistics from market regulator, the Communications and Information Technology Commission (CITC), show a total of 2.25m fixed broadband subscribers, of which 1.88m (83.6%) were using ADSL connections and 0.3m (13.3%) used WiMax.

This is nearly four times the number of broadband subscribers that were reported in 2007, a total of 600,000 subscribers. The state-backed telecoms operator Saudi Telecom Company (STC) reports that it currently holds a 52% share of the broadband market (including both mobile and fixed broadband) and overwhelmingly dominates the fixed broadband market with its DSL and FTTH services.

Cost & Speed

Continued growth in fixed broadband is likely to be supported in coming years by the fact that costs are comparatively low in Saudi Arabia at about 1.8% of average income in 2010, which is a drop from 2.7% just two years previously. This is one of the lowest rates in the Middle East, where the average for the region as a whole was 53%, driven up by poorer countries such as Yemen.

According to Ookla, a leading provider of broadband testing and network diagnostics, average consumer download speeds in the Kingdom stood at 6.30 Mbps as of January 2013, ranking the country 80th in the world and third in the GCC (behind Qatar in 67th place and the UAE in 43rd place).

The Kingdom’s international internet bandwidth stood at 440 Gbps in 2011, up 38% from 318 Gbps in 2010, according to the CITC. Capacity was further boosted in February 2012 when the operators of the Gulf Bridge International cable, the Middle East’s first privately owned and carrier-neutral submarine cable, announced the cable’s entry into service.

The undersea cable, which links the six GCC states and Iraq with each other as well as with Europe and India (landing at Sicily and Mumbai, respectively), was put in place at an investment cost of around $500m and will have an initial capacity of 5.18 Tbps.

Web & Social Media Usage

According to Alexa, a provider of website usage statistics, the three most popular websites in the Kingdom as of October 2012 were respectively, Google’s Saudi search page (www.google.com.sa), YouTube and Facebook, in line with global trends. The most popular local website was news site sabq.com (which was the ninth-most-popular site of all websites viewed in the Kingdom).

Social media industry analysts, socialbakers, put the number of Saudi Facebook users at 5.86m as of October 2012, ranking the Kingdom 32nd in the world and representing a penetration rate of 22.76% of the population. Use of social media is growing rapidly, doubling between 2010 and the first quarter of 2012, according to the CITC.

In terms of social media advertising, socialbakers put the average cost-per-click for Saudi Facebook users at $0.34 and the average cost-per-1000 impressions at $0.06. By way of comparison, these costs stood at $0.93 and $0.24, respectively, in the US.

E-Commerce

E-commerce has been in existence in the Kingdom for close to a decade; the local bank Samba became the first bank to launch an online payment system (SambaConnect) within the country in 2004. However, in 2010 the CITC described the sector as “still in its early stages.”

According to the CITC, 30% of Saudi businesses and 13% of government entities carried out online purchases in 2010, but few consumers did so and only 8% of businesses offered online sales. However, 47% of businesses said that while they did not currently sell online, they planned to start doing so “in the next few years”, suggesting the segment should grow substantially in the medium term.

A report by the Boston Consulting Group put the value of online retail sales in 2010 at around 2.9% of total retail sales in the Kingdom, though it forecast that this would rise to 8% by 2016; another more recent study by the Sacha Orloff consulting group put the value of retail online sales at $520m in 2011 (out of total e-commerce sales, including business-to-business and business-to government, sales of $3.5bn), or just 0.68% of all retail.

One potential obstacle to the expansion of the sector is the relatively low proportion of adults holding credit cards, which stood at 17% in 2011 according to the World Bank’s Global Financial Inclusion Database, compared, for example, to 62% in the US. Although credit card usage was low, the World Bank reported that in 2011 some 42% of the Saudi population held a debit card.

Expansion of the SADAD payment system, which links banks with billers and previously was largely focused on utility bill payments, into the retail sector should boost the prospects for e-commerce in the Kingdom. In August 2012 electronics chain eXtra became the first retailer to join the system, which allows people to pay for goods electronically and which will give customers of the firm’s online store – in particular those without credit or debit cards – another payment option.

Market Development

The CITC has identified a number of key direct and indirect drivers for the development of the local ICT market. These include direct factors such as high demand for data centres, growth in outsourced managed services and high consumer demand. In terms of indirect drivers of ICT expansion, the CITC has identified infrastructure investment (the state has committed close to SR1.4trn ($373.2bn) of public investment between 2010 and 2014), investment in education and health care, and the development of economic cities.

IT spending stood at SR24.8bn ($6.6bn) in 2011, up 10% from SR22.5bn ($6.0bn) in 2010, according to figures released by the CITC. In 2010 (a breakdown for 2011 was not released at the time of writing), outlay on hardware accounted for two-thirds of expenditure (66.7%), while IT services accounted for 22.8% of the total and packaged software 10.5%.

One of the main trends in the hardware market is growth in sales of smartphone and tablets. Smartphone sales grew 154% in 2010, bringing their share of the hardware market to 32%. In 2012, media reports suggested that continued rising demand for tablet computers was eating into sales of PCs.

Services Segment

As for the IT services market, project services such as systems integration and application development dominate and are likely to continue to do so for the foreseeable future, according to the CITC. The commission has noted a shift under way towards managed IT system services, though it says most management remains in-house.

The commission expects spending to grow at a compound annual growth rate of around 11% until 2015, much of which is likely to be driven by state expenditure. “Government spending is the main source of industry growth,” said O.B Jacob, the technical director of local ICT firm Saudi Inteltec.

More generally, customers in both government and the private sector tend to be willing to spend on IT, say local industry players. “One of the main characteristics of the Saudi ICT market is a large budget,” Jacob told OBG, noting that, in the private sector, the retail and distribution segments are generally the main drivers of expansion.

However, this willingness to invest is not always accompanied by an appreciation of the range of potential opportunities offered by IT services. In the private sector, IT is still not seen as a major business enabler; most companies see the industry mainly as desktop support, and PC maintenance. Businesses tend to use IT products and services in a straightforward manner to run their operations rather than, for example, recording and mining data for research. However, things are beginning to change, with some firms starting to view IT as a business enabler and a way to increase efficiency, especially as margins are being increasingly squeezed.

Data Centres

The CITC has cited data centres as one of the growth segments of the sector. “The data centre market is developing well, with lots of tiers and a number of new entrants,” said Jacob of Saudi Inteltec, noting however that the market is price sensitive. Inteltec is one of the largest providers of data centre services in the Kingdom; the firm estimates it has market share of between 30-35%. The company’s main clients are government entities and the banking and telecoms sectors, which mainly use the services for disaster recovery purposes as well as offsite management services.

The market is evolving rapidly, although industry players say there are limits to how far clients are willing to go in terms of outsourcing data storage, in particular with regard to cloud storage.

“At first our clients just asked for rooms and put their own racks in,” said Jacob. “Then they began to ask us to provide servers too, albeit dedicated ones. Now some of them are willing to share critical space; however, they are not yet willing to go to the cloud due to challenges of security and the fact that customers want to use their own applications,” he told OBG. “Private clouds have some prospects, but beyond that the opportunities are limited as companies have their own processes and want systems modified to their own specifications.”

In September 2012, local telecoms operator Mobily announced that it had entered into an SR1bn ($267m) strategic alliance with global IT and consulting company, IBM. This alliance assigned IBM the responsibility to deliver Mobily’s IT services for a five-year period and build an information security data centre in the Kingdom.

Under the agreement the two firms will build a facility in the capital Riyadh in 2013 to provide security services such as managed security systems as well a data centre offering services such as cloud computing and business continuity.

Human Resources

Industry players say that Saudi nationals do not see the IT industry as particularly attractive and that those who do want to enter it are primarily focused on front-end sales.

“There is a shortage of human resources with expertise in communications and IT in Saudi Arabia, and a need for more graduates specialised in the sector,” Abduljabbar Al Abduljabbar, the executive president of Arabian Advanced Systems, told OBG. “The gap will increase as there is major demand that is currently being met by foreign high-skilled workers. Educational institutions could help to reduce dependence on foreign labour by increasing the range of IT courses on offer.” The CITC has also identified an IT skills deficit as one of the main challenges to the development of the Kingdom’s ICT market, noting that firms often have difficulty in recruiting and keeping skilled IT staff, and that large organisations in need of staff with advanced technical skills, due to the size and complexity of their operations, face particularly acute problems.

Government Initiatives

E-government services are developing strongly in the Kingdom, which ranked 41st in the UN’s e-government survey in 2012, up from 58th in 2010. In 2006 the authorities launched an e-government initiate known as Yesser, which was made jointly responsible to the Ministry of Communications and Information Technology, the CITC and the Ministry of Finance, and which acts as a facilitator by offering government entities technical advice and in some cases financial support for e-government projects.

In September 2012 Yesser launched the Kingdom’s second action plan on e-governance, which will run from 2012 to 2016. The plan will be based around the key themes of developing sustainable e-government human resources, improving public interaction with the state, building a culture of collaboration and innovation, and improving overall efficiency within the government.

All In The Alphabet

In addition to e-government, the authorities are taking initiatives to address weaknesses in the local IT market. One potential obstacle to expansion of internet use in the region is the relative paucity of Arabic-language content – some estimates put it at less than 1% of all online content – and the dominance of the Roman alphabet in web and email addresses.

The government has launched a number of projects aimed at addressing these concerns, including the King Abdullah Initiative for Arabic Content, which is managed by the King Abdulaziz City for Sciences and Technology (KACST). The KACST-managed programme aims to boost the local creation of Arabic-language internet content through more than 60 projects currently under way.

The CITC and the KACST are also working on a project called Raseel, a web-based email service with addresses that are composed entirely in the Arabic alphabet. A pilot for the project has been completed and as of June 2012 the initiative’s backers were planning to develop plug-ins that will support the use of Arabic addresses in major online email services and popular email clients and mobile devices.

SME Support

The authorities are also taking steps to boost provision of IT services by local firms. In 2011, for example, the CITC launched Tahfeez, an initiative aimed at boosting the range of ICT products and services offered by domestic small and medium-sized enterprises (SMEs). This initiative is designed to reverse the falling market share of Saudi companies, compared to foreign firms operating in the Kingdom. Tahfeez provides local SMEs with business development support and consulting services.

In June 2012 the commission reported that 10 companies out of 130 applicants to Tahfeez had been selected to take part in its final stage. The initiative has identified a lack of “innovative and risk-taking small and medium ICT enterprises that focus on high-value-added services,” noting that existing Saudi ICT firms tend to concentrate on traditional markets such as sales and distribution and post-sales support. State-backed STC is also investing in the development of the segment in the form of a venture capital fund that aims to invest $50m in ICT SMEs both within the Kingdom and abroad.

Security Threats & Nuisances

According to an October 2012 report in the Kingdom’s Arab News newspaper, citing the results of IT security firm Symantec’s Norton Cybercrime report, cybercrime cost the Kingdom a total of SR2.6bn ($693.2m) over the preceding 12-month period.

Arab News reported that 3.6m Saudis had been affected by criminal activity online in the last year, and suggested that around 20% of Saudi social networking users had fallen victim during the period, roughly in line with the global average of 21%.

While many instances of cybercrime are relatively trivial, corporates can also be at risk of major attacks. Notably, in mid-August 2012 the state oil company Saudi Aramco announced that it had cut external access to its systems after 30,000 of its PCs were affected by a malware attack. The firm said it had restored the workstations two weeks later.

According to a report in the New York Times, the attack wiped data off three-quarters of the company’s computers, though the virus did not infect its oil operation networks. A hacker group calling itself the Cutting Sword of Justice claimed responsibility for carrying out the attack, which reportedly involved a form of malware known as Shamoon.

Media reports cited US officials as believing Iran carried out the attack in retaliation for similar infiltrations on its own oil ministry earlier in the year, though IT security firm Kaspersky said it believed the programme was comparatively unsophisticated and likely the work of amateurs.

Needing A Change

Industry figures say the cybercrime threat in the region as a whole is rising and that managing this requires a change in IT culture. “Since the financial crisis, cyber threats are increasingly targeting Gulf countries, partly due to the perceived wealth of the region,” Dimitrios Petropoulos, CEO of IT security firm ITS2 told OBG. “Although companies are trying to play catch-up by installing point solutions, what is really needed is a holistic approach that takes into account not only products, but policies, procedures and people as well. The main challenge to information security in Saudi Arabia, like in many other countries, is awareness,” he said.

Saudi Arabia has the highest rate of spam emails as a proportion of total emails in the world, according to a report from IT security firm Symantec in October 2011, at a rate of 84% (compared to a global rate of 69%). The company attributed the fact to high internet penetration and perceptions of high wealth in the Kingdom. A report by IT security firm Sophos in October 2012 said the Kingdom relayed 5.1% of all global spam in the third quarter of the year, identifying it as the largest spam relaying country in the region and fourth-largest in the world. The CITC operates a national anti-spam initiative aimed at combating the problem.

Internet Regulation & Censorship

Media, including electronic media, is regulated by the 2001 Press and Publications Law; electronic publishing must abide by specific regulations issued in March 2011. Reporters Without Borders listed the Kingdom as an “enemy of the internet” due to reports that the authorities have blocked around 400,000 websites, including access to political and human rights-related websites and some news media. The CITC, which takes requests from the public to block and unblock websites, is responsible for filtering pornographic and gambling-related internet material as well as dealing with phishing websites. According to the US State Department, an inter-government committee headed by the Ministry of Interior examines requests to block other sites. According to a CITC publication from 2010, 84% of respondents to a poll believed “that internet content requires stricter regulation from the authorities.”

The US State Department also cites “credible reports” that the government monitors email and chat rooms. Since April 2009 internet cafes have been obliged to provide the authorities with lists of customers and websites visited and to install closed circuit television cameras. A number of bloggers and users of social media have been detained in recent years for their political and religious statements.

Outlook

Internet use, as well as the hardware and IT services market, look set to continue to grow, with state investment likely to drive growth in services in particular. Furthermore, with the expansion of FTTH and LTE services (see Telecoms chapter) in the Kingdom both mobile and fixed broadband speeds are expected to increase significantly, expanding the opportunities offered by the internet.

The main challenges will be to facilitate wider expansion in the sector, in particular in under-developed areas such as software production, by improving the availability of local human resources and encouraging domestic ICT SMEs to innovate so as to be able to compete with more foreign companies.

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The Report: Saudi Arabia 2013

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